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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
__________________
|X| ANNUAL 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 fiscal year ended December 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 No. 2-23772
American Express Certificate Company
(Exact name of registrant as specified in its charter)
Delaware 41-6009975
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
52 AXP Financial Center
Minneapolis, Minnesota 55474
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 671-3131
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------------- ------------------------
None None
Securities registered pursuant to Section 12(g) of the Act: 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. __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes _____ No __X__
As of December 31, 2003, there were no voting shares held by non-affiliates
of the registrant. Common shares of the registrant outstanding at March 29, 2004
were 150,000.
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.
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TABLE OF CONTENTS
Form 10-K
Item Number
Page
PART I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 - 6
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 6
4. Submission of Matters to a Vote of Security Holders. . . . . . 7
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . 7
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . 7
7. Management's Discussion and Analysis of Financial Condition and
Results of Operation . . . . . . . . . . . . . . . . . . . . . 8 - 13
7A. Quantitative and Qualitative Disclosures About Market Risk . . 14
8. Financial Statements and Supplementary Data. . . . . . . . . . 14
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 14
9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 14
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 16 - 17
Index to Financial Statements. . . . . . . . . . . . . . . . . F-1
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . E-1 - E-4
PART I
ITEM 1. BUSINESS
American Express Certificate Company (AECC) is incorporated under the laws of
Delaware. AECC's 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
located at 200 AXP Financial Center, Minneapolis, Minnesota 55474, owns 100
percent of the outstanding voting securities of AECC. AEFC is a wholly-owned
subsidiary of American Express Company (American Express), a New York
Corporation, with headquarters at World Financial Center, 200 Vesey Street, New
York, New York 10285.
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 Advisors Inc. (AEFAI), and American
Express Bank Ltd. (AEB), 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.
As of the date of this report, AECC offered nine different certificate products
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 AEB, an indirect
wholly-owned subsidiary of American Express in England, and is not registered
for sale in the United States. All certificates are currently sold without a
sales charge. The American Express Flexible Savings Certificate, the American
Express Installment Certificate, the American Express Preferred Investors
Certificate, the American Express Stock Market 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
AEFAI. With respect to the American Express Investors Certificate and a form of
the American Express Stock Market Certificate, AEFAI, in turn, has Selling Agent
Agreements with American Express Bank International (AEBI), a direct subsidiary
of AEB, and Coutts & Co. (USA) International (Coutts), a subsidiary of National
Westminster Bank PLC. With respect to the American Express Special Deposits,
AECC has a Marketing Agreement with AEB. With respect to American Express Stock
Market Certificate, AEFAI 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
-1-
Certificates, AEFAI has a Selling Dealer Agreement effective July 31, 2000 with
Securities America, Inc. There is no assurance that AECC's 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. AEFAI has entered into a consulting
agreement with AEBI under which AEBI provides consulting services related to any
selling agent agreements between AEFAI and other Edge Act corporations.
Except for the American Express Investors Certificate, the American Express
Stock Market Certificate sold through AEBI, and the American Express Special
Deposits, all of AECC's certificate products are available as qualified
investments for IRAs, 401(k) plans, and other qualified retirement plans. The
specified maturities of AECC's certificate products range from ten to twenty
years. Within that maturity period, most certificates have interest crediting
rate terms ranging from one to thirty-six months. Interest crediting rates are
subject to change and certificate product 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 six, twelve, eighteen,
twenty-four, thirty or thirty-six months, and potentially other terms, at the
certificate product owner'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 Preferred Investors Certificate is a single payment
certificate that combines a fixed rate of return with AECC's guarantee of
principal for investments ranging from $250,000 to $5 million. Interest
crediting rates are guaranteed in advance by AECC for a term of one, two, three,
six, twelve, twenty-four or thirty-six months, at the certificate product
owner's option.
The American Express Stock Market Certificate is a single payment certificate
that offers the certificate product owner the opportunity to have all or part of
the certificate product returns tied to fifty-two 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 AEFAI, to AEBI's clients and certain of Coutts' clients, respectively, who
are neither citizens nor residents of the United States.
The American Express Market Strategy Certificate is a flexible payment
certificate that pays interest at a fixed rate or that offers the certificate
product owner the opportunity to have all or part of the certificate product
returns tied to fifty-two week stock market performance as
-2-
measured by a broad stock market index, for a series of fifty-two week terms
starting every month or at intervals the certificate product owner selects.
The American Express Equity Indexed Savings Certificates is a single payment
certificate that offers the certificate product owner the opportunity to have
all or part of the certificate product returns tied to a fifty two week stock
market performance, as measured by a broad stock market index, with return of
principal guaranteed by AECC. The certificate is sold by Securities America,
Inc. under a selling agreement with AEFAI.
The American Express Investors Certificate is a single payment certificate that
generally permits additional payments within fifteen days of term renewal.
Interest crediting rates are guaranteed in advance by AECC for a term of one,
two, three, six, twelve, twenty-four, or thirty-six months, at the certificate
product owner's option. AEBI and Coutts, under Selling Agent Agreements with
AEFAI, currently sell this certificate only to AEBI's clients and certain of
Coutts' clients, respectively, who are neither citizens nor residents of the
United States.
The American Express Special Deposits is a single payment certificate that
generally permits additional payments within fifteen days of term renewal.
Interest crediting rates are guaranteed in advance by AECC for a term of one,
two, three, six, twelve, twenty-four, or thirty-six months, at the certificate
product owner's option. This certificate is currently marketed by AEB through
its London office, 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.
AECC also offers the Series D-1 Investment Certificate in connection with
certain employee benefit plans available to eligible AEFC employees, financial
advisors, retirees, and eligible employees of the American Express funds, and to
Individual Retirement Accounts (IRAs) of persons retired as employees or
financial advisors with AEFC.
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 Preferred Investors
Certificate, the American Express Investors Certificate, and the American
Express Special Deposits products, AECC's current policy is to re-evaluate the
certificate product interest crediting rates weekly to respond to marketplace
changes. For the American Express Preferred Investors Certificate, the American
Express Investors Certificate, and the American Express Special Deposits
products, AECC's current policy is to re-evaluate such 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 the American Express Special Deposits product, AECC
must set the rates for an initial purchase of the
-3-
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.
For the American Express Cash Reserve Certificate product, the published rates
of the U.S. ninety day treasury bill are used as a guide in setting rates. For
the American Express Flexible Savings Certificate and the American Express
Series D-1 Investment Certificate products, 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 product, 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 Investors Certificate, American
Express Preferred Investors Certificate, and American Express Special Deposits
products, 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 certificate 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 products also compete with short-term products, and use
LIBOR rates. The American Express Installment Certificate product 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
products are designed to offer returns 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 products.
AECC's net investment income is derived principally from interest and, to a
lesser extent, dividends generated by its investments. AECC's net income is
determined by deducting from net investment income provision expenses for
certificate reserves, and other expenses, including taxes, fees paid to AEFC for
investment advisory and other services, distribution fees paid to AEFAI, and
marketing fees paid to AEB.
-4-
AECC's certificate product payments received and certificate surrenders paid for
each of the three years ended December 31, 2003 were (in millions of US
dollars):
2003 2002 2001
Single Payment Certificates
Non-Qualified
Payments through:
AEFAI $1,124.2 $1,116.1 $1,044.9
AEBI, AEB, and Coutts $1,095.4 $ 512.6 $ 562.8
Surrenders through:
AEFAI $1,039.2 $ 865.1 $ 865.1
AEBI, AEB, and Coutts $ 999.6 $ 601.5 $ 585.5
Qualified
Payments through:
AEFAI $ 312.4 $ 361.6 $ 263.3
Surrenders through:
AEFAI $ 292.6 $ 224.1 $ 167.8
Installment Payment Certificates
Through AEFAI
Non-Qualified
Payments $ 38.6 $ 40.8 $ 41.1
Surrenders $ 47.9 $ 57.2 $ 68.7
Qualified
Payments $ .6 $ .3 $ .3
Surrenders $ .7 $ .5 $ .7
For the year ended December 31, 2003, 43.3 percent of single payment certificate
products payments were through AEBI, AEB, and Coutts; and 12.3 percent of
payments received by AECC on single payment certificate products and 1.5 percent
of payments received by AECC on installment certificate products were from
tax-qualified certificate products for use in IRAs, 401(k) plans, and other
qualified retirement plans.
The certificates offered by AEFAI are sold pursuant to a distribution agreement
which is terminable on sixty 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 AEFAI or AECC as that term is defined in the 1940 Act.
The distribution agreement provides for the payment of distribution fees to
AEFAI for services provided. For the sale of the American Express Investors
Certificate and the American Express Stock Market Certificate by AEBI, AEFAI, in
turn, has Selling Agent Agreements with AEBI and Coutts. For the sale of
American Express Stock Market Certificate, AEFAI has a Selling Agent Agreement
with Securities America Inc. effective March 10, 1999. For the sale of American
Express Equity Indexed Savings Certificates, AEFAI 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 sixty days' notice and subject to annual
review by
-5-
directors who are not "interested persons" of AEFAI 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 in its investment portfolio from AEFC,
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 AEFC 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 percent 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 percent 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 series of certificate products are
deferred and amortized over the estimated lives of the related certificates,
which is approximately one year and can be up to 10 years. Upon surrender prior
to maturity, unamortized deferred distribution fees are reflected in expenses
and any related surrender charges are reflected as a reduction to the provision
expense for certificate reserves. Products are designed to recover such costs
within the surrender charge period.
ITEM 2. PROPERTIES
None.
ITEM 3. 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.
-6-
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 AECC's common stock since it is a wholly-owned subsidiary
of AEFC and, indirectly, of American Express Company. Frequency and amount of
return of capital amounts paid to AEFC during the past two years were (in
millions of dollars):
For the year ended December 31, 2003:
August 8, 2003 $30
December 15, 2003 20
---
Total $50
===
For the year ended December 31, 2002:
December 30, 2002 $10
===
Restriction on AECC's present or future ability to make return of capital
payments or to pay dividends to AEFC:
Certain series of installment certificate products 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 percent on such series of certificates have been
authorized by AECC. This restriction was removed for 2003 and 2002 by AECC's
declaration of additional credits in excess of this requirement.
Appropriated retained earnings resulting from the pre-declaration of additional
credits to AECC's certificate product 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 pre-declaration as to outstanding certificates if at any time the
capital and unappropriated retained earnings of AECC should be less than 5
percent of net certificate reserves (certificate reserves less certificate
loans). At December 31, 2003, the capital and unappropriated retained earnings
amounted to 5.8 percent of net certificate reserves.
ITEM 6. SELECTED FINANCIAL DATA
Item omitted pursuant to General Instructions I (2)(a) of Form 10-K.
-7-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
American Express Certificate Company's (AECC's) net income is derived primarily
from the after-tax yield on investments and realized investment gains (losses),
less investment expenses and interest credited on certificate reserve
liabilities. Changes in net income trends occur largely due to changes in
investment returns, interest crediting rates to certificate products, the mix of
fully taxable and tax-advantaged investments in AECC's portfolio and from
realization of investment gains (losses). AECC follows accounting principles
generally accepted in the United States (GAAP).
Net income increased $6.8 million, or 14.8 percent, reflecting increased
investment income, increased gross realized gains and decreased gross realized
losses on sale of investments, partially offset by slightly higher investment
expenses and a higher provision expense for certificate reserves. In 2002, the
net income was significantly higher than 2001. The 2001 results included net
pre-tax realized losses on investments of ($92.4 million), primarily due to 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.
Investment income increased $43.1 million, or 19.5 percent, reflecting a $66.0
million increase in net pre-tax gains on equity index options, partially offset
by lower investment portfolio yields. The increase in net pre-tax gains on
equity index options was due to the effect of appreciation in the S&P 500 on the
value of options economically hedging stock market certificate products.
Investment income for 2002 was $16.8 million or 8.2 percent higher than 2001 as
a result of higher levels of invested assets and lower losses on interest rate
swap agreements in 2002.
The favorable impact on investment income from the equity index options was
largely offset by the increase in provision expenses for certificate reserves.
Provision for certificate reserves increased $41.2 million or 41.1 percent
reflecting the effect on stock market certificates of appreciation in the S&P
500 this year versus depreciation last year, partially offset by lower interest
crediting rates on the interest rate sensitive portion of AECC's certificate
product portfolio. The 2002 provision for certificate reserves was significantly
lower than 2001 as a result of lower client interest crediting rates, partially
offset by an increase in certificate reserves during 2002.
AECC's gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $47.1 million
and $23.4 million for the years ended December 31, 2003 and 2002, respectively.
Gross realized losses on sales were ($2.8 million) and ($15.7 million) for the
same periods. AECC also recognized losses of ($36.0 million) and ($15.8 million)
in other-than-temporary impairments on Available-for-Sale securities for the
years ended December 31, 2003 and 2002, respectively. In 2001, gross realized
gains on sales of securities classified as Available-for-Sale were $20.7 million
while gross realized losses on sales of securities classified as
Available-for-Sale were ($83.9 million). AECC also recognized
other-than-temporary impairment losses on Available-for-Sale securities of
($27.9 million) in 2001.
-8-
Certain Critical Accounting Policies
AECC's significant accounting policies are described in Note 1 to the Financial
Statements. The following provides a critical accounting policy on investment
securities valuation that is important to the Financial Statements.
Investment securities valuation
Generally, investment securities are carried at fair value on the balance sheet
with unrealized gains (losses) recorded in other comprehensive income (loss)
within equity, net of income tax provisions (benefits). At December 31, 2003,
AECC had net unrealized pretax gains on Available-for-Sale securities of $74.0
million. Gains and losses are recognized in results of operations upon
disposition of the securities. In addition, losses are 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 and size of that gap, and management's judgment about the
issuer's current and prospective financial condition. Fair value is generally
based on quoted market prices. As of December 31, 2003, there were $19 million
in gross unrealized losses that related to $1.5 billion of securities based on
fair values, of which only $30 million has been in a continuous unrealized loss
position for twelve months or more. AECC does not believe that the unrealized
loss on any individual security at December 31, 2003 represents an
other-than-temporary impairment, and AECC has the ability and intent to hold
these securities for a time sufficient to recover its amortized cost.
Liquidity and Capital Resources
AECC's principal sources of cash are receipts from sales of face-amount
certificate products and cash flows from investments. AECC's principal uses of
cash are payments to certificate product owners for matured and surrendered
certificates, purchases of investments, and return of capital or dividend
payments to AEFC.
Cash received from sales of certificates totaled $2.6 billion for the year ended
December 31, 2003 compared to $2.0 billion for the year ended December 31, 2002.
Certificate maturities and cash surrenders totaled $2.4 billion for the year
ended December 31, 2003, compared to $1.8 billion and $1.7 billion for the years
ended December 31, 2002 and 2001, respectively.
AECC, as an issuer of face-amount certificates, is impacted by significant
changes in interest rates as interest crediting rates on certificate products
generally reset at shorter intervals than the change in the yield on AECC's
investment portfolio. In view of the continued uncertainty in the investment
markets, 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 cash flow in mortgage and
asset-backed securities, and to a lesser extent, intermediate term corporate
debt securities. In addition, AECC enters into interest rate swap contracts that
effectively lengthen the interest crediting rate reset interval on certificate
products. Also, on three series of AECC's certificates, interest is credited to
certificate products 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 equity market sensitive
certificates, AECC purchases and writes index call options on a major stock
market index and, from time to time, enters into futures contracts.
-9-
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 product owner obligations.
Debt securities and marketable equity securities are classified as
Available-for-Sale and are carried at fair value. The 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.
At December 31, 2003, securities classified as Available-for-Sale were carried,
in the aggregate, at a fair market value of $4.5 billion. Based on amortized
costs, fixed maturity securities comprise 90 percent of AECC's total investment
portfolio. Of these securities, 96 percent are investment grade. Investments
primarily include mortgage and asset-backed securities, and to a lesser extent,
corporate debt securities. AECC's corporate debt securities are a diverse
portfolio with concentrations 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 percent of AECC's total investment portfolio.
AECC paid AEFC return of capital amounts of $50 million and $10 million during
2003 and 2002, respectively. During the fourth quarter of 2001, AECC paid a $167
million capital 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, and during 2001,
AECC received $240 million in cash as capital contributions from AEFC.
Cash used in investing activities was $448.7 million and $265.5 million in 2003
and 2002, respectively. This change was primarily due to decreased amounts due
to brokers in 2003, while in 2002, amounts due to brokers increased, and an
increase in purchases of Available-for-Sale securities and other investments,
partially offset by an increase in sales and maturities of such securities.
Cash provided by financing activities was $246.8 million and $332.7 million in
2003 and 2002, respectively. This decrease primarily resulted from a decrease in
net certificate inflows of $45.8 million together with an increase of $40
million of combined return of capital payments to AEFC.
Impact of Recent Market-Volatility on Results of Operations
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 percent 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
-10-
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 maturity
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 length of
the interest crediting rate reset interval on certificate products so that
movements in interest rates do not adversely affect the interest credited to
such certificate products. AEFC holds regularly scheduled investment 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 such, certificate product interest crediting rates 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 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, "Accounting for Derivative
Instruments and Hedging Activities". At December 31, 2003, AECC had $900 million
notional of interest rate swaps expiring at various dates from January 2004
through February 2005.
AECC is also exposed to risk associated with fluctuations in the equity market
from three series of its certificate products. Such amounts credited to
certificate product owners' accounts are tied to the relative change in a major
stock market index between the beginning and end of the certificates' terms.
AECC purchases and writes equity index call options on a major stock market
index in order to meet such obligations. The recent appreciation in the S&P 500
caused a relatively substantial increase in AECC's provision expense for
certificate reserves, which was effectively offset by an increase in net pre-tax
gains on equity index options.
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
-11
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 to the Financial Statements for further discussion of AECC's derivative
and hedging activities.
The negative impact on AECC's annual pretax income of a 100 basis point increase
in interest rates, which assumes certificate product interest crediting rate
reset intervals and customer behavior based on the application of proprietary
models, to the book of business at December 31, 2003 and 2002, would be $11.8
million and $0.6 million for 2003 and 2002, respectively. A 10 percent decrease
in the level of a major stock market index would have a minimal impact on AECC's
annual pretax income related as of December 31, 2003 and 2002, because the
income effect is a decrease in option related 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 Certificates product owners' accounts.
The ratio of shareholder's equity, excluding accumulated other comprehensive
income (loss) net of tax, to total assets less certificate loans and net
unrealized gains (losses) on securities classified as Available-for-Sale (the
Capital-to-Assets Ratio) at December 31, 2003 and 2002, was 5.4 percent and 5.5
percent, respectively. In accordance with 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 percent.
Other Reporting Matters
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which addresses
consolidation by business enterprises of variable interest entities (VIEs) and
was subsequently revised in December 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 requires a VIE to be consolidated when an enterprise has a
variable interest for which it is deemed to be the primary beneficiary which
means that it will absorb a majority of the VIE's expected losses or receive a
majority of the VIE's expected residual return.
FIN 46 did not impact the accounting for $27 million in a minority-owned secured
loan trust (SLT) or $6 million in a collateralized debt obligation traunche
(solely supported by a portfolio of high yield bonds), both of which are managed
by third parties, as AECC is not the primary beneficiary. AECC has a 33 percent
ownership interest in the SLT, which provides returns to investors primarily
based on the performance of an underlying portfolio of high yield loans. The
aggregate fair value of the loans related to AECC's pro rata share of this
structure approximates $92.5 million. AECC's maximum exposure to loss as a
result of its investment in this SLT is represented by the carrying value, which
was $27 million at December 31, 2003.
-12-
In April 2003, the FASB issued Statement of Financial Accounting Standards Board
(SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" (SFAS No. 149). SFAS No. 149 amends and clarifies accounting
for derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered
into or modified and hedging relationships designated after June 30, 2003, and
to certain preexisting contracts. SFAS No. 149 did not have a material impact on
AECC's financial statements.
Forward-Looking Statements
Certain statements in Item 7. of this Form 10-K Annual Report contain
forward-looking statements, which are subject to risks and uncertainties. The
words "believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim,"
"will," "should," "could," "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
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
other reports filed with the SEC.
-13-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in the Management's Discussion
and Analysis of Financial Condition and Results of Operations under the section
titled Impact of Recent Market-Volatility on Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements at page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
AECC's management, with the participation of the AECC's Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the Company'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, the Company's disclosure controls
and procedures are effective. There have not been any changes in the Company'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 Company's fourth
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART III
Items omitted pursuant to General Instructions I (2)(c) of Form 10-K.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 10-K
(a) 1. Financial Statements:
See Index to Financial Statements on page F-1 hereof.
2. Financial Statement Schedules:
See Index to Financial Statements on page F-1 hereof.
3. Exhibits:
See Exhibit Index on pages E-1 through E-4 hereof.
-14-
(b) Reports on Form 8-K:
For 8-K, filed November 15, 2003, Item 5, reporting that, on November
15, 2003, AECC appointed Brian J. McGrane as Chief Financial Officer.
He succeeds John T. Sweeney, who was recently appointed Vice President,
Brokerage and Banking at AEFC.
-15-
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 29, 2004
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 29, 2004
BY /s/ Brian J. McGrane
--------------------
NAME AND TITLE Brian J. McGrane, Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE March 29, 2004
BY /s/ Jeryl A. Millner
--------------------
NAME AND TITLE Jeryl A. Millner, Vice President and
Controller
(Principal Accounting Officer)
DATE March 29, 2004
BY /s/ Rodney P. Burwell **
------------------------
NAME AND TITLE Rodney P. Burwell, Director
DATE March 29, 2004
BY /s/ Kent M. Bergene **
----------------------
NAME AND TITLE Kent M. Bergene, Director
DATE March 29, 2004
BY /s/
------------------------
NAME AND TITLE Jean B. Keffeler, Director
DATE March 29, 2004
-16-
BY /s/ Thomas R. McBurney **
-------------------------
NAME AND TITLE Thomas R. McBurney, Director
DATE March 29, 2004
BY /s/ Walter S. Berman * **
-------------------------
NAME AND TITLE Walter S. Berman, Director and Treasurer
DATE March 29, 2004
BY /s/ Karen M. Bohn **
--------------------
NAME AND TITLE Karen M. Bohn, Director
DATE March 29, 2004
* Signed pursuant to Officers' Power of Attorney dated March 3, 2004, filed
electronically herewith as Exhibit 24(a).
** Signed pursuant to Directors' Power of Attorney dated March 3, 2004, filed
electronically herewith as Exhibit 24(b).
/s/ Paula R. Meyer
- ---------------------
Paula R. Meyer
-17-
Index to Financial Statements and Schedules
Financial Statements:
Part I. Financial Information:
Item 1. Financial Statements
Responsibility of Management F-2
Report of Ernst & Young LLP Independent Auditors F-3
Balance Sheets - December 31, 2003 and 2002 F-4 - F-5
Statements of Operations - Years ended December
31, 2003, 2002 and 2001 F-6 - F-7
Statements of Cash Flows - Years ended December
31, 2003, 2002 and 2001 F-8
Statements of Comprehensive Income -Years ended
December 31, 2003, 2002 and 2001 F-9
Statements of Shareholder's Equity - Years ended
December 31, 2003, 2002 and 2001 F-10
Notes to Financial Statements F-11 - F-31
Schedule No.:
Financial Schedules:
I Investments in Securities of Unaffiliated Issuers,
December 31, 2003 F-32 - F-44
II Investments in and Advances to Affiliates and Income
thereon, December 31, 2003, 2002 and 2001 F-45 - F-46
III Mortgage Loans on Real Estate and Interest earned on
Mortgages, year ended December 31, 2003 F-47 - F-50
V Qualified Assets on Deposit, December 31, 2003 F-51
VI Certificate Reserves, year ended December 31, 2003 F-52 - F-82
VII Valuation and Qualifying Accounts, years ended December
31, 2003, 2002 and 2001 F-83
Schedules I, III and VI for the year ended December 31, 2002, and Schedule VI
for the year ended December 31, 2001, are included in Registrant's Annual
Reports on Form 10-K for the fiscal years ended December 31, 2002 and December
31, 2001, 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.
F-1
American Express Certificate Company
Responsibility of Management
The management of American Express Certificate Company (AECC) is responsible for
the preparation and fair presentation of its Financial Statements, which have
been prepared in conformity with accounting principles generally accepted in the
United States; 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 filing.
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 which 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: (i)
an organizational structure with clearly defined lines of responsibility,
policies and procedures; (ii) a Code of Conduct; and (iii) a careful selection
and training of employees. Internal auditors monitor and assess the
effectiveness of internal control and report their findings to management and
the Board of Directors 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 control system over financial reporting to the
extent they believed necessary to support their report.
F-2
Report of Ernst & Young LLP 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, 2003 and 2002, and the related statements of operations,
comprehensive income, shareholder's equity and cash flows for each of the three
years in the period ended December 31, 2003. Our audits also include 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 are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of December 31, 2003
and 2002, 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, 2003 and 2002, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2003, 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 26, 2004
F-3
Balance Sheets
AMERICAN EXPRESS CERTIFICATE COMPANY
December 31, (Thousands, except share amount) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Qualified Assets (Note 2)
- ----------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated issuers (Note 3):
Cash and cash equivalents $ 25,099 $ 240,323
Available-for-Sale securities 4,509,726 4,389,396
First mortgage loans on real estate and other loans 469,309 452,243
Certificate loans - secured by certificate reserves 15,606 18,614
- ----------------------------------------------------------------------------------------------------------------------------
Total investments 5,019,740 5,100,576
- ----------------------------------------------------------------------------------------------------------------------------
Receivables:
Dividends and interest 36,007 34,114
Investment securities sold 7,946 24,170
- ----------------------------------------------------------------------------------------------------------------------------
Total receivables 43,953 58,284
- ----------------------------------------------------------------------------------------------------------------------------
Equity index options (Note 9) 153,162 34,403
- ----------------------------------------------------------------------------------------------------------------------------
Total qualified assets 5,216,855 5,193,263
- ----------------------------------------------------------------------------------------------------------------------------
Other Assets
- ----------------------------------------------------------------------------------------------------------------------------
Due from AEFC for federal income taxes 22,963 -
Deferred taxes, net (Note 8) 9,321 -
Deferred distribution fees and other 6,453 6,506
- ----------------------------------------------------------------------------------------------------------------------------
Total other assets 38,737 6,506
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $5,255,592 $5,199,769
- ----------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
F-4
Balance Sheets (continued)
AMERICAN EXPRESS CERTIFICATE COMPANY
December 31, (Thousands, except share amount) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholder's Equity
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Certificate Reserves (Note 5):
Installment certificates:
Reserves to mature $ 146,052 $ 168,957
Additional credits and accrued interest 3,514 3,988
Advance payments and accrued interest 499 564
Other 32 34
Fully paid certificates:
Reserves to mature 4,573,514 4,277,348
Additional credits and accrued interest 64,114 42,311
Due to unlocated certificate holders 92 170
- ----------------------------------------------------------------------------------------------------------------------------
Total certificate reserves 4,787,817 4,493,372
- ----------------------------------------------------------------------------------------------------------------------------
Accounts Payable and Accrued Liabilities:
Due to AEFC (Note 7) 880 887
Due to AEFC for federal income taxes - 3,908
Due to other affiliates (Note 7) 560 690
Deferred taxes, net (Note 8) - 29,556
Payable for investment securities purchased 9,173 263,658
Equity index options and other liabilities (Note 9) 133,949 48,309
- ----------------------------------------------------------------------------------------------------------------------------
Total accounts payable and accrued liabilities 144,562 347,008
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,932,379 4,840,380
- ----------------------------------------------------------------------------------------------------------------------------
Commitments (Note 4)
- ----------------------------------------------------------------------------------------------------------------------------
Shareholder's Equity (Note 6)
- ----------------------------------------------------------------------------------------------------------------------------
Common stock, $10 par - authorized and issued 150,000 shares 1,500 1,500
Additional paid-in capital 323,844 373,844
Retained earnings (accumulated deficits):
Appropriated for pre-declared additional credits and interest 184 811
Appropriated for additional interest on advance payments 15 15
Unappropriated (46,556) (100,142)
Accumulated other comprehensive income - net of tax (Note 1) 44,226 83,361
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholder's equity 323,213 359,389
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $5,255,592 $5,199,769
- ----------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
F-5
Statements of Operations
AMERICAN EXPRESS CERTIFICATE COMPANY
Years ended December 31, (Thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Investment Income
Interest income from unaffiliated investments:
Available-for-Sale securities $204,932 $227,609 $214,534
Mortgage loans on real estate and other loans 27,093 27,719 25,133
Certificate loans 933 1,095 1,293
Dividends 5,074 9,949 19,986
Equity index options (Note 9) 29,538 (36,421) (39,510)
Interest rate swap agreements (Note 9) (5,301) (9,780) (17,616)
Other 1,969 980 525
- ----------------------------------------------------------------------------------------------------------------------------
Total investment income 264,238 221,151 204,345
- ----------------------------------------------------------------------------------------------------------------------------
Investment Expenses
AEFC and affiliated company fees (Note 7):
Distribution 29,731 29,762 30,924
Investment advisory and services 10,436 9,980 9,248
Transfer agent 3,378 3,203 3,161
Depository 349 321 285
Other 523 360 432
- ----------------------------------------------------------------------------------------------------------------------------
Total investment expenses 44,417 43,626 44,050
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income before provision for certificate
reserves and income tax (expense) benefit $219,821 $177,525 $160,295
See Notes to Financial Statements
F-6
Statements of Operations (continued)
AMERICAN EXPRESS CERTIFICATE COMPANY
Years ended December 31, (Thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Provision for Certificate Reserves (Note 5)
According to the terms of the certificates:
Provision for certificate reserves $ 6,043 $ 7,888 $ 10,321
Interest on additional credits 425 543 597
Interest on advance payments 17 19 34
Additional credits/interest authorized by AECC:
On fully paid certificates 132,975 88,201 138,020
On installment certificates 3,379 4,757 7,559
- -----------------------------------------------------------------------------------------------------------------------------
Total provision for certificate reserves before reserve recoveries 142,839 101,408 156,531
Reserve recoveries from terminations prior to maturity (1,356) (1,156) (1,144)
- -----------------------------------------------------------------------------------------------------------------------------
Net provision for certificate reserves 141,483 100,252 155,387
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income before income tax (expense) benefit 78,338 77,273 4,908
Income tax (expense) benefit (Note 8) (27,296) (24,866) 3,348
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 51,042 52,407 8,256
- -----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments
Securities of unaffiliated issuers before income tax (expense) benefit 2,944 (9,899) (92,375)
Income tax (expense) benefit (Note 8) (1,031) 3,631 32,331
- -----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 1,913 (6,268) (60,044)
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change (net of income tax benefit of $214) - - (397)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 52,955 $ 46,139 $(52,185)
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
F-7
Statements of Cash Flows
AMERICAN EXPRESS CERTIFICATE COMPANY
Years Ended December 31, (Thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $ 52,955 $ 46,139 $ (52,185)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Cumulative effect of accounting change, net of tax (Note 1) - - 397
Interest income added to certificate loans (630) (738) (820)
Amortization of premiums/discounts-net 14,907 (2,426) (1,483)
Provision for deferred federal income taxes (38,877) (3,288) (9,793)
Net deferred distribution fees (amortized) (479) 1,802 1,525
Net realized (gain) loss on equity index options (29,538) 36,421 39,510
Net realized (gain) loss on investments (2,944) 9,899 92,375
(Increase) decrease in dividends and interest receivable (1,893) 4,184 9,603
Other assets and liabilities, net (6,856) (6,004) (17,564)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (13,355) 85,989 61,565
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Available-for-Sale investments:
Sales 1,132,131 887,194 989,738
Maturities and redemptions 1,305,953 1,111,493 704,877
Purchases (2,626,239) (2,228,071) (2,435,973)
Other investments:
Sales 81,736 11,166 -
Maturities and redemptions 77,022 88,437 30,307
Purchases (182,293) (234,070) (54,927)
Certificate loans:
Payments 2,805 2,919 3,127
Fundings (1,553) (2,085) (2,830)
Changes in amounts due to and from brokers, net (238,262) 97,482 141,131
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (448,700) (265,535) (624,550)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Payments from certificate owners 2,571,209 2,031,414 1,919,769
Net provision for certificate reserves 141,483 100,252 155,387
Certificate maturities and cash surrenders (2,415,861) (1,788,995) (1,734,742)
Proceeds from repurchase agreements 337,600 - 500
Payments under repurchase agreements (337,600) - (500)
(Return of capital to) contribution from AEFC (50,000) (10,000) 240,000
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 246,831 332,671 580,414
- -----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (215,224) 153,125 17,429
Cash and cash equivalents at beginning of year 240,323 87,198 69,769
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 25,099 $ 240,323 $ 87,198
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
F-8
Statements of Comprehensive Income
AMERICAN EXPRESS CERTIFICATE COMPANY
Years Ended December 31, (Thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 52,955 $ 46,139 $(52,185)
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income net of tax (Note 1)
Cumulative effect of accounting change (Note 1) - - (2,187)
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized (losses) gains on Available-for-Sale securities:
Unrealized holding (losses) gains arising during period (52,669) 82,904 19,959
Income tax benefit (provision) 18,434 (29,016) (6,986)
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized holding (losses) gains arising during the period (34,235) 53,888 12,973
- ----------------------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for (gains) losses included in net income (loss) (8,260) 8,142 101,754
Income tax provision (benefit) 2,891 (2,850) (35,614)
- ----------------------------------------------------------------------------------------------------------------------------------
Net reclassification adjustment for (gains) losses included in net income (loss) (5,369) 5,292 66,140
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized (losses) gains on Available-for-Sale securities (39,604) 59,180 79,113
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized losses on interest rate swaps:
Unrealized losses arising during the period (4,579) (8,141) (19,683)
Income tax benefit 1,603 2,849 6,889
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized holding losses arising during the period (2,976) (5,292) (12,794)
- ----------------------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for losses included in net income (loss) 5,300 9,780 17,616
Income tax benefit (1,855) (3,423) (6,166)
- ----------------------------------------------------------------------------------------------------------------------------------
Net reclassification adjustment for losses included in net income (loss) 3,445 6,357 11,450
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on interest rate swaps 469 1,065 (1,344)
- ----------------------------------------------------------------------------------------------------------------------------------
Net other comprehensive (loss) income (39,135) 60,245 75,582
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 13,820 $106,384 $ 23,397
- ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
F-9
Statements of Shareholder's Equity
AMERICAN EXPRESS CERTIFICATE COMPANY
Years Ended December 31, (Thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock $ 1,500 $ 1,500 $ 1,500
- ----------------------------------------------------------------------------------------------------------------------------
Additional Paid-in Capital
Balance at beginning of year $ 373,844 $ 383,844 $ 143,844
(Return of capital to) contribution from Parent (50,000) (10,000) 240,000
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 323,844 $ 373,844 $ 383,844
- ----------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Appropriated for pre-declared additional credits/interest (Note 5)
Balance at beginning of year $ 811 $ 1,123 $ 2,684
Transferred to unappropriated retained earnings (627) (312) (1,561)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 184 $ 811 $ 1,123
- ----------------------------------------------------------------------------------------------------------------------------
Appropriated for additional interest on advance payments $ 15 $ 15 $ 15
- ----------------------------------------------------------------------------------------------------------------------------
Unappropriated (Note 6)
Balance at beginning of year $(100,142) $(146,593) $ 70,937
Net income (loss) 52,955 46,139 (52,185)
Transferred from appropriated retained earnings 627 312 1,561
Other 4 - -
Capital dividends declared - - (166,906)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (46,556) $(100,142) $(146,593)
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income - net of tax (Note 1)
Balance at beginning of year $ 83,361 $ 23,116 $ (52,466)
Net other comprehensive (loss) income (39,135) 60,245 75,582
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 44,226 $ 83,361 $ 23,116
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholder's equity $ 323,213 $ 359,389 $ 263,005
- ----------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
F-10
Notes to Financial Statements
AMERICAN EXPRESS CERTIFICATE COMPANY
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 (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
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. (AEFAI) and American Express Bank Ltd. (AEB), 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.
As of December 31, 2003, AECC offered nine different certificate products to the
public with specified maturities ranging from ten to twenty years. Within their
specified maturity, most certificates have interest rate terms of one to
thirty-six months. In addition, three types of certificates have interest tied,
in whole or in part, to 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, 401(k) plans and other qualified retirement
plans.
AECC's net investment income is derived primarily from interest and dividends
generated by its investments. AECC's net income is determined by deducting from
net investment income provision expenses for certificate reserves, and other
expenses, including taxes, fees paid to AEFC for investment advisory and other
services, distribution fees paid to AEFAI, and marketing fees paid to AEB, a
wholly-owned indirect subsidiary of American Express Company.
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,
Investors Syndicate Development Corporation, as prescribed by the Securities and
Exchange Commission (SEC) for non-investment company subsidiaries. Certain
reclassifications of prior period amounts have been made to conform to the
current presentation.
Accounting estimates are an integral part of the Financial Statements. In part,
they are based upon assumptions concerning future events. Among the more
significant is investment securities valuation as discussed in detail below.
These accounting estimates reflect the best judgment of management and actual
results could differ.
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.
F-11
Notes to Financial Statements
AMERICAN EXPRESS CERTIFICATE COMPANY
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 original maturities of ninety days or less.
Available-for-Sale investments
Debt securities and marketable equity securities are classified as
Available-for-Sale and carried at fair value. Unrealized gains (losses) on
securities classified as Available-for-Sale are reflected, net of taxes, in
other comprehensive (loss) income as part of Shareholder's Equity.
The basis for determining cost in computing realized gains (losses) on
securities is specific identification. Gains (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 net realized gain (loss) on investments
in the statements of operations.
Fair value is generally based on quoted market prices. However, AECC's
investment portfolio also contains structured investments of various asset
quality, which are not readily marketable. As a result, the carrying values of
these structured investments are based on future cash flow projections that
require a significant degree of management judgment as to the amount and timing
of cash payments, defaults and recovery rates of the underlying investments and
as such, are subject to change.
First mortgage loans on real estate and other loans
First mortgage loans on real estate reflect principal amounts outstanding less
reserves for losses, which is the basis for determining realized gains (losses).
Estimated fair values of mortgage loans on real estate are determined by a
discounted cash flow analysis using mortgage interest rates currently offered
for mortgages of similar maturities. Other loans reflect amortized cost less
reserve for losses. Fair values of other loans represent estimated fair values
when quoted prices are not available.
F-12
Notes to Financial Statements
AMERICAN EXPRESS CERTIFICATE COMPANY
The reserve for loan 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.
Certificate Reserves
Investment certificates may be purchased either with a lump-sum payment or by
installment payments. Certificate product 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
Distribution fees on sales of certain series of certificate products are
deferred and amortized over the estimated lives of the related certificates,
which is approximately one year and can be up to 10 years. Upon surrender prior
to maturity, unamortized deferred distribution fees are reflected in expenses
and any related surrender charges are reflected as a reduction to the provision
expense for certificate reserves. Products are designed to recover such costs
within the surrender charge period.
Federal income taxes
AECC's taxable income (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 AEFC 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 AEFC and its subsidiaries that
AEFC will reimburse its subsidiaries for any tax benefits recorded.
Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which addresses
consolidation by business enterprises of variable interest entities (VIEs) and
was subsequently revised in December 2003. An entity is subject to consolidation
according to the provisions of FIN 46, if,
F-13
Notes to Financial Statements
AMERICAN EXPRESS CERTIFICATE COMPANY
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 requires a VIE to be
consolidated when an enterprise has a variable interest for which it is deemed
to be the primary beneficiary which means that it will absorb a majority of the
VIE's expected losses or receive a majority of the VIE's expected residual
return.
FIN 46 did not impact the accounting for $27 million in a minority-owned secured
loan trust (SLT) or $6 million in a collateralized debt obligation traunche
(solely supported by a portfolio of high yield bonds), both of which are managed
by third parties, as AECC is not the primary beneficiary. AECC has a 33 percent
ownership interest in the SLT, which provides returns to investors primarily
based on the performance of an underlying portfolio of high yield loans. The
aggregate fair value of the loans related to AECC's pro rata share of this
structure approximates $92.5 million. AECC's maximum exposure to loss as a
result of its investment in this SLT is represented by the carrying value, which
is $27 million at December 31, 2003.
In April 2003, the FASB issued Statement of Financial Accounting Standards Board
(SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" (SFAS No. 149). SFAS No. 149 amends and clarifies accounting
for derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered
into or modified and hedging relationships designated after June 30, 2003, and
to certain preexisting contracts. SFAS No. 149 did not have a material impact on
AECC's financial statements.
In November 2003, the 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". The
disclosure provisions of this rule, which are addressed in Note 3, require
tabular presentation of certain information regarding investment securities with
gross unrealized losses.
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 $4.8 billion and $4.5 billion at December 31, 2003 and 2002,
respectively. AECC reported Qualified Assets of $5.1 billion and $4.8 billion at
December 31, 2003 and 2002, respectively, excluding net unrealized pretax
appreciation on Available-for-Sale securities of $74 million and $135 million at
December 31, 2003 and 2002, respectively, and unsettled investment purchases of
$9 million and $264 million at December 31, 2003 and 2002, 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
F-14
Notes to Financial Statements
AMERICAN EXPRESS CERTIFICATE COMPANY
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 (accounted for on
a trade date basis) of AECC were deposited as follows:
December 31, 2003
--------------------------------------------------------
Required
(Thousands) Deposits Deposits Excess
- ----------------------------------------------------------------------------------------------------------------------------
Deposits to meet certificate liability requirements:
Pennsylvania (at market value) $ 162 $ 100 $ 62
Texas, Illinois, New Jersey (at par value) $ 215 $ 185 $ 30
Central Depository (at amortized cost) $5,004,553 $ 4,742,572 $ 261,981
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 2002
--------------------------------------------------------
Required
(Thousands) Deposits Deposits Excess
- ----------------------------------------------------------------------------------------------------------------------------
Deposits to meet certificate liability requirements:
Pennsylvania (at market value) $ 166 $ 100 $ 66
Texas, Illinois, New Jersey (at par value) $ 215 $ 185 $ 30
Central Depository (at amortized cost) $5,020,340 $ 4,472,886 $ 547,454
- ----------------------------------------------------------------------------------------------------------------------------
The assets on deposit with the central depository at December 31, 2003 and 2002
consisted of securities and other loans having a deposit value of $4.6 billion
at both balance sheet dates, mortgage loans on real estate of $331 million and
$339 million, respectively, and other investments of $74 million and $73
million, respectively. Additionally, these assets on deposit include unsettled
purchases of investments in the amount of $9 million and $264 million at
December 31, 2003 and 2002, respectively.
American Express Trust Company is the central depository for AECC. See Note 7.
3. INVESTMENTS IN UNAFFILIATED ISSUERS
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.
F-15
Notes to Financial Statements
AMERICAN EXPRESS CERTIFICATE COMPANY
Investments classified as Available-for-Sale securities at December 31 are
distributed by type as presented below:
2003
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
Mortgage and asset-backed securities $ 2,605,686 $ 35,954 $ (10,975) $ 2,630,665
Corporate debt securities 1,710,353 53,497 (7,762) 1,756,088
Stated maturity preferred stock 44,340 1,178 (34) 45,484
Structured Investments 32,592 1,788 - 34,380
Perpetual preferred stock 17,782 270 - 18,052
U.S. Government & agency obligations 15,355 350 - 15,705
State and municipal obligations 9,539 6 (214) 9,331
Common Stock - 21 - 21
- ---------------------------------------------------------------------------------------------------------------------
Total $ 4,435,647 $ 93,064 $ (18,985) $ 4,509,726
- ---------------------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
Mortgage and asset-backed securities $ 2,938,348 $ 94,528 $ (1,728) $ 3,031,148
Corporate debt securities 1,172,446 53,394 (15,540) 1,210,300
Stated maturity preferred stock 82,554 1,876 (383) 84,047
Structured Investments 33,470 2,175 - 35,645
Perpetual preferred stock 17,782 266 - 18,048
State and municipal obligations 9,424 385 - 9,809
U.S. Government & agency obligations 362 37 - 399
- ---------------------------------------------------------------------------------------------------------------------
Total $ 4,254,386 $ 152,661 $ (17,651) $ 4,389,396
- ---------------------------------------------------------------------------------------------------------------------
F-16
Notes to Financial Statements
AMERICAN EXPRESS CERTIFICATE COMPANY
The following table provides information about Available-for-Sale securities
with gross unrealized losses and the length of time that individual securities
have been in a continuous unrealized loss position as of December 31, 2003:
(Thousands) Less than 12 months 12 months or more Total
- ------------------------------------------------------------------------------------------------------------------------
Description of Securities Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized
Losses Losses Losses
- ------------------------------------------------------------------------------------------------------------------------
Corporate debt securities $ 444,318 $ (7,147) $ 15,789 $ (615) $ 460,107 $ (7,762)
Mortgage and other
asset-backed securities
1,006,572 (9,513) 13,742 (1,462) 1,020,314 (10,975)
State and
municipal
obligations 8,790 (214) - - 8,790 (214)
Other - - 454 (34) 454 (34)
- ------------------------------------------------------------------------------------------------------------------------
Total $ 1,459,680 $ (16,874) $ 29,985 $ (2,111) $ 1,489,665 $ (18,985)
========================================================================================================================
Approximately 114 investment positions were in an unrealized loss position as of
December 31, 2003. The gross unrealized losses on these securities are
attributable to a number of factors including changes in interest rates and
credit spreads, and specific credit events associated with individual issuers.
As part of its ongoing monitoring process, management has concluded that none of
these securities are other-than-temporarily impaired at December 31, 2003. AECC
has the ability and intent to hold these securities for a time sufficient to
recover its amortized cost. See the Available-for-Sale Investments section of
Note 1 for information regarding AECC's policy for determining when an
investment's decline in value is other-than-temporary.
F-17
Notes to Financial Statements
AMERICAN EXPRESS CERTIFICATE COMPANY
The amortized cost and fair value of Available-for-Sale securities, by
contractual maturity at December 31, 2003 are shown below. Cash flows may differ
from contractual maturities because issuers may call or prepay obligations.
Amortized Fair
(Thousands) Cost Value
- --------------------------------------------------------------------------------
Due within one year $ 136,654 $ 138,877
Due from one to five years 1,302,466 1,343,323
Due from five to te