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, 2002
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
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(Exact name of registrant as specified in its charter)
Delaware 41-6009975
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 AXP Financial Center, Minneapolis, Minnesota 55474
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(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, 2002
150,000 Common shares
American Express Certificate Company ("the Company") is a wholly owned
subsidiary of American Express Financial Corporation (Parent), which is a wholly
owned subsidiary of American Express Company, and the Company 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.
FORM 10-Q
AMERICAN EXPRESS 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 for a fair statement of the results for these interim periods
presented. Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
AMERICAN EXPRESS CERTIFICATE COMPANY
BALANCE SHEET
ASSETS June 30, Dec 31,
2002 2001
(unaudited)
(in thousands)
Qualified Assets:
Cash and cash equivalents $ 310,170 $ 72,817
Investments in unaffiliated issuers (note 1) 4,518,110 4,439,142
Receivables 59,304 59,798
Other 14,727 48,815
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Total qualified assets 4,902,311 4,620,572
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Other assets
Due from Parent for federal income taxes 36,977 -
Other 6,688 7,781
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Total other assets 43,665 7,781
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Total assets $4,945,976 $4,628,353
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LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Certificate reserves $4,255,735 $4,159,926
Accounts payable and accrued liabilities 381,910 205,422
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Total liabilities 4,637,645 4,365,348
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Stockholder's equity:
Common stock 1,500 1,500
Additional paid-in-capital 383,844 383,844
Retained earnings (120,794) (145,455)
Accumulated other comprehensive income 43,781 23,116
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Total stockholder's equity 308,331 263,005
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Total liabilities and stockholder's equity $4,945,976 $4,628,353
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See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF OPERATIONS
For the Three Months Ended For the Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
(unaudited)
(in thousands)
Investment income $66,383 $ 56,123 $133,717 $125,086
Investment expenses 33,573 20,669 57,404 45,175
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Net investment income before provision for
certificate reserves and income tax (expense) benefit 32,810 35,454 76,313 79,911
Provision for certificate reserves 12,990 44,747 39,906 86,550
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Net investment income (loss) before income tax (expense) benefit 19,820 (9,293) 36,407 (6,639)
Income tax (expense) benefit (6,330) 4,494 (11,383) 5,260
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Net investment income (loss) 13,490 (4,799) 25,024 (1,379)
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Realized loss on investments - net (1) (81,343) (558) (91,870)
Income tax benefit - 28,470 195 32,155
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Net realized loss on investments (1) (52,873) (363) (59,715)
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Net income (loss) before cumulative effect of accounting change 13,489 (57,672) 24,661 (61,094)
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Cumulative effect of accounting change (net of income tax
benefit of $214) - - - (397)
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Net income (loss) $13,489 $(57,672) $ 24,661 $(61,491)
======= ======== ======== ========
See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
For the Three Months Ended For the Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
(unaudited)
(in thousands)
Net income (loss) $ 13,489 $(57,672) $24,661 $(61,491)
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Other comprehensive income
Cumulative effect of accounting change, net of tax - - - (2,188)
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period 58,340 23,802 27,189 69,980
Income tax expense (20,419) (8,331) (9,516) (24,493)
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Net unrealized holding gains arising during period 37,921 15,471 17,673 45,487
Reclassification adjustment for (gains) losses included in
net income (loss) (368) 15,954 (398) 24,583
Income tax expense (benefit) 128 (5,584) 139 (8,604)
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Net reclassification adjustment for (gains) losses included
in net income (loss) (240) 10,370 (259) 15,979
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Net unrealized gains on available-for-sale securities 37,681 25,841 17,414 61,466
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Unrealized losses on interest rate swaps:
Unrealized losses arising during the period (1,264) (387) (1,326) (3,687)
Income tax benefit 442 135 464 1,290
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Net unrealized holding losses arising during period (822) (252) (862) (2,397)
Reclassification adjustment for losses included in net
income 2,756 - 6,327 -
Income tax benefit (964) - (2,215) -
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Net reclassification adjustment for losses included
in net income 1,792 - 4,112 -
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Net unrealized gains (losses) on interest rate swaps 970 (252) 3,250 (2,397)
Net other comprehensive income 38,651 25,589 20,664 56,881
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Total comprehensive income (loss) $ 52,140 $(32,083) $45,325 $ (4,610)
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See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS
For the Six Months Ended
June 30, 2002 June 30, 2001
(unaudited)
(in thousands)
Cash Flows from Operating Activities:
Net income (loss) $ 24,661 $ (61,491)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of accounting change, net of tax - 397
Net provision for certificate reserves 39,906 86,550
Interest income added to certificate loans (369) (430)
Amortization of premiums/discounts - net (1,771) 383
Provision for deferred federal income taxes 6,648 (20,201)
Corporate bond interest adjustment - 12,266
Losses on index options 29,485 19,075
Net realized loss on investments before income taxes 558 91,870
(Increase) decrease in dividends and interest receivable (172) 1,816
(Increase) decrease in other assets (35,885) 8,261
(Decrease) increase in other liabilities (3,129) 5,727
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Net cash provided by operating activities 59,932 144,223
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Cash Flows from Investing Activities:
Maturity and redemption of investments:
Available-for-sale securities 505,680 232,151
Other investments 27,600 20,608
Sale of investments:
Available-for-sale securities 434,035 658,181
Certificate loan payments 1,565 1,652
Purchase of investments:
Available-for-sale securities (818,107) (1,204,194)
Other investments (34,913) (22,922)
Certificate loan fundings (912) (1,399)
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Net cash provided by (used in) investing activities $ 114,948 $ (315,923)
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AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Continued)
For the Six Months Ended
June 30, 2002 June 30, 2001
(unaudited)
(in thousands)
Cash Flows from Financing Activities:
Payments from certificate owners $ 951,423 $ 953,723
Proceeds from reverse repurchase agreements - 500
Capital contribution from Parent - 10,000
Certificate maturities and cash surrenders (888,950) (797,708)
Payments under reverse repurchase agreements - (500)
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Net cash provided by financing activities 62,473 166,015
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Net Increase (Decrease) In Cash and Cash Equivalents 237,353 (5,685)
Cash and Cash Equivalents Beginning of Period 72,817 58,711
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Cash and Cash Equivalents End of Period $ 310,170 $ 53,026
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Supplemental Disclosures:
Cash (paid) received for income taxes $ (43,212) $ 34,797
Certificate maturities and surrenders through loan
reductions $ 1,610 $ 2,350
See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (unaudited)
(in thousands)
1. The following is a summary of investments in unaffiliated issuers:
June 30, Dec. 31,
2002 2001
Available-for-sale securities $4,054,790 $4,073,901
First mortgage loans on real estate and other loans 443,406 343,434
Certificate loans - secured by certificate reserves 19,914 21,807
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Total $4,518,110 $4,439,142
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2. Accounting developments
Effective January 1, 2001, AECC adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended (SFAS No. 133), which establishes the accounting and
reporting standards for derivative instruments 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 are recorded in earnings or directly
to equity, depending on the instrument's designated use. Those derivative
instruments that are designated and qualify as hedging instruments are further
classified as either a cash flow hedge, a fair value hedge, or a hedge of a net
investment in a foreign operation, based upon the exposure being hedged. The
adoption of SFAS No. 133 on January 1, 2001, resulted in a cumulative after-tax
reduction of $397 and $2,188 to earnings and other comprehensive income (OCI),
respectively.
AMERICAN EXPRESS CERTIFICATE COMPANY
MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Results of operations:
As of June 30, 2002, total assets increased $318 million and certificate
reserves increased $96 million, from December 31, 2001. The increase in total
assets resulted from investment security purchases exceeding sales and
maturities by $57 million, an increase in net unrealized appreciation on
available-for-sale securities of $27 million, a net increase in cash of $237
million to fund normal operating obligations, and an increase in tax related
assets of $37 million, partially offset by a decrease in the value of index call
options. The increase in certificate reserves resulted from interest accruals of
$40 million and from certificate payments exceeding certificate maturities and
surrenders.
Sales of face-amount certificates totaled $364 million and $547 million during
the first and second quarter of 2002, respectively, compared to $432 million and
$497 million during the prior year's periods. Certificate maturities and
surrenders totaled $394 million and $495 million during the first and second
quarter of 2002, respectively compared to $407 million and $393 million during
the prior year's periods.
Investment income increased $8.6 million or 6.9% during the first six months of
2002 from the prior year's period due primarily to a $12.3 million adjustment to
interest income on investments in certain structured securities in 2001.
Otherwise investment income decreased from prior year due to lower investment
yields, primarily reflecting the Company's decision in 2001 to lower the
Company's risk profile, and from lower interest rates.
Investment expenses increased 27.1% during the first six months of 2002 from the
prior year's period. The increase primarily reflects higher index call option
expenses.
Net provision for certificate reserves decreased 53.9% from the prior years'
period reflecting declining interest rates, partially offset by a higher average
balance of certificate reserves.
During the first six months of 2002, the Company experienced net losses on
investments of $.6 million compared to net losses of $91.9 million during the
prior year's period. The write-downs of the investments in the first six months
of 2001 were associated with management's decision to reduce the Company's
holdings of high-yield investments and rebalance the fixed maturity investment
portfolio towards higher quality, less volatile holdings.
At June 30, 2002, approximately 1.2% of the Company's invested assets were
below-investment-grade bonds, compared to 1.7% at December 31, 2001.
Net certificate reserve financing activities resulted in cash provided of $62
million during the first six months of 2002 compared to cash provided of $156
million during the prior year's period. The change primarily resulted from the
net of higher certificate maturities and surrenders of $92 million and lower
certificate payments received of $2 million during the first six months of 2002
compared to the prior year's period.
Forward-Looking Statements
Certain statements in the management's discussion and analysis of consolidated
financial condition and results of operations section of this Form 10-Q contain
forward-looking statements which are subject to risks and uncertainties that
could cause results to differ materially from such statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date on which they are made. The Company undertakes no
obligation to update publicly or revise any forward-looking statements.
Important factors that could cause actual results to differ materially from the
Company's forward-looking statements include, among other things, fluctuations
in the equity and interest rate environment and changes in the ability of
issuers of investment securities held by the Company to meet their debt
obligations, which could result in further losses in the Company's investment
portfolio.
AMERICAN EXPRESS CERTIFICATE COMPANY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
Item 7. Exhibits 99.1 and 99.2 - Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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
BY /s/ Paula R. Meyer
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NAME AND TITLE Paula R. Meyer, President and
Director (Principal Executive Officer)
DATE August 14, 2002
BY /s/ Philip C. Wentzel
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NAME AND TITLE Philip C. Wentzel, Vice President and
Controller (Principal Accounting Officer)
DATE August 14, 2002