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, 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
- ---------------------------- -------------------
(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 October 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
AMERICAN EXPRESS CERTIFICATE COMPANY
BALANCE SHEET
ASSETS Sept 30, Dec 31,
2002 2001
(unaudited)
(in thousands)
Qualified Assets:
Cash and cash equivalents $ 217,497 $ 72,817
Investments in unaffiliated issuers (note 2) 4,886,469 4,439,142
Receivables 39,300 59,798
Other 13,060 48,815
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Total qualified assets 5,156,326 4,620,572
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Other assets
Due from Parent for federal income taxes 3,617 -
Other 6,148 7,781
----- -----
Total other assets 9,765 7,781
----- -----
Total assets $5,166,091 $4,628,353
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Certificate reserves $4,522,885 $4,159,926
Accounts payable and accrued liabilities 281,331 205,422
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Total liabilities 4,804,216 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 (112,575) (145,455)
Accumulated other comprehensive income 89,106 23,116
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Total stockholder's equity 361,875 263,005
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Total liabilities and stockholder's equity $5,166,091 $4,628,353
========== ==========
See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF OPERATIONS
For the Three Months Ended For the Nine Months Ended
Sept 30, 2002 Sept 30, 2001 Sept 30, 2002 Sept 30, 2001
(unaudited)
(in thousands)
Investment income $66,868 $68,337 $200,585 $193,423
Investment expenses 21,555 31,556 78,959 76,731
------ ------ ------ ------
Net investment income before provision for
certificate reserves and income tax (expense) benefit 45,313 36,781 121,626 116,692
Provision for certificate reserves 26,656 31,712 66,562 118,262
------ ------ ------ -------
Net investment income (loss) before income tax (expense) benefit 18,657 5,069 55,064 (1,570)
Income tax (expense) benefit (5,997) (697) (17,380) 4,563
------ ---- ------- -----
Net investment income (loss) 12,660 4,372 37,684 2,993
------ ----- ------ -----
Realized (loss) gain on investments - net (6,833) 558 (7,391) (91,312)
Income tax benefit (expense) 2,392 (196) 2,587 31,959
----- ---- ----- ------
Net realized (loss) gain on investments (4,441) 362 (4,804) (59,353)
------ --- ------ -------
Income (loss) before cumulative effect of accounting change 8,219 4,734 32,880 (56,360)
----- ----- ------ -------
Cumulative effect of accounting change (net of income tax
benefit of $214) - - - (397)
----- ----- ------ -------
Net income (loss) $ 8,219 $ 4,734 $ 32,880 $(56,757)
======= ======= ======== ========
See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
For the Three Months Ended For the Nine Months Ended
Sept 30, 2002 Sept 30, 2001 Sept 30, 2002 Sept 30, 2001
(unaudited)
(in thousands)
Net income (loss) $ 8,219 $ 4,734 $ 32,880 $(56,757)
-------- -------- -------- ---------
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 69,761 1,830 96,950 71,810
Income tax expense (24,416) (640) (33,932) (25,134)
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Net unrealized holding gains arising during period 45,345 1,190 63,018 46,676
Reclassification adjustment for (gains) losses included in
net income (loss) (183) 65,549 (580) 90,132
Income tax expense (benefit) 64 (22,942) 203 (31,546)
-- ------- --- -------
Net reclassification adjustment for (gains) losses included
in net income (loss) (119) 42,607 (377) 58,586
---- ------ ---- ------
Net unrealized gains on available-for-sale securities 45,226 43,797 62,641 105,262
------ ------ ------ -------
Unrealized losses on interest rate swaps:
Unrealized losses arising during the period (2,580) (4,371) (3,906) (8,057)
Income tax benefit 903 1,530 1,367 2,820
--- ----- ----- -----
Net unrealized holding losses arising during period (1,677) (2,841) (2,539) (5,237)
Reclassification adjustment for losses included in net
income 2,733 - 9,060 -
Income tax benefit (957) - (3,172) -
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Net reclassification adjustment for losses included
in net income 1,776 - 5,888 -
------ ------ ------ -------
Net unrealized gains (losses) on interest rate swaps 99 (2,841) 3,349 (5,237)
Net other comprehensive income 45,325 40,956 65,990 97,837
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Total comprehensive income $ 53,544 $ 45,690 $ 98,870 $ 41,080
======== ======== ======== ========
See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS
For the Nine Months Ended
Sept 30, 2002 Sept 30, 2001
(unaudited)
(in thousands)
Cash Flows from Operating Activities:
Net income (loss) $ 32,880 $ (56,757)
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 66,562 118,262
Interest income added to certificate loans (543) (615)
Amortization of premiums/discounts - net (2,695) (458)
Provision for deferred federal income taxes (14,068) 210
Corporate bond interest adjustment - 12,266
Losses on index options 37,376 34,770
Net realized loss on investments before income taxes 7,391 91,312
(Increase) decrease in dividends and interest receivable (1,002) 7,056
(Increase) decrease in other assets (1,985) 3,182
(Decrease) in other liabilities (5,831) (15,662)
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Net cash provided by operating activities 118,085 193,963
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Cash Flows from Investing Activities:
Maturity and redemption of investments:
Available-for-sale securities 750,342 436,077
Other investments 37,421 24,790
Sale of investments:
Available-for-sale securities 551,186 856,380
Certificate loan payments 2,213 2,361
Purchase of investments:
Available-for-sale securities (1,562,152) (1,531,037)
Other investments (55,859) (32,467)
Certificate loan fundings (1,582) (2,177)
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Net cash used in by investing activities $ (278,431) $ (246,073)
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AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Continued)
For the Nine Months Ended
Sept 30, 2002 Sept 30, 2001
(unaudited)
(in thousands)
Cash Flows from Financing Activities:
Payments from certificate owners $ 1,612,727 $ 1,346,312
Proceeds from reverse repurchase agreements - 500
Capital contribution from Parent - 70,000
Certificate maturities and cash surrenders (1,307,701) (1,186,175)
Payments under reverse repurchase agreements - (500)
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Net cash provided by financing activities 305,026 230,137
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Net Increase In Cash and Cash Equivalents 144,680 178,027
Cash and Cash Equivalents Beginning of Period 72,817 58,711
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Cash and Cash Equivalents End of Period $ 217,497 $ 236,738
=========== ===========
Supplemental Disclosures:
Cash paid for income taxes $ (34,135) $ (34,797)
Certificate maturities and surrenders through loan
reductions $ 2,232 $ 2,840
See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
1. General
The interim financial information in this report has not been audited. In the
opinion of management of American Express Certificate Company (AECC or the
Company), the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly its balance sheet as of September 30, 2002, statements of income for the
three months and nine months ended September 30, 2002 and 2001 and statements of
cash flows for the nine months ended September 30, 2002 and 2001. Results of
operations reported for interim periods are not necessarily indicative of
results for the entire year. The financial statements should be read in
conjunction with the financial statements in the Annual Report on Form 10-K of
the Company for the year ended December 31, 2001. Certain prior year amounts
have been reclassified to conform to the current year's presentation.
American Express Certificate Company is a face-amount certificate investment
company, registered under the investment Company Act of 1940 (1940 Act), and is
incorporated under the laws of Delaware. AECC is in the business of issuing
face- amount certificates. Face-amount certificates issued by AECC entitle the
certificate owner to receive, at maturity, a stated amount of money and interest
or credits declared from time to time by AECC, in its discretion. The Company is
a wholly-owned subsidiary of American Express Financial Corporation (AEFC). AEFC
is a wholly owned subsidiary of American Express Company (American Express), a
New York Corporation.
2. The following is a summary of investments in unaffiliated issuers:
Sept 30, Dec. 31,
2002 2001
Available-for-sale securities $4,406,964 $ 4,073,901
First mortgage loans on real estate and other loans 460,017 343,434
Certificate loans - secured by certificate reserves 19,488 21,807
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Total $4,886,469 $ 4,439,142
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3. 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,
respectively.
AMERICAN EXPRESS CERTIFICATE COMPANY
MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Results of operations:
As of September 30, 2002, total assets increased $538 million and certificate
reserves increased $363 million, from December 31, 2001. The increase in total
assets resulted from investment security purchases exceeding sales and
maturities by $356 million, an increase in net unrealized appreciation on
available-for-sale securities of $96 million, and a net increase in cash of $145
million to fund normal operating obligations, partially offset by decreases in
the value of index call options and receivables. The increase in net unrealized
appreciation on the available- for-sale securities is due to gains on fixed
maturity holdings, which primarily explains the difference between net income of
$33 million and total other comprehensive income of $99 million. The increase in
certificate reserves resulted from interest accruals of $67 million and from
certificate payments exceeding certificate maturities and surrenders.
Sales of face-amount certificates totaled $364 million, $547 million and $641
million during the first three quarters of 2002, compared to $432 million, $497
million and $379 million during the prior year's periods. Certificate maturities
and surrenders totaled $394 million, $495 million and $419 million during the
first nine months of 2002, compared to $407 million, $393 million and $388
million during the prior year's periods.
Investment income increased $7.1 million or 3.7% during the first nine months of
2002 from the prior year due primarily to a $12.3 million negative impact on
interest income from investments in certain structured securities. Excluding the
$12.3 million negative impact, investment income decreased from prior year due
to lower investment yields, despite higher invested asset levels. The declining
investment yields primarily reflect the Company's decision in 2001 to lower the
Company's risk profile, and from lower interest rates.
Investment expenses increased $2.2 million or 2.9% during the first nine months
of 2002 from the prior year. The increase primarily reflects higher index call
option expenses.
Net provision for certificate reserves decreased 43.7% from the prior year
reflecting declining interest accrual rates, partially offset by a higher
average balance of certificate reserves.
During the first nine months of 2002, the Company experienced net losses on
investments of $7.4 million compared to net losses of $91.3 million during the
prior year's period. The write- downs of the investments in the first nine
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 September 30, 2002 and December 31, 2001, approximately 2% of the Company's
invested assets were below-investment-grade bonds.
Net certificate reserve financing activities resulted in cash provided of $305
million during the first nine months of 2002 compared to cash provided of $160
million during the prior year's period. The $145 million increase primarily
resulted from higher certificate payments received of $267 million partially
offset by higher certificate maturities and surrenders of $122 million during
the first nine months of 2002 compared to the prior year's period.
The Company is exposed to risk associated with fluctuating interest payments
from certain certificate products tied to the London Interbank Offered Rate
(LIBOR) as the certificate products reset at shorter intervals than the average
maturity of the investment portfolio. The Company hedges the risk of rising
interest rates by entering into pay-fixed, receive-variable (LIBOR-based)
interest rate swaps that convert fluctuating crediting rate payments to fixed
payments, effectively protecting the Company from unfavorable interest rate
movements. In September 2002, the Company entered into $900 million notional of
interest rate swaps to hedge a portion of its LIBOR-based business for 2003 and
2004. The interest rate swaps are treated as cash flow hedges per SFAS No. 133.
There was no significant impact on the balance sheet or results of operations as
the derivatives were entered into near the end of this quarter. In addition to
the swaps entered into in September 2002, the Company has outstanding $250
million notional interest rate swaps which expire between October 2002 and
January 2003.
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.
Exhibits 99.3 and 99.4 - Certification pursuant to Section 302 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
Chief Executive Officer
DATE November 14, 2002
BY /s/ Philip C. Wentzel
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NAME AND TITLE Philip C. Wentzel, Vice President and
Chief Financial Officer
DATE November 14, 2002