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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 30(a) OF THE INVESTMENT
COMPANY ACT OF 1940 AND SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-6009975
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 AXP Financial Center, Minneapolis, Minnesota 55474
- ------------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 671-3131
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ( X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 2001
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.
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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.
AMERICAN EXPRESS CERTIFICATE COMPANY
BALANCE SHEET
<Table>
<Caption>
ASSETS June 30, Dec. 31,
2001 2000
(Unaudited)
-------------- -------------
($ Thousands)
Qualified Assets:
Cash and cash equivalents $53,026 $58,711
Investments in unaffiliated issuers (note 1) 4,163,514 3,824,804
Receivables 96,926 48,971
Investments in and advances to affiliates 422 422
Other 29,914 53,015
-------------- -------------
Total qualified assets 4,343,802 3,985,923
-------------- -------------
Other assets:
Due from Parent for federal income taxes - 7,016
Deferred federal income taxes 20,074 30,501
Other 8,060 9,305
-------------- -------------
Total other assets 28,134 46,822
-------------- -------------
Total assets $4,371,936 $4,032,745
============== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Certificate reserves $4,062,577 $3,831,059
Due to Parent for federal income taxes 10,293 -
Accounts payable and accrued liabilities 77,162 35,172
-------------- -------------
Total liabilities 4,150,032 3,866,231
-------------- -------------
Stockholder's equity:
Common stock 1,500 1,500
Additional paid-in-capital 203,844 143,844
Retained earnings 12,145 73,636
Accumulated other comprehensive income (loss) 4,415 (52,466)
-------------- -------------
Total stockholder's equity 221,904 166,514
-------------- -------------
Total liabilities and stockholder's equity $4,371,936 $4,032,745
============== =============
</Table>
See notes to financial statements.
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AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF OPERATIONS
<Table>
<Caption>
(Unaudited)
For the Three Months Ended For the Six Months Ended
------------------------------ -------------------------------
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
-------------- ------------- -------------- --------------
($ Thousands)
Investment income $56,123 $65,216 $125,086 $129,122
Investment expenses 20,669 21,271 45,175 42,308
-------------- ------------- -------------- --------------
Net investment income before provision for
certificate reserves and income tax benefit (expense) 35,454 43,945 79,911 86,814
Net provision for certificate reserves 44,747 36,910 86,550 72,427
-------------- ------------- -------------- --------------
Net investment (loss) income before income tax benefit (expense) (9,293) 7,035 (6,639) 14,387
Income tax benefit (expense) 4,494 (380) 5,260 (743)
-------------- ------------- -------------- --------------
Net investment (loss) income (4,799) 6,655 (1,379) 13,644
-------------- ------------- -------------- --------------
Realized loss on investments - net (81,343) (2,220) (91,870) (8,744)
Income tax benefit 28,470 776 32,155 3,060
-------------- ------------- -------------- --------------
Net realized loss on investments (52,873) (1,444) (59,715) (5,684)
-------------- ------------- -------------- --------------
(Loss) income before cumulative effect of accounting change (57,672) 5,211 (61,094) 7,960
Cumulative effect of accounting change (net of income tax
benefit of $214) - - (397) -
-------------- ------------- -------------- --------------
Net (loss) income ($57,672) $5,211 ($61,491) $7,960
============== ============= ============== ==============
</Table>
See notes to financial statements.
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AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
<Table>
<Caption>
(Unaudited)
For the Three Months Ended For the Six Months Ended
------------------------------ -------------------------------
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
-------------- ------------- -------------- --------------
($ Thousands)
Net (loss) income ($57,672) $5,211 ($61,491) $7,960
-------------- ------------- -------------- --------------
Other comprehensive income (loss)
Cumulative effect of accounting change, net of tax - - (2,188) -
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period 23,802 2,221 69,980 (13,534)
Income tax (expense) benefit (8,331) (777) (24,493) 4,737
-------------- ------------- -------------- --------------
Net unrealized holding gains (losses) arising during period 15,471 1,444 45,487 (8,797)
Reclassification adjustment for losses (gains) included in
net (loss) income 15,954 (741) 24,583 2,099
Income tax (benefit) expense (5,584) 259 (8,604) (735)
-------------- ------------- -------------- --------------
Net reclassification adjustment for losses (gains) included
in net (loss) income 10,370 (482) 15,979 1,364
-------------- ------------- -------------- --------------
Net unrealized gains (losses) on available-for-sale securities 25,841 962 61,466 (7,433)
-------------- ------------- -------------- --------------
Unrealized loss on interest rate swaps:
Unrealized loss arising during period (387) - (3,687) -
Income tax benefit 135 - 1,290 -
-------------- ------------- -------------- --------------
Net unrealized loss on interest rate swaps (252) - (2,397) -
-------------- ------------- -------------- --------------
Net other comprehensive income (loss) 25,589 962 56,881 (7,433)
-------------- ------------- -------------- --------------
Total comprehensive (loss) income ($32,083) $6,173 ($4,610) $527
============== ============= ============== ==============
</Table>
See notes to financial statements.
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AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS
<Table>
<Caption>
(Unaudited)
For the Six Months Ended
------------------------------
June 30, 2001 June 30, 2000
-------------- -------------
($ Thousands)
Cash Flows from Operating Activities:
Net (loss) income ($61,491) $7,960
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Cumulative effect of accounting change, net of tax 397 -
Net provision for certificate reserves 86,550 72,427
Interest income added to certificate loans (430) (487)
Amortization of premiums/discounts - net 383 19,008
Provision for deferred federal income taxes (20,201) (2,292)
Corporate bond interest adjustment 12,266 -
Unrealized loss on purchased call options 19,075 -
Net realized loss on investments before income taxes 91,870 8,744
Decrease (increase) in dividends and interest receivable 1,816 (195)
Decrease in deferred distribution fees 1,245 1,638
Decrease in other assets 7,016 -
Increase (decrease) in other liabilities 5,727 (4,211)
-------------- -------------
Net cash provided by operating activities 144,223 102,592
-------------- -------------
Cash Flows from Investing Activities:
Maturity and redemption of investments:
Held-to-maturity securities - 48,745
Available-for-sale securities 232,151 212,013
Other investments 20,608 39,054
Sale of investments:
Available-for-sale securities 658,181 52,320
Certificate loan payments 1,652 1,735
Purchase of investments:
Held-to-maturity securities - (161)
Available-for-sale securities (1,204,194) (338,521)
Other investments (22,922) (24,207)
Certificate loan fundings (1,399) (1,427)
-------------- -------------
Net cash used in investing activities ($315,923) ($10,449)
-------------- -------------
</Table>
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AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (CONTINUED)
<Table>
<Caption>
(Unaudited)
For the Six Months Ended
------------------------------
June 30, 2001 June 30, 2000
-------------- -------------
($ Thousands)
Cash Flows from Financing Activities:
Payments from certificate owners $953,723 $971,543
Proceeds from reverse repurchase agreements 500 -
Capital contribution from Parent 10,000 -
Certificate maturities and cash surrenders (797,708) (915,510)
Payments under reverse repurchase agreements (500) (25,000)
Dividend paid - (5,000)
-------------- -------------
Net cash provided by financing activities 166,015 26,033
-------------- -------------
Net (Decrease) Increase In Cash and Cash Equivalents (5,685) 118,176
Cash and Cash Equivalents Beginning of Period 58,711 47,086
-------------- -------------
Cash and Cash Equivalents End of Period $53,026 $165,262
============== =============
Supplemental Disclosures:
Cash received (paid) for income taxes $34,797 ($3,546)
Certificate maturities and surrenders through loan
reductions $2,350 $2,088
</Table>
See notes to financial statements.
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AMERICAN EXPRESS CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
($ in Thousands)
1. The following is a summary of investments in unaffiliated issuers:
<Table>
<Caption>
June 30, Dec. 31,
2001 2000
-------------- -------------
Available-for-sale securities $3,799,694 $3,122,950
Held-to-maturity securities - 317,732
First mortgage loans on real estate 340,445 358,575
Certificate loans - secured by certificate reserves 23,375 25,547
-------------- -------------
Total $4,163,514 $3,824,804
============== =============
</Table>
2. Accounting developments
In July 2000, the Financial Accounting Standards Board's (FASB) Emerging Issues
Task Force (EITF) issued a consensus on Issue 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets." The Company elected to early adopt the consensus
as of January 1, 2001. Issue 99-20 prescribes new procedures for recording
interest income and measuring impairment on retained and purchased beneficial
interests. The consensus primarily affects certain high-yield investments
contained in certain structured securities whose cash flows have been negatively
affected by credit experience. Although there was no significant impact
resulting from the adoption of Issue 99-20, the Company holds structured
securities that will be accounted for under Issue 99-20.
In June 1998, the FASB issued, and subsequently amended, Statement of Financial
Accounting Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which the Company adopted on January 1,
2001. This Statement establishes accounting and reporting standards for
derivative instruments, including those embedded in other contracts, and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities on the balance sheet and measure those instruments at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income.
Changes in the fair value of a derivative are recorded in income or directly to
equity, depending on the instrument's designated use. For those derivative
instruments that are designated and qualify as hedging instruments under SFAS
No. 133, a company must designate the hedging instrument, based upon the
exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge
of a net investment in a foreign operation. For derivative instruments not
designated as hedging instruments per SFAS No. 133, changes in fair value are
adjusted immediately through earnings.
The adoption of SFAS No. 133 has allowed the Company to use cash flow hedge
accounting on its interest rate swaps. For derivatives that are designated and
qualify as cash flow hedges, the effective portion of the gain or loss on the
derivative instrument is recorded in equity and reclassified into earnings in
the same period or periods during which the hedged transaction affects earnings.
The ineffective portion of the derivative's change in fair value will be
immediately recognized in earnings.
Because of changes to the rules for hedging investments, the transition
provisions of SFAS No. 133, as amended, permitted held-to-maturity securities
under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," to be reclassified at the date of adoption to available-for-sale or
trading. The Company reclassified all held-to-maturity securities to
available-for-sale upon adoption.
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AMERICAN EXPRESS CERTIFICATE COMPANY
MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Results of operations:
As of June 30, 2001, total assets and certificate reserves increased $339
million and $232 million, respectively, from December 31, 2000. The increase in
total assets resulted primarily from purchases of investment securities of $47
million during the second quarter of 2001 that will settle in July of 2001,
capital contributions from Parent of $60 million, a decrease in net unrealized
depreciation on available-for-sale securities of $80 million and certificate
payments exceeding certificate maturities and surrenders by $156 million. The
increase in certificate reserves resulted primarily from interest accruals of
$87 million and the excess of certificate payments over certificate maturities
and surrenders.
Sales of face-amount certificates totaled $432 million and $497 million during
the first and second quarters of 2001, respectively, compared to $432 million
and $435 million during the prior year's periods. Certificate maturities and
surrenders totaled $407 million and $393 million during the first and second
quarters of 2001 compared to $427 million and $491 million during the priors
year's periods.
Investment income decreased 3.1% during the first six months of 2001 from the
prior year's period primarily reflecting adjustments to interest income on
investments in certain structured securities of $12.3 million during the second
quarter of 2001.
Investment expenses increased 6.8% during the first six months of 2001 from the
prior year's period. The increase primarily reflects higher interest rate swap
expense of $4.8 million. The increase was partially offset by lower option
expense of $.9 million and lower distribution fees of $.5 million.
Net provision for certificate reserves increased 19.5% during the first six
months of 2001 from the prior year's period reflecting a higher average balance
of certificate reserves and higher accrual rates during the first six months of
2001.
During the first six months of 2001, the Company experienced net losses on
investments of $91.9 million compared to net losses of $8.7 million during the
prior year's period. The net losses for the six months ended June 30, 2001 were
primarily composed of a $36.9 million loss to recognize the impact of higher
default assumptions used to determine impairment on rated structured investments
and a $57.1 million loss on high-yield securities. The write-downs of these
investments are 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 during the second half
of 2001.
At June 30, 2001, approximately 6.4% of the Company's invested assets were
below- investment-grade bonds, compared to 8.5% at December 31, 2000. During the
year 2000 and the first half of 2001, the industry-wide default rate on
below-investment-grade bonds increased significantly and this trend is expected
to continue over the next several months and possibly beyond.* Additional
investment security losses throughout the remainder of 2001 are possible but the
amount of any such losses is dependent on a number of factors and cannot be
estimated at this time.* The Company's management believes that there will be no
adverse impact on the certificate owners of any such losses.*
Net certificate reserve financing activities provided cash of $156 million
during the first six months of 2001 compared to cash provided of $56 million
during the prior year's period. The change resulted from the net of lower
certificate maturities and surrenders of $118 million and lower certificate
payments received of $18 million during the first six months of 2001 compared to
the prior year's period.
*Statements in this discussion of the Company's results of operations marked
with an asterisk are forward-looking statements which are subject to risks and
uncertainties. Important factors that could cause results to differ materially
from these forward-looking statements include, among other things, changes in
the ability of issuers of investment securities held by the Company to meet
their debt obligations.
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AMERICAN EXPRESS CERTIFICATE COMPANY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed electronically herewith
24.(a) Directors' Power of Attorney dated August 10th, 2001.
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
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PAGE 10
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
NAME AND TITLE /s/ Paula R. Meyer
------------------
Paula R. Meyer, President and
DATE Director (Principal Executive Officer)
August 13, 2001
BY
NAME AND TITLE /s/ Philip C. Wentzel
---------------------
Philip C. Wentzel, Vice President and
DATE Controller (Principal Accounting Officer)
August 13, 2001