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, 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 October 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.
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
ASSETS Sept 30, Dec 31,
2001 2000
(Unaudited)
($ Thousands)
Qualified Assets:
Cash and cash equivalents $236,738 $58,711
Investments in unaffiliated issuers (note 1) 4,101,869 3,824,804
Receivables 55,302 48,971
Investments in and advances to affiliates 422 422
Other 14,525 53,015
------ ------
Total qualified assets 4,408,856 3,985,923
--------- ---------
Other assets:
Due from Parent for federal income taxes 5,428 7,016
Deferred federal income taxes -- 30,501
Other 7,711 9,305
----- -----
Total other assets 13,139 46,822
------ ------
Total assets $4,421,995 $4,032,745
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Certificate reserves $4,095,633 $3,831,059
Accounts payable and accrued liabilities 48,767 35,172
------ ------
Total liabilities 4,144,400 3,866,231
--------- ---------
Stockholder's equity:
Common stock 1,500 1,500
Additional paid-in-capital 213,844 143,844
Retained earnings 16,880 73,636
Accumulated other comprehensive income (loss) 45,371 (52,466)
------ -------
Total stockholder's equity 277,595 166,514
------- -------
Total liabilities and stockholder's equity $4,421,995 $4,032,745
========== ==========
See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF OPERATIONS (Unaudited)
For the Three Months Ended For the Nine Months Ended
Sept 30, 2001 Sept 30, 2000 Sept 30, 2001 Sept 30, 2000
($ Thousands)
Investment income $68,337 $67,093 $193,423 $196,215
Investment expenses 31,556 22,400 76,731 64,708
------ ------ ------ ------
Net investment income before provision for
certificate reserves and income tax (expense) benefit 36,781 44,693 116,692 131,507
Provision for certificate reserves 31,712 40,590 118,262 113,017
------ ------ ------- -------
Net investment income (loss) before income tax (expense)
benefit 5,069 4,103 (1,570) 18,490
Income tax (expense) benefit (697) 306 4,563 (437)
---- --- ----- ----
Net investment income 4,372 4,409 2,993 18,053
----- ----- ----- ------
Realized gain (loss) on investments - net 558 669 (91,312) (8,075)
Income tax (expense) benefit (196) (234) 31,959 2,826
---- ---- ------ -----
Net realized gain (loss) on investments 362 435 (59,353) (5,249)
--- --- ------- ------
Income (loss) income before cumulative
effect of accounting change 4,734 4,844 (56,360) 12,804
----- ----- ------- ------
Cumulative effect of accounting change (net of income tax
benefit of $214) -- -- (397) --
------ ------ -------- -------
Net income (loss) $4,734 $4,844 ($56,757) $12,804
====== ====== ======== =======
See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
For the Three Months Ended For the Nine Months Ended
Sept 30, 2001 Sept 30, 2000 Sept 30, 2001 Sept 30, 2000
($ Thousands)
Net income (loss) $4,734 $4,844 ($56,757) $12,804
------ ------ -------- -------
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 1,830 22,291 71,810 8,757
Income tax expense (640) (7,802) (25,134) (3,065)
---- ------ ------- ------
Net unrealized holding gains arising during period 1,190 14,489 46,676 5,692
Reclassification adjustment for losses (gains) included in
net income (loss) 65,549 (3,081) 90,132 (982)
Income tax (benefit) expense (22,942) 1,079 (31,546) 344
------- ----- ------- ---
Net reclassification adjustment for losses (gains) included
in net income (loss) 42,607 (2,002) 58,586 (638)
------ ------ ------ ----
Net unrealized gains on available-for-sale securities 43,797 12,487 105,262 5,054
------ ------ ------- -----
Unrealized loss on interest rate swaps:
Unrealized loss arising during period (4,371) -- (8,057) --
Income tax benefit 1,530 -- 2,820 --
----- ----- ----- ----
Net unrealized loss on interest rate swaps (2,841) -- (5,237) --
----- ----- ----- ----
Net other comprehensive income 40,956 12,487 97,837 5,054
------ ------ ------ -----
Total comprehensive income $45,690 $17,331 $41,080 $17,858
========== ======= ======= =======
See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Unaudited)
For the Nine Months Ended
Sept 30, 2001 Sept 30, 2000
($ Thousands)
Cash Flows from Operating Activities:
Net (loss) income ($56,757) $12,804
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 118,262 113,017
Interest income added to certificate loans (615) (687)
Amortization of premiums/discounts - net (458) 29,991
Provision benefit for deferred federal income taxes 210 (1,743)
Corporate bond interest adjustment 12,266 --
Unrealized loss on purchased call options 34,770 --
Net realized loss on investments before income taxes 91,312 8,075
Decrease (increase) in dividends and interest receivable 7,056 (1,474)
Decrease in deferred distribution fees 1,593 2,343
Decrease in other assets 1,589 --
Decrease in other liabilities (15,662) (4,253)
------- ------
Net cash provided by operating activities 193,963 158,073
------- -------
Cash Flows from Investing Activities:
Maturity and redemption of investments:
Held-to-maturity securities -- 97,463
Available-for-sale securities 436,077 335,933
Other investments 24,790 60,194
Sale of investments:
Available-for-sale securities 856,380 251,438
Certificate loan payments 2,361 2,605
Purchase of investments:
Held-to-maturity securities -- (161)
Available-for-sale securities (1,531,037) (806,581)
Other investments (32,467) (37,529)
Certificate loan fundings (2,177) (2,308)
------ ------
Net cash used in investing activities ($246,073) ($98,946)
--------- --------
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Continued) (Unaudited)
For the Nine Months Ended
Sept 30, 2001 Sept 30, 2000
($ Thousands)
Cash Flows from Financing Activities:
Payments from certificate owners $1,346,312 $1,367,911
Proceeds from reverse repurchase agreements 500 --
Capital contribution from Parent 70,000 --
Certificate maturities and cash surrenders (1,186,175) (1,220,933)
Payments under reverse repurchase agreements (500) (25,000)
Dividend paid -- (5,000)
----- ------
Net cash provided by financing activities 230,137 116,978
------- -------
Net Increase In Cash and Cash Equivalents 178,027 176,105
Cash and Cash Equivalents Beginning of Period 58,711 47,086
------ ------
Cash and Cash Equivalents End of Period $236,738 $223,191
======== ========
Supplemental Disclosures:
Cash received (paid) for income taxes ($34,797) $2,558
Certificate maturities and surrenders through loan
reductions $2,840 $3,070
See notes to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)
($ in Thousands)
1. The following is a summary of investments in unaffiliated issuers:
Sept 30, Dec. 31,
2001 2000
Available-for-sale securities $3,742,468 $3,122,950
Held-to-maturity securities -- 317,732
First mortgage loans on real estate 336,263 358,575
Certificate loans - secured by certificate reserves 23,138 25,547
------ ------
Total $4,101,869 $3,824,804
========== ==========
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.
3. Subsequent Events
During the fourth quarter of 2001, the Company paid a $167 million dividend to
American Express Financial Corporation (AEFC) by transferring at book value
certain Collateralized Debt Obligation (CDO) securities owned by the company.
In part, the dividend was paid to allow AEFC to transfer the CDO securities and
related accrued interest into a securitization trust. Additionally, in the
fourth quarter of 2001, the Company received a $150 million cash capital
contribution from AEFC.
AMERICAN EXPRESS CERTIFICATE COMPANY
MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Results of operations:
As of September 30, 2001, total assets and certificate reserves increased $389
million and $265 million, respectively, from December 31, 2000. The increase in
total assets resulted primarily from capital contributions from Parent of $70
million, a decrease in net unrealized depreciation on available-for-sale
securities of $165 million and certificate payments exceeding certificate
maturities and surrenders by $160 million. The increase in certificate reserves
resulted primarily from interest accruals of $118 million and the excess of
certificate payments over certificate maturities and surrenders.
Sales of face-amount certificates totaled $432 million, $497 million and $379
million during the first, second, and third quarters of 2001, respectively,
compared to $432 million, $435 million and $380 million during the prior year's
periods. Certificate maturities and surrenders totaled $407 million, $393
million, and $388 million during the first, second, and third quarters of 2001
compared to $427 million, $491 million, and $306 million during the prior year's
periods.
Investment income decreased 1.4% during the first nine 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 18.6% during the first nine months of 2001 from
the prior year's period. The increase primarily reflects higher interest rate
swap expense of $9.9 million and higher options expense of $3.2 million. The
increase was partially offset by lower distribution fees of $.6 million.
Net provision for certificate reserves increased 4.6% from the prior years'
period reflecting a higher average balance of certificate reserves, particially
offset by the effects of declining interest rates.
During the first nine months of 2001, the Company experienced net losses on
investments of $91.3 million compared to net losses of $8.1 million during the
prior year's period. The net losses for the nine months ended September 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 the company'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 September 30, 2001, approximately 2.9% 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. 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 $160 million
during the first nine months of 2001 compared to cash provided of $147 million
during the prior year's period. The change resulted from the net of lower
certificate maturities and surrenders of $35 million and lower certificate
payments received of $22 million during the first nine 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.
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.
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
------------------
NAME AND TITLE Paula R. Meyer, President and
Director (Principal Executive Officer)
DATE November 12, 2001
BY /s/ Philip C. Wentzel
---------------------
NAME AND TITLE Philip C. Wentzel, Vice President and
Controller (Principal Accounting Officer)
DATE November 12, 2001