UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 30 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 March 31, 2003
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 Identification No.)
incorporation or organization)
52 AXP Financial Center, Minneapolis, Minnesota 55474
- ----------------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 671-3131
----------------------
None
-----------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _______ No ___X___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 2003
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.
AMERICAN EXPRESS CERTIFICATE COMPANY
FORM 10-Q
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Balance Sheets - March 31, 2003 and December
31, 2002
1
Statements of Income - Three months ended
March 31, 2003 and 2002 2
Statements of Comprehensive Income - Three
months ended March 31, 2003 and 2002 3
Statements of Cash Flows - Three months ended
March 31, 2003 and 2002 4
Notes to Financial Statements 5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
Item 4. Controls and Procedures 9
Part II. Other Information: 10
Item 1. Legal Proceedings
Item 2. Change in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 11
Certifications 12-15
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
AMERICAN EXPRESS CERTIFICATE COMPANY
BALANCE SHEETS
(In thousands)
March 31, December 31,
2003 2002
(Unaudited)
------------------ -----------------
ASSETS
Qualified Assets:
Cash and cash equivalents $ 488,257 $ 224,363
Investments in unaffiliated issuers 4,849,669 4,860,253
Equity index options 30,435 34,403
Receivables 47,640 58,284
------------------ -----------------
Total qualified assets 5,416,001 5,177,303
------------------ -----------------
Other assets:
Due from Parent for federal income taxes 3,313 -
Deferred distribution fees and other 5,596 5,979
------------------ -----------------
Total other assets 8,909 5,979
------------------ -----------------
Total assets $ 5,424,910 $ 5,183,282
================== =================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves $ 4,494,221 $ 4,493,372
Accounts payable and accrued liabilities 568,759 330,521
------------------ -----------------
Total liabilities 5,062,980 4,823,893
------------------ -----------------
Shareholder's equity:
Common stock 1,500 1,500
Additional paid-in-capital 373,844 373,844
Accumulated deficit (82,684) (99,316)
Accumulated other comprehensive income 69,270 83,361
------------------ -----------------
Total shareholder's equity 361,930 359,389
------------------ -----------------
Total liabilities and shareholder's equity $ 5,424,910 $ 5,183,282
================== =================
See notes to financial statements.
-1-
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Three Months Ended
March 31,
-----------------------------------
2003 2002
--------------- ----------------
Investment income $ 64,409 $ 67,334
Investment expenses 15,646 20,010
---------------- ----------------
Net investment income before provision for
certificate reserves and income tax expense 48,763 47,324
Provision for certificate reserves 25,328 30,737
---------------- ----------------
Net investment income before income tax expense 23,435 16,587
Income tax expense (7,808) (5,053)
---------------- ----------------
Net investment income 15,627 11,534
--------------- ----------------
Net realized gain (loss) on investments 1,546 (557)
Income tax (expense) benefit (541) 195
---------------- ----------------
Net realized gain (loss) on investments 1,005 (362)
---------------- ----------------
Net income $ 16,632 $ 11,172
================ ================
See notes to financial statements.
-2-
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2003 2002
------------- ------------
Net income $ 16,632 $ 11,172
Other comprehensive income
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during period (18,072) (31,151)
Income tax benefit 6,325 10,903
------------ ------------
Net unrealized holding losses arising during period (11,747) (20,248)
------------ ------------
Reclassification adjustment for gains included in net income (2,537) (30)
Income tax expense 888 10
------------ ------------
Net reclassification adjustment for gains included in net income (1,649) (20)
------------ ------------
Net unrealized losses on available-for-sale securities (13,396) (20,268)
------------ ------------
Unrealized losses on interest rate swaps:
Unrealized losses arising during the period (2,089) (62)
Income tax benefit 732 22
------------ ------------
Net unrealized holding losses arising during period (1,357) (40)
------------ ------------
Reclassification adjustment for losses included in net income 1,019 3,571
Income tax benefit (357) (1,250)
------------ ------------
Net reclassification adjustment for losses included in net income 662 2,321
------------ ------------
Net unrealized (losses) gains on interest rate swaps (695) 2,281
------------ ------------
Net other comprehensive loss (14,091) (17,987)
------------ ------------
Total comprehensive income (loss) $ 2,541 $ (6,815)
============ ============
See notes to financial statements.
-3-
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------------------------
2003 2002
----------------- -----------------
Operating Activities:
Net income $ 16,632 $ 11,172
Adjustments to reconcile net income
to net cash provided by operating activities:
Interest added to certificate loans (161) (184)
Net amortization of premiums (accretion of discounts) 1,164 (1,258)
Deferred taxes (2,828) (3,161)
Deferred distribution fees 378 508
Net realized losses on equity index options 4,087 5,651
Net realized (gain) loss on investments before income taxes (1,546) 557
Dividends and interest receivable 770 (1,575)
Other assets and liabilities, net (3,193) (3,598)
----------------- -----------------
Net cash provided by operating activities 15,303 8,112
----------------- -----------------
Investing Activities:
Maturity and redemption of investments:
Available-for-sale securities 375,915 221,962
Other investments 20,202 5,919
Sale of investments:
Available-for-sale securities 963,041 152,330
Other investments 2,963 -
Certificate loan payments 756 753
Purchase of investments:
Available-for-sale securities (1,070,141) (469,109)
Other investments (43,527) (12,738)
Certificate loan fundings (422) (417)
----------------- -----------------
Net cash provided by (used in) investing activities 248,787 (101,300)
----------------- -----------------
Financing Activities:
Payments from certificate owners 483,045 396,793
Interest credited on certificates 25,328 30,737
Certificate maturities and cash surrenders (508,569) (394,482)
----------------- -----------------
Net cash (used in) provided by financing activities (196) 33,048
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 263,894 (60,140)
Cash and cash equivalents beginning of period 224,363 72,817
----------------- -----------------
Cash and cash equivalents end of period $ 488,257 $ 12,677
================= =================
See notes to financial statements.
-4-
AMERICAN EXPRESS CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
1. Basis of Presentation
The accompanying Financial Statements should be read in conjunction with
the financial statements in the Annual Report on Form 10-K of American
Express Certificate Company (AECC) for the year ended December 31, 2002.
Certain reclassifications of prior period amounts have been made to conform
to the current presentation.
The interim financial information in this report has not been audited. In
the opinion of management, all adjustments necessary for a fair
presentation of the financial position and results of operations for the
interim periods have been made. All adjustments made were of a normal,
recurring nature. Results of operations reported for interim periods are
not necessarily indicative of results for the entire year.
Recently Issued Accounting Standards
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 are effective at
inception for VIEs created after January 31, 2003, and are effective for
reporting periods beginning after June 15, 2003 for VIEs created prior to
February 1, 2003. An entity is 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 returns 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.
Implementation had no effect on the results of operations for the first
three months of 2003, however, it is likely that AECC will disclose
additional information about VIEs when FIN 46 becomes fully 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. The aggregate fair value of
loans related to AECC's pro rata share of this structure approximates
$107,082. Over the life of this structure through its maturity, AECC's
maximum cumulative exposure to pre-tax loss as a result of its investment
is represented by the carrying value, which was $26,542 at March 31, 2003.
AECC continues to evaluate other relationships and interest in entities
that may be considered VIEs. The impact of adopting FIN 46 on the financial
statements is still being reviewed.
-5-
2. Investments in Unaffiliated Issuers
Fair market values of investments in unaffiliated issuers were:
March 31, December 31,
2003 2002
--------------- --------------
Available-for-sale securities $ 4,362,702 $ 4,389,396
First mortgage loans on real estate and other loans 469,090 452,243
Certificate loans - secured by certificate reserves 17,877 18,614
--------------- --------------
Total $ 4,849,669 $ 4,860,253
=============== ==============
Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $36,423
and $2,349 for the three months ended March 31, 2003 and 2002,
respectively. Gross realized losses on sales of securities classified as
Available-for-Sale were ($1,036) and ($2,115) for the same periods. AECC
also recognized other-than-temporary impairment losses on
Available-for-Sale securities of ($32,851) and ($325) for the three months
ended March 31, 2003 and 2002, respectively.
3. Taxes and Certificate Maturities and Surrenders through Loan Reductions
Net income taxes paid during the three months ended March 31, 2003 and 2002
were approximately $18,382 and $27,619, respectively. Certificate
maturities and surrenders through loan reductions during the three months
ended March 31, 2003 and 2002 were approximately $564 and $673,
respectively.
4. Comprehensive Income
Comprehensive income is defined as the aggregate change in shareholder's
equity, excluding changes in ownership interests. It is the sum of net
income and changes in unrealized gains or losses on available-for-sale
securities and unrealized gains or losses on derivatives. The components of
comprehensive income and related tax amounts for the three months ended
March 31, 2003 and 2002 are reflected in the accompanying statements of
comprehensive income.
5. Commitments and Contingencies
At March 31, 2003 and 2002, commitments for fundings of first mortgage
loans on real estate, at market interest rates, aggregated $3,500 and
$5,650, respectively. AECC holds the mortgage document, which gives it the
right to take possession of the property if the borrower fails to perform
according to the terms of the agreements. AECC employs policies and
procedures to ensure the creditworthiness of the borrowers and that funds
will be available on the funding date. AECC's first mortgage loans on real
estate fundings are restricted to 80% or less of the market value of the
real estate at the time of the loan funding. Management believes there is
no fair value for these commitments.
AECC is a party to litigation and arbitration proceedings in the ordinary
course of its business. The outcome of any litigation or threatened
litigation cannot be predicted with any certainty. However, in the
aggregate, AECC does not consider any lawsuits in which it is named as a
defendant to have a material impact on AECC's financial position or
operating results.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 follows accounting principles generally accepted in the United States
(GAAP).
Results of operations for the three months ended March 31, 2003 and 2002
As of March 31, 2003, total assets of the American Express Certificate Company
(AECC) increased $242 million from December 31, 2002. This increase in total
assets was substantially due to a $251 million increase in unsettled purchases
of Available-for-Sale securities, partially offset by net client flows. The
unsettled purchases were accrued for as amounts due to brokers, which are
reflected in accounts payable and accrued liabilities in AECC's balance sheet.
The increase in unsettled purchases at March 31, 2003 was primarily due to a
relatively higher level of investing activity toward the end of the first three
months of 2003.
Cash received from payments on certificates totaled $483 million during the
first three months of 2003 compared to $397 million during the first three
months of 2002. Certificate maturities and surrenders totaled $509 million
during the first three months of 2003, compared to $394 million during the
first three months of 2002.
Investment income decreased $2.9 million, or 4.3%, during the first three months
of 2003 compared to the first three months of 2002 primarily due to lower
investment yields.
Investment expenses decreased $4.4 million or 21.8% during the first three
months of 2003 compared to the first three months of 2002. The decrease
primarily reflects lower derivative related expenses.
Provision for certificate reserves decreased $5.4 million or 17.6% during the
first three months of 2003 compared to the first three months of 2002 reflecting
declining interest crediting rates, partially offset by slightly higher average
balance of certificate reserves.
For the first three months of 2003, $36.4 million of total investment gains,
primarily resulting from sales of mortgage-backed securities where AECC
repositioned its portfolio to improve its prepayment risk profile, were
partially offset by $33.9 million of impairments and losses, the majority of
which were airline-related exposures. Included in these total investment losses
are $1 million of gross losses from sales of securities, as well as $32.9
million of other-than-temporary investment impairment losses, classified as
Available-for-Sale.
-7-
At March 31, 2003 and based on amortized cost, approximately 2.8% of AECC's
fixed maturity available-for-sale investments were classified
below-investment-grade compared to 1.2% at March 31, 2002.
AECC's financing activities resulted in cash used of $196,000 during the first
three months of 2003 compared to cash provided of $33 million during the first
three months of 2002. The change primarily resulted from higher certificate
maturities and surrenders and relatively lower interest credited amounts,
partially offset by higher certificate payments received from customers.
AECC's investing activities resulted in cash provided of $249 million during the
first three months of 2003 compared to cash used of $101 million during the
first three months of 2002. The increase primarily resulted from substantially
higher sales and maturities of available-for-sale securities, partially offset
by an increase in purchases of available-for-sale securities and other
investments.
Impact of recent market-volatility on results of operations
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 product crediting rates reset at shorter intervals than the
changes in the portfolio yield related to new investments or reinvestments of
portfolio cash flow. 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 March 31, 2003, AECC has
outstanding $900 million notional of interest rate swaps expiring at various
dates from January 2004 through February 2005.
The ratio of shareholder'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) was 5.5% at both March 31, 2003 and December 31, 2002. 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%.
OTHER REPORTING MATTERS
Accounting Developments
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46),
which addresses consolidation by business enterprises of variable interest
entities (VIEs). Certain disclosures are required for financial statements
issued after January 31, 2003 and are addressed in Note 1 to the Financial
Statements. The impact of adopting FIN 46 on the Financial Statements is still
being reviewed.
In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This Statement amends and clarifies accounting for
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. The Statement is effective for contracts entered into or
modified and hedging relationships designated after June 30, 2003, and to
certain preexisting contracts. AECC is currently evaluating the impact of
adopting SFAS No. 149 on the Financial Statements.
-8-
Forward-Looking Statements
Certain statements in this discussion and analysis of AECC's financial condition
and results of operations 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. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date on which
they are made. AECC undertakes no obligation to update publicly or revise any
forward-looking statements.
ITEM 4. 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 Investment
Company Act of 1940 and 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 action with regard to
significant deficiencies and material weaknesses.
-9-
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
AECC is a party to litigation and arbitration proceedings in the
ordinary course of its business. The outcome of any litigation or
threatened litigation cannot be predicted with any certainty. However,
in the aggregate, AECC does not consider any lawsuits in which it is
named as a defendant to have a material impact on AECC's financial
position or operating results.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(b) Form 8-K, filed April 21, 2003, Item 5, reporting that on April
15, 2003 American Express Certificate Company (the "Company")
appointed Jeryl A. Millner, Vice President and Controller. Ms. Millner
will act as the Company's Principal Accounting Officer. She succeeds
Philip C. Wentzel, who was recently appointed Vice President, Business
Planning & Analysis for the Company's parent. On April 17, 2003 John
T. Sweeney was appointed Vice President-Finance for the Company. Mr.
Sweeney will act as the Company's Principal and Chief Financial
Officer.
Item 7. Exhibits 99.1 and 99.2 - Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibits 99.3 and 99.4 - Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
-10-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN EXPRESS CERTIFICATE COMPANY
(Registrant)
Date: May 15, 2003 By /s/ Paula R. Meyer
-----------------------------------
Paula R. Meyer
Chief Executive Officer
Date: May 15, 2003 By /s/ John T. Sweeney
-----------------------------------
John T. Sweeney
Principal and Chief Financial Officer
Date: May 15, 2003 By /s/ Jeryl A. Millner
-----------------------------------
Jeryl A. Millner
Principal Accounting Officer
-11-