UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL 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 fiscal year ended December 31, 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 Identification No.)
incorporation or organization)
52 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
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: None Name of each exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant. None
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
150,000 Common shares
CERTAIN DOCUMENTS INCORPORATED BY REFERENCE.
None
The registrant meets the conditions set forth in General Instructions I(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
The Exhibit Index is located on sequential pages 18-22.
Item 1. Business
American Express Certificate Company (AECC), is incorporated under the
laws of Delaware. Its principal executive offices are located at 52 AXP
Financial Center, Minneapolis, Minnesota 55474, and its telephone number is
(612) 671-3131. American Express Financial Corporation (AEFC), a Delaware
corporation, 200 AXP Financial Center, Minneapolis, Minnesota 55474, owns 100%
of the outstanding voting securities of AECC. American Express Financial
Corporation 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.
AECC is a face-amount certificate investment company registered under
the Investment Company Act of 1940 (1940 Act). 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.
AECC currently offers nine certificates to the public: "American Express Cash
Reserve Certificate," "American Express Flexible Savings Certificate", "American
Express Installment Certificate," "American Express Preferred Investors
Certificate," "American Express Stock Market Certificate," "American Express
Market Strategy Certificate," "American Express Equity Indexed Savings
Certificates", "American Express Investors Certificate" (including a form of
American Express Investors Certificate offered to select investors who, among
other things, invest at least $100,000 in the certificate), and "American
Express Special Deposits." The American Express Special Deposits is marketed
only through offices of American Express Bank Ltd. (AEB) in England and Hong
Kong and is not registered for sale in the United States. All certificates are
currently sold without a sales charge. The American Express Installment
Certificate, the American Express Flexible Savings Certificate, the American
Express Stock Market Certificate, the American Express Preferred Investors
Certificate, the American Express Market Strategy Certificate, the American
Express Equity Indexed Savings Certificates, the American Express Investors
Certificate and the American Express Special Deposits currently bear surrender
charges for premature surrenders. All of the above described certificates,
except the American Express Special Deposits, are distributed pursuant to a
Distribution Agreement with American Express Financial Advisors Inc., an
affiliate of AECC. With respect to the American Express Investors Certificate
and a form of the American Express Stock Market Certificate, American Express
Financial Advisors Inc., in turn, has Selling Agent Agreements with American
Express Bank International (AEBI), an indirect subsidiary of American Express,
and Coutts & Co. (USA) International (Coutts), a subsidiary of National
Westminster Bank PLC, for selling the certificates. With respect to the American
Express Special Deposits, AECC has a Marketing Agreement with AEB, a direct
subsidiary of American Express, for marketing the certificate. With respect to
American Express Stock Market Certificate, American Express Financial Advisors
Inc. has a Selling Agent Agreement effective March 10, 1999 with Securities
America Inc., an affiliate of AECC. With respect to American Express Equity
Indexed Savings Certificates, American Express Financial Advisors Inc. has a
Selling Dealer Agreement effective
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July 31, 2000 with Securities America, Inc., an affiliate with AECC. There is no
assurance that American Express certificates will be sold by Securities America
Inc.
AEBI and Coutts are Edge Act corporations organized under the
provisions of Section 25(a) of the Federal Reserve Act. American Express
Financial Advisors Inc. has entered into a consulting agreement with AEBI under
which AEBI provides consulting services related to any selling agent agreements
between American Express Financial Advisors Inc. and other Edge Act
corporations.
AECC also offers one certificate in connection with certain employee
benefit plans available to eligible American Express Financial Corporation
employees, financial advisors, retirees, and eligible employees of the American
Express funds, and to IRAs of persons retired as employees or financial advisors
with American Express Financial Corporation. This certificate is called the
Series D-1 Investment Certificate.
Except for the American Express Investors Certificate and the American
Express 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 ten to twenty
years. Within that maturity period, most certificates have interest rate terms
ranging from one to thirty-six months. Interest rates change and certificate
owners can surrender their certificates without penalty at term end.
The American Express Cash Reserve Certificate is a single payment
certificate that permits additional investments. AECC guarantees interest in
advance for a three-month term on these certificates.
The American Express Flexible Savings Certificate is a single payment
certificate that permits a limited amount of additional payments and on which
AECC guarantees interest in advance for a term of 6, 12, 18, 24, 30, or 36
months, and potentially other terms, at the investor's option.
The American Express Installment Certificate is an installment payment
certificate that declares interest in advance for a three-month period and
offers bonuses for up to four certificate years for regular investments.
The American Express Stock Market Certificate is a single payment
certificate that offers the certificate owner the opportunity to have all or
part of his/her interest tied to 52-week stock market performance, as measured
by a broad stock market index, with return of principal guaranteed by AECC. The
owner can also choose to earn a fixed rate of interest. This certificate is also
marketed by AEBI and Coutts, under Selling Agent Agreements with American
Express Financial Advisors Inc., to AEBI's clients and certain of Coutts'
clients, respectively, who are neither citizens nor residents of the United
States.
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The American Express Market Strategy Certificate is a flexible payment
certificate that pays interest at a fixed rate or that offers the owner the
opportunity to have all or part of his/her interest tied to 52-week stock market
performance as measured by a broad stock market index, for a series of 52-week
terms starting every month or at intervals the owner selects.
The American Express Investors Certificate is a single payment
certificate that generally permits additional payments within 15 days of term
renewal. Interest rates are guaranteed in advance by AECC for a term of 1, 2, 3,
6, 12, 24, or 36 months, at the investor's option. This certificate is currently
sold by AEBI and Coutts, under Selling Agent Agreements with American Express
Financial Advisors Inc., only to AEBI's clients and certain of Coutts' clients,
respectively, who are neither citizens nor residents of the United States.
The American Express Preferred Investors Certificate is a single
payment certificate that combines a fixed rate of return with AECC's guarantee
of principal for investments of $250,000 to $5,000,000. Interest rates are
guaranteed in advance by AECC for a term of 1, 2, 3, 6, 12, 24 or 36 months, at
the investor's option.
The American Express Special Deposits Certificate is a single payment
certificate that generally permits additional payments within 15 days of term
renewal. Interest rates are guaranteed in advance by AECC for a term of 1, 2, 3,
6, 12, 24, or 36 months, at the investor's option. This certificate is currently
marketed by AEB through its London and Hong Kong offices, under a Marketing
Agreement with AECC, 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.
To AECC's knowledge, AECC 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 AECC's products are designed to be competitive with the
types of investment offered by banks and thrifts. Since AECC's face-amount
certificates are securities, their offer and sale are subject to regulation
under federal and state securities laws. AECC's certificates are backed by its
qualified assets on deposit and are not insured by any governmental agency or
other entity.
For all the certificates, except for the American Express Investors
Certificate, American Express Preferred Investors Certificate, and the American
Express Special Deposits, AECC's current policy is to re-evaluate the
certificate rates weekly to respond to marketplace changes. For the American
Express Investors Certificate, American Express Preferred Investors Certificate,
and the American Express Special Deposits, AECC's current policy is to
re-evaluate the rates on a daily basis. For each product, AECC refers to an
independent index or source to set the rates for new sales. Except for American
Express Special Deposits, AECC must set the rates for an initial purchase of the
certificate within a specified range of the rate from such index or source. For
renewals, AECC uses such rates as an indication of the competitors' rates, but
is not required to set rates within a specified range.
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For the American Express Flexible Savings Certificate, and the American
Express Series D-1 Investment Certificate, the published rates of the BANK RATE
MONITOR Top 25 Market Average(R) (the BRM Average(R)) for various length bank
certificates of deposit are used as the guide in setting rates. For the American
Express Installment Certificate, the average interest rate for money market
deposit accounts, as published by the BRM Average(R), is used as a guide in
setting rates. For the American Express Cash Reserve Certificates, the published
rates of the U.S. 90 day Treasury Bill are used as the guide in setting rates.
For the American Express Investors Certificate, American Express Preferred
Investors Certificate, and American Express Special Deposits, the published
average rates for comparable length dollar deposits available on an interbank
basis, referred to as the London Interbank Offering 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, AECC offers the
American Express Cash Reserve Certificate and the American Express Flexible
Savings Certificate. The yields and features on these products are designed to
be competitive with such short-term products. The American Express Investors
Certificate, American Express Preferred Investors Certificate and American
Express Special Deposits also compete with short-term products, but use LIBOR
rates. The American Express Installment Certificate is intended to help clients
save systematically and may compete with passbook savings and NOW accounts. The
American Express Stock Market Certificate, American Express Market Strategy
Certificate and American Express Equity Indexed Savings Certificates are
designed to offer interest tied to a major stock market index and principal
guaranteed by AECC. Certain banks offer certificates of deposit that have
features similar to the American Express Stock Market Certificate, American
Express Market Strategy Certificate and American Express Equity Indexed Savings
Certificates.
AECC's gross income is derived principally from interest and dividends
generated by its investments. AECC'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 American Express Financial Corporation for
advisory and other services, the distribution fees paid to American Express
Financial Advisors Inc., and marketing fees paid to AEB.
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AECC may make forward-looking statements in documents such as this 10-K
Annual Report. In addition, from to time to time, AECC may make oral
forward-looking statements through its management. Forward-looking statements
are subject to uncertainties that could cause actual results to differ
materially from such statements. Readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the date on which
they are made. AECC undertakes no obligation to update publicly or revise any
forward-looking statements.
The following table shows AECC's certificate payments received and certificate
surrenders for the three years ended December 31, 2002:
2002 2001 2000
($ in Millions)
Single Payment Certificates
Non-Qualified
Payments through:
American Express Financial Advisors Inc. $1,116.1 $1,044.9 $773.5
AEBI, AEB, and Coutts 512.6 562.8 636.1
Surrenders through:
American Express Financial Advisors Inc. 865.1 865.1 710.2
AEBI, AEB, and Coutts 601.5 585.5 482.9
Qualified
Payments through:
American Express Financial Advisors Inc. 361.6 263.3 209.1
Surrenders through:
American Express Financial Advisors Inc. 224.1 167.8 151.8
Installment Payment Certificates
Through American Express Financial Advisors Inc.
Non-Qualified
Payments 40.8 41.1 48.3
Surrenders 57.2 68.7 101.8
Qualified
Payments .3 .3 .4
Surrenders .5 .7 1.4
In 2002, approximately 26% of single payment certificate payments were
through AEBI, AEB, and Coutts, and approximately 18% of single payment
certificate payments and 1% of installment certificate payments were of
tax-qualified certificates for use in IRAs, 401(k) plans and other qualified
retirement plans.
The certificates offered by American Express Financial Advisors Inc.
are sold pursuant to a distribution agreement which is terminable on 60 days'
notice and is subject to annual approval by AECC's Board of Directors, including
a majority of the directors who are not "interested persons" of American Express
Financial Advisors Inc. or AECC as that term is defined in the
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1940 Act. The agreement provides for the payment of distribution fees to
American Express Financial Advisors Inc. for services provided thereunder.
American Express Financial Advisors Inc. is a wholly-owned subsidiary of
American Express Financial Corporation. For the sale of the American Express
Investors Certificate and the American Express Stock Market Certificate by AEBI,
American Express Financial Advisors Inc., in turn, has Selling Agent Agreements
with AEBI and Coutts. For the sale of American Express Stock Market Certificate,
American Express Financial Advisors Inc. has a Selling Agent Agreement with
Securities America Inc. effective March 10, 1999. For the sale of American
Express Equity Indexed Savings Certificates, American Express Financial Advisors
Inc. has a Selling Dealer Agreement with Securities America, Inc., effective
July 31, 2000. For marketing American Express Special Deposits, AECC has a
Marketing Agreement with AEB. These agreements are terminable upon 60 days'
notice and subject to annual review by directors who are not "interested
persons" of American Express Financial Advisors Inc. or AECC except that such
annual review is not required for selling agent agreements.
AECC receives advice, statistical data and recommendations with respect
to the acquisition and disposition of securities for its portfolio from American
Express Financial Corporation, under an investment management agreement which is
subject to annual review and approval by AECC's Board of Directors, including a
majority of the directors who are not "interested persons" of American Express
Financial Corporation or AECC.
AECC is required to maintain cash and "qualified investments" meeting
the standards of Section 28(b) of the 1940 Act, as modified by an order of the
Securities and Exchange Commission (the SEC). The amortized cost of such
investments must be at least equal to AECC's net liabilities on all outstanding
face-amount certificates plus $250,000. So long as AECC wishes to rely on the
SEC order, as a condition to the order, AECC has agreed to maintain an amount of
unappropriated retained earnings and capital equal to at least 5% of net
certificate reserves. For these purposes, net certificate reserves means
certificate reserves less outstanding certificate loans. In determining
compliance with this condition, qualified investments are valued in accordance
with the provisions of Minnesota Statutes where such provisions are applicable.
AECC's qualified assets consist of cash and cash equivalents, first mortgage
loans on real estate and other loans, U.S. government and government agency
securities, municipal bonds, corporate bonds, preferred stocks and other
securities meeting specified standards. AECC has also entered into a written
informal understanding with the State of Minnesota, Department of Commerce, that
AECC will maintain capital equal to 5% of the assets of AECC (less any loans on
outstanding certificates). When computing its capital for these purposes, AECC
values its assets on the basis of statutory accounting for insurance companies
rather than generally accepted accounting principles. AECC is subject to annual
examination and supervision by the State of Minnesota, Department of Commerce
(Banking Division).
Distribution fees on sales 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
and any related surrender charges are recognized in income. Thus, these
certificates must remain in effect for a period of time to permit AECC to
recover such costs.
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Item 2. Properties
None.
Item 3. Legal Proceedings
Registrant has no material pending legal proceedings other than
ordinary routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
PART II
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 American Express Financial Corporation and,
indirectly, of American Express Company. Frequency and amount of dividends
declared during the past two years are as follows:
Cash Dividend (Return of Capital) Payable Date
For the year ended December 31, 2002:
December 30, 2002 $10,000,000
Capital Dividend Payable Date
For the year ended December 31, 2001:
October 17, 2001 $166,907,522
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 AECC only in calendar years for which additional
credits of at least 1/2 of 1% on such series of certificates have been
authorized by AECC. This restriction has been removed for 2002 and 2003 by
AECC's declaration of additional credits in excess of this requirement.
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Appropriated retained earnings resulting from the pre-declaration of
additional credits to AECC's certificate owners are not available for the
payment of dividends by AECC. In addition, AECC will discontinue issuance of
certificates subject to the pre-declaration of additional credits and will make
no further predeclaration as to outstanding certificates if at any time the
capital and unappropriated retained earnings of AECC should be less than 5% of
net certificate reserves (certificate reserves less certificate loans). At
December 31, 2002, the capital and unappropriated retained earnings amounted to
6.2% of net certificate reserves.
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Item 6. Selected Financial Data
SUMMARY OF SELECTED FINANCIAL INFORMATION
The following selected financial information has been derived from the audited
financial statements and should be read in conjunction with those statements and
the related notes to financial statements. Also see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for additional
comments.
Year Ended December 31, (In thousands) 2002 2001 2000 1999 1998
Statements of Operations Data
Investment income $ 267,352 $ 261,523 $ 266,106 $ 254,344 $ 273,135
Investment expenses 89,827 101,228 87,523 77,235 76,811
------ ------- ------ ------ ------
Net investment income before provision
for certificate reserves and income
tax (expense) benefit 177,525 160,295 178,583 177,109 196,324
Net provision for certificate reserves 100,252 155,387 155,461 138,555 167,108
------- ------- ------- ------- -------
Net investment income before income
tax (expense) benefit 77,273 4,908 23,122 38,554 29,216
Income tax (expense) benefit (24,866) 3,348 (14) (4,615) 265
------- ----- --- ------ ---
Net investment income 52,407 8,256 23,108 33,939 29,481
------ ----- ------ ------ ------
Net realized (loss) gain on investments in securities of
unaffiliated issuers before income taxes (9,899) (92,375) (10,110) 1,250 5,143
Income tax benefit (expense) 3,631 32,331 3,539 (437) (1,800)
----- ------ ----- ---- ------
Net realized (loss) gain on investments (6,268) (60,044) (6,571) 813 3,343
Net income - wholly-owned subsidiary - - - 4 1,646
Cumulative effect of accounting change - (397) - - -
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 46,139 $ (52,185) $ 16,537 $ 34,756 $ 34,470
---------- ---------- ---------- ---------- ----------
Cash Dividends Declared $ - $ - $ 5,000 $ 40,000 $ 29,500
Capital Dividends Declared - 166,906 - - -
(Return of capital to) contributions from Parent (10,000) 240,000 - - -
Balance Sheet Data
Total assets $5,183,282 $4,628,353 $4,032,745 $3,761,068 $3,834,244
Certificate loans 18,614 21,807 25,547 28,895 32,343
Certificate reserves 4,493,372 4,159,926 3,831,059 3,536,659 3,404,883
Stockholder's equity 359,389 263,005 166,514 141,702 222,033
------- ------- ------- ------- -------
American Express Certificate Company (AECC), is 100% owned by American Express
Financial Corporation (Parent).
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of operations
American Express Certificate Company's (AECC) earnings are derived primarily
from the after-tax yield on invested assets less investment expenses and
interest credited on certificate reserve liabilities, as well as realized
investment gains or losses. Changes in earnings trends occur largely due to
changes in investment returns, interest crediting rates to certificate owner
accounts, the mix of fully taxable and tax-advantaged investments in the AECC
portfolio and from realization of investment gains or losses.
During 2002, total assets and certificate reserves increased $555 million and
$333 million, respectively. The increase in total assets resulted primarily from
increases in the investment portfolio. The level of the investment portfolio
rose due primarily to an increase in net unrealized appreciation on
available-for-sale securities of $91 million, higher levels of short term
securities and certificate payments exceeding certificate maturities and
surrenders by $242 million. The increase in net after-tax unrealized
appreciation on available-for-sale securities during 2002 is due to unrealized
gains on fixed maturity holdings, which primarily explains the difference
between net income of $46 million and total comprehensive income of $106
million. The increase in certificate reserves resulted primarily from interest
accruals of $100 million and the total certificate payments being greater than
the maturities and surrenders.
During 2001, total assets and certificate reserves increased $596 million and
$329 million, respectively. The increase in total assets resulted primarily from
capital contributions from AEFC of $240 million, an increase in net unrealized
appreciation on available-for-sale securities of $125 million and certificate
payments exceeding certificate maturities and surrenders by $185 million. The
increase in certificate reserves resulted primarily from interest accruals of
$155 million and the total certificate payments being greater than the
maturities and surrenders.
2002 compared to 2001
Gross investment income increased 2.2% primarily due to higher levels of
invested assets and the 2001 adjustments to interest income on investments in
certain structured securities. Partially offsetting the increase in gross
investment income is the impact of lower investment yields. The declining
investment yields are due to AECC's decision in 2001 to lower its risk profile
and from lower interest rates.
Investment expenses decreased 11.3% in 2002. The decrease resulted primarily
from lower interest rate swap expense of $7.8 million. AECC enters into interest
rate swap contracts to hedge the risk of rising interest rates on a portion of
the Certificate products. Note 9 in the attached financial statements provides
more detail about the interest rate swaps.
The net provision for certificate reserves decreased 35.5% in 2002 as a result
of lower client interest crediting rates, partially offset by the increase
in certificate reserves during 2002.
During 2002, AECC experienced net pretax realized losses on investments of $9.9
million as compared to $92.4 million of pretax losses in 2001. The net losses in
2002 include $15.8 million of losses due to declines in the fair value of
corporate debt or structured available-for-sale securities that were other-than-
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temporary. The losses in 2001 are 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-down of these investments was associated with AECC's
decision to reduce its holdings of high-yield investments and rebalance the
fixed maturity investment portfolio towards higher quality, less volatile
holdings.
Income tax expenses increased significantly over 2002 primarily due to the net
investment losses recognized in 2001.
2001 compared to 2000
Gross investment income decreased 1.7% due primarily to lower rates of return on
invested assets, and adjustments to interest income on investments in certain
structured securities.
Investment expenses increased 15.7% in 2001. The increase resulted primarily
from higher interest rate swap expense of $17.6 million partially offset by
lower index options expense.
The net provision for certificate reserves remained relatively flat to 2000
levels as lower accrual rates offset the impact from the growth in certificate
reserves during 2001.
During 2001, AECC experienced net pretax realized losses on investments of $92.4
million as compared to $10.1 million of pretax losses in 2000. The losses for
the year are 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-down of
these investments was associated with AECC's decision to reduce its holdings of
high-yield investments and rebalance the fixed maturity investment portfolio
towards higher quality, less volatile holdings.
The increase in income tax benefit resulted from lower pretax income, primarily
due to the investment losses realized during 2001.
Liquidity and cash flow
AECC's principal sources of cash are receipts from sales of face-amount
certificates and cash flows from investments. AECC's principal uses of cash are
payments to certificate owners for matured and surrendered certificates,
purchase of investments and dividend payments to AEFC.
Certificate sales continued to be strong in 2002 despite declining interest
rates, reflecting clients' ongoing desire for safety of principal in the current
times of general market turmoil. Sales of certificates totaled $2.0 billion in
2002 compared to $1.9 billion and $1.5 billion in 2001 and 2000, respectively.
The higher certificate sales in 2002 over 2001 resulted primarily from special
promotions during 2002 of the American Express Flexible Savings Certificate.
Certificate sales in 2001 compared to 2000 benefited primarily from special
promotions of the seven-month term American Express Flexible Savings
Certificate, which produced sales of $388 million in 2001.
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Certificate maturities and surrenders totaled $1.8 billion during 2002, compared
to $1.7 billion in 2001 and $1.5 billion in 2000. The slightly higher
certificate maturities and surrenders in 2002, compared to 2001, resulted
primarily from higher surrenders of American Express Flexible Savings
Certificates.
AECC, as an issuer of face-amount certificates, is impacted whenever there is a
significant change in interest rates as customer interest crediting rates are
reset at shorter intervals than the yield on underlying investments. In view of
the continued uncertainty in the investment markets and due to the short-term
repricing nature of certificate reserve liabilities, AECC continues to invest in
securities that provide for more immediate, periodic interest/principal
payments, resulting in improved liquidity. To accomplish this, AECC continues to
invest much of its cash flow in intermediate-term bonds and mortgage-backed
securities. In addition, AECC enters into interest rate swap contracts that
effectively lengthen the rate reset interval on customer's certificates.
AECC's investment program is designed to maintain an investment portfolio that
will produce the highest possible after-tax yield within acceptable risk and
liquidity parameters. The program considers investment securities as investments
acquired to meet anticipated certificate owner obligations.
Debt securities, as well as all marketable equity securities, are classified as
available-for-sale and carried at fair value. The available-for-sale
classification does not mean that AECC expects to sell these securities, but
that these securities are available to meet possible liquidity needs should
there be significant changes in market interest rates or certificate owner
demand.
At December 31, 2002, securities classified as available-for-sale were carried
at a fair market value of $4.4 billion. The fixed maturity securities comprise
83% of AECC's total invested assets. Of these securities, approximately 97% are
investment grade. Investments primarily include corporate debt and
mortgage-backed securities. AECC's corporate debt securities is a diverse
portfolio with the largest concentrations, accounting for approximately 69% of
the portfolio, in the following industries: banking and finance, utilities,
communications and media, and transportation. Other than U.S. Government Agency
mortgage-backed securities, no one issuer represents more than 1% of total
securities.
At December 31, 2002, approximately 3.4% of AECC's invested assets were below
investment grade bonds, compared to 1.7% at December 31, 2001. Investment losses
continued in 2002, although at significantly lower levels than in 2001, with
$15.8 million of other-than-temporary impairments recognized in 2002. As
described earlier, in 2001 AECC recognized approximately $57.1 million in losses
on high-yield securities, which primarily includes below investment grade bonds,
largely associated with AECC's decision to reduce its holdings of high-yield
investments and rebalance the fixed maturity investment portfolio towards higher
quality, less volatile holdings. See notes 1 and 3 to the financial statements
for additional information relating to investments. Additional investment
security losses through 2003 are possible but the amount of any such losses is
dependent on a number of factors and cannot be estimated at this time.* AECC's
management believes that there will be no adverse impact on the certificate
owners of
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any such losses.*
*Statements in this discussion and analysis of AECC's financial condition and
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 industry-wide and AECC's default rate on
below investment grade bonds and other investments, changes in economic
conditions, such as a recession or a substantial increase in prevailing interest
rates or other factors that could cause a slowdown in the economy, outcomes in
litigation, adoption of recently issued accounting rules such as the
consolidation of variable interest entities, and changes in government
regulation that affects the ability of issuers to repay their debt.
AECC paid a cash dividend (return of capital) to AEFC of $10 million during
2002. During the fourth quarter of 2001, AECC paid a $167 million dividend to
AEFC by transferring at book value certain collateralized debt obligation (CDO)
securities owned by AECC. In part, the dividend was paid to allow AEFC to
transfer the CDO securities and related accrued interest into a securitization
trust. Additionally, AECC received $240 million in total cash as capital
contributions from AEFC during 2001.
Market risk and derivative financial instruments
The sensitivity analysis of two different tests of market risk discussed below
estimate the effects of hypothetical sudden and sustained changes in the
applicable market conditions on the ensuing year's earnings based on year-end
positions. The market changes, assumed to occur as of year-end, are a 100 basis
point increase in market interest rates and a 10% decline in a major stock
market index. Computation of the prospective effects of hypothetical interest
rate and major stock market index changes are based on numerous assumptions,
including relative levels of market interest rates and the major stock market
index level, as well as the levels of assets and liabilities. The hypothetical
changes and assumptions presented will be different than what actually occurs in
the future.
Furthermore, the computations do not anticipate actions that may be taken by
management if the hypothetical market changes occur over time. As a result,
actual earnings effects in the future will differ from those quantified below.
AECC primarily invests in intermediate-term and long-term fixed income
securities to provide its certificate owners with a competitive rate of return
on their certificate while managing risk. These investment securities provide
AECC with a historically dependable and targeted margin between the interest
rate earned on investments and the interest rate credited to certificate owners'
accounts. AECC does not invest in securities to generate short-term trading
profits for its own account.
AECC's goal is to manage interest rate sensitivity by modifying the repricing
characteristics of certificate liabilities so that the interest credited to
related investment certificate owners is not adversely affected by movements in
interest rates. AEFC holds regularly scheduled investment
-14-
committee meetings which is comprised of senior business managers, to review
models projecting various interest rate scenarios and risk/return measures and
their effect on the profitability of AECC. The committee's objectives are to
structure AECC's portfolio of investment securities based upon the type and
behavior of the certificates in the certificate reserve liabilities, to achieve
targeted levels of profitability within defined risk parameters and to meet
certificate contractual obligations. Part of the committee's strategy includes
entering into interest rate swaps to hedge interest rate risk.
AECC is exposed to risk associated with fluctuating interest payments from
certain certificate products tied to the London Interbank Offering Rate (LIBOR)
as the certificate products reset at shorter intervals than the average maturity
of the investment portfolio. Therefore, AECC's margins may be negatively
impacted by increases in the general level of interest rates. AECC 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 AECC from unfavorable
interest rate movements. The interest rate swaps are treated as cash flow hedges
per Statement of Financial Accounting Standards (SFAS) No. 133. At December 31,
2002, AECC has outstanding $950 million notional of interest rate swaps which
expire from 2003 to 2005.
On three series of certificates, interest is credited to the certificate owners'
accounts based upon the relative change in a major stock market index between
the beginning and end of the certificates' terms. To meet the obligations
related to the provisions of these certain certificates, AECC purchases
and writes index call options on a major stock market index and/or enters into
futures contracts.
SFAS No. 133 establishes 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 under SFAS No. 133 are further classified as either fair
value hedges, cash flow hedges or hedges of a net investment in a foreign
operation, based upon the exposure being hedged. See note 9 for further
discussion of the Company's derivative and hedging activities.
The negative impact on AECC's pretax earnings of the 100 basis point increase in
interest rates, which assumes repricings and customer behavior based on the
application of proprietary models, to the book of business at December 31, 2002
and 2001, would be approximately $0.9 million and $2.2 million for 2002 and
2001, respectively. The 10% decrease in a major stock market index level would
have a minimal impact on AECC's pretax earnings as of December 31, 2002 and
2001, because the income effect is a decrease in option income and a
corresponding decrease in interest credited to the American Express Stock Market
Certificate, American Express Market Strategy Certificate and American Express
Equity Indexed Savings Certificate owners' accounts.
-15-
Ratios
The ratio of stockholder's equity, excluding accumulated other comprehensive
income (loss) net of tax, to total assets less certificate loans and net
unrealized holding gains/losses on investment securities (capital to asset
ratio) at December 31, 2002 and 2001, was 5.4% and 5.2%, respectively. Under an
informal agreement established with the Commissioner of Commerce for the State
of Minnesota, AECC has agreed to maintain at all times a minimum capital to
assets ratio of 5.0%.
-16-
Item 7A. Ouantitative and Qualitative Disclosures About Market Risk
See Item 7.
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:
Responsibility for Preparation of Financial Statements 31
Report of Independent Auditors 32
Balance Sheets, December 31, 2002 and 2001 33 - 34
Statements of Operations, years ended December 31, 2002, 2001 and 2000 35 - 36
Statements of Comprehensive Income, years ended December 31, 2002,
2001 and 2000 37
Statements of Stockholder's Equity, years ended December 31, 2002,
2001 and 2000 38
Statements of Cash Flows, years ended December 31, 2002, 2001 and 2000 39 - 40
Notes to Financial Statements 41 - 55
Schedules:
I - Investments in Securities of Unaffiliated Issuers, December 31, 2002
II - Investments in and Advances to Affiliates and Income Thereon,
December 31, 2002, 2001 and 2000
III - Mortgage Loans on Real Estate and Interest earned on Mortgages,
year ended December 31, 2002
IV - Qualified Assets on Deposit, December 31, 2002
VI - Certificate Reserves, year ended December 31, 2002
VII - Valuation and Qualifying Accounts, years ended December 31, 2002, 2001
and 2000
Schedules I, III and VI for the year ended December 31, 2001, and
Schedule VI for the year ended December 31, 2000, are included in Registrant's
Annual Reports on Form 10-K for the fiscal years ended December 31, 2001 and
December 31, 2000, respectively, Commission file 2-23772, and are incorporated
herein by reference.
All other Schedules required by Article 6 of the Regulation S-X are not
required under the related instructions or are inapplicable and therefore have
been omitted.
-17-
2. Supplementary Data
None
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
Items omitted pursuant to General Instructions I(2)(c) of Form 10-K.
PART IV
Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this report, AECC
carried out an evaluation under the supervision and with the
participation of AECC's management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of its disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have concluded that AECC's disclosure
controls and procedures are effective to ensure that information
required to be disclosed by AECC in reports that it files or submits
under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. The CEO and CFO
also note that subsequent to the date of their evaluation, there were
no significant changes in AECC's internal controls or in other factors
that could significantly affect the internal controls, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Item 15. 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. None or not applicable.
2. None or not applicable.
3(a). Certificate of Incorporation, dated December 31, 1977,
filed electronically as Exhibit 3(a) to Post-Effective
Amendment No. 10 to Registration Statement No. 2-89507, is
incorporated herein by reference.
-18-
3(b). Certificate of Amendment, dated April 2, 1984 filed
electronically as Exhibit 3(b) to Post-Effective Amendment
No. 10 to Registration Statement No. 2-89507, is
incorporated herein by reference.
3(c). Certificate of Amendment, dated September 12, 1995, filed
electronically as Exhibit 3(c) to Post-Effective Amendment
No. 44 to Registration Statement No. 2-55252, is
incorporated herein by reference.
3(d). Certificate of Amendment, dated April 30, 1999, filed
electronically as Exhibit 3(a) to Registrant's March 31,
1999 Quarterly Report on Form 10-Q is incorporated herein
by reference.
3(e). Certificate of Amendment, dated January 28, 2000, filed
electronically as exhibit 3(e) to Post-Effective Amendment
No. 47 to Registration Statement No. 2-55252, is
incorporated herein by reference.
3(f). Current By-Laws, filed electronically as Exhibit 3(e) to
Post-Effective Amendment No. 19 to Registration Statement
No. 33-26844, are incorporated herein by reference.
4-9. None or not applicable.
10(a). Investment Advisory and Services Agreement between
Registrant and American Express Financial Corporation
dated March 6, 2002, filed electronically as Exhibit 10(a)
to Registrant's Post-Effective Amendment No. 51 to
Registration Statement No. 2-55252, is incorporated herein
by reference.
10(b). Distribution Agreement dated November 18, 1988, between
Registrant and IDS Financial Services Inc., filed
electronically as Exhibit 1(a) to the Registration
Statement No. 33-26844, for the American Express
International Investment Certificate (now called, the IDS
Investors Certificate) is incorporated herein by
reference.
10(c). Depositary 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. 3 to
Registration Statement No. 2-89507, is incorporated herein
by reference.
10(d). 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.
-19-
10(e). Selling Agent Agreement dated June 1, 1990, between
American Express Bank International and IDS Financial
Services Inc. for the American Express Investors and
American Express Stock Market Certificates, filed
electronically as Exhibit 1(c) to the Post-Effective
Amendment No. 5 to Registration Statement No. 33-26844, is
incorporated herein by reference.
10(f). Second amendment to Selling Agent Agreement between
American Express Financial Advisors Inc. and American
Express Bank International dated as of May 2, 1995, filed
electronically as Exhibit (1) to Registrant's June 30,
1995, Quarterly Report on Form 10-Q, is incorporated
herein by reference.
10(g). 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 2-55252, is incorporated
herein by reference.
10(h). Amendment to the Selling Agent Agreement dated December
12, 1994, between IDS Financial Services Inc. and American
Express Bank International, filed electronically as
Exhibit 1(d) to Post-Effective Amendment No. 13 to
Registration Statement No. 2-95577, is incorporated herein
by reference.
10(i). Selling Agent Agreement dated December 12, 1994, between
IDS Financial Services Inc. and Coutts & Co. (USA)
International, filed electronically as Exhibit 1(e) to
Post-Effective Amendment No. 13 to Registration Statement
No. 2-95577, is incorporated herein by reference.
10(j). Consulting Agreement dated December 12, 1994, between IDS
Financial Services Inc. and American Express Bank
International, filed electronically as Exhibit 16(f) to
Post-Effective Amendment No. 13 to Registration Statement
No. 2-95577 is incorporated herein by reference.
10(k). Letter amendment dated January 9, 1997 to the Marketing
Agreement dated October 10, 1991, between Registrant and
American Express Bank Ltd. filed electronically as Exhibit
10(j) to Post-Effective Amendment No. 40 to Registration
Statement No. 2-55252, is incorporated herein by
reference.
10(l). Form of Letter amendment dated April 7, 1997 to the
Selling Agent Agreement dated June 1, 1990 between
American Express Financial Advisors Inc. and American
Express Bank International, filed electronically as
Exhibit 10 (j) to Post-Effective Amendment No. 14 to
Registration Statement 33-26844, is incorporated herein by
reference.
-20-
10(m). Letter Agreement dated July 28, 1999 amending the
Selling Agent Agreement dated June 1, 1990, or a
schedule thereto, as amended, between American
Express Financial Advisors Inc. (formerly IDS
Financial Services Inc.) and American Express Bank
International, filed electronically to Registrant's
June 30, 1999 Quarterly Report on Form 10-Q, is
incorporated herein by reference.
10(n). Letter Agreement dated July 28, 1999, amending the
Marketing Agreement dated October 10, 1991, or a
schedule thereto, as amended, between IDS
Certificate Company and American Express Bank Ltd.,
filed electronically to Registrant's June 30, 1999
Quarterly Report on Form 10-Q, is incorporated
herein by reference.
10(o) Selling Agent Agreement, dated March 10, 1999
between American Express Financial Advisors Inc. and
Securities America, Inc., filed electronically as
Exhibit 10 (l) to Post-Effective Amendment No. 18 to
Registration Statement 33-26844, is incorporated
herein by reference.
10(p) Letter Agreement, dated April 10, 2000, amending the
Selling Agent Agreement, dated March 10, 1999,
between American Express Financial Advisors Inc. and
Securities America, Inc., filed electronically as
Exhibit 10 (o) to Post-Effective Amendment No. 20 to
Registration Statement 33-26844, is incorporated
herein by reference.
10(q) (1) Code of Ethics under rule 17j-1 for Registrant,
filed electronically as Exhibit 10(p)(1) to
Pre-Effective Amendment No. 1 to Registration
Statement No. 333-34982, is herein by reference.
(2) Code of Ethics under rule 17j-1 for Registrant's
investment advisor and principal underwriters, filed
electronically as Exhibit 10(p)(2) to Pre-Effective
Amendment No. 1 to Registration Statement No.
333-34982, is incorporated herein by reference.
10(r) Letter of Representations dated August 22, 2000 between
American Express Certificate Company and the Depository
Trust Company, filed electronically as Exhibit 10(r) to
Post-Effective Amendment No. 2-552527 is incorporated
herein by reference.
11-23. None or not applicable.
24(a). Officers' Power of Attorney, dated March 5, 2003, filed
electronically as Exhibit 24(a) to Post-Effective
Amendment No. 29 to Registration Statement No. 2-95577 on
or about March 24, 2003 is incorporated by reference.
24(b). Directors' Power of Attorney, dated December 4, 2002,
filed electronically as Exhibit 24(b) to Post-Effective
Amendment No. 29 to Registration Statement No. 2-95577 on
or about March 24, 2003 is incorporated by reference.
25-99. None or not applicable.
-21-
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.3 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
99.4 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K filed during the last quarter of the period
covered by this report.
None.
-22-
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 American Express Certificate Company
BY /s/ Paula R. Meyer
----------------------
NAME AND TITLE Paula R. Meyer, President
DATE March 27, 2003
Pursuant to the requirements of the Securities and 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 /s/ Paula R. Meyer
---------------------------------
NAME AND TITLE Paula R. Meyer, President and Director
(Principal Executive Officer)
DATE March 27, 2003
BY /s/ Judd K. Lohmann
---------------------------------
NAME AND TITLE Judd K. Lohmann, Treasurer
(Principal Financial Officer)
DATE March 27, 2003
BY /s/ Philip C. Wentzel
---------------------------------
NAME AND TITLE Philip C. Wentzel, Vice President and Controller
(Principal Accounting Officer)
DATE March 27, 2003
BY /s/ Rodney P. Burwell *
---------------------------------
NAME AND TITLE Rodney P. Burwell, Director
DATE March 27, 2003
BY /s/ Kent M. Bergene *
---------------------------------
NAME AND TITLE Kent M. Bergene, Director
DATE March 27, 2003
BY /s/ Jean B. Keffeler *
---------------------------------
NAME AND TITLE Jean B. Keffeler, Director
DATE March 27, 2003
-23-
BY /s/ Thomas R. McBurney *
---------------------------------
NAME AND TITLE Thomas R. McBurney, Director
DATE March 27, 2003
BY /s/ Walter S Berman *
---------------------------------
NAME AND TITLE Walter S Berman, Director
DATE March 27, 2003
BY /s/ Karen M. Bohn *
---------------------------------
NAME AND TITLE Karen M. Bohn, Director
DATE March 27, 2003
* Signed pursuant to Directors' Power of Attorney dated December 4, 2002,
filed electronically as Exhibit 24(b) to Post-Effective Amendment No. 29 to
Registration Statement No. 2-95577 on or about March 24, 2003 is
incorporated by reference by:
/s/ Paula R. Meyer
- --------------------
Paula R. Meyer
-24-
Contents of this page are filed electronically herewith as Exhibit 99.1.
-25-
Contents of this page are filed electronically herewith as Exhibit 99.2.
-26-
Contents of this page are filed electronically herewith as Exhibit 99.3.
-27-
Contents of this page are filed electronically herewith as Exhibit 99.3.
-28-
Contents of this page are filed electronically herewith as Exhibit 99.4.
-29-
Contents of this page are filed electronically herewith as Exhibit 99.4.
-30-
American Express Certificate Company
Responsibility for Preparation of Financial Statements
The management of American Express Certificate Company (AECC) is responsible for
the preparation and fair presentation of its financial statements. The financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States which are appropriate in the circumstances, and
include amounts based on the best judgment of management. AECC's management is
also responsible for the accuracy and consistency of other financial information
included in this Form 10-K.
In recognition of its responsibility for the integrity and objectivity of data
in the financial statements, AECC maintains a system of internal control over
financial reporting. The system is designed to provide reasonable, but not
absolute, assurance with respect to the reliability of AECC's financial
statements. The concept of reasonable assurance is based on the notion that the
cost of internal control should not exceed the benefits derived.
The internal control system is founded on an ethical climate and includes an
organizational structure with clearly defined lines of responsibility, policies
and procedures, a Code of Conduct, and the careful selection and training of
employees. Internal auditors monitor and assess the effectiveness of the
internal control system and report their findings to management throughout the
year. AECC's independent auditors are engaged to express an opinion on the
year-end financial statements and, with the coordinated support of the internal
auditors, review the financial records and related data and test internal
controls over financial reporting.
-31-
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Security Holders
American Express Certificate Company:
We have audited the accompanying balance sheets of American Express Certificate
Company a wholly-owned subsidiary of American Express Financial Corporation, as
of December 31, 2002 and 2001, and the related statements of operations,
comprehensive income, stockholder's equity, and cash flows for each of the three
years in the period ended December 31, 2002. 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 American
Express 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 auditing standards generally accepted
in the United States. 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, 2002 and 2001, by correspondence with custodians. 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 American Express Certificate
Company at December 31, 2002 and 2001, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
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 LLP
Minneapolis, Minnesota
January 27, 2003
-32-
Balance Sheets, December 31,
Assets
(In thousands) 2002 2001
Qualified Assets (note 2)
Investments in unaffiliated issuers (notes 3, 4 and 10):
Cash and cash equivalents $ 224,363 $ 72,817
Available-for-sale securities 4,389,396 4,073,901
First mortgage loans on real estate and other loans 452,243 343,434
Certificate loans - secured by certificate reserves 18,614 21,807
Investments in and advances to affiliates - 422
--------- ---------
Total investments 5,084,616 4,512,381
--------- ---------
Receivables:
Dividends and interest 34,114 38,298
Investment securities sold 24,170 21,500
------ ------
Total receivables 58,284 59,798
------ ------
Other (notes 9 & 10) 34,403 48,393
------ ------
Total qualified assets 5,177,303 4,620,572
--------- ---------
Other Assets
Deferred distribution fees and other 5,979 7,781
----- -----
Total other assets 5,979 7,781
----- -----
Total assets $5,183,282 $4,628,353
---------- ----------
-33-
Balance Sheets, December 31, (continued)
Liabilities and Stockholder's Equity
(In thousands, except share amounts) 2002 2001
Liabilities
Certificate Reserves (note 5):
Installment certificates:
Reserves to mature $ 168,957 $ 193,175
Additional credits and accrued interest 3,988 5,082
Advance payments and accrued interest 564 645
Other 34 33
Fully paid certificates:
Reserves to mature 4,277,348 3,900,824
Additional credits and accrued interest 42,311 59,948
Due to unlocated certificate holders 170 219
--- ---
Total certificate reserves 4,493,372 4,159,926
--------- ---------
Accounts Payable and Accrued Liabilities:
Due to Parent (note 7) 887 878
Due to Parent for federal income taxes 3,908 1,774
Due to other affiliates (note 7) 690 587
Deferred federal income taxes, net (note 8) 29,556 404
Payable for investment securities purchased 263,658 163,507
Other (notes 9 and 10) 31,822 38,272
------ ------
Total accounts payable and accrued liabilities 330,521 205,422
------- -------
Total liabilities 4,823,893 4,365,348
--------- ---------
Commitments (note 4)
Stockholder's Equity (notes 5 and 6)
Common stock, $10 par - authorized and issued 150,000 shares 1,500 1,500
Additional paid-in capital 373,844 383,844
Retained earnings (deficit):
Appropriated for predeclared additional credits/interest 811 1,123
Appropriated for additional interest on advance payments 15 15
Unappropriated (100,142) (146,593)
Accumulated other comprehensive income - net of tax (note 1) 83,361 23,116
------ ------
Total stockholder's equity 359,389 263,005
------- -------
Total liabilities and stockholder's equity $5,183,282 $4,628,353
---------- ----------
See notes to financial statements.
-34-
Statements of Operations
Year ended December 31, (In thousands) 2002 2001 2000
Investment Income
Interest income from unaffiliated investments:
Bonds and notes $227,609 $214,534 $204,923
Mortgage loans on real estate and other loans 27,719 25,133 26,675
Certificate loans 1,095 1,293 1,471
Dividends 9,949 19,986 32,478
Other 980 577 559
--- --- ---
Total investment income 267,352 261,523 266,106
------- ------- -------
Investment Expenses
Parent and affiliated company fees (note 7):
Distribution 29,762 30,924 31,209
Investment advisory and services 9,980 9,248 8,779
Transfer agent 3,203 3,161 3,300
Depository 321 285 254
Options (note 9) 36,421 39,510 43,430
Repurchase agreements - 52 124
Interest rate swap agreements (note 9) 9,780 17,616 17
Other 360 432 410
--- --- ---
Total investment expenses 89,827 101,228 87,523
------ ------- ------
Net investment income before provision for certificate
reserves and income tax (expense) benefit $177,525 $160,295 $178,583
-------- -------- --------
-35-
Statements of Operations (continued)
Year ended December 31, (In thousands) 2002 2001 2000
Provision for Certificate Reserves (notes 5 and 9)
According to the terms of the certificates:
Provision for certificate reserves $ 7,888 $ 10,321 $ 12,599
Interest on additional credits 543 597 714
Interest on advance payments 19 34 33
Additional credits/interest authorized by AECC:
On fully paid certificates 88,201 138,020 134,633
On installment certificates 4,757 7,559 8,483
----- ----- -----
Total provision for certificate reserves before reserve recoveries 101,408 156,531 156,462
Reserve recoveries from terminations prior to maturity (1,156) (1,144) (1,001)
------ ------ ------
Net provision for certificate reserves 100,252 155,387 155,461
------- ------- -------
Net investment income before income tax (expense) benefit 77,273 4,908 23,122
Income tax (expense) benefit (note 8) (24,866) 3,348 (14)
------- ----- ---
Net investment income 52,407 8,256 23,108
------ ----- ------
Net realized loss on investments
Securities of unaffiliated issuers before income tax benefit (9,899) (92,375) (10,110)
------ ------- -------
Income tax benefit (expense) (note 8):
Current (5,742) 36,320 (537)
Deferred 9,373 (3,989) 4,076
----- ------ -----
Total income tax benefit 3,631 32,331 3,539
----- ------ -----
Net realized loss on investments (6,268) (60,044) (6,571)
------ ------- ------
Cumulative effect of accounting change (net of income tax benefit of $214) - (397) -
-------- -------- --------
Net income (loss) $ 46,139 $(52,185) $ 16,537
-------- -------- --------
See notes to financial statements.
-36-
Statements of Comprehensive Income
Year ended December 31, (In thousands) 2002 2001 2000
Net income (loss) $ 46,139 $(52,185) $16,537
-------- -------- -------
Other comprehensive income net of tax (note 1)
Cumulative effect of accounting change (note 1) - (2,187) -
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during year 99,188 19,959 21,840
Income tax expense (34,716) (6,986) (7,644)
------- ------ ------
Net unrealized holding gains arising during the period 64,472 12,973 14,196
Reclassification adjustment for (gains) losses included in net income (loss) (8,142) 101,754 (1,417)
Income tax expense (benefit) 2,850 (35,614) 496
----- ------- ---
Net reclassification adjustment for (gains) losses included in net income (loss) (5,292) 66,140 (921)
------ ------ ----
Net unrealized gains on available-for-sale securities 59,180 79,113 13,275
------ ------ ----
Unrealized losses on interest rate swaps:
Unrealized losses arising during the period (8,141) (19,683) -
Income tax benefit 2,849 6,889 -
------ ------ ----
Net unrealized holding losses arising during the period (5,292) (12,794) -
------ ------ ----
Reclassification adjustment for losses included in net income (loss) 9,780 17,616 -
Income tax benefit (3,423) (6,166) -
------ ------ ----
Net reclassification adjustment for losses included in net income (loss) 6,357 11,450 -
------ ------ ----
Net unrealized gains (losses) on interest rate swaps 1,065 (1,344) -
Net other comprehensive income 60,245 75,582 13,275
------ ------ ------
Total comprehensive income $106,384 $ 23,397 $29,812
-------- -------- -------
See notes to financial statements.
-37-
Statements of Stockholder's Equity
Year ended December 31, (In thousands) 2002 2001 2000
Common Stock
Balance at beginning and end of year $ 1,500 $ 1,500 $ 1,500
--------- --------- --------
Additional Paid-in Capital
Balance at beginning of year $ 383,844 $ 143,844 $143,844
(Return of capital to) contribution from Parent (10,000) 240,000 -
--------- --------- --------
Balance at end of year $ 373,844 $ 383,844 $143,844
--------- --------- --------
Retained Earnings
Appropriated for predeclared additional credits/interest (note 5)
Balance at beginning of year $ 1,123 $ 2,684 $ 2,879
Transferred to unappropriated retained earnings (312) (1,561) (195)
---- ------ ----
Balance at end of year $ 811 $ 1,123 $ 2,684
--------- --------- --------
Appropriated for additional interest on advance payments (note 5)
Balance at beginning of year $ 15 $ 15 $ 10
Transferred from unappropriated retained earnings - - 5
--------- --------- --------
Balance at end of year $ 15 $ 15 $ 15
--------- --------- --------
Unappropriated (note 6)
Balance at beginning of year $(146,593) $ 70,937 $ 59,210
Net income (loss) 46,139 (52,185) 16,537
Transferred from appropriated retained earnings 312 1,561 190
Capital dividends declared - (166,906) -
Cash dividends declared - - (5,000)
--------- --------- --------
Balance at end of year $(100,142) $(146,593) $ 70,937
--------- --------- --------
Accumulated other comprehensive income -
net of tax (note 1)
Balance at beginning of year $ 23,116 $ (52,466) $(65,741)
Net other comprehensive income 60,245 75,582 13,275
------ ------ ------
Balance at end of year $ 83,361 $ 23,116 $(52,466)
--------- --------- --------
Total stockholder's equity $ 359,389 $ 263,005 $166,514
--------- --------- --------
See notes to financial statements.
-38-
Statements of Cash Flows
Year ended December. 31, (In thousands) 2002 2001 2000
Cash Flows from Operating Activities
Net income (loss) $ 46,139 $ (52,185) $ 16,537
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of accounting change, net of tax (note 1) - 397 -
Net provision for certificate reserves 100,252 155,387 155,461
Interest income added to certificate loans (738) (820) (914)
Amortization of premiums/discounts-net (2,426) (1,483) 42,192
Provision for deferred federal income taxes (3,288) (9,793) 4,940
Net realized loss on investments before income taxes 9,899 92,375 10,110
Decrease (increase) in dividends and interest receivable 4,184 9,603 (6,317)
Decrease in deferred distribution fees 1,802 1,525 2,946
Decrease (increase) in other assets 13,990 4,622 (7,016)
Increase (decrease) in other liabilities 14,848 14,001 (2,823)
------ ------ ------
Net cash provided by operating activities 184,662 213,629 215,116
------- ------- -------
Cash Flows from Investing Activities
Maturity and redemption of investments:
Held-to-maturity securities - - 138,150
Available-for-sale securities 1,111,493 704,877 447,643
Other investments 88,437 30,307 68,877
Sale of investments:
Held-to-maturity securities - - 8,836
Available-for-sale securities 884,524 969,308 312,612
Other investments 11,166 - -
Certificate loan payments 2,919 3,127 3,399
Purchase of investments:
Held-to-maturity securities - - (161)
Available-for-sale securities (2,128,914) (2,274,412) (1,250,487)
Other investments (233,075) (54,927) (49,460)
Certificate loan fundings (2,085) (2,830) (3,197)
------ ------ ------
Net cash used in investing activities $ (265,535) $ (624,550) $ (323,788)
----------- ----------- -----------
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Statements of Cash Flows (continued)
Year ended December 31, (In thousands) 2002 2001 2000
Cash Flows from Financing Activities
Payments from certificate owners $ 2,031,414 $ 1,919,769 $ 1,667,475
Proceeds from repurchase agreements - 500 -
Certificate maturities and cash surrenders (1,788,995) (1,734,742) (1,517,178)
Payments under repurchase agreements - (500) (25,000)
(Return of capital to) contribution from parent (10,000) 240,000 -
Dividends paid - - (5,000)
------- ------- -------
Net cash provided by financing activities 232,419 425,027 120,297
------- ------- -------
Net increase in cash and cash equivalents 151,546 14,106 11,625
Cash and cash equivalents at beginning of year 72,817 58,711 47,086
------ ------ ------
Cash and cash equivalents at end of year $ 224,363 $ 72,817 $ 58,711
----------- ----------- -----------
Supplemental Disclosures Including Non-cash Transactions
Cash paid for income taxes $ 22,233 $ - $ 2,558
Certificate maturities and surrenders through
loan reductions $ 3,097 $ 4,263 $ 4,060
See notes to financial statements.
-40-
Notes to Financial Statements
(In thousands unless indicated otherwise)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
American Express Certificate Company (AECC), is a wholly-owned subsidiary of
American Express Financial Corporation (Parent), which is a wholly-owned
subsidiary of American Express Company. AECC is registered as an investment
company under the Investment Company Act of 1940 ("the 1940 Act") and is in the
business of issuing face-amount investment 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, at its discretion. The certificates issued by AECC are not insured by any
government agency. AECC's certificates are sold primarily by American Express
Financial Advisor Inc.'s (AEFA) (an affiliate) field force operating in 50
states, the District of Columbia and Puerto Rico. The Parent acts as investment
advisor for AECC.
AECC currently offers ten types of certificates with specified maturities
ranging from 10 to 20 years. Within their specified maturity, most certificates
have interest rate terms of one- to 36-months. In addition, three types of
certificates have interest tied, in whole or in part, to any upward movement in
a broad-based stock market index. Except for two types of certificates, all of
the certificates are available as qualified investments for Individual
Retirement Accounts or 401(k) plans and other qualified retirement plans.
AECC's gross income is derived primarily from interest and dividends generated
by its investments. AECC'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 Parent for investment advisory and other services, and
the distribution fees paid to AEFA.
Basis of financial statement presentation
The accompanying financial statements are presented in accordance with
accounting principles generally accepted in the United States. AECC uses the
equity method of accounting for its wholly-owned unconsolidated subsidiary,
which is the method prescribed by the Securities and Exchange Commission (SEC)
for non-investment company subsidiaries. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
income and expenses during the year then ended. Actual results could differ from
those estimates.
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.
-41-
Interest Income
Interest income is accrued as earned using the effective interest method, which
makes an adjustment for security premiums and discounts, so that the related
security recognizes a constant rate of return on the outstanding balance
throughout its term.
Preferred stock dividend income
AECC 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. Dividend income from perpetual preferred
stock is recognized on an ex-dividend basis.
Cash and cash equivalents
Cash equivalents are carried at amortized cost, which approximates fair value.
AECC 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.
Investment securities
Debt securities and marketable equity securities are classified as
available-for-sale and carried at fair value. Unrealized holding gains and
losses on securities classified as available-for-sale are carried as a separate
component, net of deferred income taxes, in Accumulated other comprehensive
income (loss) in Stockholder's Equity.
The basis for determining cost in computing realized gains and losses on
securities is specific identification. Gains and losses are recognized in the
results of operations upon disposition of the securities. In addition, losses
are also recognized when management determines that a decline in value is
other-than-temporary, which requires judgment regarding the amount and timing of
recovery. Indicators of other-than-temporary impairment for debt securities
include issuer downgrade, default or bankruptcy. AECC also considers the extent
to which cost exceeds fair value, the duration of time of that decline and
management's judgment as to the issuer's current and prospective financial
condition. The charges are reflected in the Net realized loss on investments
within the Statement of Operations.
First mortgage loans on real estate and other loans
Mortgage and other loans reflects principal amounts outstanding less reserves
for losses, which is the basis for determining any realized gains or losses. The
estimated fair value of the mortgage loans on real estate is determined by a
discounted cash flow analysis using mortgage interest rates currently offered
for mortgages of similar maturities. The fair value of the other loans
represents market prices or estimated fair values when quoted prices are not
available.
The reserve for losses is measured as the excess of the loan's recorded
investment over its present value of expected principal and interest payments
discounted at the loan's effective interest rate or the fair value of
collateral. Additionally, the level of the reserve account is determined based
on several factors, including historical experience and current economic and
political conditions. Management regularly evaluates the adequacy of the reserve
for loan losses, and believes it is adequate to absorb estimated losses in the
portfolio.
AECC generally stops accruing interest on mortgage loans on real estate for
which interest payments are delinquent more than three months. Based on
management's judgment as to the ultimate collectibility of principal, interest
payments received are either recognized as income or applied to the recorded
investment in the loan.
-42-
Certificates
Investment certificates may be purchased either with a lump-sum payment or by
installment payments. Certificate owners are entitled to receive at maturity a
definite sum of money. Payments from certificate owners are credited to
investment certificate reserves. Investment certificate reserves accumulate
interest at specified percentage rates as declared by AECC. Reserves also are
maintained for advance payments made by certificate owners, accrued interest
thereon, and for additional credits in excess of minimum guaranteed rates 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 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 prior to maturity, unamortized deferred distribution fees
are recognized in expense and any related surrender charges are recognized as a
reduction in Provision for certificate reserves.
Federal income taxes
AECC's taxable income or loss is included in the consolidated federal income tax
return of American Express Company. AECC provides for income taxes on a separate
return basis, except that, under an agreement between Parent 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 the Parent and its
subsidiaries that the Parent will reimburse a subsidiary for any tax benefits
recorded.
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 $2,187 to earnings and other comprehensive income (OCI),
respectively. See note 9 for further discussion of the Company's derivative and
hedging activities.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which addresses consolidation by business
enterprises of variable interest entities (VIEs). The accounting provisions and
expanded disclosure requirements for VIEs existing at December 31, 2002, are
fully effective for reporting periods beginning after June 15, 2003. An entity
shall be subject to consolidation according to the provisions of FIN 46, if, by
design, either (i) the total equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated
financial support from other parties, or (ii) as a group, the holders of the
equity investment at risk lack (a) direct or indirect ability to make decisions
about an entity's activities; (b) the obligation to absorb the expected losses
of the entity if they occur; or (c) the right to receive the expected residual
return of the entity if they occur. In general, FIN 46 will require a VIE to be
consolidated when an enterprise has a variable interest that will absorb a
majority of the VIE's expected losses or receive a majority of the VIE's
expected residual return.
It is likely that AECC will disclose additional information about VIE's when FIN
46 becomes effective in the third quarter of 2003. The entity primarily impacted
by FIN 46 relates to a secured loan trust (SLT) for which AECC has a 33%
ownership interest. The SLT provides returns to investors primarily based on the
performance of an underlying portfolio of high-yield loans. AECC's pro rata
return is based on the performance of up to $125,000 of high yield loans.
Currently, the underlying portfolio consists of $114,472 in high-yield loans
which have a market value of $103,739. The SLT has an
-43-
adjusted cost basis of $26,593. AECC continues to evaluate other relationships
and interest in entities that may be considered VIEs. The impact of adopting FIN
46 on the Consolidated Financial Statements is still being reviewed.
2. DEPOSIT OF ASSETS AND MAINTENANCE OF QUALIFIED ASSETS
Under the provisions of its certificates and the 1940 Act, AECC was required to
have Qualified Assets (as that term is defined in Section 28(b) of the 1940 Act)
in the amount of $4,492,725 and $4,152,437 at December 31, 2002 and 2001,
respectively. AECC had Qualified Assets of $4,778,592 and $4,413,104 at December
31, 2002 and 2001, respectively, excluding net unrealized appreciation on
Available-for-sale securities of $135,010 and $43,962 at December 31, 2002 and
2001, respectively, and Payable for investment securities purchased of $263,658
and $163,507 at December 31, 2002 and 2001, respectively.
Qualified Assets are valued in accordance with such provisions of Minnesota
Statutes as are applicable to investments of life insurance companies. These
values are the same as financial statement carrying values, except for debt
securities classified as available-for-sale and all marketable equity
securities, which are carried at fair value in the financial statements but are
valued at amortized cost for qualified asset and deposit maintenance purposes.
Pursuant to provisions of the certificates, the 1940 Act, the central depository
agreement and requirements of various states, qualified assets of AECC were
deposited as follows:
December 31, 2002
Required
Deposits deposits Excess
Deposits to meet certificate liability requirements:
States $ 362 $ 318 $ 44
Central Depository 5,031,924 4,472,886 559,038
--------- --------- -------
Total $5,032,286 $4,473,204 $559,082
---------- ---------- --------
December 31, 2001
Required
Deposits deposits Excess
Deposits to meet certificate liability requirements:
States $ 361 $ 318 $ 43
Central Depository 4,547,283 4,129,056 418,227
--------- --------- -------
Total $4,547,644 $4,129,374 $418,270
---------- ---------- --------
The assets on deposit at December 31, 2002 and 2001 consisted of securities and
other loans having a deposit value of $4,608,914 and $3,955,748, respectively;
mortgage loans on real estate of $338,924 and $343,434, respectively, and other
assets of $84,448 and $248,462, respectively.
American Express Trust Company is the central depository for AECC. See note 7.
-44-
3. INVESTMENTS IN SECURITIES
Fair values of investments in securities represent market prices or estimated
fair values when quoted prices are not available. Estimated fair values are
determined by using established procedures involving, among other things, review
of market indexes, price levels of current offerings and comparable issues,
price estimates, estimated future cash flows, and market data from independent
brokers. The procedures are reviewed annually by management and the Board of
Directors.
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. AECC reclassified all held-to-maturity securities to available-for-sale
upon adoption as of January 1, 2001.
A summary of Available-for-sale securities at December 31, is as follows:
2002
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Government and
agency obligations $ 362 $ 37 $ - $ 399
Mortgage and asset-backed securities 2,938,348 94,528 1,728 3,031,148
Structured investments 33,470 2,175 - 35,645
State and municipal obligations 9,424 385 - 9,809
Corporate debt securities 1,172,446 53,394 15,540 1,210,300
Stated maturity preferred stock 82,554 1,876 383 84,047
Perpetual preferred stock 17,782 266 - 18,048
---------- -------- ------- ----------
Total $4,254,386 $152,661 $17,651 $4,389,396
---------- -------- ------- ----------
2001
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Government and
agency obligations $ 361 $ 24 $ - $ 385
Mortgage and asset-backed securities 2,136,070 23,121 10,059 2,149,132
Structured investments 59,586 582 2,613 57,555
State and municipal obligations 10,893 563 - 11,456
Corporate debt securities 1,623,612 38,078 10,379