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 September 30, 2004
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 No. 2-23772
American Express Certificate Company
(Exact name of registrant as specified in its charter)
Delaware 41-6009975
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
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 the latest practicable date.
Class Outstanding at October 31, 2004
- -------------------------------------------- ----------------------------------
Common Shares (par value $10 per share) 150,000 shares
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS 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 - September 30, 2004 and
December 31, 2003 1
Statements of Income - Three months ended
September 30, 2004 and 2003 2
Statements of Income - Nine months ended
September 30, 2004 and 2003 3
Statements of Cash Flows - Nine months ended
September 30, 2004 and 2003 4
Statements of Comprehensive Income (Loss) -
Three months ended September 30, 2004 and 2003 5
Statements of Comprehensive Income -
Nine months ended September 30, 2004 and 2003 6
Notes to Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Item 4. Controls and Procedures 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
AMERICAN EXPRESS CERTIFICATE COMPANY
BALANCE SHEETS
(thousands)
September 30, December 31,
2004 2003
------------- -------------
(Unaudited)
Assets
- ------
Qualified Assets
Cash and cash equivalents $ 135,128 $ 25,099
Investments in unaffiliated issuers 5,476,157 4,994,641
Equity index options, purchased 62,369 153,162
Receivables 46,704 43,953
------------ -------------
Total qualified assets 5,720,358 5,216,855
------------ -------------
Other Assets
Deferred taxes, net 16,485 9,321
Due from American Express Financial Corporation for federal income taxes - 22,963
Deferred distribution fees and other - 6,453
------------ -------------
Total other assets 16,485 38,737
------------ -------------
Total assets $ 5,736,843 $ 5,255,592
============ =============
Liabilities and Shareholder's Equity
- -------------------------------------
Liabilities
Certificate reserves $ 5,310,413 $ 4,787,817
Equity index options, written 29,993 110,642
Amounts due to brokers 41,309 9,173
Accounts payable and accrued liabilities 33,098 24,747
------------ -------------
Total liabilities 5,414,813 4,932,379
------------ -------------
Shareholder's equity
Common stock 1,500 1,500
Additional paid-in-capital 303,844 323,844
Accumulated deficit (10,614) (46,357)
Accumulated other comprehensive income, net of tax 27,300 44,226
------------ -------------
Total shareholder's equity 322,030 323,213
------------ -------------
Total liabilities and shareholder's equity $ 5,736,843 $ 5,255,592
============ =============
See Notes to Financial Statements.
-1-
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENTS OF INCOME
(thousands)
(Unaudited)
Three Months Ended
September 30,
-----------------------------
2004 2003
----------- -----------
Investment income $ 55,953 $ 60,741
Investment expenses (18,088) (11,297)
----------- -----------
Net investment income before provision for
certificate reserves and income tax provision 37,865 49,444
Net provision for certificate reserves (23,481) (32,217)
----------- -----------
Net investment income before income tax provision 14,384 17,227
Income tax provision (5,474) (6,027)
----------- -----------
Net investment income 8,910 11,200
----------- -----------
Net realized gain (loss) on investments before income tax
provision 2,874 (1,350)
Income tax (provision) benefit (1,051) 473
----------- -----------
Net realized gain (loss) on investments 1,823 (877)
----------- -----------
Net income $ 10,733 $ 10,323
=========== ===========
See Notes to Financial Statements.
-2-
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENTS OF INCOME
(thousands)
(Unaudited)
Nine Months Ended
September 30,
------------------------------
2004 2003
------------ -----------
Investment income $ 178,296 $ 191,922
Investment expenses (41,990) (32,748)
------------ -----------
Net investment income before provision for
certificate reserves and income tax provision 136,306 159,174
Net provision for certificate reserves (84,718) (100,561)
------------ -----------
Net investment income before income tax provision 51,588 58,613
Income tax provision (18,314) (19,788)
------------ -----------
Net investment income 33,274 38,825
------------ -----------
Net realized gain on investments before income tax
provision 3,868 2,575
Income tax provision (1,399) (901)
------------ -----------
Net realized gain on investments 2,469 1,674
------------ -----------
Net income $ 35,743 $ 40,499
============ ===========
See Notes to Financial Statements.
-3-
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENTS OF CASH FLOWS
(thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------------
2004 2003
------------- -------------
Cash Flows from Operating Activities
Net income $ 35,743 $ 40,499
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Interest added to certificate loans (394) (461)
Amortization of premiums, accretion of discounts, net 14,858 10,182
Deferred taxes, net (7,856) (33,604)
Net realized gain on investments before income tax provision (3,868) (2,575)
Changes in other operating assets and liabilities:
Deferred distribution fees, net 6,453 25
Equity index options purchased and written, net 10,143 (19,274)
Dividends and interest receivable (4,809) (1,843)
Other assets and liabilities, net 45,921 490
------------- -------------
Net cash provided by (used in) operating activities 96,191 (6,561)
------------- -------------
Cash Flows from Investing Activities
Available-for-Sale investments:
Sales 85,652 1,115,808
Maturities and redemptions 678,268 1,106,454
Purchases (1,298,153) (2,329,547)
Other investments:
Sales 12,242 14,741
Maturities and redemptions 94,480 86,346
Purchases (97,764) (105,222)
Certificate loans:
Payments 1,432 2,249
Fundings (1,219) (1,280)
Changes in amounts due to and from brokers, net 34,194 (206,887)
------------- -------------
Net cash used in investing activities (490,868) (317,338)
------------- -------------
Cash Flows from Financing Activities
Payments from certificate owners 2,120,192 1,861,176
Net provision for certificate reserves 84,718 100,561
Certificate maturities and cash surrenders (1,680,204) (1,756,834)
Proceeds from reverse repurchase agreements - 326,300
Payments on reverse repurchase agreements - (326,300)
Return of capital to American Express Financial Corporation (20,000) (30,000)
------------- -------------
Net cash provided by financing activities 504,706 174,903
------------- -------------
Net increase (decrease) in cash and cash equivalents 110,029 (148,996)
Cash and cash equivalents beginning of period 25,099 240,323
------------- -------------
Cash and cash equivalents end of period $ 135,128 $ 91,327
============= =============
See Notes to Financial Statements.
-4-
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(thousands)
(Unaudited)
Three Months Ended
September 30,
-------------------------------
2004 2003
----------- ------------
Net income $ 10,733 $ 10,323
----------- ------------
Other comprehensive income (loss)
Unrealized gains (losses) on Available-for-Sale securities:
Unrealized holding gains (losses) arising during period 62,851 (30,134)
Income tax (expense) benefit (21,999) 10,547
----------- ------------
Net unrealized holding gains (losses) arising during period 40,852 (19,587)
----------- ------------
Reclassification adjustment for gains included in net income (2,204) (679)
Income tax expense 771 237
----------- ------------
Net reclassification adjustment for gains included in net income (1,433) (442)
----------- ------------
Net unrealized gains (losses) on Available-for-Sale securities 39,419 (20,029)
----------- ------------
Unrealized (losses) gains on interest rate swaps:
Unrealized holding (losses) gains arising during the period (209) 80
Income tax benefit (expense) 74 (28)
----------- ------------
Net unrealized holding (losses) gains arising during period (135) 52
----------- ------------
Reclassification adjustment for losses included in net income 1,270 1,507
Income tax benefit (445) (527)
----------- ------------
Net reclassification adjustment for losses included in net income 825 980
----------- ------------
Net unrealized gains on interest rate swaps 690 1,032
----------- ------------
Net other comprehensive income (loss) 40,109 (18,997)
----------- ------------
Total comprehensive income (loss) $ 50,842 $ (8,674)
=========== ============
See Notes to Financial Statements.
-5-
AMERICAN EXPRESS CERTIFICATE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------------------
2004 2003
------------------ -----------------
Net income $ 35,743 $ 40,499
----------- ------------
Other comprehensive income
Unrealized (losses) on Available-for-Sale securities:
Unrealized holding (losses) arising during period (27,226) (22,231)
Income tax benefit 9,529 7,781
----------- ------------
Net unrealized holding (losses) arising during period (17,697) (14,450)
----------- ------------
Reclassification adjustment for gains included in net income (3,620) (6,910)
Income tax expense 1,267 2,418
----------- ------------
Net reclassification adjustment for gains included in net income (2,353) (4,492)
----------- ------------
Net unrealized (losses) on Available-for-Sale securities (20,050) (18,942)
----------- ------------
Unrealized gains (losses) on interest rate swaps:
Unrealized holding gains (losses) arising during the period 318 (3,955)
Income tax (expense) benefit (110) 1,384
----------- ------------
Net unrealized holding gains (losses) arising during period 208 (2,571)
----------- ------------
Reclassification adjustment for losses included in net income 4,487 3,797
Income tax benefit (1,571) (1,328)
----------- ------------
Net reclassification adjustment for losses included in net income 2,916 2,469
----------- ------------
Net unrealized gains (losses) on interest rate swaps 3,124 (102)
----------- ------------
Net other comprehensive loss (16,926) (19,044)
----------- ------------
Total comprehensive income $ 18,817 $ 21,455
=========== ============
See Notes to Financial Statements.
-6-
AMERICAN EXPRESS CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS
(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, 2003.
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 November 2003, the Financial Accounting Standards Board (FASB) ratified
a consensus on the disclosure provisions of Emerging Issues Task Force
(EITF) Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." AECC complied with the disclosure
provisions of this rule in Note 3 to the Financial Statements included in
its Annual Report on Form 10-K for the year ended December 31, 2003. In
March 2004, the FASB reached a consensus regarding the application of a
three-step impairment model to determine whether investments accounted for
in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and other cost method investments are
other-than-temporarily impaired. However, with the issuance of FASB Staff
Position (FSP) No. EITF 03-1-1, the provisions of the consensus relating to
the measurement and recognition of other-than-temporary impairments will be
deferred pending further clarification from the FASB. The remaining
provisions of this rule, which primarily relate to disclosure requirements,
are required to be applied prospectively to all current and future
investments accounted for in accordance with SFAS No. 115 and other cost
method investments. AECC will evaluate the potential impact of EITF 03-1
after the FASB completes its reassessment.
2. Investments in Unaffiliated Issuers
Investments in unaffiliated issuers at September 30, 2004 and December 31,
2003 were:
September 30, December 31,
2004 2003
--------------- --------------
(Thousands)
Available-for-Sale securities, at fair value
(cost: 2004, $4,958,539; 2003, $4,435,647) $ 5,001,773 $ 4,509,726
First mortgage loans on real estate and other loans, at cost
(fair value: 2004, $487,455; 2003, $493,798) 460,706 469,309
Certificate loans - secured by certificate reserves, at cost,
which approximates fair value 13,678 15,606
--------------- --------------
Total $ 5,476,157 $ 4,994,641
=============== ==============
-7-
AMERICAN EXPRESS CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Gross realized gains and losses on sales and losses recognized for
other-than-temporary impairments of securities classified as
Available-for-Sale, using the specific identification method, were as
follows for the three and nine months ended September 30, 2004 and 2003:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------
2004 2003 2004 2003
--------------- ---------------- ------------ -------------
(Thousands)
Gross realized gains on sales $ 2,373 $ 4,017 $ 4,874 $ 45,645
Gross realized (losses) on sales $ (168) $ (150) $ (1,054) $ (2,697)
Realized (losses) recognized for
other-than-temporary impairments $ - $ (3,188) $ (200) $ (36,038)
3. Deferred Distribution Fees and Other
Prior to September 30, 2004, distribution fees on sales of certain
certificate products were deferred and amortized over the estimated lives
of the related certificates, which was generally one year but could have
been up to 10 years. Upon surrender prior to maturity, unamortized deferred
distribution fees were reflected in expenses and any related surrender
charges were reflected as a reduction to the provision expense for
certificate reserves. During the third quarter of 2004, and based on
management's recent review of AECC's certificate product portfolio mix and
certificate portfolio maturities, AECC determined it to be appropriate to
not defer distribution fees in the future and to completely write-down
previously deferred balances to zero. As a result of these actions,
investment expenses increased $5.7 million on a pre-tax basis during the
third quarter of 2004.
4. Comprehensive Income (Loss)
Comprehensive income (loss) 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 net unrealized gains or losses on
Available-for-Sale securities, net of related tax and net unrealized gains
or losses on derivatives, net of related tax. The components of
comprehensive income (loss) for the three and nine months ended September
30, 2004 and 2003 are reflected in the accompanying Statements of
Comprehensive Income (Loss).
5. Taxes and Certificate Maturities and Surrenders through Loan Reductions
Net cash received for income taxes during the nine months ended September
30, 2004 was $22.9 million. Net cash paid for income taxes during the nine
months ended September 30, 2003 was $52.1 million. Certificate maturities
and surrenders through loan reductions during the nine months ended
September 30, 2004 and 2003 were $2.1 million and $1.8 million,
respectively.
-8-
AMERICAN EXPRESS CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. Commitments and Contingencies
Commitments to fund first mortgage loans on real estate at September 30,
2004 and December 31, 2003 were $18.6 million and $9.8 million,
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
designed to ensure the creditworthiness of the borrowers and that funds
will be available on the funding date. AECC's investments in first mortgage
loans on real estate are restricted to 80 percent or less of the market
value of the real estate at the time of the loan funding.
AECC believes that it is not a party to, nor are any of its properties the
subject of, any pending legal, arbitration, or regulatory proceedings that
would have a material adverse effect on its financial condition, results of
operations or liquidity. However, it is possible that the outcome of any
such proceedings could have a material impact on results of operations in
any particular reporting period as the proceedings are resolved.
-9-
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 (AEFC), 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 investment
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 Advisors Inc. (AEFAI), and American Express Bank Ltd. (AEBL), both
affiliates of AECC. AEFAI is registered as a broker-dealer in all 50 states, the
District of Columbia and Puerto Rico. AEFC acts as investment advisor for AECC.
AECC follows United States generally accepted accounting principles (GAAP).
Certain reclassifications of prior period amounts have been made to conform to
the current presentation.
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. See the
"Forward-Looking Statements" section below.
Results of Operations for the Three Months Ended September 30, 2004 and 2003
AECC's net income increased $0.4 million or 4 percent reflecting a decrease in
the net provision for certificate reserves, an increase in the net realized gain
on investments partially offset by an increase in investment expense due to
distribution fees which are no longer deferred.
Net provision for certificate reserves decreased $8.7 million or 27 percent this
period versus the same period last year due to the impact of depreciation this
year versus appreciation last year in the S&P 500 on the value of options
hedging outstanding stock market certificates, partially offset by higher
average certificate reserves.
For the three months ended September 30, 2004, $4.9 million of total investment
gains were partially offset by $2.0 million of investment losses. Included in
these total investment gains and losses are $2.4 million of gross realized gains
and $0.2 million of gross realized losses from sales of securities classified
as Available-for-Sale. For the three months ended September 30, 2003, $4.0
million of gross realized gains from sales of securities classified as
Available-for-Sale were more than offset by $5.4 million of investment losses.
Included in these total investment losses were $0.2 million of gross realized
losses on sales of securities, as well as $3.2 million of other-than-temporary
impairment losses on investments classified as Available-for-Sale.
Results of Operations for the Nine Months Ended September 30, 2004 and 2003
AECC's net income decreased $4.8 million or 12 percent reflecting a decrease in
investment income, primarily due to lower average investment yields and an
increase in investment expenses due to deferred distribution fees which are no
longer deferred, all of which is partially offset by a decrease in the net
provision for certificate reserves.
-10-
Net provision for certificate reserves decreased $15.8 million or 16 percent
this period versus the same period last year reflecting the effect on stock
market certificates of lower appreciation in the S&P 500 and lower interest
crediting rates on the interest rate sensitive portion of AECC's certificate
reserves, partially offset by higher average certificate reserves.
For the nine months ended September 30, 2004, $7.5 million of total investment
gains were partially offset by $3.6 million of investment losses. Included in
these total investment gains and losses are $4.9 million of gross realized gains
and $1.1 million of gross realized losses from sales of securities, as well as
$0.2 million of other-than-temporary impairment losses on investments
classified as Available-for-Sale. For the nine months ended September 30, 2003,
$45.6 million of gross realized gains from sales of securities classified as
Available-for-Sale were partially offset by $43.0 million of investment losses.
Included in these total investment losses were $2.7 million of gross realized
losses from sales of securities, as well as $36.0 million of
other-than-temporary impairment losses on investments classified as
Available-for-Sale.
Impact of Market Volatility on Results of Operations
AECC is exposed to risk associated with fluctuating interest payments for
certain certificate products tied to the London Interbank Offering Rate (LIBOR)
because interest crediting rates for certificate products reset at shorter
intervals than the changes in the investment portfolio yield related to new
investments and reinvestments. Therefore, AECC's spreads may be negatively
impacted by increases in the general level of interest rates. AECC may hedge the
risk of rising interest rates by entering into pay-fixed, receive-variable
(LIBOR-based) interest rate swaps that convert fluctuating interest crediting
rate payments to fixed payments, effectively protecting AECC from unfavorable
interest rate movements. The interest rate swaps are designated and accounted
for as cash flow hedges in accordance with Statement of Financial Accounting
Standards (SFAS) No. 133. At September 30, 2004, AECC had $300 million notional
of interest rate swaps expiring at various dates from January 2005 through
February 2005. At December 31, 2003, AECC had $900 million notional of interest
rate swaps outstanding, $600 million of which expired during the first quarter
of 2004.
AECC is also exposed to risk associated with fluctuations in the S&P 500 stock
market index for three series of certificate products. Such amounts credited to
the certificate owners' accounts are tied to the relative change in the S&P 500
stock market index between the beginning and end of the certificates' terms.
AECC purchases and writes equity index options in order to meet such
obligations. The recent depreciation in the S&P 500 index caused a decrease in
AECC's provision for certificate reserves, which was effectively offset by a
decrease in net pre-tax mark-to-market gains on equity index options included in
investment income.
Liquidity and Capital Resources
AECC's principal sources of cash are receipts from sales of face-amount
investment certificates and net cash flows from investments. AECC's principal
uses of cash are payments to certificate owners for matured and surrendered
certificates, purchases of investments and return of capital or dividend
payments to AEFC.
-11-
Cash received from sales of certificates totaled $2.1 billion during the nine
months ended September 30, 2004 compared to $1.9 billion during the same period
a year ago. Certificate maturities and cash surrenders totaled $1.7 billion
during the nine months ended September 30, 2004, compared to $1.8 billion during
the same period a year ago.
AECC, as an issuer of face-amount investment certificate products, is impacted
whenever there is a change in interest rates because interest crediting rates
for certificate products reset at shorter intervals than changes in yields on
AECC's investments. In view of continued uncertainty in investment markets and
due to the short-term repricing nature of certificate products, AECC continues
to invest in securities that provide for more immediate, periodic interest and
principal payments, resulting in improved liquidity. To accomplish this, AECC
continues to invest much of its investable funds 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 certificate
products. Also, on three of AECC's products, interest is credited to 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 options on a major stock market index and, from time
to time, enters into futures contracts.
AECC's investment program is designed to maintain an investment portfolio that
will produce competitive portfolio yields within acceptable risk and liquidity
parameters. AECC's investment program considers investment securities as
investments acquired to meet anticipated certificate owner obligations.
Debt securities and marketable equity securities are classified as
Available-for-Sale and are carried at fair value. Such Available-for-Sale
classification does not mean AECC expects to sell these securities, but rather
these securities are available to meet possible liquidity needs should there be
significant changes in market interest rates or certificate owner redemptions.
Cash used in investing activities was $490.9 million and $317.3 million during
the nine months ended September 30, 2004 and 2003, respectively. This change
primarily reflects a decrease in sales, maturities and redemptions of
Available-for-Sale and sales of other investments, offset by a decrease in total
investment purchases.
Cash provided by financing activities was $504.7 million and $174.9 million
during the nine months ended September 30, 2004 and 2003, respectively. This
change reflects an increase in net certificate product inflows of $319.8
million and a decrease of $10 million on the return of capital payment to AEFC
in the 2004 period.
Investments include $233.5 million, $190.4 million and $144.0 million of below
investment grade securities (excluding net unrealized appreciation and
depreciation) at September 30, 2004, December 31, 2003 and September 30, 2003,
respectively. These investments represent 4.3 percent, 3.9 percent and 3.0
percent of AECC's investment portfolio at September 30, 2004, December 31, 2003
and September 30, 2003, respectively. These investments may be subject to a
higher degree of risk than the investment grade issues because of the borrower's
generally greater sensitivity to adverse economic conditions, such as recession
or increasing interest rates, and in certain instances, the lack of an active
secondary market. Expected returns on below investment grade securities reflect
consideration of such factors. AECC has identified certain investments for which
a decline in fair value has been determined to be other than temporary, and has
written such securities down to fair value with a charge to net income.
-12-
The ratio of shareholder's equity, excluding accumulated other comprehensive
income (loss), to total assets less certificate loans and net unrealized holding
gains and losses on investment securities classified as Available-for-Sale (the
Capital-to-Assets-Ratio) was 5.2 percent and 5.4 percent at September 30, 2004
and December 31, 2003, respectively. In accordance with an agreement 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 five percent.
OTHER REPORTING MATTERS
Accounting Developments
See "Recently Issued Accounting Standards" section of Note 1 to the Financial
Statements.
ITEM 4. CONTROLS AND PROCEDURES
AECC's management, with the participation of AECC's Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of AECC's disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this report. Based on such
evaluation, AECC's Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, AECC's disclosure controls and
procedures are effective. There have not been any changes in AECC's internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, AECC's internal control over financial reporting.
Forward-Looking Statements
This report includes forward-looking statements, which are subject to risks and
uncertainties. The words "believe," "expect," "anticipate," "optimistic,"
"intend," "plan," "aim," "will," "should," "could," "would," "likely," and
similar expressions are intended to identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date on which they are made. AECC undertakes no
obligation to update or revise any forward-looking statements. Factors that
could cause actual results to differ materially from these forward-looking
statements include, but are not limited to: AECC's ability to successfully
implement a business model that allows for significant net income growth based
on revenue growth that is lower than historical levels, including the ability to
improve its operating expense to revenue ratio both in the short-term and over
time, which will depend in part on the effectiveness of reengineering and other
cost control initiatives, as well as factors impacting AECC's revenues; AECC's
ability to grow its business, over time, which will depend on AECC's ability to
manage its capital needs and the effect of business mix; the ability to increase
investment spending, which will depend in part on the equity markets and other
factors affecting revenues, and the ability to capitalize on such investments to
improve business metrics; the accuracy of certain critical accounting estimates,
including the fair value of the assets in AECC's investment portfolio (including
those investments that are not readily marketable), fluctuation in the equity
and fixed income markets, which can affect the amount and types of certificate
products sold by AECC, potential deterioration in AECC's high-yield and other
investments, which could result in further losses in AECC's investment
portfolio; the ability of AECC to sell certain high-yield investments at
expected values and within anticipated timeframes and to maintain its high-yield
portfolio at certain levels in the future; and spreads in the certificate
businesses; credit trends and the rate of
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bankruptcies, which can affect returns on AECC's investment portfolios;
fluctuations in foreign currency exchange rates, which could affect commercial
activities, among other businesses, or restrictions on convertibility of certain
currencies; changes in laws or government regulations, including tax laws
affecting AECC's businesses or that may affect the sales of the products and
services that it offers, and regulatory activity in the areas of customer
privacy, consumer protection, business continuity and data protection; the
adoption of recently issued accounting rules related to the consolidation of
variable interest entities, including those involving collateralized debt
obligations and secured loan trusts, that AECC invests in, which could affect
both AECC's balance sheet and results of operations; and outcomes and costs
associated with litigation and compliance and regulatory matters. A further
description of these and other risks and uncertainties can be found in AECC's
Annual Report on Form 10-K for the year ended December 31, 2003 and its other
reports filed with the SEC.
PART II. OTHER INFORMATION
AMERICAN EXPRESS CERTIFICATE COMPANY
Item 1. Legal Proceedings
AECC believes that it is not a party to, nor are any of its properties
the subject of, any pending legal, arbitration, or regulatory
proceedings that would have a material adverse effect on its financial
condition, results of operations or liquidity. However, it is possible
that the outcome of any such proceedings could have a material impact
on results of operations in any particular reporting period as the
proceedings are resolved.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page E-1 hereof.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by AECC during the
quarterly period ended September 30, 2004.
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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.
AMERICAN EXPRESS CERTIFICATE COMPANY
-------------------------------------
(Registrant)
Date: November 10, 2004 By /s/ Paula R. Meyer
------------------------------
Paula R. Meyer
Chief Executive Officer
Date: November 10, 2004 By /s/ Brian J. McGrane
------------------------------
Brian J. McGrane
Vice President and Chief Financial
Officer
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EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
Exhibit Description
- ------- -----------
31.1 Certification of Paula R. Meyer pursuant to Rule 13a-14(a) promulgated
under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Brian J. McGrane pursuant to Rule 13a-14(a) promulgated
under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Paula R. Meyer and Brian J. McGrane pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
E-1