UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________________________ to __________________
Commission file number 1-7657
AMERICAN EXPRESS COMPANY
(Exact name of registrant as specified in its charter)
NEW YORK 13-4922250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WORLD FINANCIAL CENTER, 200 VESEY STREET, NEW YORK, NY 10285
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 640-2000
NONE
-------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 2001
Common Shares (par value $.20 per share) 1,334,220,197 shares
AMERICAN EXPRESS COMPANY
FORM 10-Q
INDEX
Part I. Financial Information:
Consolidated Statements of Income - Three months ended September 30, 2001 and 2000 1
Consolidated Statements of Income - Nine months ended September 30, 2001 and 2000 2
Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 3
Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and
2000 4
Notes to Consolidated Financial Statements 5-10
Independent Accountants' Review Report 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations 12-33
Part II. Other Information 34
PART I--FINANCIAL INFORMATION
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
------------------------------------
2001 2000
-------------- --------------
Revenues:
Discount revenue $ 1,870 $ 1,963
Interest and dividends, net 736 858
Management and distribution fees 595 700
Net card fees 423 418
Travel commissions and fees 358 433
Other commissions and fees 600 611
Cardmember lending net finance charge revenue 222 232
Life and other insurance premiums 173 145
Other 747 621
-------------- --------------
Total 5,724 5,981
-------------- --------------
Expenses:
Human resources 1,540 1,657
Provisions for losses and benefits:
Annuities and investment certificates 313 343
Life insurance, international banking and other 247 182
Charge card 284 236
Cardmember lending 302 267
Interest 385 352
Marketing and promotion 327 396
Occupancy and equipment 398 372
Professional services 413 374
Communications 125 133
Restructuring charge 326 -
Disaster recovery charge 90 -
Other 620 640
-------------- --------------
Total 5,370 4,952
-------------- --------------
Pretax income 354 1,029
Income tax provision 56 292
-------------- --------------
Net income $ 298 $ 737
============== ==============
Earnings Per Common Share:
Basic $ 0.23 $ 0.56
============== ==============
Diluted $ 0.22 $ 0.54
============== ==============
Average common shares outstanding for earnings per common share (millions):
Basic 1,324 1,326
============== ==============
Diluted 1,335 1,361
============== ==============
Cash dividends declared per common share $ 0.08 $ 0.08
============== ==============
See notes to Consolidated Financial Statements.
1
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share amounts)
(Unaudited)
Nine Months Ended
September 30,
------------------------------------
2001 2000
-------------- --------------
Revenues:
Discount revenue $ 5,801 $ 5,717
Interest and dividends, net 1,360 2,490
Management and distribution fees 1,856 2,089
Net card fees 1,248 1,234
Travel commissions and fees 1,203 1,378
Other commissions and fees 1,823 1,729
Cardmember lending net finance charge revenue 662 766
Life and other insurance premiums 490 425
Other 2,268 1,781
-------------- --------------
Total 16,711 17,609
-------------- --------------
Expenses:
Human resources 4,859 4,968
Provisions for losses and benefits:
Annuities and investment certificates 985 1,013
Life insurance, international banking and other 638 532
Charge card 852 778
Cardmember lending 935 613
Interest 1,159 997
Marketing and promotion 997 1,182
Occupancy and equipment 1,164 1,100
Professional services 1,200 1,079
Communications 388 388
Restructuring charge 326 -
Disaster recovery charge 90 -
Other 1,870 1,964
-------------- --------------
Total 15,463 14,614
-------------- --------------
Pretax income 1,248 2,995
Income tax provision 234 862
-------------- --------------
Net income $ 1,014 $ 2,133
============== ==============
Earnings Per Common Share:
Basic $ 0.77 $ 1.61
============== ==============
Diluted $ 0.76 $ 1.57
============== ==============
Average common shares outstanding for earnings per common share (millions):
Basic 1,323 1,328
============== ==============
Diluted 1,338 1,361
============== ==============
Cash dividends declared per common share $ 0.24 $ 0.24
============== ==============
See notes to Consolidated Financial Statements.
2
AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS
(millions)
(Unaudited)
September 30, December 31,
ASSETS 2001 2000
-------------- --------------
Cash and cash equivalents $ 9,860 $ 8,487
Accounts receivable and accrued interest:
Cardmember receivables, less reserves:
2001, $1,026; 2000, $809 23,765 25,067
Other receivables, less reserves:
2001, $105; 2000, $123 4,508 5,476
Investments 45,291 43,747
Loans:
Cardmember lending, less reserves:
2001, $771; 2000, $650 19,063 19,855
International banking, less reserves:
2001, $144; 2000, $137 5,411 5,207
Other, net 1,084 1,026
Separate account assets 24,349 32,349
Deferred acquisition costs 3,645 3,574
Land, buildings and equipment - at cost, less
accumulated depreciation: 2001, $2,520; 2000, $2,219 2,716 2,506
Other assets 5,865 7,129
-------------- --------------
Total assets $ 145,557 $ 154,423
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Customers' deposits $ 13,075 $ 13,870
Travelers Cheques outstanding 6,624 6,127
Accounts payable 7,052 7,495
Insurance and annuity reserves:
Fixed annuities 19,409 19,417
Life and disability policies 4,868 4,681
Investment certificate reserves 8,309 7,348
Short-term debt 30,808 36,030
Long-term debt 7,158 4,711
Separate account liabilities 24,349 32,349
Other liabilities 11,177 10,211
-------------- --------------
Total liabilities 132,829 142,239
-------------- --------------
Guaranteed preferred beneficial interests in the company's junior subordinated
deferrable interest debentures 500 500
Shareholders' equity:
Common shares, $.20 par value, authorized 3.6 billion shares; issued and
outstanding 1,336 million shares in 2001 and 1,326
million shares in 2000 267 265
Capital surplus 5,473 5,439
Retained earnings 6,230 6,198
Other comprehensive income, net of tax:
Net unrealized securities gains (losses) 754 (145)
Net unrealized derivatives losses (445) -
Foreign currency translation adjustments (51) (73)
-------------- --------------
Accumulated other comprehensive income (loss) 258 (218)
-------------- --------------
Total shareholders' equity 12,228 11,684
-------------- --------------
Total liabilities and shareholders' equity $ 145,557 $ 154,423
============== ==============
See notes to Consolidated Financial Statements.
3
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
(Unaudited)
Nine Months Ended
September 30,
------------------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,014 $ 2,133
Adjustments to reconcile net income to net cash provided by operating activities:
Provisions for losses and benefits 2,411 1,980
Depreciation, amortization, deferred taxes and other 1,206 323
Restructuring charge 326 -
Disaster recovery charge 90 -
Changes in operating assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable and accrued interest 478 (729)
Other assets 905 (445)
Accounts payable and other liabilities (1,940) 1,846
Increase in Travelers Cheques outstanding 497 359
Increase in insurance reserves 165 153
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,152 5,620
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments 8,360 2,096
Maturity and redemption of investments 4,796 4,699
Purchase of investments (14,092) (6,289)
Net decrease (increase) in Cardmember loans/receivables 983 (7,434)
Cardmember loans/receivables sold to trust, net 2,715 3,373
Proceeds from repayment of loans 19,239 17,717
Issuance of loans (18,669) (17,730)
Purchase of land, buildings and equipment (568) (700)
Sale of land, buildings and equipment 13 28
(Acquisitions)/Dispositions, net of cash acquired/sold (161) 213
-------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,616 (4,027)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in customers' deposits (783) 1,769
Sale of annuities and investment certificates 4,248 4,309
Redemption of annuities and investment certificates (3,536) (4,313)
Net (decrease) increase in debt with maturities of three months or less (3,416) 5,507
Issuance of debt 8,376 7,255
Principal payments on debt (10,122) (13,625)
Issuance of American Express common shares 71 190
Repurchase of American Express common shares (626) (958)
Dividends paid (320) (313)
-------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (6,108) (179)
-------------- --------------
Effect of exchange rate changes on cash (287) 74
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,373 1,488
Cash and cash equivalents at beginning of period 8,487 7,471
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,860 $ 8,959
============== ==============
See notes to Consolidated Financial Statements.
4
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements should be read in conjunction with
the financial statements in the Annual Report on Form 10-K of American
Express Company (the company or American Express) for the year ended
December 31, 2000. Significant accounting policies disclosed therein have
not changed, except as disclosed in Note 2. Certain reclassifications of
prior period amounts have been made to conform to the current
presentation.
Cardmember lending net finance charge revenue is presented net of
interest expense of $236 million and $272 million for the third quarter
of 2001 and 2000, respectively, and $780 million and $761 million for the
nine months ended September 30, 2001 and 2000, respectively. Interest and
dividends is presented net of interest expense of $105 million and $146
million for the third quarter of 2001 and 2000, respectively, and $364
million and $419 million for the nine months ended September 30, 2001 and
2000, respectively, related primarily to the company's international
banking operations.
At September 30, 2001 and December 31, 2000, cash and cash equivalents
included $0.9 billion and $1.2 billion, respectively, segregated in
special bank accounts for the benefit of customers.
The interim financial information in this report has not been audited. In
the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position and the consolidated
results of operations for the interim periods have been made. All
adjustments made were of a normal, recurring nature. Results of
operations reported for interim periods are not necessarily indicative of
results for the entire year.
2. ACCOUNTING DEVELOPMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
Effective January 1, 2001, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, which establishes the accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair
value. Changes in the fair value of a derivative are recorded in earnings
or directly to equity, depending on the instrument's designated use.
Those derivative instruments that are designated and qualify as hedging
instruments are further classified as either a cash flow hedge, a fair
value hedge, or a hedge of a net investment in a foreign operation, based
upon the exposure being hedged.
5
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 140
From time to time, the company, through Travel Related Services (TRS),
American Express Centurion Bank (Centurion Bank) and special purpose
subsidiaries, has securitized U.S. Cardmember loans and Charge Card
receivables by issuing securities through one or more trusts. The
securities are non-recourse to the company. Net proceeds are used by the
special purpose subsidiaries to purchase the receivables from TRS or its
subsidiaries. The consolidated financial statements include the assets
and liabilities of these special purpose subsidiaries.
Effective April 1, 2001, the company adopted SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," a replacement of SFAS No. 125. This Statement establishes
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities, as well as the
recognition and reclassification of collateral. SFAS No. 140 did not
materially impact the company's securitized U.S. Cardmember loans. The
company's Charge Card receivables securitization structure did not meet
certain sale criteria of SFAS 140. As a result, effective beginning in
the second quarter, this structure is accounted for as secured borrowings
by the special purpose subsidiary that purchases Charge Card receivables,
as well as by Centurion Bank. Approximately $2.9 billion of Charge Card
receivables and a commensurate amount of long-term debt were reinstated
to the applicable balance sheets. While the Charge Card receivables and
associated long-term debt reappeared on the consolidated financial
statements, these securitized assets of the special purpose subsidiary
and Centurion Bank are not available to creditors of the company and are
not the assets of the company, and the company has no liability for
securities issued by the securitization trusts. The impact of this
adoption on results of operations, as well as on capital requirements,
was immaterial.
3. RESTRUCTURING CHARGE
During the third quarter of 2001, the company incurred a restructuring
charge of $352 million ($232 million after-tax). $26 million of the
pretax charge is included in "Provisions for losses and benefits - Life
insurance, international banking and other" on the Consolidated
Statements of Income, and relates to plans to further scale back AEB's
corporate lending activities in parts of Asia, Latin America and Europe.
The pretax charge includes $184 million for severance relating to the
elimination of approximately 6,100 jobs. It also includes $168 million of
other charges, including the $26 million of provision previously
discussed, asset impairment charges and other exit costs relating to the
exit of certain locations, and currency translation losses previously
recorded in shareholder's equity. As of September 30, 2001, the company
has a liability of $257 million for the expected future cash outlays
related to this charge. The pretax charge and employee reductions by
operating segment are as follows:
(Dollars in
millions) Restructuring Charge
-------------------- Employee
Pretax After-tax Reductions
------------ ------------- -------------
TRS $195 $127 4,700
AEFA 62 41 900
AEB 84 57 400
Corporate & Other 11 7 100
-------- --------- ---------
Total $352 $232 6,100
======== ========= =========
6
4. DISASTER RECOVERY CHARGE
As a result of the terrorist attacks on September 11, 2001, the company
incurred a $90 million ($59 million after-tax) disaster recovery charge.
This charge mainly includes provisions for credit exposures to travel
industry service establishments and insurance claims. $79 million of the
pretax charge was incurred by the Travel Related Services segment, while
$11 million was incurred by American Express Financial Advisors. In
addition to the pretax charge, the company waived approximately $8
million of finance charges and late fees.
5. INVESTMENT SECURITIES
The following is a summary of investments at September 30, 2001 and
December 31, 2000:
(in millions) September 30, 2001 December 31, 2000
--------------------- ---------------------
Held to Maturity, at amortized cost
(fair value: 2001, $0; 2000, $8,486) $ - $ 8,404
Available for Sale, at fair value
(cost: 2001, $39,857; 2000, $31,301) 41,069 31,052
Investment mortgage loans (fair
value: 2001, $4,263; 2000, $4,178) 4,020 4,097
Trading 202 194
--------------------- -------------------
Total $ 45,291 $ 43,747
===================== ====================
During the first and second quarters of 2001, the company recognized
pretax losses of $182 million and $826 million, respectively, from the
write-down and sale of certain high-yield securities. These losses are
included in "Interest and dividends" on the Consolidated Statements of
Income. The second quarter pretax charge of $826 million is comprised
of: $403 million to recognize the impact of higher default rate
assumptions on certain structured investments; $344 million to write down
lower-rated securities (most of which were sold in the third quarter of
2001) in connection with the company's decision to lower its risk profile
by reducing the level of its high-yield portfolio, allocating holdings
toward stronger credits, and reducing the concentration of exposure to
individual companies and industry sectors; and $79 million to write down
certain other investments to recognize losses incurred during the second
quarter.
7
Early in the fourth quarter of 2001, the company placed a majority of its
rated Collateralized Debt Obligation (CDO) securities and related accrued
interest, as well as a relatively minor amount of other liquid securities,
having an aggregate book value of $905 million into a securitization
trust. In return, the company received $120 million in cash (excluding
transaction expenses) relating to sales to investors, and retained
interests with allocated book amounts aggregating $785 million. An
immaterial amount of realized losses relating to the CDOs designated for
this transaction was recorded as of September 30, 2001.
6. COMPREHENSIVE INCOME
Comprehensive income is defined as the aggregate change in shareholders'
equity, excluding changes in ownership interests. For the company, it is
the sum of net income and changes in (i) unrealized gains or losses on
available-for-sale securities, (ii) unrealized gains or losses on
derivatives (pursuant to SFAS No. 133) and (iii) foreign currency
translation adjustments. The components of comprehensive income, net of
related tax, for the three and nine months ended September 30, 2001 and
2000 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------------
(in millions) 2001 2000 2001 2000
----------- ------------------ --------------- -------------------
Net income $ 298 $ 737 $ 1,014 $ 2,133
Change in:
Net unrealized securities
gains/losses 441 181 899 (27)
Net unrealized derivative
gains/losses* (182) - (445) -
Foreign currency translation
adjustments** 10 19 22 27
----------- ------------------ --------------- -------------------
Total $ 567 $ 937 $ 1,490 $ 2,133
=========== ================== =============== ===================
* The change in net unrealized derivative gains/losses for the nine
months ended September 30, 2001 includes the January 1, 2001 SFAS No. 133
transition effect of $120 million in net unrealized losses. At September
30, 2001, $445 million of net after-tax losses were recorded in other
comprehensive income on the consolidated balance sheet. The increase
during the nine-month period is primarily related to interest rate
derivatives used as cash flow hedges. These losses will be recognized in
earnings during the terms of the derivative contracts at the same time
that the company realizes the benefits of lower market rates of interest
on its funding activities.
** The change in foreign currency translation adjustments for the three
and nine months ended September 30, 2001 includes the reversal of $24
million of currency translation losses as a result of the third quarter
2001 restructuring charge. See Note 3 to the consolidated financial
statements for further details.
7. TAXES AND INTEREST
Net income taxes paid during the nine months ended September 30, 2001 and
2000 were approximately $470 million and $567 million, respectively.
Interest paid during the nine months ended September 30, 2001 and 2000
was approximately $1.9 billion and $2.7 billion, respectively.
8
The decrease in the company's effective tax rate for the three and
nine-month periods ended September 30, 2001, as compared to the three and
nine-month periods ended September 30, 2000, is due to the company's
higher proportion of nontaxable earnings relative to pretax income.
8. EARNINGS PER SHARE
The computations of basic and diluted earnings per common share (EPS) for
the three and nine months ended September 30, 2001 and 2000 are as
follows:
(in millions, except per Three Months Ended Nine Months Ended
share amounts) September 30, September 30,
--------------------------------- -----------------------------------
2001 2000 2001 2000
------------- ------------------ --------------- ------------------
Numerator: Net income $ 298 $ 737 $ 1,014 $ 2,133
Denominator:
Denominator for basic EPS -
weighted-average shares 1,324 1,326 1,323 1,328
Effect of dilutive securities:
Stock Options, Restricted
Stock Awards and other 11 35 15 33
------------- ------------------ --------------- ------------------
Denominator for diluted EPS 1,335 1,361 1,338 1,361
------------- ------------------ --------------- ------------------
Basic EPS $ 0.23 $ 0.56 $ 0.77 $ 1.61
------------- ------------------ --------------- ------------------
Diluted EPS $ 0.22 $ 0.54 $ 0.76 $ 1.57
------------- ------------------ --------------- ------------------
9. SEGMENT INFORMATION
The following tables present three and nine-month results for the
company's operating segments, based on management's internal reporting
structure. Net revenues (managed basis) exclude the effect of
securitizations at Travel Related Services, and include provisions for
losses and benefits for annuities, insurance and investment certificate
products of American Express Financial Advisors (AEFA). AEFA's revenues
for the nine-month period include the effect of $182 million and $826
million of losses from the write down and sale of certain high-yield
securities in the first and second quarters of 2001, respectively.
9
NET REVENUES Three Months Ended Nine Months Ended
(MANAGED BASIS) September 30, September 30,
-------------------------------------- -------------------------------------
(in millions) 2001 2000 2001 2000
------------- ----------------------- -------------- ---------------------
Travel Related Services $ 4,466 $ 4,400 $ 13,575 $ 12,898
American Express
Financial Advisors 908 1,052 1,876 3,153
American Express Bank 165 146 481 447
Corporate and Other (61) (44) (162) (127)
------------- ----------------------- -------------- ---------------------
Total $ 5,478 $ 5,554 $ 15,770 $ 16,371
============= ======================= ============== =====================
REVENUES (GAAP BASIS) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- -------------------------------------
(in millions) 2001 2000 2001 2000
------------- ----------------------- -------------- ---------------------
Travel Related Services $ 4,228 $ 4,339 $ 13,051 $ 12,701
American Express
Financial Advisors 1,392 1,540 3,341 4,588
American Express Bank 165 146 481 447
Corporate and Other (61) (44) (162) (127)
------------- ----------------------- -------------- ---------------------
Total $ 5,724 $ 5,981 $ 16,711 $ 17,609
============= ======================= ============== =====================
NET INCOME Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- -----------------------------------
(in millions) 2001 2000 2001 2000
------------- ----------------------- ------------ ---------------------
Travel Related Services $ 248 $ 507 $ 1,289 $ 1,460
American Express
Financial Advisors 145 269 (110) 790
American Express Bank (43) 7 (22) 22
Corporate and Other (52) (46) (143) (139)
------------- ----------------------- ------------- ---------------------
Total $ 298 $ 737 $ 1,014 $ 2,133
============= ======================= ============= =====================
10
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Shareholders and Board of Directors
American Express Company
We have reviewed the accompanying consolidated balance sheet of American
Express Company (the "Company") as of September 30, 2001 and the related
consolidated statements of income for the three and nine-month periods ended
September 30, 2001 and 2000 and consolidated statements of cash flows for the
nine-month periods ended September 30, 2001 and 2000. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States, which will be performed for the full year with the objective of
expressing an opinion regarding the consolidated financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of the Company
as of December 31, 2000, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein), and in our report dated February 8, 2001, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2000 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/Ernst & Young LLP
New York, New York
November 13, 2001
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2001
The company's consolidated net income declined 60 percent and 52 percent in
the three and nine-month periods ended September 30, 2001, respectively.
Diluted earnings per share (EPS) declined 59 percent and 52 percent. The
company's return on equity was 14.2 percent. Results for the three-month
period ended September 30, 2001 were negatively affected by two significant
items: a previously announced restructuring charge of $352 million pretax,
$232 million after-tax, and the impacts from the September 11th terrorist
attacks.
The restructuring charge includes severance costs for the elimination of
approximately 6,100 jobs and asset impairment and other costs, relating to the
consolidation and reorganization of certain business units, the scale back of
corporate lending in certain regions, the migration of certain processes to
lower cost locations, the outsourcing of certain activities, and the transition
of certain processing and service functions to the Internet. As of September 30,
2001, the company has a liability of $257 million for the expected future cash
outlays related to this charge; the majority of these outlays are expected to
occur over the next six months. The charge is further discussed within each
operating segment's review of operations as well as in footnote 3 to the
consolidated financial statements. These initiatives are expected to produce
expense savings of approximately $325 million in 2002 and $360 million in 2003.
A portion of these savings is expected to flow through to earnings in the form
of improved operating expense margins and the remainder are expected to be
reinvested back into high-growth areas of the company. The pretax
charge, estimated cost savings and employee reductions by segment are as
follows:
(Dollars in Expected
millions) Restructuring Charge Cost Savings
------------------------------- Employee -------------------------------
Pretax After-tax Reductions 2002 2003
----------- ---------------- -------------------- ----------- -------------
TRS $195 $127 4,700 $250 $260
AEFA 62 41 900 40 50
AEB 84 57 400 25 35
Corporate & Other 11 7 100 10 15
-------- ---------- ------------ -------- --------
Total $352 $232 6,100 $325 $360
======== ========== ============ ======== ========
The September 11th terrorist attacks resulted in certain one-time costs and
business interruption losses, including provisions related to credit exposures
to travel industry service establishments, insurance claims, and waived
finance charges and late fees. The combination of these items totaled $98
million pretax, $65 million after-tax. Excluding the restructuring charge and
the September 11th items, net income declined 19 percent and 39 percent for
the three and nine-month periods ended September 30, 2001. EPS declined 17
percent and 38 percent for the three and nine-month periods. The company's
adjusted return on equity was 16.7 percent.
The company also incurred costs of approximately $42 million related to
September 11th events, which are expected to be
12
covered by insurance. Consequently, these costs did not impact the quarterly
results. These include the cost of duplicate facilities and equipment
associated with the relocation of the company's offices in lower Manhattan and
certain other business recovery expenses. Costs associated with the damage to
the company's offices, extra operating expenses and business interruption
losses are still being evaluated. The company expects that a substantial
portion of such costs and losses will be covered by insurance.
Included in the company's nine-month results ended September 30, 2001 is
$182 million pretax, $132 million after-tax, recorded in the first quarter and
$826 million pretax, $537 million after-tax, recorded in the second quarter, of
losses related to the writedown and sale of certain high-yield securities and
the reduction of the risk profile within the investment portfolio. Excluding
high-yield losses from both years, and the restructuring and September 11th
related charges mentioned above, the company's net income in the nine-month
period would have been down 9 percent from a year ago, and EPS would have been
down 6 percent. Consolidated net revenues on a managed basis declined 1 percent
and 4 percent for the three and nine-month periods ended September 30, 2001,
reflecting the continued impact of a weaker economy and equity market declines.
Net revenues, adjusted for high-yield losses in both years, increased 2 percent
for the nine-month period. The decrease in revenues, for the three month period
reflects a decline in billed business volumes, lower spreads on AEFA's
investment portfolio, decreased management and distribution fees, and
significantly weaker travel revenues. These factors were partly offset by an
increase in cards in force, larger loan balances and greater insurance premiums.
The increase in adjusted revenues for the nine-month period reflects the same
factors as the three-month period, except that billed business rose for the
nine-month period. Consolidated expenses increased for both periods due to the
restructuring and September 11th items mentioned above, larger provisions for
losses, greater interest costs, and higher operating expenses. The higher
operating expenses for the nine-month period include the effect of a $67 million
expense increase due to an adjustment of Deferred Acquisition Costs (DACs) for
variable insurance and annuity products made in the first quarter of 2001 as a
result of the steep decline in equity markets. These increases were partially
offset by lower marketing costs, a decline in human resource expenses,
reengineering activities and expense control initiatives. In addition to the
activities related to the restructuring charge, the company made strong progress
on its global reengineering efforts initiated in the first half of the year, and
as of September 30, 2001 had realized savings in excess of $700 million.
FOURTH QUARTER OUTLOOK
Given the continuing weak economic environment in general, the high level
of uncertainty in the securities markets and the unpredictable effects of the
September 11th terrorist attacks on consumer and corporate travel and spending
and the economy overall, the company expects business volumes on a
consolidated basis to continue to be weak for at least the remainder of 2001.
If these trends continue, the company expects that, compared with the prior
year, consolidated revenues and net income, as well as those in the TRS and
AEFA business segments, will continue to be materially adversely impacted for
at least the remainder of the year. In addition, in light of the current
business conditions and the weak economic outlook, the company continues to
reassess its costs and
13
infrastructure, which it expects will result in further job reductions in the
near and intermediate term.
TRAVEL RELATED SERVICES (TRS) While billed business volumes have
partially rebounded from the initial weeks following September 11th, billings
continued to show declines of approximately 10 percent in the month of October
as compared with the comparable prior year period, on continued weakness
within the travel and entertainment categories. In addition, provisions and
other credit-related exposures are expected to show the pressure of additional
deterioration in credit trends in light of increasing unemployment and the
overall industry environment, and the natural effect of the maturation
process for loans added over the past few years. In contrast, human resource
expenses should reflect continued reengineering benefits, and interest rates
should again be a positive factor in results.
AMERICAN EXPRESS FINANCIAL ADVISORS (AEFA) The market environment will
continue to be a critical factor in AEFA's results; equity markets have been
volatile since September 11th and are expected to remain so for at least the
balance of the year. Overall sales and financial planning levels deteriorated
after the September 11th terrorist attacks and remained weak in October. Also,
investment portfolio yield pressures should remain in light of the company's
previous decision to lower its risk profile by rebalancing its high-yield
portfolio. However, as in TRS, continued reengineering benefits should
partially offset the impacts of the current economic environment.
***************
This financial review is presented on the basis used by management to evaluate
operations. It differs in two respects from the accompanying financial
statements, which are prepared in accordance with U.S. Generally Accepted
Accounting Principles (GAAP). First, results are presented as if there had
been no asset securitizations at TRS. This format is generally termed on a
"managed basis." Second, revenues are shown net of AEFA's provisions for
annuities, insurance and investment certificate products, which are
essentially spread businesses.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
In 1999 and 2000, the company entered into agreements under which a third
party purchased 29 million company common shares at an average purchase price
of $50.41. During the term of the agreements, the company will periodically
issue shares to or receive shares from the third party so that the value of
the shares held by the third party equals the original purchase price for the
shares. At maturity in five years, the company is required to deliver to the
third party an amount equal to such original purchase price. The company may
elect to settle this amount (i) physically, by paying cash against delivery of
the shares held by the third party or (ii) on a net cash or net share basis.
The company may also prepay outstanding amounts at any time prior to the end
of the five-year term. These agreements, which partially offset the company's
exposure from its stock option program, are separate from the company's
previously authorized share repurchase program. During the first nine months
of 2001, net settlements under the agreements resulted in the company issuing
20.3
14
million shares. In the first quarter of 2001, the company elected to prepay
$350 million of the aggregate outstanding amount, which resulted in 7.8
million shares being delivered to the company.
In the first nine months of 2001, the company repurchased 6.4 million common
shares at an average price of $43.56 per share under its share repurchase
program. This is in addition to the 7.8 million shares delivered to the
company during the first quarter as a result of the prepayment discussed
above, resulting in a total of 14.2 million shares repurchased during the
nine-month period ended September 30, 2001.
Due to the negative capital generation impact of the third quarter 2001
restructuring and disaster recovery charges, as well as the first and second
quarter high-yield losses, discussed in the Consolidated Results of Operations
section of the financial review, no share repurchases are anticipated for the
remainder of 2001.
In September 2001, the company issued $500 million of 5.5% Fixed Rate
Notes, which are due to mature in September 2006.
Subsequent to the terrorist attacks of September 11th, the company's A+
and its subsidiaries' credit ratings were affirmed by Standard & Poor's and
Fitch, two credit rating agencies. At the same time, however, each agency
revised its respective rating outlook on the company and its subsidiaries from
stable to negative in light of the ensuing weak climate for business and
consumer travel and spending and weaker capital markets. In their statements,
the rating agencies indicated that while the company has significant financial
resources to address short-term business volume disruptions, if business
volumes remained depressed for an extended period, its credit ratings would be
under pressure.
During the fourth quarter of 2001, the company completed a transaction that
placed a large portion of its rated Collateralized Debt Obligation (CDO)
securities into a securitization trust. The transaction has the following
consequences (See Note 5 to the Consolidated Financial Statements for further
details):
- It pools the performance of 44 separate CDO securities, allowing
recognition of the investment return related to the overall performance
of the portfolio. The ability to evaluate future cash flows at the
portfolio level, rather than on a security-by-security basis, should
increase the predictability of future performance; and
- It monetizes a small portion of the CDO securities by selling notes in
this structure to third-party investors.
15
TRAVEL RELATED SERVICES
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
AND 2000
STATEMENTS OF INCOME
(Unaudited, Managed Basis)
(Dollars in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
Percentage Percentage
2001 2000 Inc/(Dec) 2001 2000 Inc/(Dec)
---------- ------------- ------------ ------------ ------------ -----------
Net Revenues:
Discount Revenue $ 1,870 $ 1,963 (4.8)% $ 5,801 $ 5,717 1.5%
Net Card Fees 423 420 0.5 1,265 1,236 2.3
Lending:
Finance Charge Revenue 1,187 1,052 12.8 3,466 2,887 20.0
Interest Expense 358 429 (16.6) 1,195 1,146 4.2
----------- ---------- ---------- ---------
Net Finance Charge Revenue 829 623 33.1 2,271 1,741 30.4
Travel Commissions and Fees 358 433 (17.4) 1,203 1,378 (12.7)
Travelers Cheque Investment Income 103 103 - 300 292 2.7
Other Revenues 883 858 2.9 2,735 2,534 7.9
----------- ---------- ---------- ---------
Total Net Revenues 4,466 4,400 1.5 13,575 12,898 5.2
----------- ---------- ---------- ---------
Expenses:
Marketing and Promotion 298 358 (16.9) 863 1,034 (16.6)
Provision for Losses and Claims:
Charge Card 284 273 3.9 888 896 (0.9)
Lending 573 386 48.3 1,638 1,054 55.4
Other 34 29 20.6 83 85 (2.0)
----------- ---------- ---------- ----------
Total 891 688 29.5 2,609 2,035 28.2
Charge Card Interest Expense 365 362 0.7 1,141 1,024 11.3
Human Resources 987 1,017 (2.8) 3,074 3,080 (0.2)
Other Operating Expenses 1,335 1,254 6.4 3,831 3,652 4.9
Restructuring Charge 195 - - 195 - -
Disaster Recovery Charge (A) 79 - - 79 - -
----------- ---------- ---------- ---------
Total Expenses 4,150 3,679 12.8 11,792 10,825 8.9
----------- ---------- ---------- ---------
Pretax Income 316 721 (56.1) 1,783 2,073 (14.0)
Income Tax Provision 68 214 (68.0) 494 613 (19.3)
Net Income $ 248 $ 507 (51.0) $ 1,289 $ 1,460 (11.7)
=========== ========== ========== =========
(A) Excludes approximately $8 million of waived finance charges and late fees.
16
TRAVEL RELATED SERVICES
SELECTED STATISTICAL INFORMATION
(Unaudited)
(Amounts in billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- Percentage --------------------- Percentage
2001 2000 Inc/(Dec) 2001 2000 Inc/(Dec)
------------ --------- ---------- --------- ---------- ----------
Total Cards in Force (millions):
United States 34.7 32.9 5.5% 34.7 32.9 5.5%
Outside the United States 20.2 17.5 14.9 20.2 17.5 14.9
----------- ---------- --------- -----------
Total 54.9 50.4 8.8 54.9 50.4 8.8
=========== ========== ========= ===========
Basic Cards in Force (millions):
United States 26.9 25.8 4.3 26.9 25.8 4.3
Outside the United States 15.4 13.4 15.1 15.4 13.4 15.1
----------- ---------- --------- -----------
Total 42.3 39.2 8.0 42.3 39.2 8.0
=========== ========== ========= ===========
Card Billed Business:
United States $ 54.4 $ 56.2 (3.3) $ 168.7 $ 162.7 3.7
Outside the United States 18.0 18.6 (3.2) 55.0 55.0 (0.1)
----------- ---------- --------- -----------
Total $ 72.4 $ 74.8 (3.2) $ 223.7 $ 217.7 2.8
=========== ========== ========= ===========
Average Discount Rate (A) 2.67% 2.70% - 2.67% 2.70% -
Average Basic Cardmember
Spending (dollars) (A) $ 1,846 $ 2,041 (9.6) $ 5,767 $ 6,112 (5.6)
Average Fee per Card -
Managed (dollars) (A) $ 34 $ 36 (5.6) $ 34 $ 36 (5.6)
Non-Amex Brand (B):
Cards in Force (millions) 0.7 0.6 5.9 0.7 0.6 5.9
Billed Business $ 0.9 $ 0.8 9.9 $ 2.5 $ 2.1 21.5
Travel Sales $ 3.9 $ 5.4 (27.5) $ 13.9 $ 17.1 (19.0)
Travel Commissions and Fees/Sales(C) 9.2% 8.0% - 8.7% 8.1% -
Travelers Cheque:
Sales $ 7.3 $ 7.7 (4.6) $ 18.8 $ 19.4 (3.2)
Average Outstanding $ 6.8 $ 6.9 (1.6) $ 6.5 $ 6.5 (0.9)
Average Investments $ 7.0 $ 6.7 4.5 $ 6.6 $ 6.3 5.4
Tax Equivalent Yield 8.8% 8.8% - 9.0% 8.8% -
Managed Charge Card Receivables:
Total Receivables $ 24.8 $ 28.1 (11.8) $ 24.8 $ 28.1 (11.8)
90 Days Past Due as a % of Total 3.0% 2.3% - 3.0% 2.3% -
Loss Reserves (millions) $ 1,026 $ 987 4.0 $ 1,026 $ 987 4.0
% of Receivables 4.1% 3.5% - 4.1% 3.5% -
% of 90 Days Past Due 136% 152% - 136% 152% -
Net Loss Ratio 0.45% 0.37% - 0.40% 0.36% -
Managed U.S. Lending:
Total Loans $ 31.3 $ 27.1 15.4 $ 31.3 $ 27.1 15.4
Past Due Loans as a % of Total:
30-89 Days 2.2% 1.8% - 2.2% 1.8% -
90+ Days 1.0% 0.8% - 1.0% 0.8% -
Loss Reserves (millions)
Beginning Balance $ 959 $ 686 39.8 $ 820 $ 672 22.0
Provision 493 328 50.3 1,414 881 60.5
Net Charge-Offs/Other (434) (283) 53.3 (1,216) (822) 47.9
----------- ---------- --------- -----------
Ending Balance $ 1,018 $ 731 39.3 $ 1,018 $ 731 39.3
=========== ========== ========= ===========
% of Loans 3.3% 2.7% - 3.3% 2.7% -
% of Past Due 101% 103% - $ 101% 103% -
Average Loans $ 31.0 $ 26.6 16.1 $ 30.1 $ 25.2 19.5
Net Write-Off Rate 5.6% 4.3% - 5.5% 4.4% -
Net Interest Yield 8.8% 7.8% - 8.6% 7.6% -
(A) Computed from proprietary card activities only.
(B) This data relates to Visa and Eurocards issued in connection with joint
venture activities.
(c) Computed from information provided herein.
17
TRAVEL RELATED SERVICES
Travel Related Services' (TRS) net income fell 51 percent and 12 percent for
the three and nine-month periods ended September 30, 2001, respectively,
compared with a year ago. These results include a restructuring charge of $195
million pretax ($127 million after-tax) that was recorded in the three-month
period ended September 30, 2001. The largest component of this charge is $128
million in severance costs for the elimination of approximately 4,700 jobs.
The majority of these eliminations relate to accelerating the transition of
business travel operations to the Internet, introducing new technology and
consolidating facilities to allow for the further reduction of staffing levels
in light of slower travel sales, primarily in the U.S. The severance also
reflects the relocation or outsourcing of certain finance, operations,
customer support and technology functions to lower-cost overseas locations and
moving certain employee processing and service functions, including Human
Resources processes, expense report processing and employee travel bookings,
to the Internet. The remaining charge of $67 million is primarily related to
lease and equipment abandonment costs, and other exit costs. Also included in
the results are charges of $87 million pretax ($57 million after-tax) of
one-time costs and waived finance charges and late fees directly related to
the September 11th terrorist attacks. Excluding these costs and the
restructuring charge, TRS' net income would have been down 15 percent and up 1
percent for the three and nine-month periods ended September 30, 2001,
respectively. Net revenues increased 2 percent and 5 percent for the same
periods, reflecting growth in loans and additional cards in force and, for the
nine-month period, greater billed business. For the three-month period, these
improvements were partly offset by lower billed business and lower travel
sales.
Discount revenue declined 5 percent for the three-month period ended September
30, 2001 compared with a year ago and increased 1 percent for the nine-month
period. The decline for the three-month period is a result of lower billed
business, decreased spending per Cardmember, and a decline in the average
discount rate, partially offset by a 9 percent increase in cards in force. The
1 percent increase for the nine-month period reflects the factors mentioned
above, with the exception of billed business, which increased 3 percent over
last year. Billed business declined 3 percent for the three-month period ended
September 30, 2001 reflecting weakening economic conditions during the quarter
and a substantial decrease in corporate travel and entertainment spending and
consumer travel, particularly subsequent to the events of September 11th. U.S.
billed business for the three-month period ended September 30, 2001 decreased
3 percent reflecting 3 percent growth within the consumer card business on 11
percent higher transaction volume, a slight decrease within small business
services and a 19 percent decline within Corporate Services. Total billed
business outside the U.S. was flat (excluding the impact of foreign exchange
translation) on slight growth in Europe and Asia, offset by mid-single digit
declines in Canada and Latin America. Non-travel and entertainment related
volume categories continued to grow, but were offset by lower travel-related
volumes. During the first eight months of 2001, non-travel and entertainment
related volumes in the U.S. represented approximately 57 percent of total
billed business and travel and entertainment related volumes were 43 percent.
U.S. non-travel and entertainment related volumes were up 10 percent during
the first two months of the three-month period, but were flat in September.
U.S. travel
18
and entertainment volumes were down 7 percent during the first two months and
declined 34 percent in September. Airline related volume, which represented
approximately 17 percent of U.S. billed business during the first eight months
of 2001, declined approximately 28 percent as both the average airline charge
and transaction volume were down double digits. During September, airline
volumes were down approximately 50 percent. U.S. cards in force, which grew
more slowly than in recent periods, increased 6 percent as the company
rationalized acquisition spending given the current economic environment.
Outside the U.S., cards in force rose 15 percent due to continued strong
proprietary and network card growth. For the three and nine-month periods
ended September 30, 2001, average spending per basic Cardmember decreased 10
percent and 6 percent, respectively, compared to a year ago, reflecting the
weaker current economic conditions and the dilutive effect of multiple
quarters of strong card growth. The average discount rate declined for the
three and nine-month periods as compared to a year ago from the cumulative
impact of stronger than average growth in the lower rate retail and other
"everyday spend" merchant categories and significantly weaker travel and
entertainment spending. Net finance charge revenue increased 33 percent and 30
percent for the three and nine-month periods ended September 30, 2001,
respectively, due to higher volumes and wider yields. The U.S. lending net
interest yield increased from last year for both the three and nine-month
periods, due to a smaller percentage of loan balances on introductory rates
and a benefit from declining interest rates throughout the first nine months
of the year. Travel commissions and fees decreased 17 percent and 13 percent
for the three and nine-month periods ended September 30, 2001. The three-month
decline was due to a 28 percent contraction in travel sales due to the effects
of the terrorist attacks on September 11th and the previously existing weaker
corporate travel environment. Travel sales declined 35 percent in September.
Other revenues increased for both periods, reflecting higher fee income.
The provision for losses on the lending portfolio grew for the three and
nine-month periods ended September 30, 2001 as a result of an increase in U.S.
lending write-off rates and delinquencies as well as higher volumes. Marketing
and promotion expenses were lower in both periods as certain marketing efforts
were scaled back in light of the weaker business environment. Human resource
and other operating expenses rose 2 percent and 3 percent for the three and
nine-month periods ended September 30, 2001, respectively, as progress on
reengineering and other cost-control efforts and a lower average number of
employees were partially offset by higher costs related to business growth,
cardmember loyalty programs, and professional fees for outsourcing activities.
19
TRAVEL RELATED SERVICES
The preceding statements of income and related discussion present TRS results
on a managed basis, as if there had been no securitization transactions. On a
GAAP reporting basis, TRS recognized pretax gains of $29 million ($19 million
after-tax) and $26 million ($17 million after-tax) in the third quarters of
2001 and 2000, respectively, and $155 million ($101 million after-tax) and
$142 million ($92 million after-tax) for the nine months ended September 30,
2001 and 2000, respectively, related to the securitization of U.S.
receivables. These gains were invested in additional card acquisition
activities and had no material impact on Net Income or Total Expenses in any
period. The following tables reconcile TRS' income statements from a managed
basis to a GAAP basis. These tables are not complete statements of income, as
they include only those income statement items that are affected by
securitizations.
(Dollars in millions)
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
----------------------------------------- ------------------------------------------
Managed Securitization GAAP Managed Securitization GAAP
Basis Effect Basis Basis Effect Basis
---------- ---------------- ----------- ----------- --------------- -------------
Net Revenues:
Net Card Fees $ 423 $ - $ 423 $ 420 $ (2) $ 418
Lending Net Finance Charge Revenue 829 (607) 222 623 (391) 232
Other Revenues 883 369 1,252 858 332 1,190
Total Net Revenues 4,466 (238) 4,228 4,400 (61) 4,339
Expenses:
Marketing and Promotion 298 16 314 358 15 373
Provision for Losses and Claims:
Charge Card 284 - 284 273 (37) 236
Lending 573 (271) 302 386 (119) 267
Charge Card Interest Expense 365 4 369 362 (50) 312
Net Discount Expense - - - - 119 119
Other Operating Expenses 1,335 13 1,348 1,254 11 1,265
Total Expenses 4,150 (238) 3,912 3,679 (61) 3,618
Pretax Income $ 316 $ - $ 316 $ 721 $ - $ 721
----------- ---------------- ----------- ------------ --------------- -------------
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
----------------------------------------- ------------------------------------------
Managed Securitization GAAP Managed Securitization GAAP
Basis Effect Basis Basis Effect Basis
---------- ---------------- ----------- ----------- --------------- ------------
Net Revenues:
Net Card Fees $ 1,265 $ (16) $ 1,249 $ 1,236 $ (2) $ 1,234
Lending Net Finance Charge Revenue 2,271 (1,608) 663 1,741 (975) 766
Other Revenues 2,735 1,100 3,835 2,534 780 3,314
Total Net Revenues 13,575 (524) 13,051 12,898 (197) 12,701
Expenses:
Marketing and Promotion 863 92 955 1,034 85 1,119
Provision for Losses and Claims:
Charge Card 888 (36) 852 896 (117) 779
Lending 1,638 (703) 935 1,054 (441) 613
Charge Card Interest Expense 1,141 (36) 1,105 1,024 (157) 867
Net Discount Expense - 96 96 - 376 376
Other Operating Expenses 3,831 63 3,894 3,652 57 3,709
Total Expenses 11,792 (524) 11,268 10,825 (197) 10,628
Pretax Income $ 1,783 $ - $ 1,783 $ 2,073 $ - $ 2,073
----------- ---------------- ------------ ----------- --------------- ------------
20
TRAVEL RELATED SERVICES
LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION
(Unaudited, GAAP Basis)
(Dollars in billions, except percentages)
September 30, December 31, Percentage September 30, Percentage
2001 2000 Inc/(Dec) 2000 Inc/(Dec)
------------------ ----------------- ---------------- ------------------ ----------------
Accounts Receivable, net $ 27.3 $ 29.6 (8.0)% $ 27.9 (2.3)%
Travelers Cheque Investments $ 7.0 $ 6.5 7.8 $ 6.5 7.4
U.S. Loans $ 16.1 $ 17.4 (7.7) $ 15.8 1.9
Total Assets $ 69.2 $ 71.4 (3.1) $ 67.0 3.3
Travelers Cheques Outstanding $ 6.6 $ 6.1 8.1 $ 6.6 0.9
Short-term Debt $ 32.3 $ 36.7 (12.2) $ 32.2 0.3
Long-term Debt $ 5.7 $ 3.3 73.8 $ 3.0 92.1
Total Liabilities $ 62.6 $ 64.8 (3.5) $ 60.7 3.1
Total Shareholder's Equity $ 6.6 $ 6.6 0.8 $ 6.3 5.2
Return on Average Equity* 27.0% 33.0% - 32.6% -
Return on Average Assets** 2.6% 3.0% - 3.0% -
* Computed based on the past twelve months of net income and excludes the
effect on Shareholder's Equity of SFAS No. 115 And SFAS No. 133. The
company adopted SFAS No. 133 On January 1, 2001.
** Computed based on the past twelve months of net income and excludes the
effect on Total Assets of SFAS No. 115 And SFAS No. 133 to the extent that
they directly affect Shareholder's Equity.
In the first, second and third quarters of 2001, the American Express
Credit Account Master Trust (the Trust) securitized $1.0 billion, $2.7 billion
and $0.7 billion of loans, respectively, through the public issuance of investor
certificates. In the second quarter of 2001, $1.0 billion of investor
certificates that were previously issued by the Trust matured, resulting in $1.7
billion of net additional securitizations during that quarter. The securitized
assets consist primarily of loans arising in a portfolio of designated consumer
American Express credit card, Optima Line of Credit and Sign & Travel/Extended
Payment Option revolving credit accounts or features and, in the future, may
include other charge or credit accounts or features or products.
During the second quarter of 2001, in conjunction with the company's
adoption of SFAS No. 140, TRS reinstated approximately $2.9 billion of Charge
Card receivables and a commensurate amount of long-term debt to the balance
sheet. (See Note 2, "Accounting Developments," for further information.) In the
third quarter of 2001, $0.6 billion of investor certificates that were
previously issued by the American Express Master Trust (the Master Trust)
matured. In November 2001, the Master Trust securitized an additional $750
million of Charge Card receivables, which also remain on the balance sheet.
Travelers Cheque Investments increased, reflecting unrealized appreciation as
a result of declining interest rates.
U.S. loans and related short-term debt declined from December 31, 2000, mainly
reflecting lower billed business, as previously discussed.
21
AMERICAN EXPRESS FINANCIAL ADVISORS
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
AND 2000
STATEMENTS OF INCOME
(Unaudited)
(Dollars in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ Percentage ------------------------- Percentage
2001 2000 Inc/(Dec) 2001 2000 Inc/(Dec)
---------- -------------- ----------- ------------ ------------ -----------
Net Revenues:
Investment Income $ 490 $ 582 (15.8) $ 612 $ 1,746 (64.9)
Management and Distribution Fees 595 700 (15.0) 1,856 2,089 (11.2)
Other Revenues 307 258 18.5 873 753 15.9
----------- ---------- ---------- ----------
Total Revenues 1,392 1,540 (9.7) 3,341 4,588 (27.2)
Provision for Losses and Benefits:
Annuities 242 253 (4.7) 734 767 (4.3)
Insurance 171 146 17.3 480 422 13.6
Investment Certificates 71 89 (19.8) 251 246 2.0
----------- ---------- ---------- ----------
Total 484 488 (0.9) 1,465 1,435 2.0
----------- ---------- ---------- ----------
Net Revenues 908 1,052 (13.7) 1,876 3,153 (40.5)
----------- ---------- ---------- ----------
Expenses:
Human Resources 469 527 (11.0) 1,513 1,553 (2.5)
Other Operating Expenses 172 138 23.8 533 462 15.4
Restructuring Charge 62 - - 62 - -
Disaster Recovery Charge 11 - - 11 - -
----------- ---------- ---------- ----------
Total Expenses 714 665 7.2 2,119 2,015 5.2
----------- ---------- ---------- ----------
Pretax Income (Loss) 194 387 (49.8) (243) 1,138 -
Income Tax Provision (Benefit) 49 118 (58.4) (133) 348 -
----------- ---------- ---------- ----------
Net Income (Loss) $ 145 $ 269 (46.1) $ (110) $ 790 -
----------- ---------- ---------- ----------
22
AMERICAN EXPRESS FINANCIAL ADVISORS
SELECTED STATISTICAL INFORMATION
(Unaudited)
(Dollars in millions, except where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- Percentage -------------------------- Percentage
2001 2000 Inc/(Dec) 2001 2000 Inc/(Dec)
----------- ------------- ------------ ------------ ----------- ------------
Life Insurance in Force (billions) $ 104.8 $ 95.8 9.4 $ 104.8 $ 95.8 9.4
Deferred Annuities in Force (billions) $ 41.0 $ 51.8 (20.8) $ 41.0 $ 51.8 (20.8)
Assets Owned, Managed or
Administered (billions):
Assets Managed for Institutions $ 47.8 $ 56.7 (15.6) $ 47.8 $ 56.7 (15.6)
Assets Owned, Managed or Administered
for Individuals:
Owned Assets:
Separate Account Assets 24.3 36.6 (33.6) 24.3 36.6 (33.6)
Other Owned Assets 42.5 40.6 4.7 42.5 40.6 4.7
----------- ----------- ---------- -----------
Total Owned Assets 66.8 77.2 (13.5) 66.8 77.2 (13.5)
Managed Assets 91.2 122.0 (25.3) 91.2 122.0 (25.3)
Administered Assets 28.6 38.0 (24.8) 28.6 38.0 (24.8)
----------- ----------- ---------- -----------
Total $ 234.4 $ 293.9 (20.3) $ 234.4 $ 293.9 (20.3)
=========== =========== ========== ===========
Market Appreciation (Depreciation) During
the Period:
Owned Assets:
Separate Account Assets $ (4,470) $ (203) # $ (8,426) $ (172) #
Other Owned Assets $ 535 $ 163 # $ 1,372 $ (47) -
Total Managed Assets $ (15,719) $ (76) # $ (27,824) $ 456 -
Cash Sales:
Mutual Funds $ 7,384 $ 11,698 (36.9) $ 25,667 $ 34,178 (24.9)
Annuities 1,308 1,465 (10.8) 4,141 4,393 (5.8)
Investment Certificates 941 868 8.4 2,912 2,574 13.1
Life and Other Insurance Products 200 220 (8.7) 677 675 0.4
Institutional 488 1,922 (74.6) 4,259 5,030 (15.3)
Other 1,115 815 36.8 4,127 2,050 101.3
----------- ----------- ---------- -----------
Total Cash Sales $ 11,436 $ 16,988 (32.7) $ 41,783 $ 48,900 (14.6)
=========== =========== ========== ===========
Number of Financial Advisors 11,385 12,137 (6.2) 11,385 12,137 (6.2)
Fees from Financial Plans and
Advice Services $ 23.1 $ 26.1 (11.4) $ 80.4 $ 76.2 5.5
Percentage of Total Sales from Financial
Plans and Advice Services 72.4% 69.2% - 72.6% 67.4% -
# Denotes a variance of more than 100%.
23
AMERICAN EXPRESS FINANCIAL ADVISORS
American Express Financial Advisors' (AEFA) reported net income of $145
million for the three-month period ended September 30, 2001 and a net loss of
$110 million for the nine-month period. This is compared with net income of $269
million and $790 million for the three and nine-month periods a year ago.
Included in these results is a third quarter 2001 restructuring charge of $62
million pretax, $41 million after-tax. Of the pretax charge, $16 million
represents severance costs, for approximately 900 employees to optimize the
client service organization and field force leadership structures and relocate
and consolidate finance and technology functions while the remainder primarily
reflects office lease and equipment abandonment costs. Also included in the
three-month period results are $11 million pretax, $8 million after-tax of
insurance claims directly related to the September 11th terrorist attacks.
Excluding these items, AEFA's net income would have been $194 million in the
three-month period, down 28 percent from a year ago. Included in the company's
nine-month results ended September 30, 2001 is $182 million pretax, $132
million after-tax, recorded in the first quarter and $826 million pretax, $537
million after-tax, recorded in the second quarter of losses related to the
writedown and sale of certain high-yield securities and the reduction of the
risk profile within the investment portfolio. Excluding high-yield losses from
both years, and the restructuring and September 11th related charges mentioned
above, AEFA's net income in the nine-month period ended September 30, 2001,
would have been down 28 percent from a year ago. Net revenues decreased 14
percent and 40 percent for the three and nine-month periods ended September 30,
2001. Adjusted for high-yield losses, net revenues decreased 11 percent for the
nine-month period.
AEFA's results also reflect continued weakness in equity markets and narrower
spreads on the investment portfolio from the lagging benefit of lower interest
rates, and from lower yields as a result of repositioning the high-yield
portfolio. Management and distribution fees fell 15 percent and 11 percent in
the three and nine-month periods ending September 30, 2001. Managed assets
fell 22 percent from a year ago and cash sales from all products were 33
percent and 15 percent lower for the three and nine-month periods. Other
revenues rose in both periods primarily as a result of higher insurance
premiums; financial planning and advice service fees were higher in the year
to date period but lower in the quarter. Gross investment income declined 16
percent and 65 percent in the three and nine-month periods due to the first
and second quarter high-yield write-downs and a lower average investment yield
in both periods, mostly due to the repositioning of the investment portfolio.
The effect of this repositioning was amplified in the three-month period by
the company's inability to reinvest in appropriate quality high-yield bonds
during September. Included in investment income for both periods is the effect
of a decrease in the value of options hedging outstanding stock market
certificates, which was offset in the certificate provision. Also included in
the three-month period is a modest loss related to the securitization of
Collateral Debt Obligations and the mark-to-market on the high-yield bonds
still held for sale at the end of September. Annuity product provisions were
lower in the three and nine-month periods ending September 30, 2001 primarily
due to smaller inforce levels. Insurance provisions rose in both periods
primarily due to higher inforce levels. Certificate provisions decreased in
the three-month period as higher inforce levels were offset by lower accrual
rates and the effect on the stock market
24
certificate product of greater depreciation this year in the S&P 500. The
nine-month period increased slightly.
Total expenses, (excluding the restructuring and September 11th items
mentioned above) fell 4 percent and increased 2 percent in the three and
nine-month periods ended September 30, 2001. Also included in the nine-month
period is a $67 million first quarter adjustment to the amortization of
Deferred Acquisition Costs (DAC)* for variable insurance and annuity products
as a result of the steep decline in equity markets ($39 million was recorded
in human resources expenses, $28 million was included in other operating
expenses). Excluding the DAC adjustment, restructuring charges, and September
11th items, total expenses for the nine-month period were 2 percent lower than
last year. Human resources expenses declined 11 percent and 5 percent
(excluding the DAC adjustment) for the three and nine-month periods reflecting
lower field force compensation-related expenses due to relatively slow advisor
growth and the impact of lower volumes on advisor compensation, as well as the
benefits of reengineering and cost containment initiatives within the home
office where employees were down 12 percent from a year ago. The total advisor
force of 11,385 decreased by 752 from September 30, 2000 and was down 261 from
June 30, 2001 and down 1,278 from year end. The decrease in advisors resulted
from reduced recruiting activities during recent quarters as AEFA worked to
improve the advisor platform economics, from higher termination rates due to
the weaker environment and from proactive efforts to weed out unproductive
advisors. In light of current challenging market conditions, AEFA expects to
continue to carefully manage new advisor additions in coming quarters to
ensure overall field force costs are appropriately controlled and advisor
production is maximized. Other operating expenses increased 24 percent and 9
percent (excluding the DAC adjustment) for the three and nine-month periods.
The 24 percent three-month period increase reflects a relatively low level of
expenses last year. Other operating expenses declined 1 percent in the third
quarter from the second quarter of this year, reflecting the success of
reengineering activities and continuing efforts to control core operating
expenses.
* DACs are the costs of acquiring new businesses, which are deferred and
amortized according to a schedule that reflects a number of factors, the most
significant of which are the anticipated profits and persistency of the
product. The amortization schedule must be adjusted periodically to reflect
changes in those factors.
25
AMERICAN EXPRESS FINANCIAL ADVISORS
LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION
(UNAUDITED)
(Dollars in billions, except percentages)
September 30, December 31, Percentage September 30, Percentage
2001 2000 Inc/(Dec) 2000 Inc/(Dec)
------------------ ----------------- --------------- ------------------ ---------------
Investments* $ 32.9 $ 30.5 7.9% $ 30.0 9.7%
Separate Account Assets $ 24.3 $ 32.3 (24.7) $ 36.6 (33.6)
Total Owned Assets $ 66.8 $ 73.6 (9.2) $ 77.2 (13.5)
Client Contract Reserves $ 32.6 $ 31.4 3.6 $ 31.4 3.9
Total Liabilities $ 61.3 $ 69.2 (11.4) $ 73.0 (16.1)
Total Shareholder's Equity $ 5.5 $ 4.4 25.3 $ 4.2 31.5
Return on Average Equity** 2.7% 22.6% - 23.1% -
* Excludes cash, derivatives, short term and other investments.
** Computed based on the past twelve months of net income and excludes the
effect of SFAS No. 115 and SFAS No. 133. The company adopted SFAS No. 133
on January 1, 2001.
Separate account assets and liabilities decreased, mainly due to market
depreciation.
In July 2001, American Express Financial Advisors received a capital
contribution of $490 million from American Express Company (Parent company).
Investments increased, in part due to unrealized appreciation as a result of
declining interest rates, as well as additional investment as a result of
positive net cash flows.
26
AMERICAN EXPRESS BANK
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
AND 2000
STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- Percentage -------------------------- Percentage
2001 2000 Inc/(Dec) 2001 2000 Inc/(Dec)
----------- ---------------- ----------- ---------- -------------- ----------
Net Revenues:
Interest Income $ 174 $ 188 (7.7)% $ 544 $ 554 (1.9)%
Interest Expense 98 125 (21.8) 331 362 (8.7)
----------- ---------- ---------- ----------
Net Interest Income 76 63 20.3 213 192 11.2
Commissions and Fees 51 54 (5.4) 154 162 (5.1)
Foreign Exchange Income & Other Revenue 38 29 30.1 114 93 22.5
----------- ---------- ---------- ----------
Total Net Revenues 165 146 12.8 481 447 7.7
----------- ---------- ---------- ----------
Expenses:
Human Resources 60 65 (8.2) 185 197 (5.9)
Other Operating Expenses 69 67 3.2 198 204 (2.7)
Provision for Losses:
Ongoing 14 6 # 44 20 #
Restructuring Related* 26 - - 26 - -
----------- ---------- ---------- ----------
Total Provision 40 6 # 70 20 #
Restructuring Charge* 58 - - 58 - -
----------- ---------- ---------- ----------
Total Expenses 227 138 64.3 511 421 21.2
----------- ---------- ---------- ----------
Pretax (Loss)/Income (62) 8 - (30) 26 -
Income Tax (Benefit)/Provision (19) 1 - (8) 4 -
----------- ---------- ---------- ----------
Net (Loss)/Income $ (43) $ 7 - $ (22) $ 22 -
=========== ========== ========== ==========
SELECTED STATISTICAL INFORMATION
(UNAUDITED)
(Dollars in billions)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- Percentage -------------------------- Percentage
2001 2000 Inc/(Dec) 2001 2000 Inc/(Dec)
----------- --------------- ------------ ----------- ------------- ----------
Assets Managed**/Administered $ 11.3 $ 10.2 10.4% $ 11.3 $ 10.2 10.4%
Assets of Non-Consolidated Joint $ 2.0 $ 2.3 (15.2) $ 2.0 $ 2.3 (15.2)
Ventures
* AEB recorded an aggregate third quarter 2001 restructuring charge of $84
million pretax consisting of $26 million of additional provision for losses
and $58 million for severance, foreign currency translation losses
previously recorded in Shareholder's Equity and other charges.
** Includes assets managed by American Express Financial Advisors.
# Denotes variance of more than 100%.
27
AMERICAN EXPRESS BANK
American Express Bank (AEB) reported net losses of $43 million and $22 million
for the three and nine-month periods ended September 30, 2001, respectively,
compared with net income of $7 million and $22 million in the same periods a
year ago. These results include a restructuring charge of $84 million pretax,
$57 million after-tax, primarily reflecting plans to further scale back
corporate lending activities in parts of Asia, Latin America, and Europe. The
charge includes $24 million of currency translation losses previously recorded
in shareholder's equity, $26 million of provisions for loan losses, and $29
million of severance benefits for approximately 400 employees. Excluding these
charges, AEB's net income would have been $15 million, up 98 percent and $35
million, up 58 percent for the three and nine-month period ended September 30,
2001.
Results for both periods reflect strong performance in Personal Financial
Services and Private Banking despite a difficult market environment, lower
funding costs and lower operating expenses as a result of AEB's reengineering
efforts. These were partially offset by higher provisions for losses due to
higher Personal Financial Services loan balances, and lower revenue from
Corporate Banking as AEB continues to shift its focus to Personal Financial
Services and Private Banking.
28
AMERICAN EXPRESS BANK
LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION
(Unaudited)
(Dollars in billions, except where indicated)
September 30, December 31, Percentage September 30, Percentage
2001 2000 Inc/(Dec) 2000 Inc/(Dec)
----------- ------------ --------------- ------------- -----------
Total Assets $ 12.8 $ 11.4 12.0% $ 11.0 16.4%
Total Liabilities $ 12.0 $ 10.7 12.7 $ 10.3 17.1
Total Shareholder's Equity (millions) $ 771 $ 754 2.3 $ 729 5.8
Return on Average Assets* (0.13)% 0.26% - 0.24% -
Return on Average Common Equity** (2.4)% 4.4% - 4.1% -
Total Loans $ 5.6 $ 5.3 4.0 $ 5.1 8.4
Total Non-performing Loans (millions) $ 133 $ 137 (2.3) $ 156 (14.3)
Other Non-performing Assets (millions) $ 2 $ 24 (90.6) $ 37 (94.0)
Reserve for Credit Losses (millions)*** $ 149 $ 153 (2.7) $ 179 (17.0)
Loan Loss Reserves as a
Percentage of Total Loans 2.6% 2.6% - 3.1% -
Deposits $ 8.7 $ 8.0 9.0 $ 8.0 8.3
Risk-Based Capital Ratios:
Tier 1 9.9% 10.1% - 10.4% -
Total 10.6% 11.4% - 11.9% -
Leverage Ratio 5.4% 5.9% - 5.8% -
* Computed based on the past twelve months of net (loss)/income and
excludes the effect on total assets of SFAS No. 115 and SFAS No. 133 to
the extent that they affect Shareholder's Equity. The company adopted
SFAS No. 133 as of January 1, 2001.
** Computed based on the past twelve months of net (loss)/income and
excludes the effect on Shareholder's Equity of SFAS No. 115 and
SFAS No. 133.
*** Allocation (millions):
Loans $ 144 $ 137 $ 158
Other Assets, primarily derivatives 3 14 16
Other Liabilities 2 2 5
------- ------- -------
Total Reserve for Credit Losses $ 149 $ 153 $ 179
------- ------- -------
AEB had loans outstanding of $5.6 billion at September 30, 2001, up from
$5.3 billion at December 31, 2000, and $5.1 billion at September 30, 2000.
The increase since September 30, 2000 resulted primarily from a $1.0 billion
increase in consumer and private banking loans ($1.1 billion excluding the
effect of asset sales and securitizations in the consumer loan portfolio),
including the transfer of $200 million of collateralized loans from
Corporate Banking, and a $30 million increase in financial institution and
other loans. This was partially offset by a $650 million decrease in
Corporate Banking loans. The increase since December 31, 2000 resulted
primarily from an $800 million increase in consumer and private banking
loans ($900 million excluding asset sales and securitizations in the
consumer loan portfolio), including the $200 million transfer discussed
above, partially offset by a $600 million decrease in Corporate Banking
loans and a $40 million decrease in financial institution and other loans.
As of September 30, 2001, consumer and private banking loans comprised 55%
of total loans versus 41% at December 31, 2000 and 39% at September 30,
2000.
Total non-performing loans of $133 million at September 30, 2001 were down
from $137 million at December 31, 2000, and down from $156 million at
29
September 30, 2000. The decrease from both periods is primarily due to loan
payments and write-offs, mainly in Indonesia, partially offset by net
downgrades of the risk status of various loans.
30
CORPORATE AND OTHER
Corporate and Other reported net expenses of $52 million and $143 million for
the three and nine months ended September 30, 2001, respectively, compared
with net expenses of $46 million and $139 million in the same periods a year
ago. Included in the three month period ended September 30, 2001 results is a
restructuring charge, related primarily to severance, of $11 million pretax,
$7 million after-tax. The nine-month results for both years include a
preferred stock dividend based on earnings from Lehman Brothers, which was
offset by expenses related to business building initiatives in both years.
ACCOUNTING DEVELOPMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests.
The company will adopt the new rule on accounting for goodwill and other
intangible assets as of January 1, 2002. The company is currently evaluating
the provisions of the new rules and has not yet determined what the effect of
these tests will be on earnings and the financial position of the company. The
impact on the company's net income in 2000 and the first nine months of 2001
from goodwill amortization was $82 million ($106 million pretax) and $58
million($75 million pretax).
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The company is required to adopt SFAS
No. 143 as of January 1, 2003. The adoption of this Statement is not expected
to have a material impact on the company's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes FASB No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets
to Be Disposed Of." This new Statement also supercedes certain aspects of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
with regard to reporting the effects of a disposal of a segment of a business.
The new rule will require operating losses from discontinued operations to be
reported in future periods, as incurred. In addition, businesses below the
operating segment level may qualify for discontinued operations treatment. The
company is required to adopt the provisions of the Statement as of January 1,
2002. The company is currently evaluating the new rule's changes to previous
accounting principles, which will primarily affect the company if and when
qualifying future business dispositions occur.
31
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, which are subject to risks
and uncertainties. The words "believe", "expect", "anticipate", "optimistic",
"intend", "aim", "will", "should" and similar expressions are intended to
identify such forward-looking statements. Factors that could cause actual
results to differ materially from these forward-looking statements include,
but are not limited to, the following:
Fluctuation in the equity markets, which can affect the amount and types of
investment products sold by AEFA, the market value of its managed assets, and
management and distribution fees received based on those assets; potential
deterioration in the high-yield sector and other investment areas, which could
result in further losses in AEFA's investment portfolio; the ability of AEFA
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; developments relating to AEFA's new platform structure
for financial advisors, including the ability to increase advisor
productivity, moderate the growth of new advisors and create efficiencies in
the infrastructure; AEFA's ability to effectively manage the economics in
selling a growing volume of non-proprietary products to clients; investment
performance in AEFA's businesses; the success, timeliness and financial
impact, including costs, cost savings and other benefits, of reengineering
initiatives being implemented or considered by the company, including cost
management, structural and strategic measures such as vendor, process,
facilities and operations consolidation, outsourcing, relocating certain
functions to lower cost overseas locations, moving internal and external
functions to the Internet to save costs, the scale-back of corporate lending
in certain regions, and planned staff reductions relating to certain of such
reengineering actions; the ability to control and manage operating,
infrastructure, advertising and promotion and other expenses as business
expands or changes, including balancing the need for longer term investment
spending; the impact of and uncertainty created by the September 11th
terrorist attacks; the company's ability to recover under its insurance
policies for losses resulting from the September 11th terrorist attacks;
consumer and business spending on the company's travel related services
products, particularly credit and charge cards and growth in card lending
balances, which depend in part on the ability to issue new and enhanced card
products and increase revenues from such products, attract new cardholders,
capture a greater share of existing cardholders' spending, sustain premium
discount rates, increase merchant coverage, retain Cardmembers after low
introductory lending rates have expired, and expand the global network
services business; successfully expanding the company's on-line and off-line
distribution channels and cross-selling financial, travel, card and other
products and services to its customer base, both in the U.S. and abroad;
effectively leveraging the company's assets, such as its brand, customers and
international presence, in the Internet environment; investing in and
competing at the leading edge of technology across all businesses; higher
borrowing costs due to potential negative changes in the company's and its
subsidiaries' credit ratings; increasing competition in all of the company's
major businesses; fluctuations in interest rates, which impact the company's
borrowing costs, return on lending products and spreads in the investment and
insurance businesses; credit trends and the rate of
32
bankruptcies, which can affect spending on card products, debt payments
by individual and corporate customers and businesses that accept the company's
card products and returns on the company's investment portfolios; foreign
currency exchange rates; political or economic instability in certain regions
or countries, which could affect commercial lending activities, among other
businesses; legal and regulatory developments, such as in the areas of
consumer privacy and data protection; acquisitions; and outcomes in
litigation. A further description of these and other risks and uncertainties
can be found in the company's 10-K Annual Report for the fiscal year ending
December 31, 2000 and its other reports filed with the Securities and Exchange
Commission.
33
PART II. OTHER INFORMATION
AMERICAN EXPRESS COMPANY
ITEM 1. LEGAL PROCEEDINGS
The company commenced an action, AMERICAN EXPRESS COMPANY V. THE UNITED
STATES, on September 16, 1997 in the United States Court of Federal Claims
(the "Court") seeking a refund from the United States of Federal income taxes
paid (plus related interest) for the year 1987. The company contends that the
Internal Revenue Service abused its discretion by denying the company's
request to include annual fees from Cardmembers in taxable income ratably over
the twelve-month period to which the fees relate rather than in full at the
time they are billed. On June 30, 2000, the Court entered a judgment in favor
of the Internal Revenue Service. The company filed a notice of appeal with the
United States Court of Appeals for the Federal Circuit ("Appeals Court") on
July 19, 2000. On August 23, 2001, the Court of Appeals for the Federal
Circuit affirmed the decision of the Court of Federal Claims denying the
American Express refund claim.
The matter described above was previously reported in the company's Form
10-K for the year ended December 31, 2000.
The matters described below were previously reported in the company's
Form 10-Q for the quarter ended June 30, 2001.
On December 13, 1996, an action entitled LESA BENACQUISTO AND DANIEL
BENACQUISTO V. IDS LIFE INSURANCE COMPANY AND AMERICAN EXPRESS FINANCIAL
CORPORATION was commenced in Minnesota state court. A second action, entitled
ARNOLD MORK, ISABELLA MORK, RONALD MELCHERT AND SUSAN MELCHERT V. IDS LIFE
INSURANCE COMPANY AND AMERICAN EXPRESS FINANCIAL CORPORATION was commenced in
the same court on March 21, 1997. On October 13, 1998, an action entitled
RICHARD W. AND ELIZABETH J. THORESEN V. AMERICAN EXPRESS FINANCIAL
CORPORATION, AMERICAN CENTURION LIFE ASSURANCE COMPANY, AMERICAN ENTERPRISE
LIFE INSURANCE COMPANY, AMERICAN PARTNERS LIFE INSURANCE COMPANY, IDS LIFE
INSURANCE COMPANY AND IDS LIFE INSURANCE COMPANY OF NEW YORK was also
commenced in Minnesota state court. These three class action lawsuits included
allegations of improper insurance and annuity sales practices including
improper replacement of existing annuity contracts and insurance policies,
improper use of annuities to fund tax deferred contributory retirement plans,
alleged agent misconduct, failure to properly supervise agents and other
matters relating to life insurance policies and annuity contracts.
In January 2000, AEFC reached an agreement in principle to settle the three
class-action lawsuits described above. It is expected the settlement will
provide $215 million of benefits to more than two million participants and for
release by class members of all insurance and annuity market conduct claims
dating back to 1985.
34
In August, 2000 an action entitled LESA BENACQUISTO, DANIEL BENACQUISTO,
RICHARD THORESEN, ELIZABETH THORESEN, ARNOLD MORK, ISABELLA MORK, RONALD
MELCHERT AND SUSAN MELCHERT V. AMERICAN EXPRESS FINANCIAL CORPORATION,
AMERICAN EXPRESS FINANCIAL ADVISORS, AMERICAN CENTURION LIFE ASSURANCE
COMPANY, AMERICAN ENTERPRISE LIFE INSURANCE COMPANY, AMERICAN PARTNERS LIFE
INSURANCE COMPANY, IDS LIFE INSURANCE COMPANY AND IDS LIFE INSURANCE COMPANY
OF NEW YORK was commenced in the United States District Court for the District
of Minnesota. The complaint put at issue various alleged sales practices and
misrepresentations and allegations of violations of federal laws.
In May, 2001 the United States District Court for the State of Minnesota
and The District Court, Fourth Judicial District for the State of Minnesota,
County of Hennepin entered orders approving the settlement as tentatively
reached in January, 2000. Appeals were filed in both federal and state court
but subsequently dismissed by the parties filing the appeals. The orders
approving the settlement were final as of September 24, 2001. Implementation
of the settlement commenced October 15, 2001.
Numerous individuals opted out of the settlement described above.
Although a significant number of these individuals are represented by counsel,
to date very few have filed lawsuits against AEFC and its subsidiaries. The
outcome of any litigation cannot be predicted with certainty; however, in the
aggregate, the company does not consider these lawsuits to be material.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on page E-1 hereof.
(b) Reports on Form 8-K:
Form 8-K, dated July 18, 2001, Item 5, announcing the company's
expectation relating to its second quarter earnings, reflecting
the write-down of high-yield securities and reduction in risk
profile of investment portfolio, and the company's intention to
take a restructuring charge in its third quarter.
Form 8-K, dated July 23, 2001, Items 5 and 7, reporting the
company's earnings for the quarter ended June 30, 2001 and
including a Second Quarter Earnings Supplement.
Form 8-K, dated July 23, 2001, Item 5, announcing the company's
election of Charlene Barshefsky and Peter R. Dolan to its Board of
Directors.
35
Form 8-K, dated August 1, 2001, Item 9, reporting certain
information from presentations to the financial community on
August 1, 2001 by Ken Chenault, Chairman and Chief Executive
Officer of the company, and Jim Cracchiolo, Group President,
Global Financial Services and Chairman and Chief Executive Officer
of American Express Financial Advisors.
Form 8-K, dated September 11, 2001, Item 5, reporting certain
information relating to the effects of the September 11, 2001
terrorist attacks on the company's headquarters and business.
Form 8-K, dated September 17, 2001, Item 5, announcing the
company's expectation relating to its third quarter earnings,
reflecting the effects of the September 11, 2001 terrorist
attacks.
Form 8-K, dated October 22, 2001, Items 5 and 7, 1) reporting the
company's earnings for the quarter ended September 30, 2001 and
including a Third Quarter Earnings Supplement and 2) adjusting
certain statistical data contained in its Form 10-Q Reports dated
May 15, 2001 and August 14, 2001, and its Form 8-K Reports dated
April 23, 2001 (relating to the company's first quarter 2001
earnings release and earnings supplement) and July 23, 2001
(relating to the company's second quarter 2001 earnings release
and earnings supplement).
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN EXPRESS COMPANY
------------------------
(Registrant)
Date: November 13, 2001 By /s/Gary L. Crittenden
-------------------------------
Gary L. Crittenden
Executive Vice President and
Chief Financial Officer
Date: November 13, 2001 /s/Thomas A. Iseghohi
--------------------------------
Thomas A. Iseghohi
Senior Vice President and
Comptroller
(Principal Accounting Officer)
37
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
Exhibit Description
------- -----------
12 Computation in Support of Ratio of Earnings to Fixed Charges.
15 Letter re Unaudited Interim Financial Information.
E-1