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 JUNE 30, 2003
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission file number 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 Identification No.)
incorporation or organization)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 July 31, 2003
--------------------------------------------- ----------------------------
Common Shares (par value $.20 per share) 1,287,053,492 shares
AMERICAN EXPRESS COMPANY
FORM 10-Q
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income - Three months
ended June 30, 2003 and 2002 1
Consolidated Statements of Income - Six months
ended June 30, 2003 and 2002 2
Consolidated Balance Sheets - June 30, 2003 and
December 31, 2002 3
Consolidated Statements of Cash Flows - Six
months ended June 30, 2003 and 2002 4
Notes to Consolidated Financial Statements 5 - 10
Independent Accountants' Review Report 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 36
Item 4. Controls and Procedures 37
Part II. Other Information 39
Item 1. Legal Proceedings 39
Item 2. Change in Securities and Use of Proceeds 42
Item 4. Submission of Matters to a Vote of Security Holders 42
Item 6. Exhibits and Reports on Form 8-K 43
Signatures 44
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share amounts)
(Unaudited)
Three Months Ended
June 30,
--------------------------------------
2003 2002
----------------- -----------------
Revenues:
Discount revenue $ 2,152 $ 1,997
Interest and dividends, net 780 658
Management and distribution fees 569 609
Cardmember lending net finance charge revenue 442 411
Net card fees 455 429
Travel commissions and fees 373 369
Other commissions and fees 479 480
Insurance and annuity revenues 341 311
Securitization income, net 386 354
Other 379 327
----------------- -----------------
Total 6,356 5,945
----------------- -----------------
Expenses:
Human resources 1,576 1,454
Provisions for losses and benefits:
Annuities and investment certificates 339 277
Life insurance, international banking and other 253 257
Charge card 205 280
Cardmember lending 278 290
Marketing, promotion, rewards and cardmember services 944 775
Professional services 527 484
Occupancy and equipment 379 328
Interest 231 277
Communications 130 128
Restructuring charges -- (6)
Disaster recovery charge -- (7)
Other 397 447
----------------- -----------------
Total 5,259 4,984
----------------- -----------------
Pretax income 1,097 961
Income tax provision 335 278
----------------- -----------------
Net income $ 762 $ 683
================= =================
Earnings per common share:
Basic $ 0.59 $ 0.52
================= =================
Diluted $ 0.59 $ 0.51
================= =================
Average common shares outstanding for
earnings per common share:
Basic 1,283 1,325
================= =================
Diluted 1,295 1,341
================= =================
Cash dividends declared per common share $ 0.10 $ 0.08
================= =================
See Notes to Consolidated Financial Statements.
1
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share amounts)
(Unaudited)
Six Months Ended
June 30,
--------------------------------------
2003 2002
----------------- ------------------
Revenues:
Discount revenue $ 4,128 $ 3,842
Interest and dividends, net 1,547 1,416
Management and distribution fees 1,089 1,206
Cardmember lending net finance charge revenue 950 860
Net card fees 906 852
Travel commissions and fees 713 697
Other commissions and fees 976 933
Insurance and annuity revenues 655 598
Securitization income, net 641 585
Other 774 715
----------------- -----------------
Total 12,379 11,704
----------------- -----------------
Expenses:
Human resources 3,066 2,932
Provisions for losses and benefits:
Annuities and investment certificates 653 576
Life insurance, international banking and other 510 519
Charge card 413 532
Cardmember lending 609 636
Marketing, promotion, rewards and cardmember services 1,719 1,492
Professional services 1,025 876
Occupancy and equipment 717 697
Interest 461 548
Communications 261 252
Restructuring charges -- (19)
Disaster recovery charge -- (7)
Other 852 851
----------------- -----------------
Total 10,286 9,885
----------------- -----------------
Pretax income 2,093 1,819
Income tax provision 639 518
----------------- -----------------
Net income $ 1,454 $ 1,301
================= =================
Earnings per common share:
Basic $ 1.13 $ 0.98
================= =================
Diluted $ 1.12 $ 0.97
================= =================
Average common shares outstanding for
earnings per common share:
Basic 1,290 1,325
================= =================
Diluted 1,300 1,338
================= =================
Cash dividends declared per common share $ 0.18 $ 0.16
================= =================
See Notes to Consolidated Financial Statements.
2
AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS
(millions, except share data)
June 30, December 31,
2003 2002
----------------- ------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 6,689 $ 10,288
Accounts receivable and accrued interest:
Cardmember receivables, less reserves: 2003, $943; 2002, $930 25,073 25,403
Other receivables, less reserves: 2003, $13; 2002, $28 4,240 3,684
Investments 56,312 53,638
Loans:
Cardmember lending, less reserves: 2003, $1,017; 2002, $1,030 21,527 21,574
International banking, less reserves: 2003, $141; 2002, $151 5,703 5,466
Other, net 691 782
Separate account assets 24,051 21,981
Deferred acquisition costs 3,996 3,908
Land, buildings and equipment - at cost, less accumulated
depreciation: 2003, $2,726; 2002, $2,603 3,036 2,979
Other assets 7,725 7,550
----------------- ------------------
Total assets $ 159,043 $ 157,253
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Customers' deposits $ 19,153 $ 18,317
Travelers Cheques outstanding 6,779 6,623
Accounts payable 7,176 9,235
Insurance and annuity reserves:
Fixed annuities 25,892 23,411
Life and disability policies 5,436 5,272
Investment certificate reserves 8,868 8,666
Short-term debt 16,626 21,103
Long-term debt 17,736 16,308
Separate account liabilities 24,051 21,981
Guaranteed preferred beneficial interests in the Company's junior
subordinated deferrable interest debentures 502 511
Other liabilities 12,332 11,965
----------------- ------------------
Total liabilities 144,551 143,392
----------------- ------------------
Shareholders' equity:
Common shares, $.20 par value, authorized 3.6 billion shares;
issued and outstanding 1,286 million shares in 2003 and
1,305 million shares in 2002 257 261
Capital surplus 5,774 5,675
Retained earnings 7,920 7,606
Other comprehensive income (loss), net of tax:
Net unrealized securities gains 1,398 1,104
Net unrealized derivatives losses (616) (538)
Foreign currency translation adjustments (192) (198)
Minimum pension liability (49) (49)
----------------- ------------------
Accumulated other comprehensive income 541 319
----------------- ------------------
Total shareholders' equity 14,492 13,861
----------------- ------------------
Total liabilities and shareholders' equity $ 159,043 $ 157,253
================= ==================
See Notes to Consolidated Financial Statements.
3
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
(Unaudited)
Six Months Ended
June 30,
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2003 2002
------------------ ----------------
Net income $ 1,454 $ 1,301
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Provisions for losses and benefits 1,280 1,563
Depreciation, amortization, deferred taxes and other 185 210
Non-cash portion of restructuring charges -- (19)
Non-cash portion of disaster recovery charges -- (7)
Changes in operating assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable and accrued interest (881) 323
Other assets (765) 212
Accounts payable and other liabilities (1,757) 739
Increase in Travelers Cheques outstanding 152 402
Increase in insurance reserves 122 130
------------------ ----------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (210) 4,854
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments 8,208 4,895
Maturity and redemption of investments 6,997 4,104
Purchase of investments (16,871) (9,293)
Net increase in cardmember loans/receivables (1,559) (1,523)
Cardmember loans/receivables sold to trust, net 1,384 4,524
Loan operations and principal collections, net (275) (291)
Purchase of land, buildings and equipment (317) (372)
Sale of land, buildings and equipment 6 72
Acquisitions, net of cash acquired (51) (25)
------------------ ----------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (2,478) 2,091
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in customers' deposits 659 (1,310)
Sale of annuities and investment certificates 6,335 3,020
Redemption of annuities and investment certificates (3,610) (2,029)
Net decrease in debt with maturities of three months or less (3,307) (10,341)
Issuance of debt 9,104 12,962
Principal payments on debt (8,913) (7,510)
Issuance of American Express common shares 122 114
Repurchase of American Express common shares (986) (79)
Dividends paid (213) (215)
------------------ ----------------
NET CASH USED IN FINANCING ACTIVITIES (809) (5,388)
------------------ ----------------
Effect of exchange rate changes on cash (102) 124
------------------ ----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,599) 1,681
Cash and cash equivalents at beginning of period 10,288 7,222
------------------ ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,689 $ 8,903
================== ================
See Notes to Consolidated Financial Statements.
4
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying 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, 2002. Certain reclassifications of prior period amounts
including those relating to securitization activity, other revenues and
other expenses have been made to conform to the current presentation.
Cardmember lending net finance charge revenue is presented net of interest
expense of $115 million and $127 million for the three months ended June
30, 2003 and 2002, respectively, and $244 million and $254 million for the
six months ended June 30, 2003 and 2002, respectively. Interest and
dividends is presented net of interest expense of $58 million and $62
million for the three months ended June 30, 2003 and 2002, respectively,
and $119 million and $123 million for the six months ended June 30, 2003
and 2002, respectively, related primarily to the Company's international
banking operations.
At June 30, 2003 and December 31, 2002, cash and cash equivalents included
$1.2 billion and $1.1 billion, respectively, segregated in special bank
accounts for the benefit of customers.
At June 30, 2003 and December 31, 2002, accounts receivable and accrued
interest included $4.0 billion and $5.1 billion, respectively, of
cardmember receivables which have been securitized through the issuance of
trust certificates.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company
adopted the provisions of SFAS No. 143 on January 1, 2003; the impact on
the Company's financial statements was immaterial.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which addresses consolidation by
business enterprises of variable interest entities (VIEs). The accounting
provisions and expanded disclosure requirements for VIEs were effective at
inception for VIEs created after January 31, 2003, and are effective for
reporting periods beginning after June 15, 2003 for VIEs created prior to
February 1, 2003. An entity is subject to consolidation according to the
provisions of FIN 46, if, by design, either (i) the total equity investment
at risk is not sufficient to permit the entity to finance its activities
without additional subordinated financial support from other parties, or,
(ii) as a group, the holders of the equity investment at risk lack: (a)
direct or indirect ability to make decisions about an entity's activities;
(b) the obligation to absorb the expected losses of the entity if they
occur; or (c) the right to receive the expected residual returns of the
entity if they occur. In general, FIN 46 requires a VIE to be consolidated
when an enterprise has a variable interest that will absorb a majority of
the VIE's expected losses or receive a majority of the VIE's expected
residual return. The entities primarily impacted by FIN 46 relate to
structured investments, including collateralized debt obligations (CDOs)
and secured loan trusts (SLTs), which are both managed and partially owned
in the Company's American Express Financial Advisors (AEFA) operating
segment. FIN 46 does not impact the accounting for qualified special
purpose entities as defined by SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Debt," such as the
Company's credit card securitizations, as well as the CDO securitization
trust established in 2001 where the
5
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Company's retained interest in the trust had a carrying value of $712
million at June 30, 2003, of which $529 million is considered investment
grade.
The CDO entities impacted by FIN 46 contain debt issued to investors which
is non-recourse to the Company and solely supported by portfolios of
high-yield bonds and loans. AEFA manages the portfolios of high-yield bonds
and loans for the benefit of CDO debt held by investors and often retains
an interest in the residual and rated debt tranches of the CDO structures.
The SLTs provide returns to investors primarily based on the performance of
an underlying portfolio of high-yield loans which are generally managed by
the Company.
Detailed interpretations of FIN 46 continue to emerge and, accordingly, the
Company is still in the process of evaluating its impact. Preliminary
estimates are that the consolidation of these and other VIE entities could
result in a cumulative effect of accounting change that will reduce
reported third quarter 2003 net income through a non-cash charge of
approximately $150 million ($230 million pretax) with the consolidation of
up to $2.0 billion of related assets. Substantially all of the charge
relates to the CDOs. Taken together, over the lives of the structures
subject to FIN 46 through their maturity, the Company's maximum cumulative
exposure to pretax loss as a result of its investment in these entities is
represented by the carrying values at June 30, 2003. Those carrying values
include CDO residual tranches having an adjusted cost basis of $18 million
and SLTs having an adjusted cost basis of $670 million.
The initial charge related to the application of FIN 46 for CDOs and SLTs
will have no cash flow effect on the Company. Future valuation adjustments
specifically related to the application of FIN 46 to the CDOs are also
non-cash items, and will be reflected in the Company's quarterly results
until maturity. The Company expects these aggregate gains or losses
related to CDOs, including the July 1, 2003 implementation charge,
to reverse themselves over time as the structures mature, because the
debt issued to the investors in the CDOs is non-recourse to the Company,
and further reductions in the value of the related assets will be
absorbed by the third party investors. To the extent losses are
incurred in the SLT portfolio, future charges could be incurred
under FIN 46.
In July 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1). The Company is currently evaluating its
impact, which, among other provisions, requires reserves related to
guaranteed minimum death benefits included within the majority of variable
annuity contracts offered by AEFA. SOP 03-1 is required to be adopted on
January 1, 2004.
2. STOCK-BASED COMPENSATION
At June 30, 2003, the Company has two stock-based employee compensation
plans, which are described more fully in Note 14 of the Company's 2002
Annual Report to Shareholders. Effective January 1, 2003, the Company
adopted the fair value recognition provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," prospectively for all stock options granted
after December 31, 2002. The fair value of each option is estimated on the
date of grant using a Black-Scholes option-pricing model. Prior to 2003,
the Company accounted for those plans under the recognition and measurement
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. Prior to the
adoption of the fair value recognition provisions of SFAS No. 123 in 2003,
no employee compensation cost was recorded in net income for stock options
granted, since all options granted under these plans had an exercise price
equal to the market value of the underlying common stock on the date of
grant. For the three and six months ended June 30, 2003, the Company
expensed $6 million and $10 million after-tax, respectively, related to
stock options granted in 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amended APB Opinion 28,
"Interim Financial Reporting," to require disclosure about the pro forma
effects of SFAS No. 123 on reported net income of stock-based compensation
accounted for under APB Opinion No. 25. The following table illustrates the
effect on net income and earnings per common
6
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
share (EPS) assuming the Company had followed the fair value recognition
provisions of SFAS No. 123 for all outstanding and unvested stock options
and other stock-based compensation for the three and six-month periods
ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended
(Millions, except per share amounts) June 30, June 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- -------------- -------------- ---------------
Net income as reported $ 762 $ 683 $ 1,454 $ 1,301
Add: Stock-based employee compensation included
in reported net income, net of related tax effects 21 7 38 10
Deduct: Total stock-based employee compensation
expense determined under fair value based
method, net of related tax effects (89) (90) (173) (175)
--------------- -------------- -------------- ---------------
Pro forma net income $ 694 $ 600 $ 1,319 $ 1,136
=============== ============== ============== ===============
Basic EPS:
As reported $ 0.59 $ 0.52 $ 1.13 $ 0.98
Pro forma $ 0.54 $ 0.45 $ 1.02 $ 0.86
Diluted EPS:
As reported $ 0.59 $ 0.51 $ 1.12 $ 0.97
Pro forma $ 0.54 $ 0.45 $ 1.01 $ 0.85
3. INVESTMENT SECURITIES
The following is a summary of investments at June 30, 2003 and December 31,
2002:
June 30, December 31,
2003 2002
-------------------- ---------------------
(Millions) (Audited)
Available-for-Sale, at fair value
(cost: 2003, $49,204; 2002, $47,321) $ 51,469 $ 49,102
Investment loans, at cost
(fair value: 2003, $4,285; 2002, $4,405) 3,841 3,981
Trading 1,002 555
-------------------- ---------------------
Total $ 56,312 $ 53,638
==================== =====================
Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $68
million and $62 million for the three months ended June 30, 2003 and 2002,
respectively, of which $63 million and $57 million, respectively, related
to AEFA. Gross realized losses on sales of securities classified as
Available-for-Sale were $13 million and $14 million for the same periods,
all of which related to AEFA. The Company also recognized
other-than-temporary impairment losses on AEFA's Available-for-Sale
securities of $45 million and $108 million for the three months ended June
30, 2003 and 2002, respectively.
Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $265
million and $115 million for the six months ended June 30, 2003 and 2002,
respectively, of which $249 million and $100 million, respectively, related
to AEFA. Gross realized losses on sales of securities classified as
Available-for-Sale were $63 million and $47 million for the same periods,
of which $62 million and $45 million, respectively, related to AEFA. The
Company also recognized other-than-temporary impairment losses on AEFA's
Available-for-Sale securities of $158 million and $117 million for the six
months ended June 30, 2003 and 2002, respectively.
7
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. GUARANTEES
The Company, through its Travel Related Services (TRS) operating segment,
provides cardmember protection plans that cover losses associated with
purchased products, as well as certain other guarantees in the ordinary
course of business. In the hypothetical scenario that all claims occur
within one year, the aggregate maximum amount of potential future losses
associated with such guarantees as of June 30, 2003 would not exceed $82
billion. The total amount of related liability accrued at June 30, 2003 for
such programs was $328 million, which management believes to be adequate
based on historical experience. The Company has minimal collateral or other
recourse provisions related to these guarantees.
The Company, through its American Express Bank (AEB) operating segment,
provides various guarantees to its customers in the ordinary course of
business, including financial letters of credit, performance guarantees and
financial guarantees, among others. Generally, guarantees range in term
from three months to one year. AEB receives a fee related to most of these
guarantees, many of which help to facilitate customer cross-border
transactions. Virtually all of these guarantees are collateralized or
supported by other types of recourse provisions (i.e., pledged assets,
primarily comprised of cash and time deposits, and counter-guarantees). The
following table provides information related to such guarantees as of June
30, 2003:
Maximum amount
(Millions) of undiscounted Amount of related
Type of Guarantee: future payments liability
--------------------- -----------------
Financial letters of credit $ 182 $ 1.1
Performance guarantees 137 0.6
Financial guarantees 618 0.5
--------------------- -----------------
Total $ 937 $ 2.2
===================== =================
5. COMPREHENSIVE INCOME
Comprehensive income is defined as the aggregate change in shareholders'
equity, excluding changes in ownership interests. 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, (iii) foreign
currency translation adjustments and (iv) minimum pension liability
adjustment. The components of comprehensive income, net of related tax, for
the three and six months ended June 30, 2003 and 2002 were as follows:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ -----------------------------------
(in millions) 2003 2002 2003 2002
--------------- ---------------- --------------- ---------------
Net income $ 762 $ 683 $ 1,454 $ 1,301
Change in:
Net unrealized securities gains 294 432 294 248
Net unrealized derivative losses (99) (104) (78) (28)
Foreign currency translation adjustments 27 (76) 6 (79)
--------------- ---------------- --------------- ---------------
Total $ 984 $ 935 $ 1,676 $ 1,442
=============== ================ =============== ===============
6. TAXES AND INTEREST
Net income taxes paid during the six months ended June 30, 2003 and 2002
were approximately $756 million and $432 million, respectively. Interest
paid during both of the six months ended June 30, 2003 and 2002 was $0.8
billion.
8
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. EARNINGS PER COMMON SHARE
The computations of basic and diluted EPS for the three and six months
ended June 30, 2003 and 2002 are as follows:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ -----------------------------------
(in millions, except per share amounts) 2003 2002 2003 2002
---------------- --------------- --------------- ---------------
Numerator: Net income $ 762 $ 683 $ 1,454 $ 1,301
Denominator:
Basic: Weighted-average shares outstanding
during the period 1,283 1,325 1,290 1,325
Add: Dilutive effect of stock options and
restricted stock awards 12 16 10 13
---------------- --------------- --------------- ---------------
Diluted 1,295 1,341 1,300 1,338
Basic EPS $ 0.59 $ 0.52 $ 1.13 $ 0.98
Diluted EPS $ 0.59 $ 0.51 $ 1.12 $ 0.97
Stock options having an exercise price greater than the average market
price of the Company's common shares for each period presented are excluded
from the computation of EPS, because the effect would be antidilutive. The
number of these excluded stock options for the three months ended June 30,
2003 and 2002 was 103 million and 77 million, respectively. The number of
these excluded stock options for the six months ended June 30, 2003 and
2002 was 108 million and 87 million, respectively.
8. SEGMENT INFORMATION
The Company is principally engaged in providing travel related, financial
advisory and international banking services throughout the world. TRS'
products and services include, among others, charge cards, cardmember
lending products, Travelers Cheques, and corporate and consumer travel
services. AEFA's services and products include financial planning and
advice, investment advisory services and a variety of products, including
insurance and annuities, investment certificates and mutual funds. AEB's
products and services include providing private banking, personal financial
services and financial institution services, global trading and corporate
banking. The Company operates on a global basis, although the principal
market for financial advisory services is the United States.
The following tables present the results for these operating segments,
based on management's internal reporting structure, for the three and six
months ended June 30, 2003 and 2002. For certain income statement items
that are affected by asset securitizations at TRS, data is provided on both
a managed basis, which excludes the effect of securitizations, as well as
on a GAAP basis. See TRS Results of Operations section of MD&A for further
information regarding the effect of securitizations on the financial
statements. In addition, net revenues (managed basis) are presented net of
provisions for losses and benefits for annuities, insurance and investment
certificate products of AEFA which are essentially spread businesses as
further discussed in the AEFA Results of Operations section of MD&A.
9
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended Six Months Ended
REVENUES (GAAP BASIS) June 30, June 30,
------------------------------------------ ------------------------------------------
(in millions) 2003 2002 2003 2002
------------------ ------------------- ------------------- ------------------
Travel Related Services $ 4,734 $ 4,462 $ 9,220 $ 8,661
American Express
Financial Advisors 1,496 1,351 2,907 2,785
American Express Bank 200 180 397 358
Corporate and Other (74) (48) (145) (100)
------------------ ------------------- ------------------- ------------------
Total $ 6,356 $ 5,945 $ 12,379 $ 11,704
================== =================== =================== ==================
Three Months Ended Six Months Ended
NET REVENUES (MANAGED BASIS) June 30, June 30,
------------------------------------------ ------------------------------------------
(in millions) 2003 2002 2003 2002
------------------ ------------------- ------------------- ------------------
Travel Related Services $ 4,950 $ 4,655 $ 9,700 $ 9,107
American Express
Financial Advisors 970 893 1,875 1,857
American Express Bank 200 180 397 358
Corporate and Other (74) (48) (145) (100)
------------------ ------------------- ------------------- ------------------
Total $ 6,046 $ 5,680 $ 11,827 $ 11,222
================== =================== =================== ==================
Three Months Ended Six Months Ended
PRETAX INCOME (LOSS) June 30, June 30,
------------------------------------------ ------------------------------------------
(in millions) 2003 2002 2003 2002
------------------ ------------------- ------------------- ------------------
Travel Related Services $ 937 $ 822 $ 1,795 $ 1,488
American Express
Financial Advisors 209 202 387 454
American Express Bank 39 27 68 47
Corporate and Other (88) (90) (157) (170)
------------------ ------------------- ------------------- ------------------
Total $ 1,097 $ 961 $ 2,093 $ 1,819
================== =================== =================== ==================
Three Months Ended Six Months Ended
NET INCOME (LOSS) June 30, June 30,
------------------------------------------ ------------------------------------------
(in millions) 2003 2002 2003 2002
------------------ ------------------- ------------------- ------------------
Travel Related Services $ 634 $ 565 $ 1,218 $ 1,032
American Express
Financial Advisors 157 145 290 327
American Express Bank 27 18 46 31
Corporate and Other (56) (45) (100) (89)
------------------ ------------------- ------------------- ------------------
Total $ 762 $ 683 $ 1,454 $ 1,301
================== =================== =================== ==================
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 June 30, 2003 and the related
consolidated statements of income for the three and six-month periods ended
June 30, 2003 and 2002 and the consolidated statements of cash flows for the
six-month periods ended June 30, 2003 and 2002. 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, 2002, 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 January 27, 2003, 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, 2002 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
August 11, 2003
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
American Express Company (the Company) is primarily engaged in the business of
providing travel related services, financial advisory services and
international banking services throughout the world. The Company generates
revenue from a variety of sources including global payments such as charge and
credit cards; travel services including airline, hotel and rental car
reservations; and a wide range of retail financial service products.
The Company follows accounting principles generally accepted in the United
States (GAAP). In addition to information provided on a GAAP basis, the
Company discloses certain data on a "managed basis." These data, which should
be read only as a supplement to GAAP information, assume there have been no
securitization transactions at Travel Related Services (TRS), i.e., as if all
securitized cardmember loans and related income effects are reflected in the
Company's balance sheet and income statement. In addition, revenues are
considered net of American Express Financial Advisors' (AEFA) provisions for
losses and benefits for annuities, insurance and investment certificate
products, which are essentially spread businesses. See the TRS and AEFA
Results of Operations sections for further discussion of and reasons for this
approach. Certain reclassifications of prior period amounts relating to
securitization activity, other revenues and other expenses have been made to
conform to the current presentation. Management believes this presentation
better emphasizes various revenue and expense impacts to the Company and is
more consistent with industry practice. See Exhibit 99.1 for further details.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003
AND 2002
The following discussion is presented on a basis consistent with GAAP unless
otherwise noted.
The Company's consolidated net income rose 11 percent to $762 million for the
three-month period ended June 30, 2003 as compared to a year ago. Diluted
earnings per share (EPS) rose 16 percent to $0.59. On a trailing 12-month
basis, return on average shareholders' equity was 20.1 percent.
Consolidated revenues for the three months ended June 30, 2003 were $6.4
billion, up 7 percent from $5.9 billion in the same period a year ago
reflecting 6 percent growth at TRS and 11 percent growth at both AEFA and
American Express Bank (AEB). As discussed in further detail below, the
increase in the second quarter was due primarily to increases in discount
revenue, interest and dividend revenues, other revenues, securitization income
and cardmember lending net finance charge revenue. These increases were
partially offset by lower management and distribution fees. Translation of
foreign currency revenues contributed approximately 2 percent of the 7 percent
revenue growth rate.
Discount revenue at TRS rose 8 percent compared to a year ago as a result of a
10 percent increase in billed business partially offset by a lower discount
rate. Interest and dividends increased 19 percent primarily due to higher
invested assets and the effect of a 2002 $78 million investment loss related
to the Company's WorldCom debt holdings, largely at AEFA. Management and
distribution fees declined 7 percent primarily due to lower average assets
under management and net outflows within both institutional and retail
activities over the past year. Distribution fees were flat as the impact of
lower mutual fund sales was offset by greater limited partnership product
sales and increased brokerage-related activities.
Cardmember lending net finance charge revenue at TRS increased 8 percent due
to growth in the cardmember lending portfolio. Net card fees increased 6
percent reflecting 5 percent growth in cards-in-force as well as a shift in
the mix of products. The average fee per proprietary card-in-force was $34 in
2003 and 2002. Travel commissions and fees increased slightly as higher
revenue earned per dollar of sales was offset by a 9 percent decline in travel
sales reflecting the continued weak travel environment. Insurance and annuity
revenues increased 10 percent versus the same period a year ago primarily due
to higher property-casualty and life insurance-related revenues at AEFA. Net
securitization income at TRS rose 9 percent as a result of a higher average
balance of cardmember lending securitizations. Other revenues increased 16
percent versus the same period a year ago
12
primarily due to higher card-related revenues at TRS and higher financial
planning and advice service fees at AEFA.
Consolidated expenses for the three months ended June 30, 2003 were $5.3
billion, up 5 percent from $5.0 billion for the same period in 2002 reflecting
increases of 4 percent at TRS, 12 percent at AEFA and 5 percent at AEB. As
discussed in further detail below, the increase in the second quarter of 2003
was primarily driven by higher marketing, promotion, rewards and cardmember
services, human resources, occupancy and equipment and professional fees
expenses offset by lower interest expense, provisions for losses and other
expenses. Translation of foreign currency expenses contributed approximately 2
percent of the 5 percent expense growth rate.
Human resources expenses increased 8 percent versus last year, as merit
increases, higher employee benefit expenses and increased management incentive
costs, including higher stock-based compensation costs from both stock options
and increased levels of restricted stock awards. This reflected the Company's
decisions to expense stock options beginning in January 2003 and to eliminate
the awarding of stock options for middle management and increase levels of
restricted stock awards in their place. These increases were partially
offset by lower staffing levels and the benefits of outsourcing which had the
effect of moving certain technology related costs from human resources expense
to professional services expense.
Total provisions for losses and benefits declined 3 percent compared to last
year, primarily driven by a 27 percent decline in the charge card provision
and a 4 percent decline in the lending provision, both at TRS. The decrease in
the provisions at TRS was primarily due to strong credit quality as reflected
in improved past due and write-off rates despite strengthening of reserve
coverage ratios. These decreases were partially offset by a 22 percent net
increase in annuity and investment certificates provisions at AEFA. Annuity
provisions increased primarily due to higher inforce levels and the effect of
appreciation in the S&P 500 on equity indexed annuities this period versus
depreciation in the same period a year ago, partially offset by lower
crediting rates. Investment certificates provisions increased significantly
due to the effect on the stock market certificate product of appreciation in
the S&P 500 this period versus depreciation in the year ago period and higher
average reserves partially offset by lower crediting rates.
Marketing, promotion, rewards and cardmember services expenses increased 22
percent versus a year ago primarily due to a 22 percent increase at TRS
related to the continuation of brand advertising activities, more loyalty
program marketing and a step-up of selected card acquisition activities, as
well as a significant increase in cardmember rewards and services expenses
reflecting higher volumes and greater program participation. The increase in
rewards expenditures reflects management's belief that, based on historical
experience, cardmembers enrolled in rewards and co-brand programs yield higher
spend, better retention, stronger credit performance and greater profitability
for the Company. Professional services expense rose 9 percent versus the same
period a year ago primarily due to the technology and service-related
outsourcing agreements discussed above. Occupancy and equipment
expense increased 16 percent primarily due to increased amortization of
capitalized computer software costs versus the prior year. Interest expense
declined 17 percent including a 20 percent decrease in charge card interest
expense at TRS primarily due to the benefit of a lower effective cost of
funds. Other expenses declined 11 percent as reengineering benefits were
partially offset by the impact of fewer capitalized deferred acquisition costs
(DAC) at AEFA.
In the second quarter of 2002, the Company recognized a net benefit of $6
million ($4 million after-tax) to adjust the restructuring reserves
established during 2001. In addition, the second quarter 2002 results also
included a benefit of $7 million ($4 million after-tax) related to third
quarter 2001 disaster recovery reserves to reflect lower than anticipated
insured loss claims at AEFA.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND
2002
The following discussion is presented on a basis consistent with GAAP unless
otherwise noted.
The Company's consolidated net income rose 12 percent to $1.5 billion for the
six-month period ended June 30, 2003 as compared to $1.3 billion a year ago.
Diluted EPS rose 15 percent to $1.12. On a trailing 12-month basis, return on
average shareholders' equity was 20.1 percent.
13
Consolidated revenues for the six months ended June 30, 2003 were $12.4
billion, up 6 percent from $11.7 billion in the same period a year ago
reflecting 6 percent growth at TRS, 4 percent growth at AEFA and 11 percent
growth at AEB. As discussed in further detail below, the increase in the first
half of 2003 was due primarily to increases in discount revenue, interest and
dividend revenues, cardmember lending net finance charge revenue, other
revenues and securitization income. These increases were partially offset by
lower management and distribution fees. Translation of foreign currency
revenues contributed approximately 2 percent of the 6 percent revenue growth
rate.
Discount revenue at TRS rose 7 percent compared to a year ago primarily as a
result of a 10 percent increase in billed business partially offset by a lower
discount rate. Interest and dividends increased 9 percent primarily due to
higher invested assets and the effect of a 2002 $78 million investment loss
related to the Company's WorldCom debt holdings, largely at AEFA, partially
offset by lower average yields. Management and distribution fees declined 10
percent due to lower average assets under management and lower distribution
fees. Distribution fees decreased as a result of lower mutual fund sales
partially offset by greater limited partnership product sales and higher fees
from variable annuity and variable life products.
Cardmember lending net finance charge revenue at TRS increased 11 percent due
to growth in the cardmember lending portfolio partially offset by lower
yields. Net card fees increased 6 percent reflecting 5 percent growth in
cards-in-force as well as a shift in the mix of products. The average fee per
proprietary card-in-force was $34 in 2003 and 2002. Travel commissions and
fees increased 2 percent as higher revenue earned per dollar of sales was
partially offset by a 5 percent decline in travel sales reflecting the weaker
travel environment during the first half of 2003. Other commissions and fees
increased 5 percent primarily due to growth in average worldwide lending
balances at TRS. Insurance and annuity revenues increased 10 percent versus
the same period a year ago primarily due to higher property-casualty and life
insurance-related revenues at AEFA. Net securitization income at TRS rose 10
percent as a result of a higher average balance of cardmember lending
securitizations. Other revenues increased 8 percent versus the same period a
year ago primarily due to higher card-related revenues at TRS and higher
financial planning and advice service fees at AEFA.
Consolidated expenses for the six months ended June 30, 2003 were $10.3
billion, up 4 percent from $9.9 billion for the same period in 2002 reflecting
increases of 4 percent at TRS, 8 percent at AEFA and 5 percent at AEB. As
discussed in further detail below, the increase in the first half of 2003 was
primarily driven by higher marketing, promotion, rewards and cardmember
services, professional services and human resources expenses partially
offset by lower interest expense and provision for losses. Translation of
foreign currency expenses contributed approximately 2 percent of the 4 percent
expense growth rate.
Human resources expense increased 5 percent versus last year, as increased
costs related to merit increases, employee benefit expenses and management
incentive costs, including higher stock-based compensation costs from both
stock options and increased levels of restricted stock awards. This reflected
the Company's decisions to expense stock options beginning in January 2003 and
to eliminate the awarding of stock options for middle management and increase
levels of restricted stock awards in their place. These increases were
partially offset by lower staffing levels and the benefits of outsourcing
which had the effect of moving certain technology related costs from human
resources expense to professional services expense.
Total provisions for losses and benefits declined 3 percent compared to last
year, primarily driven by a 22 percent decline in the charge card provision at
TRS, as well as a 4 percent decline in the lending provision, also at TRS. The
decrease in the provisions at TRS was primarily due to strong credit quality
as reflected in an improved past due and write-off rates, despite
strengthening of reserve coverage ratios. These decreases were partially
offset by a 13 percent net increase in annuity and investment certificates
provisions at AEFA. Annuity provisions increased primarily due to higher
inforce levels, the effect of appreciation in the S&P 500 on equity indexed
annuities this year versus depreciation last year and increased costs
related to guaranteed minimum death benefits, partially offset by lower
crediting rates. Investment certificate provisions for losses and benefits
increased due to the effect on the stock market certificate product of
appreciation in the S&P 500 this year versus depreciation last year and
higher average reserve levels, partially offset by lower crediting rates.
14
Marketing, promotion, rewards and cardmember services expenses increased 15
percent versus a year ago primarily due to a 17 percent increase at TRS
related to the continuation of brand advertising, more loyalty marketing
and a step-up of selected card acquisition activities, as well as a
significant increase in cardmember rewards and services expenses
reflecting higher volumes and greater program participation. The increase
in rewards expenditures reflects management's belief that, based on
historical experience, cardmembers enrolled in rewards and co-brand
programs yield higher spend, better retention, stronger credit performance
and greater profitability for the Company. Professional services expense
rose 17 percent versus the same period a year ago primarily due to the impact
of the technology and service-related outsourcing agreements discussed
above. Occupancy and equipment expense increased 3 percent as higher
amortization of capitalized computer software costs was partially offset
by the benefits of reengineering activities. Interest expense declined
16 percent including a 17 percent decrease in charge card interest expense
at TRS primarily due to the benefit of a lower effective cost of funds.
Other expenses were relatively flat as reengineering benefits were offset
by the impact of fewer capitalized deferred acquisition costs (DAC) at AEFA.
In the first half of 2002, the Company recognized a net benefit of $19 million
($12 million after-tax) to adjust the restructuring reserves established
during 2001. In addition, 2002 results also included a benefit of $7 million
($4 million after-tax) related to third quarter 2001 disaster recovery
reserves to reflect lower than anticipated insured loss claims at AEFA.
The Company's reengineering initiatives are expected to deliver an estimated
savings of approximately $1.0 billion in 2003, including significant
carry-over benefits from certain initiatives begun in prior periods.
Revenue-related reengineering activities are driving a growing proportion of
the total benefits, including approximately 25 percent of the benefits
expected to be delivered in 2003. The Company plans to invest more in business
building initiatives during the second half of the year rather than allow the
expected additional benefits from reengineering and momentum in the business
to result in improved profit margins. In light of these plans, the Company
believes that 2003 EPS before the impact of accounting changes will exceed
$2.26 but is not likely to exceed $2.29.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
The Company believes allocating capital to its growing businesses with a
return on risk-adjusted equity in excess of their cost of capital will
continue to build shareholder value. The Company's philosophy is to retain
earnings sufficient to enable it to meet its growth objectives, and, to the
extent capital exceeds investment opportunities, return excess capital to
shareholders. As previously reported, the Company has indicated that its
financial objectives are 12-to-15% EPS growth, 18-to-20% return on equity and
8% revenue growth, on average and over time, assuming 6-to-10% growth in
billed business and 8% appreciation in the equity markets. Assuming it
achieves these objectives, the Company will seek to return to shareholders an
average of 65 percent of capital generated, subject to business mix,
acquisitions and rating agency requirements. During the first six months of
2003, the Company returned to shareholders through dividends and share
repurchases approximately 75 percent of capital generated.
On June 16, 2003, the Company announced an agreement for AEFA to acquire
Threadneedle Asset Management Holdings LTD. The transaction, which is subject
to regulatory approval, is expected to close in the second half of the year
and has been valued at approximately $570 million. Additionally, on July 14,
2003, the Company announced the signing of an agreement to acquire Rosenbluth
International, an international travel management company. This transaction,
also subject to regulatory approval, is expected to be completed in the second
half of the year. Both of these transactions will be paid in cash upon
completion and are expected to have no material impact on the Company's EPS in
2003 but are expected to be slightly accretive to EPS in 2004 with additional
benefits in future years. In light of these acquisitions and their impact on
capital, the Company expects lower share repurchase activity for the remainder
of 2003.
The Company has in place a share repurchase program both to offset in whole or
in part the issuance of new shares as part of employee compensation plans and
to reduce shares outstanding. The Company repurchases its common shares
primarily by open market purchases using several brokers at competitive
commission and fee rates. In addition, common shares may also be purchased
from the Company-sponsored Incentive Savings Program (ISP) to facilitate the
ISP's required disposal of shares when employee-directed activity results in
an excess common share
15
position. Such purchases are made at market price without commissions or
other fees. Repurchases may also be accomplished by prepayments for cash
under the Company's agreements with third parties, which are described
below. During the first half of 2003, the Company repurchased 27.2 million
common shares at an average price of $36.23. Since the inception of the share
repurchase program in September 1994, 417.2 million shares have been acquired
under authorizations to repurchase up to 570 million shares, including
purchases made under the agreements with third parties. Included in the 2003
share repurchase amount are 14.8 million shares returned to the Company under
the agreements discussed below.
In August 1999 and March 2000, the Company entered into agreements under which
a financial institution purchased an aggregate 29.5 million of the Company's
common shares at an average purchase price of $50.41 per share. The agreements
provided that upon their termination, the Company would be required to deliver
an amount equal to the original purchase price for the shares less any
prepayments. In May 2003, the Company repaid the remaining balance under the
agreements of $335 million and terminated the agreements, which resulted in
the return to the Company of approximately 8.9 million common shares.
At June 30, 2003, the Parent Company had $2.8 billion of debt or equity
securities available for issuance under shelf registrations filed with the
Securities and Exchange Commission (SEC). In July 2003, the Parent Company
issued $1 billion of fixed rate, 10-year Senior Notes under the shelf
registrations to be used for general corporate purposes. In addition, TRS;
American Express Centurion Bank (Centurion Bank), a wholly-owned subsidiary of
TRS; American Express Credit Corporation (Credco), a wholly-owned subsidiary
of TRS; American Express Overseas Credit Corporation Limited, a wholly-owned
subsidiary of Credco; and AEB have established programs for the issuance,
outside the United States, of debt instruments to be listed on the Luxembourg
Stock Exchange. The maximum aggregate principal amount of debt instruments
outstanding at any one time under the program will not exceed $6.0 billion. At
June 30, 2003, $0.5 billion was outstanding under this program.
As of June 30, 2003, the Parent Company and two subsidiaries, Credco and
Centurion Bank had total available credit lines of $10.85 billion, including
$2.0 billion allocated to the Parent Company and $8.5 billion allocated to
Credco. Credco has the right to borrow a maximum amount of $10.5 billion, with
a commensurate reduction in the amount available to the Parent Company. These
lines expire in increments from 2004 through 2007. At June 30, 2003, Credco's
bank line coverage of net short-term debt was 103%.
On July 16, 2003, the Company exercised a call option on the Junior
Subordinated Deferrable Interest Debentures issued by the Company, which
resulted in the redemption of 20 million shares of 7.0% Cumulative Quarterly
Income Preferred Shares Series I (QUIPS). The QUIPS had a carrying value of
$502 million at June 30, 2003.
The Company funds the costs of the American Express Retirement Plan (the
Plan), which covers eligible U.S. employees, in compliance with the applicable
funding requirements specified by the Employee Retirement Income Security
Act of 1974, as amended (ERISA). In March 2003, the Company elected to make
a $350 million contribution to the Plan, including approximately $25
million of minimum required funding per ERISA.
16
SUPPLEMENTAL INFORMATION - MANAGED NET REVENUES
The following supplemental information is presented on the basis used by
management to evaluate operations. It differs in two respects from the
Consolidated Statements of Income contained in this report, which are prepared
in accordance with GAAP. First, revenues are presented as if there had been no
asset securitizations at TRS. This format is generally termed on a managed
basis, as further discussed in the TRS Results of Operations section of
Management's Discussion and Analysis (MD&A). Second, revenues are considered
net of AEFA's provisions for losses and benefits for annuities, insurance and
investment certificate products, which are essentially spread businesses, as
further discussed in the AEFA Results of Operations section of MD&A. A
reconciliation of consolidated revenues from a GAAP to a net managed basis is
as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------- ----------------------------------------
(Unaudited, millions) 2003 2002 2003 2002
------------------- ------------------ ------------------- -------------------
GAAP revenues $ 6,356 $ 5,945 $ 12,379 $ 11,704
Effect of TRS securitizations 216 193 480 446
Effect of AEFA provisions for
losses and benefits (526) (458) (1,032) (928)
------------------- ------------------ ------------------- -------------------
Managed net revenues $ 6,046 $ 5,680 $ 11,827 $ 11,222
=================== ================== =================== ===================
Consolidated managed net revenues increased 6 percent for the three months
ended June 30, 2003 to $6.0 billion, compared with $5.7 billion for the same
period in 2002. For the six months ended June 30, 2003, consolidated managed
net revenues increased 5 percent to $11.8 billion, compared with $11.2 billion
for the same period in 2002. For both periods, managed net revenues rose due
to greater discount revenues, higher cardmember loan balances, larger interest
and dividend revenues and higher other revenues. These items were partially
offset by lower management and distribution fees.
See TRS and AEFA segments for a discussion of why a managed basis presentation
at TRS and net revenues at AEFA is used by management and is important to
investors.
17
TRAVEL RELATED SERVICES
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND
2002
STATEMENTS OF INCOME
(Unaudited)
(Dollars in millions) Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- Percentage ------------------------- Percentage
2003 2002 Inc/(Dec) 2003 2002 Inc/(Dec)
------------ ----------- ---------- ----------- ----------- ----------
Net Revenues:
Discount revenue $ 2,152 $ 1,997 7.7% $ 4,128 $ 3,842 7.4%
Net card fees 455 429 6.0 906 852 6.3
Lending:
Finance charge revenue 557 538 3.8 1,194 1,114 7.3
Interest expense 115 127 (9.2) 244 254 (3.8)
------------ ----------- ------------ -----------
Net finance charge revenue 442 411 7.8 950 860 10.5
Travel commissions and fees 373 369 1.0 713 697 2.2
Other commissions and fees 457 448 1.9 921 890 3.5
Travelers Cheque investment income 92 95 (2.2) 184 185 (0.1)
Securitization income, net 386 354 9.2 641 585 9.7
Other revenues 377 359 5.0 777 750 3.5
------------ ----------- ------------ -----------
Total net revenues 4,734 4,462 6.1 9,220 8,661 6.5
------------ ----------- ------------ -----------
Expenses:
Marketing, promotion, rewards
and cardmember services 918 754 21.9 1,679 1,435 17.1
Provision for losses and claims:
Charge card 205 280 (27.0) 413 532 (22.4)
Lending 278 290 (4.4) 609 636 (4.3)
Other 37 37 1.1 68 85 (20.1)
------------ ----------- ------------ -----------
Total 520 607 (14.5) 1,090 1,253 (13.1)
Charge card interest expense 204 256 (20.1) 413 500 (17.4)
Human resources 965 879 9.8 1,881 1,780 5.7
Other operating expenses 1,190 1,150 3.4 2,362 2,224 6.2
Restructuring charges -- (6) -- -- (19) --
------------ ----------- ------------ -----------
Total expenses 3,797 3,640 4.3 7,425 7,173 3.5
------------ ----------- ------------ -----------
Pretax income 937 822 14.0 1,795 1,488 20.7
Income tax provision 303 257 18.2 577 456 26.7
------------ ----------- ------------ -----------
Net income $ 634 $ 565 12.1 $ 1,218 $ 1,032 18.0
============ =========== ============ ===========
TRS reported net income of $634 million for the three month period ended June
30, 2003, a 12 percent increase from $565 million for the same period a year
ago. For the six-month period ended June 30, 2003, TRS reported net income of
$1.2 billion, an 18 percent increase over $1.0 billion in the same period in
2002. Certain reclassifications of prior period amounts relating to
securitization activity, other revenues and other expenses have been made to
conform to the current presentation. Management believes this presentation
better emphasizes various revenues and expense impacts to the Company and is
more consistent with industry practice. See Exhibit 99.1 for further details.
The following management discussion includes information on both a GAAP basis
and managed basis. The managed basis presentation assumes there have been no
securitization transactions, i.e., all securitized cardmember loans and
related income effects are reflected as if they were in the Company's balance
sheet and income statement, respectively. The Company presents TRS information
on a managed basis because that is the way the Company's management views and
manages the business. Management believes that a full picture of trends in the
Company's cardmember lending business can only be derived by evaluating the
performance of both securitized and non-securitized cardmember loans. Asset
securitization is just one of several ways for the Company to fund cardmember
loans. Use of a managed basis presentation, including non-securitized and
securitized cardmember loans, presents a more accurate picture of the key
dynamics of the cardmember lending business, avoiding distortions due to the
mix of funding sources at any particular point in time. For example,
irrespective of the mix, it
18
is important for management and investors to see metrics, such as changes in
delinquencies and write-off rates, for the entire cardmember lending portfolio
because it is more representative of the economics of the aggregate cardmember
relationships and ongoing business performance and trends over time. It is
also important for investors to see the overall growth of cardmember loans and
related revenue and changes in market share, which are significant metrics in
evaluating the Company's performance and which can only be properly assessed
when all non-securitized and securitized cardmember loans are viewed together
on a managed basis.
On a GAAP basis, results reflect only net finance charge revenue on the owned
portfolio, comprised of unsecuritized cardmember and other loans. Revenues
relating to the Company's retained interest in securitized loan receivables
are shown in securitization income, which includes gains on securitizations
(as discussed below), net finance charge revenue on retained interests in
securitized loans and servicing income net of related discounts.
Securitization income increased 9 percent and 10 percent for the three and six
month periods ended June 30, 2003, respectively, versus the same periods a
year ago as a result of a higher average balance of cardmember lending
securitizations. See Selected Statistical Information below for data relating
to TRS' U.S. owned portfolio.
TRS' results for the three months ended June 30, 2003 and 2002 included net
cardmember lending securitization gains of $81 million ($53 million after-tax)
and $85 million ($55 million after-tax), respectively. Management views the
gains from securitizations as discretionary benefits to be used for card
acquisition expenses, which are reflected in both marketing, promotion, rewards
and cardmember services expenses and other operating expenses. Consequently,
the managed basis presentation for the three months ended June 30, 2003 and
2002 assumes that lending securitization gains were offset by higher marketing,
promotion, rewards and cardmember services expenses of $48 million and
$51 million, respectively, and other operating expenses of $33 million and $34
million, respectively. Accordingly, the incremental expenses, as well as the
gains, have been eliminated.
Similarly, TRS' results for the six months ended June 30, 2003 and 2002
included net cardmember lending securitization gains of $124 million ($81
million after-tax) and $127 million ($83 million after-tax), respectively.
Therefore, the managed basis presentation for the six months ended June 30,
2003 and 2002 assumes that lending securitization gains were offset by higher
marketing, promotion, rewards and cardmember services expenses of $74 million
and $76 million, respectively, and other operating expenses of $50 million
and $51 million, respectively. Accordingly, the incremental expenses, as well
as the gains, have been eliminated. The following tables reconcile the GAAP
basis for certain TRS income statement line items to the managed basis
information, where different.
19
GAAP BASIS TO MANAGED BASIS RECONCILIATION -- EFFECT OF SECURITIZATIONS
(Unaudited)
THREE MONTHS ENDED JUNE 30, (Dollars in millions)
GAAP Basis Securitization Effect Managed Basis
------------------------------------- ---------------------- ----------------------------------
Percentage Percentage
2003 2002 Inc/(Dec) 2003 2002 2003 2002 Inc/(Dec)
------------------------------------- ---------------------- ---------------------- -----------
Net revenues:
Discount revenue $ 2,152 $ 1,997 7.7%
Net card fees 455 429 6.0
Lending:
Finance charge
revenue 557 538 3.8 $ 607 $ 578 $ 1,164 $ 1,116 4.3%
Interest expense 115 127 (9.2) 50 73 165 200 (17.7)
----------------------- ---------------------- ----------------------
Net finance
charge revenue 442 411 7.8 557 505 999 916 9.1
Travel commissions
and fees 373 369 1.0
Other commissions
and fees 457 448 1.9 45 45 502 493 1.8
Travelers Cheque
investment income 92 95 (2.2)
Securitization
income, net 386 354 9.2 (386) (354) -- -- --
Other revenues 377 359 5.0 -- (3) 377 356 6.0
----------------------- ---------------------- ----------------------
Total net revenues 4,734 4,462 6.1 216 193 4,950 4,655 6.3
----------------------- ---------------------- ----------------------
Expenses:
Marketing, promotion,
rewards and
cardmember services 918 754 21.9 (48) (51) 870 703 23.8
Provision for losses
and claims:
Charge card 205 280 (27.0)
Lending 278 290 (4.4) 297 282 575 572 0.4
Other 37 37 1.1
----------------------- ---------------------- ----------------------
Total 520 607 (14.5) 297 282 817 889 (8.2)
----------------------- ---------------------- ----------------------
Charge card
interest expense 204 256 (20.1) -- (4) 204 252 (19.0)
Human resources 965 879 9.8
Other operating
expenses 1,190 1,150 3.4 (33) (34) 1,157 1,116 3.7
Restructuring charges -- (6) --
----------------------- ---------------------- ----------------------
Total expenses 3,797 3,640 4.3 $ 216 $ 193 $ 4,013 $ 3,833 4.7
----------------------- ---------------------- ----------------------
Pretax income 937 822 14.0
Income tax provision 303 257 18.2
-----------------------
Net income $ 634 $ 565 12.1
-----------------------
The following discussion of TRS' results is presented on a managed basis.
For the three months ended June 30, 2003, TRS' net revenues were up 6 percent
primarily due to higher discount revenue, cardmember lending net finance
charge revenue, net card fees and other revenues. Translation of foreign
currency revenues contributed approximately 3 percent of the 6 percent revenue
growth rate.
20
Discount revenue rose 8 percent compared to a year ago as a result of a 10
percent increase in billed business partially offset by a lower discount rate
primarily due to the cumulative impact of stronger than average growth in the
lower rate retail and other everyday spend merchant categories. Based on the
Company's business strategy, it expects to see continued changes in the mix of
business. This, along with volume-related pricing discounts and selective
repricing initiatives, will probably continue to result in some rate erosion
over time. The 10 percent increase in billed business in the second quarter
resulted from 5 percent growth in cards-in-force and a 7 percent increase in
spending per basic cardmember worldwide. U.S. cards-in-force rose 3 percent
reflecting the continued benefit of increased acquisition spending within the
consumer and small business segments. International cards-in-force increased 8
percent due to growth in both proprietary and network partnership cards. U.S.
billed business rose 10 percent reflecting 12 percent growth within the
consumer card business (on 14 percent higher transaction volume), 14 percent
growth in small business services volume and a 1 percent decrease within
Corporate Services. U.S. non-T&E related volume categories (which represented
approximately 64 percent of U.S. billed business during the second quarter of
2003) increased 15 percent over the same period a year ago while U.S. T&E
volumes rose 1 percent reflecting continued weak T&E environment during the
quarter. Total billed business outside the U.S., excluding the impact of
foreign exchange translation, was up 2 percent reflecting high double-digit
improvement in Latin America, mid single-digit growth in Canada and relatively
flat growth in Asia partially offset by a low single-digit decline in Europe.
Worldwide airline related volumes, which represented 13 percent of total
billed business volumes during the quarter, declined 3 percent as a result of
a 6 percent decrease in the average airline charge partially offset by 3
percent growth in transaction volume.
Net card fees increased 6 percent versus a year ago, reflecting the growth in
cards-in-force and a shift in the mix of products. The average fee per
proprietary card-in-force was $34 for both the three months ended June 30,
2003 and 2002. Cardmember lending net finance charge revenue rose 9 percent on
14 percent growth in average worldwide lending balances. The net interest
yield on the U.S. portfolio decreased compared to the prior year reflecting an
increase in the proportion of the portfolio on introductory rates and the
evolving mix of products toward more lower-rate offerings, partially offset by
lower funding costs. Travel commissions and fees rose 1 percent as revenue
earned per dollar of sales was up versus the prior year as a result of the
benefits of the fee-based revenue model. Other commissions and fees increased
2 percent primarily due to growth in average worldwide lending balances.
Other revenues increased 6 percent primarily due to higher card-related
revenues and larger insurance premiums partially offset by significantly
lower interest income on investment and liquidity pools held within card
funding vehicles.
For the three months ended June 30, 2003, TRS' expenses were up 5 percent
primarily due to increased marketing, promotion, rewards and cardmember
services and human resources expenses partially offset by lower provisions
for losses and charge card interest expense. Translation of foreign currency
expenses contributed approximately 3 percent of the 5 percent expense growth
rate.
Marketing, promotion, rewards and cardmember services expenses increased 24
percent compared to the prior year on the continuation of brand advertising
activities, new product advertising, more loyalty marketing and an increase
in selected card acquisition activities, as well as a significant increase
in cardmember rewards and services expenses reflecting higher volumes and
greater program participation. The increase in rewards expenditures reflects
management's belief that, based on historical experience, cardmembers enrolled
in rewards and co-brand programs yield higher spend, better retention,
stronger credit performance and greater profitability for the Company.
The provision for losses on charge card products decreased 27 percent on
strong credit quality reflected in improved past due and loss levels. The
provision for losses on the worldwide lending portfolio was relatively flat
compared to prior year despite growth in outstanding loans and increased
reserve coverage levels due to well-controlled credit practices. Charge card
interest expense declined 19 percent due to a lower effective cost
of funds.
Human resources expense increased 10 percent as employee merit increases,
higher employee benefit expenses and increased management incentive costs were
partially offset by the benefits of reengineering efforts, including the
impact of technology and service-related outsourcing activities. Other
operating expenses increased 4 percent primarily due to the impact of
outsourcing activities, which transferred costs from human resources expense,
although at a lower level. This increase was partially offset by the benefits
of reengineering initiatives and other
21
cost containment efforts. In addition, 2002 results included a net benefit of
$6 million ($4 million after-tax) to adjust the restructuring charge reserves
established in 2001.
GAAP BASIS TO MANAGED BASIS RECONCILIATION -- EFFECT OF SECURITIZATIONS
(Unaudited)
SIX MONTHS ENDED JUNE 30, (Dollars in millions)
GAAP Basis Securitization Effect Managed Basis
----------------------------------- ------------------------ ---------------------------------
Percentage Percentage
2003 2002 Inc/(Dec) 2003 2002 2003 2002 Inc/(Dec)
----------------------------------- ------------------------ ---------------------------------
Net revenues:
Discount revenue $ 4,128 $ 3,842 7.4%
Net card fees 906 852 6.3
Lending:
Finance charge
revenue 1,194 1,114 7.3 $ 1,140 $ 1,101 $ 2,334 $ 2,215 5.4%
Interest expense 244 254 (3.8) 114 153 358 407 (12.2)
--------------------- ------------------------ --------------------
Net finance
charge revenue 950 860 10.5 1,026 948 1,976 1,808 9.3
Travel commissions
and fees 713 697 2.2
Other commissions
and fees 921 890 3.5 95 89 1,016 979 3.8
Travelers Cheque
investment income 184 185 (0.1)
Securitization
income, net 641 585 9.7 (641) (585) -- -- --
Other revenues 777 750 3.5 -- (6) 777 744 4.5
--------------------- ------------------------ --------------------
Total net revenues 9,220 8,661 6.5 480 446 9,700 9,107 6.5
--------------------- ------------------------ --------------------
Expenses:
Marketing, promotion,
rewards and
cardmember services 1,679 1,435 17.1 (74) (76) 1,605 1,359 18.1
Provision for losses
and claims:
Charge card 413 532 (22.4)
Lending 609 636 (4.3) 604 580 1,213 1,216 (0.3)
Other 68 85 (20.1)
--------------------- ------------------------ --------------------
Total 1,090 1,253 (13.1) 604 580 1,694 1,833 (7.6)
--------------------- ------------------------ --------------------
Charge card
interest expense 413 500 (17.4) -- (7) 413 493 (16.3)
Human resources 1,881 1,780 5.7
Other operating
expenses 2,362 2,224 6.2 (50) (51) 2,312 2,173 6.4
Restructuring charges -- (19) --
--------------------- ------------------------ --------------------
Total expenses 7,425 7,173 3.5 $ 480 $ 446 $ 7,905 $ 7,619 3.7
--------------------- ------------------------ --------------------
Pretax income 1,795 1,488 20.7
Income tax provision 577 456 26.7
---------------------
Net income $ 1,218 $ 1,032 18.0
---------------------
22
The following discussion of TRS' results is presented on a managed basis.
For the six months ended June 30, 2003, TRS' net revenues were up 7 percent
primarily due to higher discount revenue, cardmember lending net finance
charge revenue, net card fees, other commissions and fees and other revenues.
Translation of foreign currency revenues contributed approximately 3 percent
of the 7 percent revenue growth rate.
Discount revenue rose 7 percent compared to a year ago as a result of a 10
percent increase in billed business partially offset by a lower discount rate
primarily due to the cumulative impact of stronger than average growth in the
lower rate retail and other everyday spend merchant categories. Based on the
Company's business strategy, it expects to see continued changes in the mix of
business. This, along with volume-related pricing discounts and selective
repricing initiatives, will probably continue to result in some rate erosion
over time. The 10 percent increase in billed business in the first half of the
year resulted from 5 percent growth in cards-in-force and a 7 percent increase
in spending per basic cardmember worldwide. U.S. billed business rose 9
percent reflecting 11 percent growth within the consumer card business (on 13
percent higher transaction volume), 12 percent growth in small business
services volume and slight increase within Corporate Services. U.S. non-T&E
related volume categories (which represented approximately 64 percent of U.S.
billed business during the first half of 2003) increased 14 percent over the
same period a year ago while U.S. T&E volumes rose less than 1 percent,
reflecting the continued weak T&E environment during the first half of the
year. Total billed business outside the U.S., excluding the impact of foreign
exchange translation, was up 3 percent reflecting low double-digit improvement
in Latin America, mid single-digit growth in both Canada and Asia partially
offset by a slight decrease in Europe. Worldwide airline related volumes,
which represented 13 percent of total volumes during the first half of the
year, declined 2 percent as a result of a 6 percent decrease in the average
airline charge partially offset by 4 percent growth in transaction volume.
Net card fees increased 6 percent versus a year ago, reflecting the growth in
cards-in-force and a shift in the mix of products. The average fee per
proprietary card-in-force was $34 for both the six months ended June 30, 2003
and 2002. Cardmember lending net finance charge revenue rose 9 percent on 13
percent growth in average worldwide lending balances. The net interest yield
on the U.S. portfolio decreased compared to the prior year reflecting an
increase in the proportion of the portfolio on introductory rates and the
evolving mix of products toward more lower-rate offerings, partially offset by
lower funding costs. Travel commissions and fees rose 2 percent as revenue
earned per dollar of sales was up versus the prior year. This was partially
offset by a 5 percent contraction in travel sales reflecting the weak travel
environment. Other commissions and fees increased 4 percent primarily due to
growth in average worldwide lending balances. Other revenues increased 4
percent primarily due to higher card-related revenues and larger insurance
premiums partially offset by significantly lower interest income on investment
and liquidity pools held within card funding vehicles.
For the six months ended June 30, 2003, TRS' expenses were up 4 percent
primarily due to increased marketing, promotion, rewards and cardmember
services and human resources expenses partially offset by lower provisions
for losses and charge card interest expense. Translation of foreign currency
expenses contributed approximately 3 percent of the 4 percent expense growth
rate.
Marketing, promotion, rewards and cardmember services expenses increased 18
percent compared to the prior year on the continuation of brand advertising
activities, new product advertising, more loyalty marketing and an increase
in selected card acquisition activities, as well as a significant increase in
cardmember rewards and services expenses reflecting higher volumes and
greater program participation. The increase in rewards expenditures reflects
management's belief that, based on historical experience, cardmembers
enrolled in rewards and co-brand programs yield higher spend, better
retention, stronger credit performance and greater profitability for the
Company. The provision for losses on charge card products decreased 22
percent on strong credit quality reflected in an improved past due
percentage and loss ratio. The provision for losses on the worldwide
lending portfolio was relatively flat versus last year despite growth in
outstanding loans and increased reserve coverage levels due to well-controlled
credit practices and the decision to add reserves in light of the uncertain
economic environment. Charge card interest expense declined 16 percent due to
a lower effective cost of funds.
23
Human resources expense increased 6 percent as employee merit increases,
higher employee benefit expenses and increased management incentive costs were
partially offset by the benefits from reengineering efforts, including the
impact of technology and service-related outsourcing activities. Other
operating expenses increased 6 percent primarily due to the impact of
outsourcing activities, which transferred costs from human resources expense,
although at a lower level. This increase was partially offset by the benefits
of reengineering initiatives and other cost containment efforts. In addition,
2002 results included a net benefit of $19 million ($12 million after-tax) to
adjust the restructuring charge reserves established in 2001.
SELECTED STATISTICAL INFORMATION
(Unaudited)
(Amounts in billions, except percentages and where indicated)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- Percentage --------------------------- Percentage
2003 2002 Inc/(Dec) 2003 2002 Inc/(Dec)
------------ ------------ ------------- ------------ ------------ -----------
Total cards-in-force (millions):
United States 35.7 34.8 2.8% 35.7 34.8 2.8%
Outside the United States* 22.9 21.1 8.2 22.9 21.1 8.2
------------ ------------ ------------ ------------
Total 58.6 55.9 4.8 58.6 55.9 4.8
============ ============ ============ ============
Basic cards-in-force (millions):
United States 27.3 26.7 2.1 27.3 26.7 2.1
Outside the United States* 18.9 16.1 8.2 18.9 16.1 8.2
------------ ------------ ------------ ------------
Total 46.2 42.8 4.5 46.2 42.8 4.5
============ ============ ============ ============
Card billed business:
United States $ 64.6 $ 58.7 9.9% $ 123.5 $ 113.0 9.2%
Outside the United States 21.5 19.4 10.9 41.4 36.7 12.9
------------ ------------ ------------ ------------
Total $ 86.1 $ 78.1 10.1 $ 164.9 $ 149.7 10.1
============ ============ ============ ============
Average discount rate* 2.59% 2.65% -- 2.60% 2.66% --
Average basic cardmember spending (dollars)* $ 2,054 $ 1,993 6.6 $ 3,949 $ 3,818 7.0
Average fee per card - managed (dollars)* $ 34 $ 34 -- $ 34 $ 34 --
Non-Amex brand:**
Cards-in-force (millions) 0.7 0.7 (0.4) 0.7 0.7 (0.4)
Billed business $ 1.0 $ 0.9 5.7 $ 1.9 $ 1.8 2.6
Travel sales $ 3.9 $ 4.3 (8.7) $ 7.6 $ 8.0 (5.3)
Travel commissions and fees/sales (D) 9.6% 8.7% -- 9.4% 8.7% --
Travelers Cheque:
Sales $ 4.4 $ 5.8 (23.2) $ 8.5 $ 10.4 (17.3)
Average outstanding $ 6.4 $ 6.4 0.2 $ 6.5 $ 6.3 2.8
Average investments $ 6.9 $ 6.7 2.4 $ 6.9 $ 6.7 3.2
Tax equivalent yield 8.4% 8.8% -- 8.5% 8.8% --
Charge card receivables:
Total receivables $ 26.0 $ 24.6 5.7 $ 26.0 $ 24.6 5.7
90 days past due as a % of total 2.1% 2.6% -- 2.1% 2.6% --
Loss reserves (millions) $ 943 $ 1,039 (9.3) $ 943 $ 1,039 (9.3)
% of receivables 3.6% 4.2% -- 3.6% 4.2% --
% of 90 days past due 171% 164% -- 171% 164% --
Net loss ratio 0.29% 0.40% -- 0.28% 0.40% --
* Cards-in-force include proprietary cards and cards issued under network
partnership agreements outside the U.S. Average Discount Rate, Average
Basic Cardmember Spending and Average Fee per Card are computed from
proprietary card activities only. At September 30, 2002, 1.5 million of
Canadian lending cards were transferred to basic (though these types of
cards were available under a supplemental card program) as the specific
cards were issued under a stand-alone offer. The impact of this transfer
for the three and six months ended June 30, 2002 would have been to
increase Basic Cards-in-Force Outside the U.S. to 17.4 million and decrease
Average Basic Cardmember Spending to $1,926 and $3,692, respectively.
** These data relate to Visa and Eurocards issued in connection with joint
venture activities
24
SELECTED STATISTICAL INFORMATION (CONTINUED)
(Unaudited)
(Amounts in billions, except percentages and where indicated)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- Percentage --------------------------- Percentage
2003 2002 Inc/(Dec) 2003 2002 Inc/(Dec)
------------ ----------- ------------- ------------- ------------ ------------
U.S. Lending - Owned Basis:
Total loans $ 16.5 $ 14.1 16.8 $ 16.5 $ 14.1 16.8
Past due loans as a % of total:
30-89 days 1.7% 1.9% -- 1.7% 1.9% --
90+ days 1.1% 1.2% -- 1.1% 1.2% --
Loss reserves (millions):
Beginning balance $ 790 $ 676 16.9 $ 798 $ 668 19.5
Provision 165 176 (6.8) 365 419 (13.0)
Net charge-offs (199) (232) 14.3 (424) (502) 15.6
Other 17 7 # 34 42 (19.2)
------------ ----------- ------------- ------------
Ending balance $ 773 $ 627 23.2 $ 773 $ 627 23.2
============ =========== ============= ============
% of loans 4.7% 4.4% -- 4.7% 4.4% --
% of past due 169% 140% -- 169% 140% --
Average loans $ 16.1 $ 14.7 9.6 $ 16.3 $ 15.4 5.9
Net write-off rate 4.9% 6.3% -- 5.2% 6.5% --
U.S. Lending - Managed Basis:
Total loans $ 36.0 $ 31.6 14.0 $ 36.0 $ 31.6 14.0
Past due loans as a % of total:
30-89 days 1.7% 1.9% -- 1.7% 1.9% --
90+ days 1.0% 1.2% -- 1.0% 1.2% --
Loss reserves (millions):
Beginning balance $ 1,347 $ 1,144 17.7 $ 1,297 $ 1,077 20.5
Provision 461 458 0.7 968 999 (3.1)
Net charge-offs (475) (488) 2.6 (949) (997) 4.8
Other 17 7 # 34 42 (19.2)
------------ ----------- ------------- ------------
Ending balance $ 1,350 $ 1,121 20.4 $ 1,350 $ 1,121 20.4
============ =========== ============= ============
% of loans 3.7% 3.5% -- 3.7% 3.5% --
% of past due 136% 115% -- 136% 115% --
Average loans $ 35.3 $ 31.8 11.2 $ 34.8 $ 31.6 10.2
Net write-off rate 5.4% 6.2% -- 5.5% 6.3% --
Net interest yield 8.9% 9.8% -- 9.2% 9.9% --
# - Denotes a variance of more than 100%.
TRS' owned portfolio is primarily comprised of cardmember receivables
generated by the Company's charge card products, unsecuritized U.S. cardmember
loans, international cardmember loans and unsecuritized equipment leasing
receivables.
As discussed more fully in the TRS Liquidity and Capital Resources section
below, the Company securitizes U.S. cardmember loans as part of its financing
strategy; consequently, the level of unsecuritized U.S. cardmember loans is
primarily a function of the Company's financing requirements. As a portfolio,
unsecuritized U.S. cardmember loans tend to be less seasoned than securitized
loans, primarily because of the lead-time required to designate and securitize
each loan. The Company does not currently securitize international loans.
Delinquency, reserve coverage and net write-off rates have historically been
generally comparable between the Company's owned and managed portfolios.
25
LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION
(GAAP Basis)
(Dollars in billions, except percentages)
June 30, December 31, Percentage June 30, Percentage
2003 2002 Inc/(Dec) 2002 Inc/(Dec)
----------------- --------------- -------------- ---------------- ---------------
(Unaudited) (Unaudited)
Accounts receivable, net $ 27.7 $ 28.1 (1.3)% $ 26.2 5.9%
Travelers Cheque investments $ 7.8 $ 7.4 5.4 $ 7.5 3.8
U.S. cardmember loans $ 16.5 $ 17.1 (3.8) $ 14.1 16.8
Total assets $ 71.9 $ 72.2 (0.4) $ 66.6 7.9
Travelers Cheques outstanding $ 6.8 $ 6.6 2.4 $ 6.9 (1.7)
Short-term debt $ 17.6 $ 21.7 (18.6) $ 20.4 (13.6)
Long-term debt $ 16.6 $ 14.8 12.2 $ 13.8 20.0
Total liabilities $ 64.1 $ 64.9 (1.2) $ 59.8 7.3
Total shareholder's equity $ 7.8 $ 7.3 6.9 $ 6.8 13.9
Return on average total shareholder's 31.5% 30.3% -- 21.2% --
equity*
Return on average total assets** 3.4% 3.2% -- 2.1% --
* Computed on a trailing 12-month basis using total shareholder's equity as
included in the Consolidated Financial Statements prepared in accordance
with GAAP.
** Computed on a trailing 12-month basis using total assets as included in the
Consolidated Financial Statements prepared in accordance with GAAP.
TRS funds its charge card receivables and cardmember loans using various
funding sources, such as long- and short-term debt, medium-term notes,
commercial paper and asset securitizations. Over the past year, the Company
shifted its funding strategy to reduce its reliance on short-term debt; at
June 30, 2003, short-term debt was 51% of total debt versus 60% a year ago. As
part of the Company's ongoing funding activities, during the six months ended
June 30, 2003, Credco issued approximately $3.3 billion of floating rate
medium-term notes with maturities of one to two years, a portion of which can
be extended by the holders up to an additional four years. In May 2003, Credco
issued $1 billion of fixed rate notes due 2008 and $500 million of floating
rate notes due 2006. Additionally, in June 2003, Credco issued, through a
private placement, $1 billion of floating rate extendible notes with an
initial maturity of one year, subject to extension by the holders up to an
additional four years. As of June 30, 2003, Credco had the ability to issue
approximately $13.3 billion of debt securities under shelf registration
statements filed with the SEC. In August 2003, Credco issued $325 million
of floating rate medium-term notes with maturities of two years.
In the first and second quarters of 2003, the American Express Credit Account
Master Trust (the Trust) securitized $0.9 billion and $2.5 billion,
respectively, of loans through the public issuance of investor certificates.
The securitized assets consist 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 owned by
Centurion Bank, a wholly-owned subsidiary of TRS, and, in the future, may
include other charge or credit accounts, features or products. In June 2003,
$1.0 billion of investor certificates previously issued by the Trust matured.
The American Express Master Trust (the Master Trust) securitizes charge card
receivables through the issuance of trust certificates which remain on the
Consolidated Balance Sheets. In May 2003, $1.1 billion of accounts receivable
trust certificates that were previously issued by the Master Trust matured
with alternate funding provided by the Company's commercial paper and
medium-term note issuance programs. In September 2003, an additional $1.0
billion of accounts receivable trust certificates are scheduled to mature with
alternate funding to be provided by the Company's commercial paper and
medium-term note issuance programs.
U.S. cardmember loans decreased from December 31, 2002 reflecting the higher
levels of cardmember loans securitization.
26
AMERICAN EXPRESS FINANCIAL ADVISORS
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND
2002
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
(Dollars in millions) June 30, June 30,
---------------------- Percentage ---------------------- Percentage
2003 2002 Inc/(Dec) 2003 2002 Inc/(Dec)
---------- ---------- ------------- ---------- ---------- ------------
Revenues:
Investment income $ 571 $ 435 31.3% $ 1,129 $ 964 17.1%
Management and distribution fees 571 609 (6.1) 1,093 1,206 (9.3)
Other revenues 354 307 14.8 685 615 11.3
---------- ---------- ---------- ----------
Total revenues 1,496 1,351 10.7 2,907 2,785 4.4
---------- ---------- ---------- ----------
Expenses:
Provision for losses and benefits:
Annuities 280 245 14.3 553 492 12.3
Insurance 187 181 3.7 379 352 7.7
Investment certificates 59 32 83.1 100 84 18.8
---------- ---------- ---------- ----------
Total 526 458 14.9 1,032 928 11.2
Human resources 508 493 2.9 987 992 (0.5)
Other operating expenses 253 205 23.2 501 418 19.9
Disaster recovery charge -- (7) -- -- (7) --
---------- ---------- ---------- ----------
Total expenses 1,287 1,149 11.9 2,520 2,331 8.1
---------- ---------- ---------- ----------
Pretax income 209 202 3.7 387 454 (14.8)
Income tax provision 52 57 (6.7) 97 127 (23.4)
---------- ---------- ---------- ----------
Net income $ 157 $ 145 7.7 $ 290 $ 327 (11.4)
========== ========== ========== ==========
27
SELECTED STATISTICAL INFORMATION
(Unaudited)
(Amounts in millions, except percentages and where indicated)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- Percentage -------------------------- Percentage
2003 2002 Inc/(Dec) 2003 2002 Inc/(Dec)
----------- ----------- ----------- ----------- ----------- -----------
Life insurance inforce (billions) $ 124.4 $ 114.2 8.9% $ 124.4 $ 114.2 8.9%
Deferred annuities inforce (billions) $ 43.9 $ 41.3 6.5 $ 43.9 $ 41.3 6.5
Assets owned, managed or
administered (billions):
Assets managed for institutions $ 43.8 $ 46.5 (6.0) $ 43.8 $ 46.5 (6.0)
Assets owned, managed or administered
for individuals:
Owned assets:
Separate account assets 24.1 24.6 (2.1) 24.1 24.6 (2.1)
Other owned assets 52.2 44.4 17.7 52.2 44.4 17.7
----------- ----------- ----------- -----------
Total owned assets 76.3 69.0 10.6 76.3 69.0 10.6
Managed assets 87.3 89.7 (2.6) 87.3 89.7 (2.6)
Administered assets 37.4 32.9 13.8 37.4 32.9 13.8
----------- ----------- ----------- -----------
Total $ 244.8 $ 238.1 2.8 $ 244.8 $ 238.1 2.8
=========== =========== =========== ===========
Market appreciation (depreciation)
during the period:
Owned assets:
Separate account assets $ 2,620 $ (2,675) # $ 2,149 $ (2,954) #
Other owned assets $ 399 $ 516 (22.7) $ 419 $ 238 76.1
Managed assets $ 9,457 $ (9,123) # $ 8,312 $ (9,109) #
Cash sales:
Mutual funds $ 7,150 $ 8,940 (20.0) $ 13,950 $ 17,689 (21.1)
Annuities 2,581 2,054 25.7 4,786 3,602 32.9
Investment certificates 1,607 1,186 35.5 2,674 1,830 46.1
Life and other insurance products 188 175 7.8 350 358 (2.2)
Institutional 722 351 * # 1,414 * 2,075 * (31.8)
Other 1,531 1,504 1.7 3,214 2,532 26.9
----------- ----------- ----------- -----------
Total cash sales $ 13,779 $ 14,210 * (3.0) $ 26,388 * $ 28,086 * (6.0)
=========== =========== =========== ===========
Number of financial advisors 11,667 11,360 2.7 11,667 11,360 2.7
Fees from financial plans and
advice services $ 33.5 $ 30.0 11.5 $ 65.2 $ 59.7 9.1
Percentage of total sales from financial
plans and advice services 74.0% 72.7% -- 74.7% 72.9% --
# - Denotes a variance of more than 100%.
* - Revised from previously reported. Revised institutional cash sales for
the quarters ended March 31, 2003, December 31, 2002, September 30, 2002
and March 31, 2002 are $692 million, $521 million, $735 million, and
$1,724 million, respectively. Revised total cash sales for the quarters
ended March 31, 2003, December 31, 2002, September 30, 2002 and March
31, 2002 are $12,609 million, $11,778 million, $13,952 million and
$13,876 million, respectively.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
AEFA reported net income of $157 million for the second quarter of 2003, up 8
percent from $145 million in the same period a year ago. Total revenues
increased 11 percent primarily due to higher investment income and higher
insurance premiums partially offset by lower management fees resulting from
lower average managed asset levels. In addition, 2002 investment income
included an investment loss of $78 million on WorldCom debt holdings ($71
million of which impacted AEFA's pretax income and $7 million of which accrued
to AEB through its share of the premium deposit joint venture).
Investment income increased 31 percent as higher levels of invested assets and
the effect of the 2002 WorldCom loss noted above were partially offset by a
lower average yield. For the quarter ended June 30, 2003, $64 million of
28
total investment gains were more than offset by $80 million of impairments
and losses. Included in these total investment gains and losses are $63
million of gross realized gains and $13 million of gross realized losses
from sales of securities, as well as $45 million of other-than-temporary
investment impairment losses, classified as Available-for-Sale. For the
quarter ended June 30, 2002, $58 million of total investment gains were
more than offset by $143 million of impairments and losses. Investment
impairments and losses included a $78 million pretax investment loss
related to WorldCom debt holdings. Included in these total investment
gains and losses are $57 million of gross realized gains and $14 million
of gross realized losses from sales of securities, as well as $108
million of other-than-temporary impairment losses, classified as
Available-for-Sale.
Management and distribution fees declined 6 percent when compared to the same
period a year ago. Management fees declined primarily due to lower average
assets under management, reflecting the negative impact of weak equity market
conditions prior to the second quarter of 2003 and net outflows within both
institutional and retail activities over the past year. Distribution fees were
flat as the impact of substantially lower mutual fund sales was offset by
greater limited partnership product sales and increased brokerage-related
activities. Other revenues increased 15 percent due to strong
property-casualty and higher life insurance-related revenues coupled with
higher financial planning and advice service fees.
In the following table, the Company presents AEFA's aggregate revenues for the
three months ended June 30, 2003 and 2002 on a basis that is net of provisions
for losses and benefits because the Company manages the AEFA business and
evaluates its financial performance, where appropriate, in terms of the
"spread" on its products. An important part of AEFA's business is margin
related, particularly the insurance, annuity and certificate businesses.
One of the gross margin drivers for the AEFA business is the return on
invested cash, primarily generated by sales of insurance, annuity and
investment certificates, less provisions for losses and benefits on these
products. These investments tend to be interest rate sensitive. Thus, GAAP
revenues tend to be higher in periods of rising interest rates, and lower in
times of decreasing interest rates. The same relationship is true of
provisions for losses and benefits, only it is more accentuated
period-to-period because rates credited to customers' accounts generally reset
at shorter intervals than the change in yield on underlying investments. The
Company presents this portion of the AEFA business on a net basis to eliminate
potentially less informative comparisons of period-to-period changes in
revenue and provisions for losses and benefits in light of the impact of these
changes in interest rates.
Three Months Ended June 30,
------------------------------------------
(Millions) 2003 2002
----------------- -------------------
Total GAAP revenues $ 1,496 $ 1,351
Less: Provision for losses and benefits --
Annuities 280 245
Insurance 187 181
Investment certificates 59 32
----------------- -------------------
Total 526 458
----------------- -------------------
Net revenues $ 970 $ 893
================= ===================
The provision for losses and benefits for annuities increased 14 percent due
to higher average inforce levels and the effect of appreciation in the S&P 500
on equity indexed annuities this period versus depreciation in the same period
a year ago, partially offset by lower crediting rates. Insurance provisions
for losses and benefits increased 4 percent due to higher inforce levels
across all products, which were partially offset by lower life insurance
crediting rates. Investment certificate provisions for losses and benefits
increased 83 percent due to the effect on the stock market certificate product
of appreciation in the S&P 500 this period versus depreciation in the year ago
period and higher average reserve levels, partially offset by lower crediting
rates.
Human resources expense increased 3 percent reflecting merit increases, higher
employee benefits and management incentive costs for home office employees,
partially offset by lower field force compensation-related costs and the
benefits of reengineering and cost-containment initiatives within the home
office, where the average number of employees was down 3 percent. Other
operating expenses increased 23 percent due to the impact of fewer capitalized
costs, which is the result of the comprehensive review of DAC-related
practices completed during the
29
third quarter of 2002 and a higher minority interest expense for premium
deposits related to the joint venture with AEB. In addition, the second
quarter 2002 results also included a benefit of $7 million ($4 million
after-tax) related to third quarter 2001 disaster recovery reserves to
reflect lower than anticipated insured loss claims.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
AEFA reported net income of $290 million for the six months ended June 30,
2003, down 11 percent from $327 million in the same period a year ago. Total
revenues increased 4 percent primarily due to higher investment income and
higher insurance premiums partially offset by lower management and
distribution fees resulting from lower average managed asset levels and lower
mutual fund sales. In addition, 2002 investment income included an investment
loss of $78 million on WorldCom debt holdings ($71 million of which impacted
AEFA's pretax income and $7 million of which accrued to AEB through its share
of the premium deposit joint venture).
Investment income increased 17 percent as higher levels of invested assets and
the effect of the 2002 WorldCom loss noted above were partially offset by a
lower average yield. For the six months ended June 30, 2003, $251 million of
total investment gains were more than offset by $262 million of impairments
and losses. Included in these total investment gains and losses are $249
million of gross realized gains and $62 million of gross realized losses from
sales of securities, as well as $158 million of other-than-temporary
investment impairment losses, classified as Available-for-Sale. For the six
months ended June 30, 2002, $115 million of total investment gains were more
than offset by $208 million of impairments and losses. Investment impairments
and losses included a $78 million pretax investment loss related to WorldCom
debt holdings. Included in these total investment gains and losses are $100
million of gross realized gains and $45 million of gross realized losses from
sales of securities, as well as $117 million of other-than-temporary
impairment losses, classified as Available-for-Sale.
Management and distribution fees declined 9 percent when compared to the same
period a year ago. Management fees declined primarily due to lower average
assets under management, reflecting the negative impact of weak equity market
conditions and net outflows within both institutional and retail activities
over the past year. Distribution fees decreased as a result of lower mutual
fund sales partially offset by greater limited partnership product sales and
higher fees from variable annuity and variable life products. Other revenues
increased 11 percent due to higher property-casualty and life
insurance-related revenues coupled with higher financial planning and advice
service fees.
In the following table, the Company presents AEFA's aggregate revenues for the
six months ended June 30, 2003 and 2002 on a basis that is net of provisions
for losses and benefits (see three month discussion for reasons for this
presentation).
Six Months Ended June 30,
--------------------------------------
(Millions) 2003 2002
----------------- ---------------
Total GAAP revenues $ 2,907 $ 2,785
Less: Provision for losses and benefits --
Annuities 553 492
Insurance 379 352
Investment certificates 100 84
----------------- ---------------
Total 1,032 928
----------------- ---------------
Net revenues $ 1,875 $ 1,857
================= ===============
The provision for losses and benefits for annuities increased 12 percent due
to higher average inforce levels, the effect of appreciation this year versus
depreciation last year on equity indexed annuities and increased costs related
to guaranteed minimum death benefits, partially offset by lower crediting
rates. Insurance provisions for losses and benefits increased 8 percent due to
higher inforce levels, across all products, and higher claims, partially
offset by lower crediting rates. Investment certificate provisions for losses
and benefits increased 19 percent due to the effect on the stock market
certificate product of appreciation in the S&P 500 this year versus
depreciation last year and higher average reserve levels, partially offset by
lower crediting rates.
30
Human resources expense declined slightly primarily due to lower field force
compensation-related costs and the benefits of reengineering and
cost-containment initiatives within the home office, where the average number
of employees was down 5 percent. These decreases were partially offset by
merit increases and higher employee benefits and management incentive costs
for home office employees. Other operating expenses increased 20 percent
due to the impact of fewer capitalized costs, which is the result of the
comprehensive review of DAC-related practices completed during the third
quarter of 2002, the impact of outsourcing agreements, which resulted in the
transfer of costs from human resources, and a higher minority interest expense
for premium deposits related to a joint venture with AEB. In addition, 2002
results also included a benefit of $7 million ($4 million after-tax) related
to third quarter 2001 disaster recovery reserves to reflect lower than
anticipated insured loss claims.
DEFERRED ACQUISITION COSTS
AEFA's DAC represents the costs of acquiring new business, principally direct
sales commissions and other distribution and underwriting costs that have been
deferred on the sale of annuity, insurance and certain mutual fund products.
For annuity and insurance products, DAC are amortized over periods
approximating the lives of the business, generally as a percentage of premiums
or estimated gross profits or as a portion of the interest margins associated
with the products. For certain mutual fund products, DAC are generally
amortized over fixed periods on a straight-line basis.
For annuity and insurance products, the projections underlying the
amortization of DAC require the use of certain assumptions, including interest
margins, mortality rates, persistency rates, maintenance expense levels and
customer asset value growth rates for variable products. The customer asset
value growth rate is the rate at which contract values are assumed to
appreciate in the future. The rate is net of asset fees and anticipates a
blend of equity and fixed income investments. Management routinely monitors a
wide variety of trends in the business, including comparisons of actual and
assumed experience. Management reviews and, where appropriate, adjusts its
assumptions with respect to customer asset value growth rates on a quarterly
basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality rate, interest margin and maintenance expense level assumptions,
each quarter. Unless management identifies a material deviation over the
course of the quarterly monitoring, management reviews and updates these DAC
assumptions annually in the third quarter of each year. When assumptions are
changed, the percentage of estimated gross profits or portion of interest
margins used to amortize DAC may also change. A change in the required
amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an acceleration of DAC amortization
while a decrease in amortization percentage will result in a deceleration of
DAC amortization. The impact on results of operations of changing assumptions
with respect to the amortization of DAC can be either positive or negative in
any particular period, and is reflected in the period in which such changes
are made.
DAC balances for various insurance, annuity and other products sold by AEFA
are set forth below:
June 30, December 31,
2003 2002
--------------------- ---------------------
(Millions) (Unaudited)
Life and health insurance $ 1,659 $ 1,654
Annuities 1,787 1,656
Other 426 473
--------------------- ---------------------
Total $ 3,872 $ 3,783
===================== =====================
IMPACT OF RECENT MARKET-VOLATILITY ON RESULTS OF OPERATIONS
Various aspects of AEFA's business are impacted by equity market levels and
other market-based events. Several areas in particular involve DAC, asset
management fees, structured investments and guaranteed minimum death benefits
(GMDB). The direction and magnitude of the changes in equity markets can
increase or decrease DAC expense levels and asset management fees and
correspondingly affect results of operations in any particular period.
31
Similarly, the value of AEFA's structured investment portfolio is impacted by
various market factors. Persistency of, or increases in, bond and loan default
rates, among other factors, could result in negative adjustments to the market
values of these investments in the future, which would adversely impact
results of operations. See AEFA's Liquidity and Capital Resources section of
MD&A for a further discussion of structured investments.
Another area impacted by market-based events is guaranteed minimum death
benefits. The majority of the variable annuity contracts offered by AEFA
contain GMDB provisions. The standard guaranteed minimum death benefit in the
current "flagship" annuity offered by IDS Life and IDS Life of New York,
American Express Retirement Advisor Advantage Variable Annuity, provides that
if the contract owner and annuitant are age 80 or younger on the date of
death, the beneficiary will receive the greatest of (i) the contract value on
the date of death, (ii) purchase payments minus adjusted partial surrenders,
or (iii) the contract value as of the most recent sixth contract anniversary,
plus purchase payment and minus adjusted partial surrenders since that
anniversary.
To the extent that the guaranteed minimum death benefit is higher than the
current account value at the time of death, a cost is incurred by the issuer
of the policy. Current accounting literature does not prescribe advance
recognition of the projected future net costs associated with these
guarantees, and accordingly, AEFA currently does not record a liability
corresponding to these future obligations for death benefits in excess of
annuity account value. At present, the amount paid in excess of contract value
is expensed when payable. Amounts expensed for both the three months ended
June 30, 2003 and 2002 were $7 million. Amounts expensed for the six months
ended June 30, 2003 and 2002, were $19 million and $13 million, respectively.
In July 2003, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1) which requires reserves related to guaranteed
minimum death benefits. The impact of that requirement as well as other
provisions of SOP 03-1 are currently being evaluated.
The Company's life and annuity products all have minimum interest rate
guarantees in their fixed accounts. These guarantees range from 3% to 5%. To
the extent the yield on AEFA's invested asset portfolio declines below its
target spread plus the minimum guarantee, AEFA's profitability would be
negatively affected.
LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION
(Dollars in billions, except percentages)
June 30, December 31, Percentage June 30, Percentage
2003 2002 Inc/(Dec) 2002 Inc/(Dec)
------------------- ----------------- ---------------- ------------------ --------------
(Unaudited) (Unaudited)
Investments $ 42.4 $ 38.2 11.1% $ 33.9 25.1%
Separate account assets $ 24.1 $ 22.0 9.4 $ 24.6 (2.1)
Total assets $ 76.3 $ 73.7 3.4 $ 69.0 10.6
Client contract reserves $ 40.2 $ 37.3 7.6 $ 34.0 18.4
Total liabilities $ 69.6 $ 67.4 3.2 $ 63.3 10.1
Total shareholder's equity $ 6.7 $ 6.3 6.2 $ 5.7 16.6
Return on average total
shareholder's equity* 9.6% 10.9% -- 11.6% --
* Computed on a trailing 12-month basis using total shareholder's equity as
included in the Consolidated Financial Statements prepared in accordance
with GAAP.
Investments increased compared to June 30, 2002 primarily as a result of
positive net cash flows and the impact of unrealized appreciation in the
investment portfolio versus a year ago. Unrealized appreciation on
Available-for-Sale securities is substantially impacted by changes in market
rates of interest. At June 30, 2003, high-yield investments (excluding net
unrealized appreciation and depreciation) were 6 percent of the total
investment portfolio, consistent with December 31, 2002 and June 30, 2002.
AEFA holds investments in collateralized debt obligations (CDOs) and secured
loan trusts (SLTs), some of which are also managed by AEFA. As a condition to
its managing certain CDOs, AEFA is required to invest in the
32
residual or "equity" tranche of the CDO, which is typically the most
subordinated tranche of securities issued by the CDO entity. AEFA invested
in CDOs and SLTs as part of its investment strategy in order to pay a
competitive rate to contractholders' accounts. AEFA's exposure as an
investor is limited solely to its aggregate investment in the CDOs and
SLTs, and it has no obligations or commitments, contingent or otherwise,
that could require any further funding of such investments. As of June 30,
2003, the carrying values of the CDO residual tranches and SLT notes were
$18 million and $670 million, respectively. CDOs and SLTs are illiquid
investments. As an investor in the residual tranche of CDOs, AEFA's return
correlates to the performance of portfolios of high-yield bonds and/or bank
loans. As a noteholder of SLTs, AEFA's return is based on a reference
portfolio of loans. The carrying value of the CDO and SLT investments and
AEFA's projected return are based on discounted cash flow projections that
require a significant degree of management judgment as to assumptions
primarily related to default and recovery rates of the high-yield bonds
and/or bank loans either held directly by the CDO or in the reference
portfolio of the SLT and, as such, are subject to change. Generally, the
SLTs are structured such that the principal amount of the loans in the
reference portfolio may be up to five times that of the par amount of the
notes held by AEFA. Although the exposure associated with AEFA's investment
in CDOs and SLTs is limited to the carrying value of such investments, they
are volatile investments and have a substantial degree of risk associated
with them because the amount of the initial value of the loans and/or other
debt obligations in the related portfolios is significantly greater than
AEFA's exposure. Deterioration in the value of the high-yield bonds or bank
loans would likely result in deterioration of AEFA's investment return with
respect to the relevant CDO or SLT, as the case may be. In the event of
significant deterioration of a portfolio, the relevant CDO or SLT may be
subject to early liquidation, which could result in further deterioration
of the investment return or, in severe cases, loss of the carrying amount.
See Note 1 to the Consolidated Financial Statements.
During 2001 the Company placed a majority of its rated CDO securities and
related accrued interest, as well as a relatively minor amount of other liquid
securities (collectively referred to as transferred assets), 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 unaffiliated investors and retained interests in the
trust with allocated book amounts aggregating $785 million. As of June 30,
2003, the retained interests had a carrying value of $712 million, of which
$529 million is considered investment grade. The Company has no obligations,
contingent or otherwise, to such unaffiliated investors. One of the results of
this transaction is that increases and decreases in future cash flows of the
individual CDOs are combined into one overall cash flow for purposes of
determining the carrying value of the retained interests and related impact on
results of operations.
Separate account assets decreased from the prior year due to net outflows,
partially offset by market appreciation.
Client contract reserves increased 18 percent when compared to June 30, 2002
primarily as a result of positive net cash flows in fixed insurance, fixed
annuities and investment certificates.
On June 16, 2003, the Company announced an agreement for AEFA to acquire
Threadneedle Asset Management Holdings LTD. The transaction, which is subject
to regulatory approval, is expected to close in the second half of the year
and has been valued at approximately $570 million and will be paid in cash on
completion. Threadneedle is one of the premier asset management organizations
in the United Kingdom, with more than $75 billion in assets under management.
33
AMERICAN EXPRESS BANK
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND
2002
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
(Dollars in millions) June 30, June 30,
------------------------ Percentage ------------------------ Percentage
2003 2002 Inc/(Dec) 2003 2002 Inc/(Dec)
----------- ---------- ------------ ---------- ----------- ------------
Net revenues:
Interest income $ 148 $ 149 (0.7)% $ 297 $ 292 1.9%
Interest expense 57 60 (4.7) 117 118 (0.6)
----------- ---------- ---------- -----------
Net interest income 91 89 1.9 180 174 3.5
Commissions and fees 57 53 7.5 112 103 8.0
Foreign exchange income & other revenues 52 38 35.9 105 81 29.7
----------- ---------- ---------- -----------
Total net revenues 200 180 10.8 397 358 10.8
----------- ---------- ---------- -----------
Expenses:
Human resources 64 60 5.0 125 115 7.0
Other operating expenses 70 55 27.5 143 117 22.5
Provision for losses 27 38 (27.6) 61 79 (22.1)
----------- ---------- ---------- -----------
Total expenses 161 153 5.1 329 311 5.4
----------- ---------- ---------- -----------
Pretax income 39 27 43.4 68 47 46.5
Income tax provision 12 9 39.5 22 16 41.3
----------- ---------- ---------- -----------
Net income $ 27 $ 18 45.2 $ 46 $ 31 49.1
=========== ========== ========== ===========
AEB reported net income of $27 million and $46 million for the three and six
months ended June 30, 2003, respectively, up from $18 million and $31 million,
respectively, for the same periods a year ago. Net interest income rose in
both periods primarily due to lower funding costs on the investment portfolio
and the addition of the remaining 50 percent of AEB's Brazil joint venture,
which was purchased in the third quarter of 2002. These increases were
partially offset by declining loan balances in Corporate Banking and Personal
Financial Services (PFS). Commissions and fees increased 8 percent in both
periods, primarily due to higher fees in the Financial Institutions Group
(FIG) and Private Banking, partially offset by reduced Corporate Banking and
PFS activities. Foreign Exchange income and other revenues rose 36 percent and
30 percent, respectively, due to higher earnings within the premium deposits
joint venture with AEFA resulting partly from the negative effect on 2002
revenue from AEB's share of the WorldCom investment loss, higher client
activity in Private Banking, and higher mark-to-market gains on FIG
investments in mutual funds.
For the three and six months ended June 30, 2003, combined human resources and
other operating expenses rose 16 percent and 15 percent, respectively, from
the same periods a year ago, reflecting an increase in the average number of
employees resulting from the 2002 purchase of the remaining 50 percent of
AEB's Brazil joint venture, greater technology costs, employee merit
increases, and higher employee benefits and management incentive costs.
Provision for losses decreased 28 percent and 22 percent, respectively, as
bankruptcy related write-offs in the consumer lending portfolio in Hong Kong
continued to stabilize, although they still remain high relative to historical
levels.
34
LIQUIDITY AND CAPITAL RESOURCES
SELECTED STATISTICAL AND BALANCE SHEET INFORMATION
June 30, December 31, Percentage June 30, Percentage
(Dollars in billions, except where indicated) 2003 2002 Inc/(Dec) 2002 Inc/(Dec)
-------------- -------------- --------------- ------------ --------------
(Unaudited) (Unaudited)
Total assets $ 13.8 $ 13.2 4.0% $ 12.0 14.8%
Total liabilities $ 12.8 $ 12.3 4.2 $ 11.2 14.6
Total shareholder's equity (millions) $ 955 $ 947 0.8 $ 812 17.5
Return on average total common
shareholder's equity(A) 11.4% 10.6% -- (0.4)% --
Return on average assets(B) 0.75% 0.66% -- (0.02)% --
Total loans $ 5.8 $ 5.6 4.0 $ 5.6 4.7
Total non-performing loans (millions)(C) $ 102 $ 119 (14.3) $ 121 (15.5)
Other non-performing assets (millions) $ 16 $ 15 4.3 $ 2 #
Reserve for credit losses (millions)(D) $ 151 $ 158 (4.7) $ 160 (5.6)
Loan loss reserves as a
percentage of total loans 2.4% 2.7% -- 2.8% --
Total Personal Financial Services (PFS) loans $ 1.5 $ 1.6 (8.3) $ 1.8 (17.2)
30+ days past due PFS loans as a percentage
of total 5.5% 5.4% -- 4.6% --
Deposits $ 10.1 $ 9.5 6.4 $ 8.7 15.6
Assets managed(E)/administered $ 14.1 $ 12.5 12.7 $ 12.4 14.3
Assets of non-consolidated joint ventures $ 1.8 $ 1.8 (1.9) $ 1.9 (2.6)
Risk-based capital ratios:
Tier 1 10.5% 10.9% -- 10.1% --
Total 10.7% 11.4% -- 10.6% --
Leverage ratio 5.5% 5.3% -- 5.2% --
# - Denotes a variance of more than 100%.
(A) Computed on a trailing 12-month basis using total common shareholder's
equity as included in the Consolidated Financial Statements prepared in
accordance with GAAP.
(B) Computed on a trailing 12-month basis using total assets as included in
the Consolidated Financial Statements prepared in accordance with GAAP.
(C) AEB defines non-performing loans as loans (other than smaller-balance
homogeneous loans which may include, but are not limited to, consumer
installment and residential mortgage loans) on which the accrual of
interest is discontinued because the contractual payment of principal or
interest has become 90 days past due or if, in management's opinion, the
borrower is unlikely to meet its contractual obligations. For
smaller-balance consumer loans, management establishes reserves it
believes to be adequate to absorb credit losses inherent in the
portfolio. Generally, these loans are written off in full when an
impairment is determined or when a loan becomes 120 or 180 days past due,
depending on loan type.
(D) Allocation (millions):
Loans $ 142 $ 151 $ 153
Other assets, primarily foreign
exchange and other derivatives 5 6 6
Unfunded contingents 4 1 1
-------------- -------------- ------------
Total reserve for credit losses $ 151 $ 158 $ 160
============== ============== ============
(E) Includes assets managed by American Express Financial Advisors.
AEB had worldwide loans outstanding at June 30, 2003 of approximately $5.8
billion, up from $5.6 billion at both December 31, 2002 and June 30, 2002. The
increase since June 30, 2002 resulted from a $200 million increase in consumer
and private banking loans and a $200 million increase in financial institution
loans, offset by a $200 million net decrease in corporate and other banking
loans. As of June 30, 2003, consumer and private banking loans comprised 66
percent of total loans, which is consistent with both December 31, 2002 and
June 30, 2002.
Total non-performing loans of $102 million at June 30, 2003 decreased from
$119 million at December 31, 2002 and $121 million at June 30, 2002 as AEB
continues to wind down its Corporate Banking business. The decreases reflect
loan payments and write-offs, partially offset by net downgrades, mostly in
Egypt and India.
Other banking activities, such as securities, unrealized gains on foreign
exchange and derivatives contracts, various contingencies and market
placements added approximately $7.8 billion and $7.4 billion to AEB's credit
exposures at June 30, 2003 and 2002, respectively. Included in the $7.8
billion of additional exposures are relatively lower risk cash and
securities-related balances totaling $5.8 billion at June 30, 2003.
35
CORPORATE AND OTHER
Corporate and Other reported net expenses of $56 million and $100 million for
the three and six months ended June 30, 2003, respectively, compared with net
expenses of $45 million and $89 million in the same periods a year ago.
Included in the results for the six months ended June 30, 2002 is a first
quarter $46 million ($39 million after-tax) preferred stock dividend based on
earnings from Lehman Brothers, which was offset by expenses for business
building initiatives. This dividend related to a security that matured in May
2002. The increase in current year net expenses versus the prior periods is a
result of a lower tax benefit due to the loss of the Lehman Brothers dividend.
OTHER REPORTING MATTERS
ACCOUNTING DEVELOPMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46),
which addresses consolidation by business enterprises of variable interest
entities. Certain disclosures are required for financial statements issued
after January 31, 2003 and are addressed along with the preliminary estimates
of the impact of adopting FIN 46 in Note 1 to the Consolidated Financial
Statements.
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." The Statement amends and clarifies accounting for
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. The Statement is effective for contracts entered into or
modified and hedging relationships designated after June 30, 2003, and to
certain preexisting contracts. The adoption of this Statement is not expected
to have a material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability; many of those instruments were previously
classified as equity. The Statement is effective for financial instruments
entered into or modified after May 31, 2003, and for all others, July 1, 2003.
The adoption of this Statement is not expected to have a material impact on
the Company's financial statements.
In July 2003, the AICPA issued Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts." The Company is currently evaluating its
impact, which, among other provisions, requires reserves related to guaranteed
minimum death benefits included within the majority of variable annuity
contracts offered by AEFA. The SOP is required to be adopted on January 1,
2004. See AEFA's Impact of Recent Market-Volatility on Results of Operations
section of MD&A for further discussion.
36
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
The Company's management, with the participation of the Company'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,
the Company'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.
(b) Internal Control Over Financial Reporting.
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 fiscal quarter to which this
report relates that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which are subject to risks
and uncertainties. The words "believe," "expect," "anticipate," "optimistic,"
"intend," "plan," "aim," "will," "should," "could," "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. The company 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: the company's ability to
successfully implement a business model that allows for significant earnings
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
the company's revenues; the company's ability to grow its business and meet or
exceed its return on shareholders' equity target by reinvesting approximately
35% of annually-generated capital, and returning approximately 65% of such
capital to shareholders, over time, which will depend on the company's ability
to manage its capital needs and the effect of business mix, acquisitions and
rating agency requirements; the ability of the company to generate sufficient
revenues for expanded investment spending, to actually spend such funds over
the remainder of the year to the extent available, particularly if funds for
discretionary spending are higher than anticipated, and to capitalize on such
investments to improve business metrics; credit risk related to consumer debt,
business loans, merchant bankruptcies and other credit exposures both in the
U.S. and internationally; fluctuation in the equity and fixed income markets,
which can affect the amount and types of investment products sold by AEFA, the
market value of its managed assets, and management, distribution and other
fees received based on the value of those assets; AEFA's ability to recover
Deferred Acquisition Costs (DAC), as well as the timing of such DAC
amortization, in connection with the sale of annuity, insurance and certain
mutual fund products; changes in assumptions relating to DAC, which could
impact the amount of DAC amortization; the level of guaranteed minimum death
benefits paid to clients; potential deterioration in AEFA's high-yield and
other investments, which could result in further losses in AEFA's investment
portfolio; the ability to improve investment performance in AEFA's businesses,
including attracting and retaining high-quality personnel; the success,
timeliness and financial impact, including costs, cost savings and other
benefits including increased revenues, of re-engineering initiatives being
implemented or considered by the company, including cost management,
structural and strategic measures such as vendor, process, facilities and
operations consolidation, outsourcing (including, among others, technologies
operations), relocating certain functions to lower cost overseas locations,
moving internal and external functions to the Internet to save costs, and
planned staff reductions relating to certain of such re-engineering 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 potential negative
effect on the company's businesses and infrastructure, including information
technology
37
systems, of terrorist attacks, disasters or other catastrophic events in the
future; the impact on the company's businesses resulting from the recent war
in Iraq and its aftermath and other geopolitical uncertainty; the overall
level of consumer confidence; 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 and revolving credit, sustain premium discount rates, increase
merchant coverage, retain cardmembers after low introductory lending rates
have expired, and expand the global network services business; the impact of
severe acute respiratory syndrome (SARS) on consumer and business spending on
travel, including its potential spread to the United States and other locales
that have not, to date, been significantly affected; the ability to manage and
expand cardmember benefits, including Membership Rewards(R), in a cost
effective manner; the triggering of obligations to make payments to certain
co-brand partners, merchants, vendors and customers under contractual
arrangements with such parties under certain circumstances; successfully
cross-selling financial, travel, card and other products and services to the
company's customer base, both in the U.S. and internationally; a downturn in
the company's businesses and/or negative changes in the company's and its
subsidiaries' credit ratings, which could result in contingent payments under
contracts, decreased liquidity and higher borrowing costs; 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 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;
fluctuations in foreign currency exchange rates; political or economic
instability in certain regions or countries, which could affect lending and
other commercial activities, among other businesses, or restrictions on
convertibility of certain currencies; changes in laws or government
regulations; the costs and integration of acquisitions; the ability to
accurately interpret and apply FASB Interpretation No. 46, the recently issued
accounting rule related to the consolidation of variable interest entities,
including those involving collateralized debt obligations (CDOs) and secured
loan trusts (SLTs) that the company manages and/or invests in, and the impact
of the rule on both the company's balance sheet and results of operations,
which could be greater or less than that estimated by management to the extent
that certain assumptions have to be revised, such as estimates of the
valuations of the underlying collateral of the CDO or SLT structures, or the
application of the rule to certain types of structures has to be re-evaluated;
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 the company's Annual Report on Form 10-K for the
year ended December 31, 2002, and its other reports filed with the SEC.
38
PART II. OTHER INFORMATION
AMERICAN EXPRESS COMPANY
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in a number of legal and
arbitration proceedings concerning matters arising in connection with
the conduct of their respective business activities. The Company
believes it has meritorious defenses to each of these actions and
intends to defend them vigorously. The Company believes that it is not
a party to, nor are any of its properties the subject of, any pending
legal or arbitration proceedings that would have a material adverse
effect on the Company's consolidated financial condition, results of
operation or liquidity. However, it is possible that the outcome of
any such proceedings could have a material impact on results of
operations in any particular reporting period as the proceedings are
resolved. Certain legal proceedings involving the Company are set
forth below. For a discussion of certain other legal proceedings
involving the Company and its subsidiaries, please refer to the
Company's Annual Report on Form 10-K for the year ended December 31,
2002 and the Quarterly Report on Form 10-Q for the quarter ended March
31, 2003.
On August 15, 2000, Roger M. Lindmark ("Lindmark") filed a putative
class action against American Express Company, American Express Travel
Related Services Company, Inc. ("TRS") and American Express Centurion
Bank ("AECB") in the United States District Court for the Central
District of California. The complaint principally alleges that class
members improperly were charged daily compounded interest on revolving
credit cards and that AECB and TRS improperly applied credits for
returned merchandise against balance transfer balances. Lindmark
asserted various claims including violation of the federal Truth in
Lending Act, breach of contract, fraud and unfair and deceptive
practices and violations of the California Consumer Legal Remedies
Act. The action sought statutory and actual damages, restitution and
injunctive relief. Although the Company believed it had meritorious
defenses to this action, in light of the inherent uncertainties and
the burden and expense of lengthy litigation, the Company reached an
agreement to settle the lawsuit. On April 23, 2003 the court approved
the proposed settlement filed by the parties. The settlement provides
for certification of two classes. The first class, defined as the
"finance charge" class, includes all customers who incurred finance
charges between August 1994 and September 2002. The proposed
settlement of the first class consists of a settlement fund in the
amount of $15,950,000 that will be distributed on a pro rata basis to
those class members who are entitled to a refund. The second class,
defined as the "delayed notice" class, includes all customers who did
not receive change in terms notices and who, as a result, incurred
increased charges between September 2001 and September 2002. In April
2003, these class members received a refund of charges affected by the
terms changes that were incurred during the class period. In May 2003,
a group of class members whose objections to the settlement were
overruled by the District Court filed a notice of appeal of the
District Court's final approval order and judgment to the United
States Court of Appeals for the Ninth Circuit. The objectors' opening
brief is presently due to be filed in early September 2003. The
Company has made appropriate reserves for the settlement amounts.
Beginning in mid-July 2002, 12 putative class action lawsuits were
filed in the United States District Court for the Southern District of
New York. In October 2002, these cases were consolidated under the
caption In Re American Express Company Securities Litigation. These
lawsuits allege violations of the federal securities laws and the
common law in connection with alleged misstatements regarding certain
investments in high-yield bonds and write downs in the 2000-2001 time
frame. The purported class covers the period from July 18, 1999 to
July 17, 2001. The actions seek unspecified compensatory damages as
well as disgorgement, punitive damages, attorneys fees and costs, and
interest. The Company has filed a motion to dismiss the complaint and
is awaiting the court's ruling on such motion.
39
On October 2, 2002, a shareholder derivative suit was filed in the
Supreme Court of New York against certain former and present officers
and directors of the company. The company was also named as a nominal
defendant. The matter is captioned: Lukowski v. Akerson et al. The
complaint alleged that the officers and directors failed to exercise
their duties and obligations in connection with the Company's
investments in high yield bonds and the subsequent write downs in the
2000-2001 time frame. The action sought damages against the officers
and directors of the Company. The action has been voluntarily
withdrawn by the plaintiff without prejudice.
In April 2003, a purported class action, captioned Rubin v. American
Express Travel Related Services Co. Inc. et al. (formerly captioned
Faulkner v. American Express Travel Related Services Co. Inc. et al.),
was filed against the Company and TRS in the Circuit Court, Third
Judicial Circuit, Madison County, Illinois. The plaintiff alleges that
the Company wrongfully collected conversion fees assessed on
transactions made in a foreign currency. The complaint alleges causes
of actions for unjust enrichment, breach of contract and statutory
fraud under the Illinois Consumer Fraud Act. The plaintiff is seeking
an unspecified amount of damages. The defendants were served with the
complaint in June 2003.
In May 2003, a purported class action, captioned Angie Arambula, et
al. v. American Express Company, et al., was filed in the Cameron
County District Court for the State of Texas, 103rd Judicial District.
In the complaint, plaintiffs Angie Arambula and Wayne Dodd assert
causes of action for violation of the Texas Deceptive Trade Practices
Act, unjust enrichment and breach of contract. The plaintiffs allege
that the defendants failed properly to disclose a purported
transaction fee that is assessed on purchases of goods and/or services
in a foreign currency and further allege that the defendants include
in their cardmember agreements unconscionable and unlawful arbitration
provisions. Based on these allegations, the plaintiffs seek injunctive
relief, unspecified damages and treble damages, restitution and
attorneys' fees and costs. The defendants have not yet been served
with the complaint relating to the action.
In June 2003, a purported class action, captioned Bernd Bildstein v.
American Express Company, et al., was filed in the Queens County
Supreme Court for the State of New York. In the complaint, plaintiff
asserts a cause of action for violation of New York General Business
Law Section 349. Plaintiff alleges that the defendants failed properly
to disclose a purported transaction fee that is assessed on purchases
of goods and/or services in a foreign currency. Based on these
allegations, plaintiff seeks unspecified damages and attorneys' fees.
In early May 2003, a purported class action, captioned Phuong Corp. et
al. v. American Express Company et al., was filed in the United States
District Court for the Eastern District of New York against the
Company and one of its subsidiaries. The plaintiffs allege an unlawful
antitrust tying arrangement between the Company's charge cards, credit
cards and "debit cards." The plaintiffs seek injunctive relief and an
unspecified amount of damages. Upon being advised that the Company
intended to seek to compel arbitration of these claims pursuant to the
plaintiffs' card acceptance agreements with the Company, the
plaintiffs voluntarily dismissed their action without prejudice.
In June 2003, a purported class action captioned Hudgins Moving &
Storage Co., Inc. v. American Express Company et al., was filed in the
Circuit Court for Davidson County, Tennessee against the Company and
one of its subsidiaries making allegations similar to those in the
Phuong action described above on behalf of a class of Tennessee
merchants, alleging that the purported tying arrangements violated the
Tennessee Trade Practices Act and the Tennessee Consumer Protection
Act of 1977. Defendants removed this action to the United States
District Court for the Middle District of Tennessee. In July 2003,
defendants moved to compel arbitration or, alternatively, to dismiss
the complaint for failure to state a claim upon which relief can be
granted.
40
The Company has been advised that it and one of its subsidiaries have
recently been named in two purported class actions captioned Aydin
Inc. v. American Express Company et al. and Il Forno, Inc., et al. v.
American Express Company et al., filed in the United States District
Courts for the Eastern District of Louisiana and the Central District
of California, respectively. To date, the Company has not been served
in these actions. The Company understands that these complaints
include allegations similar to those in the Phuong action and seek
similar relief. The Company also understands that the Il Forno
complaint also alleges that the Company maintains a monopoly through
the inclusion of an arbitration provision in its merchant agreements.
In May 2003, a purported class action captioned eGeneral Medical,
Inc., et al. v. VISA U.S.A., Inc., was filed in the Eastern District
of North Carolina alleging that the fees charged to Internet merchants
when funds have been advanced by American Express and are later
charged back to those merchants because a consumer transaction has
been determined to be the result of fraud, or when a transaction has
been disputed by the consumer and the dispute is resolved in the
consumer's favor are excessive. The Plaintiffs seek treble damages in
an unspecified amount "but which is, at a minimum, hundreds of
millions of dollars," disgorgement of fees earned, injunctive and
other relief.
In July 2003, a motion to authorize a class action captioned Option
Consommateurs and Normand Painchaud v. Amex Bank of Canada et al. was
filed in the Superior Court of Quebec, District of Montreal. The
motion, which also names as defendants Citibank Canada, MBNA Canada,
Capital One and Royal Bank of Canada, alleges that the defendants have
violated the Quebec Consumer Protection Act by imposing finance
charges on credit card transactions prior to 21 days following the
receipt of the statement containing the charge. It is alleged that
the Quebec Consumer Protection Act provisions which require a 21 day
grace period prior to imposing finance charges applies to credit cards
issued by Amex Bank of Canada in Quebec and that finance charges
imposed prior to this grace period violate the Act. The proposed
class claims seek reimbursement of all finance charges imposed in
violation of the Act, $200 in punitive damages per class member,
interest and fees and costs.
In July 2003, an NASD arbitration panel held Securities America, Inc.
("SAI"), a wholly-owned subsidiary of the Company, liable in
connection with certain claims filed by clients of a former broker of
SAI who adopted an assumed identity to work for SAI and then allegedly
engaged in improper practices in connection with his clients and their
accounts. The arbitration panel awarded the clients approximately
$1.4 million in compensatory damages and approximately $4.1 million
in punitive damages. SAI intends to seek to have the decision of the
arbitration panel vacated. To date, nine additional actions by other
clients of the former broker have been filed against SAI in various
courts and before the NASD.
41
Item 2. Change in Securities and Use of Proceeds
(c) In August 1999 and March 2000, the Company entered into agreements
under which a financial institution purchased an aggregate 29.5
million shares of the Company's common stock at an average
purchase price of $50.41 per share. The agreements provided that,
upon their termination, the Company would be required to deliver
an amount equal to the original purchase price for the shares less
any prepayments. Under the agreements, the Company could elect to
settle this amount at any time (i) physically, by paying cash
against delivery of the shares held by the financial institution
or (ii) on a net cash or net share basis. During the term of these
agreements, the Company, on a monthly basis, either issued shares
to or received shares from the financial institution so that the
value of the remaining shares held by the financial institution is
equal to the aggregate outstanding amount. The Company could
prepay outstanding amounts at any time. In the first quarter of
2001, the Company elected to prepay $350 million of the aggregate
outstanding amount. In October and December 2002, the Company
elected to prepay an additional $200 million and $400 million,
respectively, of the aggregate outstanding amount.
In connection with these agreements, during the second quarter of
2003, the Company issued 28,451 common shares in April 2003 in
respect of the monthly settlement for March 2003.
The Company repaid the remaining balance of $335 million under the
agreements and terminated the agreements on May 16, 2003, which
resulted in the return to the Company of approximately 8.9 million
shares.
The issuances of common shares described above were exempt from
registration under the Securities Act of 1933 pursuant to Section
4(2) thereof, as a transaction not involving a public offering.
Item 4. Submission of Matters to a Vote of Security Holders.
For information relating to the matters voted upon at the Company's
annual meeting of shareholders held on April 28, 2003, see the
information set forth under the caption "Item 4. Submission of
Matters to a Vote of Security Holders" in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2003,
which is incorporated herein by reference.
42
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 April 9, 2003, Item 9, reporting on a purported
class action filed against American Express Company and one of its
subsidiaries in the Alameda County Superior Court for the State of
California in which the plaintiffs assert two causes of action for
violation of certain sections of California's Unfair Competition
Law and the California Consumer Legal Remedies Act.
Form 8-K, dated April 24, 2003, Items 7, 9 and 12, reporting the
Company's earnings for the quarter ended March 31, 2003 and
including a 2003 First Quarter Earnings Supplement.
Form 8-K, dated April 30, 2003, Item 9, reporting on the posting
on the Company's website of supplemental financial information
about certain subsidiaries and business units of the Company for
the year ended December 31, 2002.
Form 8-K, dated May 21, 2003, Item 5, reporting on an increase in
the quarterly dividend on the Company's common stock, payable
August 8, 2003, to shareholders of record on July 3, 2003.
Form 8-K, dated June 4, 2003, Item 9, reporting on a presentation
delivered by Kenneth I. Chenault, Chairman and Chief Executive
Officer of the Company, at Sanford C. Bernstein & Co.'s Strategic
Decisions Conference.
Form 8-K, dated June 16, 2003, Item 9, reporting on the agreement
to acquire Threadneedle Asset Management Holdings LTD from Zurich
Financial Services Group.
Form 8-K, dated July 15, 2003, Item 9, reporting on the agreement
to acquire Rosenbluth International, Inc.
Form 8-K, dated July 22, 2003, Item 5, reporting on the Company's
reconciliation to U.S. GAAP of certain previously reported
non-GAAP financial measures.
Form 8-K, dated July 28, 2003, Items 9 and 12, reporting on the
Company's financial results for the three and six months ended
June 30, 2003, and including a 2003 Second Quarter Earnings
Supplement.
Form 8-K, dated August 6, 2003, Item 9, reporting on a
presentation delivered by Kenneth I. Chenault, Chairman and Chief
Executive Officer of the Company, and Alfred F. Kelly, Jr., Group
President, U.S. Consumer and Small Business Services, to the
financial community.
43
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: August 14, 2003 By /s/ Gary L. Crittenden
----------------------------------
Gary L. Crittenden
Executive Vice President and
Chief Financial Officer
Date: August 14, 2003 By /s/ Thomas A. Iseghohi
----------------------------------
Thomas A. Iseghohi
Senior Vice President and
Comptroller
(Principal Accounting Officer)
44
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.
31.1 Certification of Kenneth I. Chenault pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Gary L. Crittenden pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Kenneth I. Chenault and Gary L. Crittenden
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.1 Presentation of revenue and expense reclassifications for the
Company and its Travel Related Services segment for the
quarterly period ended March 31, 2003 and for years ended
December 31, 2002 and 2001 and each of the quarterly periods
included therein.
E-1