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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 2002
Common Shares (par value $.20 per share) 1,314,319,373 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 September 30, 2002 and
2001 1
Consolidated Statements of Income - Nine months ended September 30, 2002 and
2001 2
Consolidated Balance Sheets - September 30, 2002 and December 31, 2001 3
Consolidated Statements of Cash Flows - Nine months ended September 30,
2002 and 2001 4
Notes to Consolidated Financial Statements 5-9
Independent Accountants' Review Report 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11-31
Item 4. Controls and Procedures 32
Part II. Other Information: 34
Item 1. Legal Proceedings 34
Item 2. Change in Securities and Use of Proceeds 34
Item 6. Exhibits and Reports on Form 8-K 35
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
-------------------
2002 2001
-------- -------
Revenues:
Discount revenue $1,967 $1,870
Interest and dividends, net 759 736
Management and distribution fees 551 595
Net card fees 439 423
Travel commissions and fees 342 358
Other commissions and fees 538 517
Cardmember lending net finance charge revenue 332 362
Life and other insurance premiums 198 173
Securitization income 500 352
Other 281 338
-------- -------
Total 5,907 5,724
-------- -------
Expenses:
Human resources 1,414 1,540
Provisions for losses and benefits:
Annuities and investment certificates 305 313
Life insurance, international banking and 258 247
other
Charge card 191 284
Cardmember lending 319 302
Interest 264 385
Marketing and promotion 403 327
Occupancy and equipment 349 398
Professional services 521 413
Communications 126 125
Restructuring charges (2) 326
Disaster recovery charge - 90
Other 800 620
-------- -------
Total 4,948 5,370
-------- -------
Pretax income 959 354
Income tax provision 272 56
-------- -------
Net income $ 687 $ 298
======== =======
Earnings per Common Share:
Basic $ 0.52 $ 0.23
======== =======
Diluted $ 0.52 $ 0.22
======== =======
Average common shares outstanding for earnings per common share:
Basic 1,323 1,324
======== =======
Diluted 1,330 1,335
======== =======
Cash dividends declared per common share $ 0.08 $ 0.08
======== =======
See notes to Consolidated Financial Statements.
1
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share amounts)
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2002 2001
------------ -----------
Revenues:
Discount revenue $ 5,809 $ 5,801
Interest and dividends, net 2,175 1,360
Management and distribution fees 1,757 1,856
Net card fees 1,291 1,248
Travel commissions and fees 1,039 1,203
Other commissions and fees 1,560 1,561
Cardmember lending net finance charge revenue 1,103 1,029
Life and other insurance premiums 591 490
Securitization income 1,423 1,048
Other 863 1,115
------------ -----------
Total 17,611 16,711
------------ -----------
Expenses:
Human resources 4,346 4,859
Provisions for losses and benefits:
Annuities and investment certificates 881 985
Life insurance, international banking and other 777 638
Charge card 723 852
Cardmember lending 955 935
Interest 812 1,159
Marketing and promotion 1,151 997
Occupancy and equipment 1,046 1,164
Professional services 1,397 1,200
Communications 378 388
Restructuring charges (21) 326
Disaster recovery charge (7) 90
Other 2,395 1,870
------------ -----------
Total 14,833 15,463
------------ -----------
Pretax income 2,778 1,248
Income tax provision 790 234
------------ -----------
Net income $ 1,988 $ 1,014
============ ===========
Earnings per Common Share:
Basic $ 1.50 $ 0.77
============ ===========
Diluted $ 1.49 $ 0.76
============ ===========
Average common shares outstanding for earnings per common share:
Basic 1,324 1,323
============ ===========
Diluted 1,334 1,338
============ ===========
Cash dividends declared per common share $ 0.24 $ 0.24
============ ===========
See notes to Consolidated Financial Statements.
2
AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS
(millions, except share data)
(Unaudited)
September 30, December 31,
ASSETS 2002 2001
--------------- --------------
Cash and cash equivalents $ 7,993 $ 7,222
Accounts receivable and accrued interest:
Cardmember receivables, less reserves:
2002, $939; 2001, $1,032 23,201 25,212
Other receivables, less reserves:
2002, $108; 2001, $134 4,529 4,286
Investments 49,254 46,488
Loans:
Cardmember lending, less reserves:
2002, $861; 2001, $831 18,851 20,131
International banking, less reserves:
2002, $156; 2001, $130 5,373 5,155
Other, net 790 1,154
Separate account assets 21,070 27,334
Deferred acquisition costs 3,869 3,737
Land, buildings and equipment - at cost, less
accumulated depreciation: 2002, $2,608;
2001, $2,507 2,870 2,811
Other assets 7,533 7,570
--------------- --------------
Total assets $145,333 $151,100
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Customers' deposits $ 14,135 $ 14,557
Travelers Cheques outstanding 6,746 6,190
Accounts payable 6,848 6,820
Insurance and annuity reserves:
Fixed annuities 22,316 19,592
Life and disability policies 5,168 4,944
Investment certificate reserves 8,612 8,227
Short-term debt 19,173 31,569
Long-term debt 14,722 7,788
Separate account liabilities 21,070 27,334
Other liabilities 12,065 11,542
--------------- --------------
Total liabilities 130,855 138,563
--------------- --------------
Guaranteed preferred beneficial interests in
the company's junior subordinated deferrable
interest debentures 500 500
Shareholders' equity:
Common shares, $.20 par value, authorized 3.6 billion shares; issued
and outstanding 1,325 million shares in 2002 and 1,331
million shares in 2001 265 266
Capital surplus 5,667 5,527
Retained earnings 7,571 6,421
Other comprehensive income (loss), net of tax:
Net unrealized securities gains 1,131 334
Net unrealized derivatives losses (402) (296)
Foreign currency translation adjustments (151) (112)
Minimum pension liability (103) (103)
--------------- --------------
Accumulated other comprehensive income (loss) 475 (177)
--------------- --------------
Total shareholders' equity 13,978 12,037
--------------- --------------
Total liabilities and shareholders' equity $145,333 $151,100
=============== ==============
See notes to Consolidated Financial Statements.
3
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
(Unaudited)
Nine Months Ended
September 30,
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2002 2001
--------------- --------------
Net income $ 1,988 $ 1,014
Adjustments to reconcile net income
to net cash provided by operating activities:
Provisions for losses and benefits 2,269 2,411
Depreciation, amortization, deferred taxes and other 456 1,160
Restructuring charge (21) 326
Disaster recovery charge (7) 90
Changes in operating assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable and accrued interest (398) 478
Other assets (491) 951
Accounts payable and other liabilities 99 (1,940)
Increase in Travelers Cheques outstanding 555 497
Increase in insurance reserves 190 165
--------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,640 5,152
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments 9,267 8,360
Maturity and redemption of investments 6,070 4,796
Purchase of investments (16,471) (14,092)
Net (increase) decrease in Cardmember loans/receivables (2,292) 983
Cardmember loans/receivables sold to trust, net 4,339 2,715
Proceeds from repayment of loans 19,497 19,239
Issuance of loans (19,559) (18,669)
Purchase of land, buildings and equipment (582) (568)
Sale of land, buildings and equipment 113 13
Acquisitions, net of cash acquired (55) (161)
--------------- --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 327 2,616
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in customers' deposits (661) (783)
Sale of annuities and investment certificates 7,344 4,248
Redemption of annuities and investment certificates (4,307) (3,536)
Net decrease in debt with maturities of three
months or less (9,501) (3,416)
Issuance of debt 15,263 8,376
Principal payments on debt (11,282) (10,122)
Issuance of American Express common shares 124 71
Repurchase of American Express common shares (542) (626)
Dividends paid (321) (320)
--------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (3,883) (6,108)
--------------- --------------
Effect of exchange rate changes on cash (313) (287)
--------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 771 1,373
Cash and cash equivalents at beginning of period 7,222 8,487
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,993 $ 9,860
=============== ==============
See notes to Consolidated Financial Statements.
4
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements should be read in conjunction with
the financial statements in the Annual Report on Form 10-K of American
Express Company (the company or American Express) for the year ended
December 31, 2001. Certain reclassifications of prior period amounts have
been made to conform to the current presentation.
Cardmember lending net finance charge revenue is presented net of interest
expense of $124 million and $234 million for the third quarters of 2002 and
2001, respectively, and $378 million and $766 million for the nine months
ended September 30, 2002 and 2001, respectively. Interest and dividends is
presented net of interest expense of $65 million and $105 million for the
third quarters of 2002 and 2001, respectively, and $188 million and $364
million for the nine months ended September 30, 2002 and 2001, respectively,
related primarily to the company's international banking operations.
At September 30, 2002 and December 31, 2001, cash and cash equivalents
included $1.1 billion and $1.0 billion, respectively, segregated in special
bank accounts for the benefit of customers.
The interim financial information in this report has not been audited. In
the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position and the consolidated
results of operations for the interim periods have been made. All
adjustments made were of a normal, recurring nature. Results of operations
reported for interim periods are not necessarily indicative of results for
the entire year.
2. RESTRUCTURING CHARGES
During the third and fourth quarters of 2001, the company recorded
aggregate restructuring charges of $631 million ($411 million after-tax).
After recording balance sheet charge-offs ($120 million) and cash payments
made during 2001 ($51 million), the company's liability at December 31,
2001 was $460 million.
During the nine months ended September 30, 2002, the company adjusted the
prior year's aggregate restructuring charge liability by taking back into
income a net pretax amount of $25 million ($16 million after-tax). This is
comprised of the reversal of severance and related benefits of $53 million,
primarily caused by voluntary attrition or redeployment into open jobs of
approximately 3,700 employees whose jobs were eliminated, partially offset
by additional net exit costs of $28 million. These net exit costs include
$37 million of additional costs relating to certain domestic and
international office facilities, a $14 million reduction primarily due to
revisions to plans relating to certain travel office locations and $5
million in charge-offs of building and related costs in facilities affected
by the restructuring plan.
Adjustment activity in the first half of 2002 resulted in an increase to
pretax income of $19 million, all of which was recorded in the Travel
Related Services (TRS) segment.
During the three months ended September 30, 2002, the company recognized a
net benefit of $2 million ($1 million after-tax) primarily related to
activity at the American Express Bank (AEB) segment. AEB reversed $6
million ($3 million after-tax) of 2001 charges and, due to an additional
review of operations, recorded a restructuring charge of $4 million ($2
million after-tax). This 2002 charge consisted of $2 million of severance
costs and $2 million of other costs. Third quarter adjustments to TRS'
restructuring charges included a $13 million reversal of severance benefits
and a $13 million increase in other costs, resulting in no net impact to
operating results.
5
As of September 30, 2002, other liabilities include $222 million for the
expected future cash outlays related to aggregate restructuring charges
recorded. In addition to employee attrition or redeployment, approximately
9,000 employees have been terminated since inception of the restructuring
plans.
The following table summarizes the company's cash payments, additional
charges and liability reductions by category for the first three quarters
of 2002:
(in millions) Severance Other Total
-------------- -------------- --------------
Liability balance at December 31, 2001 $332 $128 $460
Cash paid (57) (21) (78)
Additional charges - 12 12
Reductions (17) (8) (25)
-------------- -------------- --------------
Liability balance at March 31, 2002 258 111 369
-------------- -------------- --------------
Cash paid (60) (5) (65)
Additional charges - 7 7
Reductions (18) - (18)
-------------- -------------- --------------
Liability balance at June 30, 2002 180 113 293
-------------- -------------- --------------
Cash paid (53) (16) (69)
Additional charges 2 20 22
Reductions (18) (6) (24)
-------------- -------------- --------------
Liability balance at September 30, 2002 $111 $111 $222
============== ============== ==============
3. INVESTMENT SECURITIES
The following is a summary of investments at September 30, 2002 and December
31, 2001:
September 30, December 31,
(in millions) 2002 2001
---------------- ----------------
Available-for-Sale, at fair value
(cost: 2002, $42,980; 2001, $41,650) $44,762 $42,225
Investment mortgage loans
(fair value: 2002, $4,530; 2001, $4,195) 4,071 4,024
Trading 421 239
---------------- ----------------
Total $49,254 $46,488
================ ================
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which established new accounting and reporting
standards for goodwill and other intangible assets. Under the new rules,
goodwill and other intangible assets deemed to have indefinite lives are no
longer amortized but are instead subject to annual impairment tests.
Management has completed goodwill impairment tests as of the date of
adoption; such tests did not indicate impairment.
As of September 30, 2002, the company had acquired identifiable intangible
assets with definite lives of $135 million (net of accumulated amortization
of $43 million). These intangible assets have a weighted-average remaining
useful life of 6 years, and mainly reflect purchased credit card
relationships and certain automated teller machine merchant contracts. The
aggregate amortization expense for these intangible assets during the nine
months ended September 30, 2002 was $18 million. Amortization expense
associated with these intangible assets is estimated to be approximately
$23 million for each of the next five years.
6
Net goodwill was approximately $1.2 billion at both September 30, 2002 and
December 31, 2001. At both dates, this consisted of approximately $1.0
billion at TRS and $0.2 billion at American Express Financial Advisors
(AEFA).
The following table presents the impact to net income and earnings per
common share (EPS) of goodwill amortization for the three and nine months
ended September 30, 2001:
THREE MONTHS ENDED SEPTEMBER 30, 2001:
(in millions, except per share amounts) Net Basic Diluted
Income EPS EPS
-------- -------- --------
Reported $298 $0.23 $0.22
Add back: Goodwill amortization (after-tax) 19 0.01 0.02
-------- -------- --------
Adjusted $317 $0.24 $0.24
======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 2001:
(in millions, except per share amounts) Net Basic Diluted
Income EPS EPS
-------- -------- --------
Reported $1,014 $0.77 $0.76
Add back: Goodwill amortization (after-tax) 58 0.04 0.04
-------- -------- --------
Adjusted $1,072 $0.81 $0.80
======== ======== ========
5. COMPREHENSIVE INCOME
Comprehensive income is defined as the aggregate change in shareholders'
equity, excluding changes in ownership interests. For the company, it is
the sum of net income and changes in (i) unrealized gains or losses on
available-for-sale securities, (ii) unrealized gains or losses on
derivatives and (iii) foreign currency translation adjustments. The
components of comprehensive income, net of related tax, for the three and
nine months ended September 30, 2002 and 2001 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(in millions) 2002 2001 2002 2001
---------------------- ----------------------
Net income $ 687 $ 298 $1,988 $1,014
Change in:
Net unrealized securities gains 549 441 797 899
Net unrealized derivative losses (78) (182) (106) (445)
Foreign currency translation adjustments 40 10 (39) 22
---------------------- ----------------------
Total $1,198 $ 567 $2,640 $1,490
====================== ======================
6. TAXES AND INTEREST
Net income taxes paid during the nine months ended September 30, 2002 and
2001 were approximately $758 million and $470 million, respectively.
Interest paid during the nine months ended September 30, 2002 and 2001 was
approximately $1.3 billion and $1.9 billion, respectively.
7
7. EARNINGS PER COMMON SHARE
The computations of basic and diluted earnings per common share (EPS) for
the three and nine months ended September 30, 2002 and 2001 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(in millions, except per share amounts) 2002 2001 2002 2001
------------------------ ------------------------
Numerator: Net income $ 687 $ 298 $1,988 $1,014
Denominator:
Basic: Weighted-average shares outstanding
during the period 1,323 1,324 1,324 1,323
Add: Dilutive effect of stock options, restricted
stock awards and other dilutive securities 7 11 10 15
------------------------ ------------------------
Diluted 1,330 1,335 1,334 1,338
------------------------ ------------------------
Basic EPS $ 0.52 $ 0.23 $ 1.50 $ 0.77
------------------------ ------------------------
Diluted EPS $ 0.52 $ 0.22 $ 1.49 $ 0.76
------------------------ ------------------------
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 September
30, 2002 and 2001 was 123 million and 91 million, respectively, and for the
nine months ended September 30, 2002 and 2001 was 102 million and 61
million, respectively.
8. SEGMENT INFORMATION
The following tables present three and nine-month results for the company's
operating segments, based on management's internal reporting structure. Net
revenues (managed basis) exclude the effect of securitizations at TRS, and
include provisions for losses and benefits for annuities, insurance and
investment certificate products of AEFA. AEFA's revenues for the first nine
months of 2001 include the effect of $182 million and $826 million of
losses from the write down and sale of certain high-yield securities in the
first and second quarters, respectively. 2001 net income for the three and
nine-month periods included after-tax restructuring charges of $127 million
for TRS, $41 million for AEFA, $57 million for AEB and $7 million for
Corporate and Other. Additionally, 2001 net income for the three and
nine-month periods included after-tax one-time costs and waived customer
fees of $57 million for TRS and one-time costs of $8 million for AEFA
resulting from the September 11th terrorist attacks.
REVENUES (GAAP BASIS) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
(in millions) 2002 2001 2002 2001
------------------------- --------------------------
Travel Related Services $4,395 $4,228 $13,056 $13,051
American Express Financial Advisors 1,388 1,392 4,173 3,341
American Express Bank 199 165 557 481
Corporate and Other (75) (61) (175) (162)
------------------------- --------------------------
Total $5,907 $5,724 $17,611 $16,711
========================= ==========================
NET REVENUES Three Months Ended Nine Months Ended
(MANAGED BASIS) September 30, September 30,
------------------------- --------------------------
(in millions) 2002 2001 2002 2001
------------------------- --------------------------
Travel Related Services $4,673 $4,466 $13,780 $13,575
American Express Financial Advisors 901 908 2,758 1,876
American Express Bank 199 165 557 481
Corporate and Other (75) (61) (175) (162)
------------------------- --------------------------
Total $5,698 $5,478 $16,920 $15,770
========================= ==========================
8
NET INCOME Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
(in millions) 2002 2001 2002 2001
------------------------- --------------------------
Travel Related Services $553 $248 $1,585 $1,289
American Express Financial Advisors 152 145 479 (110)
American Express Bank 25 (43) 56 (22)
Corporate and Other (43) (52) (132) (143)
------------------------- --------------------------
Total $687 $298 $1,988 $1,014
========================= ==========================
9
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Shareholders and Board of Directors
American Express Company
We have reviewed the accompanying consolidated balance sheet of American
Express Company (the "Company") as of September 30, 2002 and the related
consolidated statements of income for the three and nine-month periods
ended September 30, 2002 and 2001 and the consolidated statements of cash
flows for the nine-month periods ended September 30, 2002 and 2001. 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, 2001, 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 28, 2002, 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, 2001 is fairly stated, in all material respects,
in relation to the consolidated balance sheet from which it has been
derived.
/s/Ernst & Young LLP
New York, New York
November 5, 2002
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This financial review is primarily presented in a format generally termed
"managed basis." This is the basis used by management to evaluate operations
and is consistent with general industry practice. It differs in two respects
from the accompanying financial statements, which are prepared in accordance
with U.S. Generally Accepted Accounting Principles (GAAP). First, results are
presented as if there had been no asset securitizations at Travel Related
Services (TRS). Second, revenues are shown net of American Express Financial
Advisors' (AEFA) provisions for annuities, insurance and investment
certificate products, which are essentially spread businesses. All numbers
below are presented on a managed basis unless otherwise specified as GAAP
basis.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2002
The company's consolidated net income and diluted earnings per share (EPS) of
$687 million and $0.52 for the three-month period ended September 30, 2002
rose significantly from $298 million and $0.22, respectively, in the same
period a year ago. The company's 2001 results included a restructuring charge
of $352 million pretax ($232 million after-tax) and one-time costs and waived
customer fees of $98 million pretax ($65 million after-tax) resulting from the
September 11th terrorist attacks. Excluding the effect of these items, net
income for the quarter increased 15 percent.
Compared to the prior year, consolidated net revenues on a GAAP basis
increased three percent. Consolidated net revenues on a managed basis
increased four percent due to greater discount revenues, higher lending
spreads and loan balances, larger insurance revenues, higher distribution fees
and higher revenues related to AEFA's investment portfolio. This growth was
partially offset by weaker travel revenues and lower management fees.
GAAP basis consolidated expenses decreased eight percent and consolidated
expenses on a managed basis decreased seven percent compared to a year ago.
Excluding the impact of the 2001 restructuring charge and one-time costs noted
above, GAAP basis and managed basis consolidated expenses both increased one
percent due to higher other operating expenses and increased marketing and
promotion costs which were partially offset by lower charge card funding
costs, a decline in human resource expenses, reduced provision costs and the
benefits of other reengineering activities and expense control initiatives. In
addition, 2002 expenses include a net $44 million expense increase related to
Deferred Acquisition Costs (DAC) at AEFA. For a further discussion of DAC, see
the following AEFA section of MD&A.
Due to the adoption of Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets," in 2002, no goodwill amortization
occurred in 2002. Results and EPS included goodwill amortization of $25
million ($19 million after-tax) or $0.02 per share for the three-month period
ended September 30, 2001.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2002
The company's consolidated net income and EPS rose 96 percent as compared to a
year ago. The company's 2001 revenues and pretax income included $1,008
million of losses ($669 million after-tax) from the write down and sale of
certain high-yield securities at AEFA. 2001 results also included a
restructuring charge of $352 million pretax ($232 million after-tax) and
one-time costs and waived customer fees of $98 million pretax ($65 million
after-tax) resulting from the September 11th terrorist attacks. On a trailing
12-month basis, the company's return on equity was 18.1 percent.
Compared to the prior year, consolidated net revenues on a GAAP basis
increased five percent and consolidated net revenues on a managed basis
increased seven percent due to higher lending spreads and loan balances,
larger insurance revenues, and higher revenues related to AEFA's investment
portfolio. Excluding the effect of AEFA's high-yield losses on 2001 results,
GAAP basis consolidated net revenues decreased one percent and managed basis
consolidated net revenues increased one percent.
11
GAAP basis consolidated expenses declined four percent compared to the prior
year and on a managed basis, consolidated expenses declined three percent.
Excluding the impact of the 2001 restructuring charge and one-time costs noted
above, consolidated expenses on a GAAP and managed basis were relatively
unchanged from the prior year reflecting a decline in human resource expenses,
lower charge card funding costs, and the benefits of other reengineering
activities and expense control initiatives offset by increases in other
operating expenses, increased marketing and promotion expenses and higher
provisions for losses. In addition, 2002 expenses include a third quarter net
$44 million expense increase related to DAC at AEFA. Similarly, 2001 results
included $67 million in expenses due to a first quarter adjustment of DAC for
variable insurance and annuity products.
In the first nine months of 2002, the company recognized a net benefit of $21
million ($14 million after-tax) primarily related to net adjustments to the
restructuring charge reserve established during the second half of 2001. This
net benefit includes a 2002 $4 million ($2 million after-tax) reserve
established at American Express Bank (AEB). 2002 results also include 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.
Results and EPS included goodwill amortization of $75 million ($58 million
after-tax) or $0.04 per share for the nine-month period ended September 30,
2001.
As of September 30, 2002, the company has incurred costs of approximately $169
million related to the terrorist attacks of September 11th, which are expected
to be substantially covered by insurance and, consequently, did not impact
results. These include the cost of duplicate facilities and equipment
associated with the relocation of the company's offices from lower Manhattan
and certain other business recovery expenses. Costs associated with the damage
to the company's offices, extra operating expenses and business interruption
losses continue to be evaluated. As of September 2002, approximately $54
million of such costs relate to the company's portion of the repair of its
headquarters building and are included in the total costs incurred to date of
the $169 million noted above.
OUTLOOK
The company plans to invest more in growth initiatives during the remainder of
2002. This increased investment is expected to come in part from improved
funding costs and reengineering benefits which otherwise would have flowed
through to earnings in the form of improved operating margins. As a result,
the company continues to expect that its full year 2002 EPS is likely not to
exceed $2.01, based on current conditions. For the full year 2002, the company
continues to expect to realize over $1 billion in reengineering related
benefits, including approximately $605 million of savings from restructuring
plans initiated in the second half of 2001. The increase in planned marketing
and promotion spending is expected to improve business metrics starting in
late 2002 and into 2003. This expected improvement, as well as business
prospects generally, is subject to the direction of the economy and the added
uncertainty regarding a possible war in Iraq and other geopolitical events.
The company's long-term targets continue to be 12 to 15 percent growth in
earnings per share, return on equity of 18 to 20 percent and revenue growth of
at least eight percent, on average and over time. These long-term targets are
reliant on certain industry growth characteristics on average and over time,
including growth in spending on charge and credit cards between six and ten
percent and appreciation in the S&P 500 of eight percent.
EXPENSING OF STOCK OPTIONS
As previously announced, the company will adopt the fair-value-based method of
recording compensatory stock options contained in Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." Beginning in 2003, the company will expense employee stock
options over the stock option vesting period based on the fair value at
the date the options are granted. As previously stated at its
12
Financial Community Meeting on July 31, 2002, the company plans to reduce the
level of new stock options it grants. Had the company adopted SFAS No. 123 for
all compensatory options granted in 2002, the full year impact to earnings
would have been $0.07 per share.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
In August 1999 and March 2000, the company entered into agreements with a
financial institution under which an aggregate 29.5 million company common
shares at an average purchase price of $50.41 per share were purchased on
behalf of the financial institution. These agreements, which partially offset
the company's exposure to the effect on diluted earnings per share of
outstanding in-the-money stock options issued under the company's stock option
program, are separate from the company's previously authorized share
repurchase program. Each of the agreements terminates after five years, at
which time the company is required to deliver an amount equal to the original
purchase price for the shares. The company may elect to settle this amount (i)
physically, by paying cash against delivery of the shares held on behalf of
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, issues shares or
receives shares so that the value of the shares held on behalf of the
financial institution equals the original purchase price for the shares.
During the first nine months of 2002, net settlements under the agreements
resulted in the company issuing 5.1 million shares. The company has the
right to terminate these agreements at any time upon full settlement.
The company may prepay outstanding amounts at any time prior to the end of
the five-year term, and from time to time may make such prepayments in lieu
of, or in addition to, its share repurchase program, which either or together
would be expected to have the same effect on outstanding shares as a purchase
under the share repurchase program. The same elections are applicable to
settlements of periodic costs and fees. In the first quarter of 2001,
the company elected to prepay $350 million of the aggregate outstanding
amount. In October 2002, the company elected to prepay an additional
$200 million of the aggregate outstanding amount. To the extent that the
price of the company's common stock declines to levels substantially lower
than current levels for a sustained period of time, thereby resulting in
significant net issuances of shares under these agreements, there could be an
adverse impact on basic or diluted earnings per share. The maximum number of
company common shares that could potentially be distributed pursuant to the
equity-forward agreements would not exceed 102.9 million shares as adjusted
for shares delivered by the company and shares delivered to the company.
On June 19, 2002, the company announced that it has resumed its share
repurchase program. The program had been suspended at the end of the second
quarter in 2001 as a result of the negative impact of the charges related to
AEFA's investment portfolio on book equity. During the nine-month period ended
September 30, 2002, the company repurchased 15.8 million common shares at an
average price of $34.33. Since the inception of the repurchase programs in
September 1994, 373 million common shares have been acquired through September
30, 2002 under authorizations to repurchase up to 420 million shares.
Additionally, 6.5 million shares were delivered to the company as a result
of the October 2002 prepayment noted above.
At September 30, 2002, the parent company had approximately $3.6 billion of
debt or equity securities available for issuance under shelf registrations
filed with the Securities and Exchange Commission (SEC). In addition, TRS,
American Express Centurion Bank (a wholly-owned subsidiary of TRS), American
Express Credit Corporation (Credco), 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 September 30, 2002, $0.9
billion was outstanding under this program. For a further discussion of TRS'
liquidity, see the following TRS section of MD&A.
In April 2002, the company and two subsidiaries, American Express Centurion
Bank and Credco, renegotiated their committed credit line facilities. As of
September 30, 2002, total available credit lines were $11.45 billion,
13
including $1.00 billion allocated to the company and $10.02 billion allocated
to Credco. As of September 30, 2002, Credco's allocated committed bank line
coverage of its net short-term debt was 103%. Credco has the right to borrow
up to a maximum amount of $11.02 billion, with a commensurate reduction in the
amount available to the company. Based on this maximum amount of available
borrowing, Credco's committed bank line coverage of its net short-term debt
would have been 114% as of September 30, 2002. These facilities expire in
increments from 2003 through 2007.
14
TRAVEL RELATED SERVICES
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
STATEMENTS OF INCOME
(Unaudited, Managed Basis)
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
---------------------- ----------------------
2002 2001 Inc/(Dec) 2002 2001 Inc/(Dec)
--------- --------- ----------- --------- --------- -----------
Net Revenues:
Discount Revenue $1,967 $1,870 5.2% $ 5,809 $ 5,801 0.1%
Net Card Fees 439 423 3.9 1,291 1,265 2.0
Lending:
Finance Charge Revenue 1,134 1,187 (4.4) 3,349 3,466 (3.3)
Interest Expense 222 358 (37.8) 629 1,195 (47.3)
--------- --------- --------- ---------
Net Finance Charge Revenue 912 829 10.0 2,720 2,271 19.8
Travel Commissions and Fees 342 358 (4.3) 1,039 1,203 (13.6)
Travelers Cheque Investment Income 96 103 (5.6) 281 300 (6.2)
Other Revenues 917 883 3.5 2,640 2,735 (3.5)
--------- --------- --------- ---------
Total Net Revenues 4,673 4,466 4.6 13,780 13,575 1.5
--------- --------- --------- ---------
Expenses:
Marketing and Promotion 389 298 31.0 1,004 863 16.4
Provision for Losses and Claims:
Charge Card 191 284 (32.4) 723 888 (18.5)
Lending 610 573 6.5 1,826 1,638 11.5
Other 38 34 8.2 123 83 46.8
--------- --------- --------- ---------
Total 839 891 (5.8) 2,672 2,609 2.4
Charge Card Interest Expense 245 365 (32.7) 738 1,141 (35.3)
Human Resources 871 987 (11.8) 2,651 3,074 (13.8)
Other Operating Expenses 1,531 1,335 14.6 4,448 3,831 16.1
Restructuring Charges - 195 - (19) 195 -
Disaster Recovery Charge - 79 - - 79 -
--------- --------- --------- ---------
Total Expenses 3,875 4,150 (6.6) 11,494 11,792 (2.5)
--------- --------- --------- ---------
Pretax Income 798 316 # 2,286 1,783 28.2
Income Tax Provision 245 68 # 701 494 42.0
--------- --------- --------- ---------
Net Income $ 553 $ 248 # $ 1,585 $ 1,289 22.9
========= ========= ========= =========
# - Denotes a variance of more than 100%.
15
TRAVEL RELATED SERVICES
SELECTED STATISTICAL INFORMATION
(Unaudited)
(Amounts in billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
---------------------- ----------------------
2002 2001 Inc/(Dec) 2002 2001 Inc/(Dec)
--------- --------- ----------- --------- --------- -----------
Total Cards in Force (millions):
United States 34.8 34.7 0.5% 34.8 34.7 0.5%
Outside the United States (A) 21.6 20.2 6.9 21.6 20.2 6.9
--------- --------- --------- ---------
Total 56.4 54.9 2.8 56.4 54.9 2.8
========= ========= ========= =========
Basic Cards in Force (millions):
United States 26.7 26.9 (0.7) 26.7 26.9 (0.7)
Outside the United States (A) 17.8 15.4 7.7 (A) 17.8 15.4 7.7 (A)
--------- --------- --------- ---------
Total 44.5 42.3 2.5 (A) 44.5 42.3 2.5 (A)
========= ========= ========= =========
Card Billed Business:
United States $ 58.2 $ 54.4 6.9 $171.2 $168.7 1.4
Outside the United States 19.4 18.0 7.9 56.1 55.0 2.3
--------- --------- --------- ---------
Total $ 77.6 $ 72.4 7.1 $227.3 $223.7 1.6
========= ========= ========= =========
Average Discount Rate (A) 2.63% 2.67% - 2.65% 2.67% -
Average Basic Cardmember Spending (dollars)(A) $1,906 $1,846 6.4 (A) $5,597 $5,767 - (A)
Average Fee per Card - Managed (dollars) (A) $ 34 $ 34 - $ 34 $ 34 -
Non-Amex Brand (B):
Cards in Force (millions) 0.7 0.7 0.4 0.7 0.7 0.4
Billed Business $ 0.9 $ 0.9 3.3 $ 2.7 $ 2.5 8.0
Travel Sales $ 3.7 $ 3.9 (6.5) $ 11.6 $ 13.9 (16.1)
Travel Commissions and Fees/Sales (C) 9.3% 9.2% - 8.9% 8.7% -
Travelers Cheque:
Sales $ 6.9 $ 7.3 (6.2) $ 17.2 $ 18.8 (8.4)
Average Outstanding $ 7.0 $ 6.8 1.8 $ 6.5 $ 6.5 0.8
Average Investments $ 7.3 $ 7.0 4.7 $ 6.9 $ 6.6 4.2
Tax Equivalent Yield 8.4% 8.8% - 8.7% 9.0% -
Charge Card Receivables:
Total Receivables $ 24.1 $ 24.8 (2.6) $ 24.1 $ 24.8 (2.6)
90 Days Past Due as a % of Total 2.4% 3.0% - 2.4% 3.0% -
Loss Reserves (millions) $ 939 $1,026 (8.5) $ 939 $1,026 (8.5)
% of Receivables 3.9% 4.1% - 3.9% 4.1% -
% of 90 Days Past Due 161% 136% - 161% 136% -
Net Loss Ratio 0.40% 0.45% - 0.40% 0.40% -
Managed U.S. Lending:
Total Loans $ 32.2 $ 31.3 3.1 $ 32.2 $ 31.3 3.1
Past Due Loans as a % of Total:
30-89 Days 2.0% 2.2% - 2.0% 2.2% -
90+ Days 1.2% 1.0% - 1.2% 1.0% -
Loss Reserves (millions):
Beginning Balance $1,121 $ 959 16.9 $1,077 $ 820 31.4
Provision 507 493 3.0 1,506 1,414 6.5
Net Charge-Offs/Other (426) (434) (1.7) (1,381) (1,216) 13.6
--------- --------- --------- ---------
Ending Balance $1,202 $1,018 18.1 $1,202 $1,018 18.1
========= ========= ========= =========
% of Loans 3.7% 3.3% - 3.7% 3.3% -
% of Past Due 117% 101% - 117% 101% -
Average Loans $ 32.2 $ 31.0 4.3 $ 31.7 $ 30.1 5.2
Net Write-Off Rate 5.6% 5.6% - 6.1% 5.5% -
Net Interest Yield 9.7% 8.8% - 9.8% 8.6% -
(A) 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
on the three and nine months ended September 30, 2001 would have been to
increase Basic Cards in Force Outside the U.S. to 16.6 million and
decrease Average Basic Cardmember Spending to $1,792 and $5,606,
respectively. Percentages of increase are calculated assuming the transfer
had occurred at the time the cards were issued.
(B) This data relates to Visa and Eurocards issued in connection with joint
venture activities.
(C) Computed from information provided herein.
16
TRAVEL RELATED SERVICES
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
Travel Related Services (TRS) reported net income of $553 million for the
three-month period ended September 30, 2002 compared with $248 million for the
same period a year ago. 2001 results included a restructuring charge of $195
million pretax ($127 million after-tax) and one-time costs and waived customer
fees of $87 million pretax ($57 million after-tax) resulting from the
September 11th terrorist attacks. Excluding the effect of these items, net
income for the quarter increased 28 percent.
Net revenues were up four percent on a GAAP basis and up five percent on a
managed basis as higher discount revenue, lending net finance charge revenue
and net card fees were partially offset by lower Travelers Cheque investment
income and lower travel commissions and fees, reflecting continued weakness in
the economy, particularly within the Corporate travel sector.
Discount revenue rose five percent compared to a year ago as a result of a
seven percent increase in billed business partially offset by a lower discount
rate. The seven percent increase in billed business resulted from a three
percent growth in cards in force and higher spending per basic Cardmember
worldwide. U.S. billed business was up seven percent as compared to the prior
year reflecting ten percent growth within the consumer card business on 11
percent higher transaction volume, five percent growth in small business
services volume and two percent growth within Corporate Services. U.S. non-T&E
related volume categories, representing approximately 62 percent of third
quarter 2002 U.S. billed business, increased 11 percent over the prior year.
U.S. T&E volumes declined six and five percent during July and August,
respectively, but increased 21 percent in September reflecting the impact of
the September 11th terrorist attacks on September 2001 volumes. U.S. non-T&E
volumes grew nine percent, ten percent and 14 percent during July, August and
September, respectively, relative to the comparable 2001 volumes.
U.S. cards in force increased one percent reflecting the impact of more
selective consumer card and small business acquisition activities during the
past year in light of weakening economic conditions. Outside the U.S., cards
in force rose seven percent on continued proprietary and network card growth,
although proprietary growth slowed reflecting attrition due to adverse
business conditions in Argentina, Brazil and Hong Kong.
Net finance charge revenue rose ten percent on four percent growth in average
worldwide lending balances. The yield on the U.S. portfolio increased compared
to the prior year reflecting a decrease in the proportion of the portfolio on
introductory rates and the benefit of lower funding costs, which were
partially offset by the evolving mix of products toward more lower-rate
offerings. Travel commissions and fees declined four percent on a seven
percent contraction in travel sales due to the continued effects of the weak
corporate travel environment. Other revenues increased four percent as larger
insurance premiums were partially offset by significantly lower interest
income on investment and liquidity pools held within card funding vehicles.
Marketing and promotion expense increased 31 percent compared to the prior
year on the continuation of a new brand advertising campaign, the introduction
of new charge cards with Membership Rewards built-in and the Cash Rebate card,
more loyalty marketing and an increase in selected card acquisition
activities. The provision for losses on charge card products declined 32
percent due to improved past due levels. The provision for losses on the
lending portfolio increased six percent over last year due to growth in
outstanding loans, increased reserve coverage levels and continued uncertainty
in the economic environment. Charge Card interest expense declined 33 percent
due to a lower effective cost of funds and lower receivables balances. Human
resources expense decreased 12 percent as a result of a lower number of
employees reflecting reengineering activities, including the outsourcing
agreement with IBM. Other operating expenses increased 15 percent partially
related to Cardmember loyalty programs as well as the impact of the company's
technology outsourcing agreement with IBM. These increases were partially
offset by reengineering initiatives and cost containment efforts. Third
quarter 2001 expenses included a restructuring charge of $195 million and
one-time costs and waived customer fees of $87 million related to the
September 11th terrorist attacks.
17
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Travel Related Services' (TRS) net income rose 23 percent for the nine months
ended September 30, 2002 compared to a year ago. Excluding the effect of the
2001 third quarter restructuring charge and one-time costs noted above, net
income was eight percent higher than the prior year.
Net revenues on a GAAP basis were unchanged and net revenues on a managed
basis rose slightly as compared to the prior year as lower travel commissions
and fees, reflecting continued weakness in the economy, particularly within
the Corporate travel sector, and a decline in other revenues were offset by
growth in lending net finance charge revenues.
Discount revenue was relatively unchanged as the two percent increase in
billed business was partially offset by a decline in the average discount
rate. The two percent increase in billed business primarily resulted from
three percent growth in cards in force which was partially offset by a slight
decline in average spending per basic Cardmember worldwide. U.S. billed
business rose one percent reflecting six percent growth within the consumer
card business on ten percent higher transaction volume, a one percent increase
in small business services volume and an eight percent decline within
Corporate Services. U.S. non-T&E related volume categories, representing
approximately 61 percent of 2002 U.S. billed business, increased eight percent
over the prior year. U.S. T&E volumes declined seven percent.
Net finance charge revenue rose 20 percent on seven percent growth in average
worldwide lending balances. The yield on the U.S. portfolio increased
significantly reflecting the benefit of lower funding costs and a decrease in
the proportion of the portfolio on introductory rates, which were partially
offset by the evolving mix of products toward more lower-rate offerings.
Travel commissions and fees declined 14 percent on a 16 percent contraction in
travel sales due to the continued effects of the weak corporate travel
environment. Other revenues decreased four percent as somewhat higher
card-related fees and larger insurance premiums were offset by significantly
lower interest income on investment and liquidity pools held within card
funding vehicles.
Marketing and promotion expense increased 16 percent compared to the prior
year on the launch and continuation of the new brand advertising campaign, the
introduction of the new charge cards with Membership Rewards built-in and the
Cash Rebate card, more loyalty marketing and an increase in selected card
acquisition activities. The provision for losses on charge card products
declined 19 percent on lower volumes and generally improved credit trends. The
provision for losses on the lending portfolio grew 11 percent on growth in
outstanding loans and a generally weaker but improving credit environment.
Other provisions for losses increased 47 percent primarily due to higher
travel-related insurance claims and additional reserves related to credit
exposures to travel industry service establishments. Charge Card interest
expense decreased 35 percent as a result of a lower effective cost of funds.
Human resources expense decreased 14 percent as a result of a lower number of
employees, outsourcing and other cost containment efforts. Other operating
expenses increased 16 percent partially due to higher Cardmember loyalty
program costs, recognition of investment losses (primarily on internet-related
strategic investments) of $41 million in the first nine months of 2002
compared with gains of $55 million in the same portfolio last year, as well as
the impact of the company's technology outsourcing agreement with IBM. These
increases were partially offset by reengineering initiatives and cost
containment efforts. In addition, 2002 results include a net benefit of $19
million ($12 million after-tax) to adjust the restructuring charge reserve
established during the second half of 2001. 2001 expenses include a
restructuring charge of $195 million and one-time costs and waived customer
fees of $87 million related to the September 11th terrorist attacks.
18
TRAVEL RELATED SERVICES
EFFECT OF SECURITIZATIONS
The preceding statements of income and related discussion present TRS results
on a managed basis, as if there had been no securitization transactions. On a
GAAP reporting basis, TRS' results for the three months ended September 30,
2002 and 2001 included net Cardmember lending securitization gains of $9
million and $29 million, respectively which is comprised of gains related to
new issuances of $83 million and $29 million, respectively, partially offset
by losses of $74 million during the third quarter of 2002 resulting from
maturities. The results for the nine months ended September 30, 2002 and 2001
included net Cardmember lending securitization gains of $136 million and $155
million, respectively which is comprised of gains related to new issuances of
$210 million and $180 million, respectively, partially offset by losses of $74
million and $25 million, respectively, resulting from maturities. Management
views the gains from securitizations as discretionary benefits to be used for
card acquisition expenses, which are reflected in both marketing and promotion
and other operating expenses. Consequently, the managed basis statements of
income for the three months ended September 30, 2002 and 2001 assume that
lending securitization gains were offset by higher marketing and promotion
expense of $5 million and $16 million, respectively, and other operating
expense of $4 million and $13 million, respectively. Accordingly, the
incremental expenses, as well as the gains, have been eliminated. Similarly,
the managed basis statements of income for the nine months ended September 30,
2002 and 2001 assume that lending securitization gains were offset by higher
marketing and promotion expense of $81 million and $92 million, respectively,
and other operating expense of $55 million and $63 million, respectively.
Accordingly, the incremental expenses, as well as the gains, have been
eliminated. The following tables reconcile TRS' income statements from a
managed basis to a GAAP basis. These tables are not complete statements of
income, as they include only those items that are affected by securitizations.
Additionally, beginning in 2002, TRS revised its GAAP reporting of revenues to
include a separate securitization income line item.
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
----------------------------------------- ---------------------------------------
(Dollars in millions) Managed Securitization GAAP Managed Securitization GAAP
Basis Effect Basis Basis Effect Basis
----------------------------------------- ---------------------------------------
Net Revenues:
Net Card Fees $ 439 $ - $ 439 $ 423 $ - $ 423
Lending Net Finance Charge Revenue 912 (580) 332 829 (468) 361
Securitization Income - 500 500 - 352 352
Other Revenues 917 (198) 719 883 (122) 761
Total Net Revenues 4,673 (278) 4,395 4,466 (238) 4,228
Expenses:
Marketing and Promotion 389 5 394 298 16 314
Provision for Losses and Claims:
Charge Card 191 - 191 284 - 284
Lending 610 (291) 319 573 (271) 302
Charge Card Interest Expense 245 4 249 365 4 369
Net Discount Expense - - - - - -
Other Operating Expenses 1,531 4 1,535 1,335 13 1,348
Total Expenses 3,875 (278) 3,597 4,150 (238) 3,912
Pretax Income $ 798 $ - $ 798 $ 316 $ - $ 316
----------------------------------------- ---------------------------------------
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
----------------------------------------- ---------------------------------------
Managed Securitization GAAP Managed Securitization GAAP
Basis Effect Basis Basis Effect Basis
----------------------------------------- ---------------------------------------
Net Revenues:
Net Card Fees $ 1,291 $ - $ 1,291 $ 1,265 $ (16) $ 1,249
Lending Net Finance Charge Revenue 2,720 (1,617) 1,103 2,271 (1,242) 1,029
Securitization Income - 1,423 1,423 - 1,048 1,048
Other Revenues 2,640 (530) 2,110 2,735 (314) 2,421
Total Net Revenues 13,780 (724) 13,056 13,575 (524) 13,051
Expenses:
Marketing and Promotion 1,004 81 1,085 863 92 955
Provision for Losses and Claims:
Charge Card 723 - 723 888 (36) 852
Lending 1,826 (871) 955 1,638 (703) 935
Charge Card Interest Expense 738 11 749 1,141 (36) 1,105
Net Discount Expense - - - - 96 96
Other Operating Expenses 4,448 55 4,503 3,831 63 3,894
Total Expenses 11,494 (724) 10,770 11,792 (524) 11,268
Pretax Income $ 2,286 $ - $ 2,286 $ 1,783 $ - $ 1,783
----------------------------------------- ---------------------------------------
19
TRAVEL RELATED SERVICES
LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION
(Unaudited, GAAP Basis)
(Dollars in billions, except percentages)
September 30, December 31, Percentage September 30, Percentage
2002 2001 Inc/(Dec) 2001 Inc/(Dec)
-------------- -------------- ---------- -------------- ----------
Accounts Receivable, net $25.8 $28.5 (9.4)% $27.3 (5.3)%
Travelers Cheque Investments $ 7.6 $ 6.8 11.1 $ 7.0 8.6
U.S. Cardmember Loans $14.9 $16.9 (11.7) $16.1 (7.3)
Total Assets $65.9 $69.4 (5.0) $69.2 (4.7)
Travelers Cheques Outstanding $ 6.7 $ 6.2 9.0 $ 6.6 1.8
Short-term Debt $20.1 $31.8 (37.0) $32.3 (38.0)
Long-term Debt $13.1 $ 6.0 # $ 5.7 #
Total Liabilities $58.5 $62.7 (6.6) $62.6 (6.5)
Total Shareholder's Equity $ 7.4 $ 6.7 9.9 $ 6.6 11.5
Return on Average Equity* 25.2% 21.9% - 27.0% -
Return on Average Assets** 2.6% 2.1% - 2.6% -
# - Denotes a variance of more than 100%.
* Computed on a trailing 12-month basis excluding the effect on
Shareholder's Equity of unrealized gains or losses related to SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
** Computed on a trailing 12-month basis excluding the effect on total assets
of unrealized gains or losses related to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to the
extent that they directly affect Shareholder's Equity.
In light of the current market environment, and as part of the company's
ongoing funding activities, during the nine months ended September 30, 2002,
American Express Credit Corporation (Credco), a wholly-owned subsidiary of
TRS, issued approximately $6 billion of medium-term notes at fixed and
floating rates with maturities of one to three years which reflects a change
in the company's approach toward managing liquidity by placing higher reliance
on medium term notes and lesser reliance on commercial paper. Proceeds from
the sale of these securities have contributed toward an overall reduction in
total commercial paper outstanding from $18 billion at December 31, 2001 to
$10 billion at September 30, 2002. As of September 30, 2002, Credco had the
ability to issue approximately $4 billion of debt securities and warrants to
purchase debt securities under a shelf registration statement filed with the
SEC. In addition, American Express Centurion Bank, a wholly-owned subsidiary
of TRS, issued approximately $340 million of medium term notes at floating
rates during the first nine months of 2002.
American Express Credit Account Master Trust (the Trust) securitized $0.9
billion, $1.9 billion, and $1.8 billion of loans in the first, second and
third quarters of 2002, respectively, through the public issuance of investor
certificates. The securitized assets consist primarily of loans arising in a
portfolio of Credit and Sign & Travel/Extended Payment Option revolving credit
accounts or features and, in the future, may include other charge or credit
accounts or features or products. In some instances, the company, through
affiliates, invests in subordinated interests issued by the Trust; these are
recorded as Investments classified as Available-for-Sale. During the third
quarter of 2002, $2 billion of investor certificates that were previously
issued by the Trust matured. The Trust does not expect to securitize any
additional loans prior to the end of the year.
In the first two quarters of 2002, the American Express Master Trust (the
Master Trust) securitized $0.8 billion and $1 billion of Charge Card
receivables, respectively, which remain on the balance sheet.
Accounts Receivable decreased from prior periods due to lower volumes and
improved customer paydowns.
20
Travelers Cheque Investments increased over the prior year partially due to
increased Travelers Cheques outstanding, particularly compared to year-end,
and unrealized appreciation as a result of declining interest rates.
Short-term debt declined from September 30, 2001 and December 31, 2001, mainly
reflecting the issuance of medium-term notes, as previously discussed. These
medium-term notes are included in the long-term debt increase.
21
AMERICAN EXPRESS FINANCIAL ADVISORS
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
(Dollars in millions) September 30, Percentage September 30, Percentage
---------------------- ----------------------
2002 2001 Inc/(Dec) 2002 2001 Inc/(Dec)
--------- --------- ----------- --------- --------- -----------
Net Revenues:
Investment Income $ 517 $ 490 5.6% $ 1,481 $ 612 # %
Management and Distribution Fees 551 595 (7.4) 1,757 1,856 (5.3)
Other Revenues 320 307 4.2 935 873 7.1
--------- --------- --------- ---------
Total Revenues 1,388 1,392 (0.3) 4,173 3,341 24.9
Provision for Losses and Benefits:
Annuities 259 242 7.1 751 734 2.4
Insurance 182 171 6.2 534 480 11.1
Investment Certificates 46 71 (35.8) 130 251 (48.4)
--------- --------- --------- ---------
Total 487 484 0.4 1,415 1,465 (3.4)
--------- --------- --------- ---------
Total Net Revenues 901 908 (0.7) 2,758 1,876 47.0
--------- --------- --------- ---------
Expenses:
Human Resources 457 469 (2.6) 1,449 1,513 (4.3)
Other Operating Expenses 239 172 39.8 657 533 23.4
Restructuring Charges - 62 - - 62 -
Disaster Recovery Charge - 11 - (7) 11 -
--------- --------- --------- ---------
Total Expenses 696 714 (2.4) 2,099 2,119 (0.9)
--------- --------- --------- ---------
Pretax Income (Loss) 205 194 5.7 659 (243) -
Income Tax Provision (Benefit) 53 49 8.6 180 (133) -
--------- --------- --------- ---------
Net Income (Loss) $ 152 $ 145 4.8 $ 479 $ (110) -
========= ========= ========= =========
# - Denotes a variance of more than 100%.
22
AMERICAN EXPRESS FINANCIAL ADVISORS
SELECTED STATISTICAL INFORMATION
(Unaudited)
(Amounts in millions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
----------------------- -----------------------
2002 2001 Inc/(Dec) 2002 2001 Inc/(Dec)
--------- --------- ----------- --------- --------- -----------
Life Insurance Inforce (billions) $ 116.3 $ 104.8 11.0% $ 116.3 $ 104.8 11.0%
Deferred Annuities Inforce (billions) $ 39.5 $ 41.0 (3.7) $ 39.5 $ 41.0 (3.7)
Assets Owned, Managed or
Administered (billions):
Assets Managed for Institutions $ 43.3 $ 47.8 (9.4) $ 43.3 $ 47.8 (9.4)
Assets Owned, Managed or Administered
for Individuals:
Owned Assets:
Separate Account Assets 21.1 24.3 (13.5) 21.1 24.3 (13.5)
Other Owned Assets 47.8 42.5 12.6 47.8 42.5 12.6
--------- --------- --------- ---------
Total Owned Assets 68.9 66.8 3.1 68.9 66.8 3.1
Managed Assets 79.4 91.2 (12.9) 79.4 91.2 (12.9)
Administered Assets 29.9 28.6 4.5 29.9 28.6 4.5
--------- --------- --------- ---------
Total $ 221.5 $ 234.4 (5.5) $ 221.5 $ 234.4 (5.5)
========= ========= ========= =========
Market Appreciation (Depreciation)
During the Period:
Owned Assets:
Separate Account Assets $ (3,143) $ (4,470) - $ (6,097) $ (8,426) -
Other Owned Assets $ 637 $ 535 - $ 875 $ 1,372 -
Total Managed Assets $(11,013) $(15,719) - $(20,122) $(27,824) -
Cash Sales:
Mutual Funds $ 7,693 $ 7,384 4.2 $ 25,382 $ 25,667 (1.1)
Annuities 2,656 1,308 # 6,257 4,141 51.1
Investment Certificates 1,299 941 38.0 3,129 2,912 7.5
Life and Other Insurance Products 170 200 (15.1) 528 677 (22.1)
Institutional 781 488 60.0 2,972 4,259 (30.2)
Other 1,399 1,115 25.6 3,931 4,127 (4.7)
--------- --------- --------- ---------
Total Cash Sales $ 13,998 $ 11,436 22.4 $ 42,199 $ 41,783 1.0
========= ========= ========= =========
Number of Financial Advisors 11,353 11,385 (0.3) 11,353 11,385 (0.3)
Fees from Financial Plans and
Advice Services $ 27.4 $ 23.1 18.6 $ 87.1 $ 80.4 8.3
Percentage of Total Sales from Financial
Plans and Advice Services 73.0% 72.4% - 73.0% 72.6% -
# - Denotes a variance of more than 100%.
23
AMERICAN EXPRESS FINANCIAL ADVISORS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
American Express Financial Advisors' (AEFA) net income increased five percent
to $152 million for the third quarter of 2002 as compared to a year ago. 2001
results included a restructuring charge of $62 million pretax ($41 million
after-tax) and one-time costs of $11 million pretax ($8 million after-tax)
resulting from the September 11th terrorist attacks. Excluding the effect of
these items, net income decreased 21 percent. GAAP basis revenues were
slightly less than a year ago and net revenues on a managed basis decreased
one percent compared to a year ago primarily due to reduced management fees
from lower average managed asset levels and slightly higher provisions,
partially offset by higher investment income driven by higher invested assets,
higher insurance premiums and advice services fees and increased distribution
fees due to higher sales levels.
Investment income increased six percent as a lower average yield was more than
offset by higher levels of invested assets. Investment income also benefited
from the effect of depreciation in the S&P 500 on the value of options used by
AEFA to hedge outstanding stock market certificates and equity indexed
annuities issued to customers and linked to the S&P 500, which was offset in
the related provisions. Investment losses, primarily related to high-yield and
structured investments, were substantially offset by realized gains during the
quarter.
Management and distribution fees decreased seven percent when compared to the
same period last year. These decreases were primarily the result of lower
average assets under management, primarily reflecting the impact of weak
equity market conditions, partially offset by higher distribution fees due to
higher sales levels. The decline in managed assets during the third quarter
reflects market depreciation and, to a lesser extent, net outflows. Total
gross cash sales were up 22 percent as sales improved within both the retail
and institutional sales channels. Other revenues increased four percent
primarily due to higher property-casualty and life insurance premiums and
charges coupled with higher financial planning and advice services fees.
Annuity product provisions increased seven percent due to higher inforce
levels and the effect described above of depreciation in the S&P 500 on equity
indexed annuities, partially offset by lower accrual rates. Insurance
provisions increased six percent due to higher inforce levels, partially
offset by lower accrual rates. Certificate provisions decreased substantially
as higher inforce levels and the effect on the stock market certificate
product of depreciation in the S&P 500 were more than offset by significantly
lower accrual rates.
Total expenses on a GAAP basis decreased one percent as compared to a year
ago. Total expenses on a managed basis decreased two percent. Human resource
expenses declined three percent as higher field force compensation-related
costs due to higher sales volumes were more than offset by the benefits of
reengineering and cost containment initiatives within the home office, where
the average number of employees was down 14 percent. Other operating expenses
increased 40 percent in the three-month period due to the net $44 million
expense increase related to DAC, the impact of the technology outsourcing
agreement with IBM, and a higher minority interest expense related to a
premium deposits joint venture (with AEB). The net increase in DAC expense
resulted from a comprehensive review of DAC related practices completed during
the quarter as discussed below.
Third quarter 2001 expenses include a pretax restructuring charge of $62
million ($41 million after-tax) and one-time costs of $11 million ($8 million
after-tax) related to the September 11th terrorist attacks.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
AEFA reported net income of $479 million for the nine-month period ended
September 30, 2002 compared with a net loss of $110 million for the same
period a year ago. 2001 revenues and net loss included the effect of the
$1,008 million pretax loss ($669 million after-tax) from the write-down and
sale of certain high-yield securities
24
recognized in the first half of the year. In addition, 2001 results included a
restructuring charge of $62 million pretax ($41 million after-tax) and
one-time costs of $11 million pretax ($8 million after-tax) resulting from the
September 11th terrorist attacks. Excluding the effect of these three items,
net income declined 21 percent versus the prior year.
On a GAAP basis, revenues increased 25 percent over the prior year. Net
revenues on a managed basis were $2,758 million, up 47 percent over the prior
year. Net revenues increased primarily due to higher investment income due to
the effect of the $1,008 million pretax loss realized in 2001 and higher
invested assets in 2002, lower provisions, and higher life and
property-casualty insurance premiums and charges. These increases were
partially offset by lower income from investment portfolio products, due in
part to lower yields from the impact of portfolio repositioning activities,
the WorldCom losses recognized in the second quarter of 2002, and reduced
management fees from lower average managed asset levels.
Excluding the effect of the 2001 high-yield related losses, investment income
declined as higher invested assets were more than offset by the second quarter
investment loss of $78 million on WorldCom debt ($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) and a lower average yield, in part due
to repositioning of the portfolio. Investment income benefited from the effect
of depreciation in the S&P 500 on the value of options used by AEFA to hedge
outstanding stock market certificates and equity indexed annuities issued to
customers and linked to the S&P 500, which was offset in the related
provisions.
Management and distribution fees decreased five percent as compared to the
prior year. This decrease was primarily the result of lower average assets
under management, reflecting the negative impact of weak equity market
conditions. Assets managed for both individuals and institutions declined 12
percent from prior year levels. The decline reflects market depreciation and
net outflows. The year-over-year comparison reflects net outflows in the
institutional business and, to a lesser extent, net outflows in the retail
channel. Total gross cash sales were up one percent as generally weak sales
conditions in the first quarter of 2002 more than offset the sales increases
during the second and third quarters. Other revenues increased seven percent
primarily due to higher life and property-casualty insurance premiums and
charges coupled with greater financial planning and advice services fees.
Annuity product provisions were up two percent as compared to the prior year
as the impact of a higher inforce level was partially offset by lower accrual
rates. Also included is the effect described above of depreciation in the S&P
500 on equity indexed annuities. Insurance provisions increased 11 percent due
to higher inforce levels, partially offset by lower accrual rates. Certificate
provisions decreased 48 percent as higher inforce levels were more than offset
by significantly lower accrual rates. Also included was the effect on the
stock market certificate product of depreciation in the S&P 500.
Total expenses on a GAAP basis decreased two percent and total expenses on a
managed basis declined slightly versus the same period a year ago. Included in
2002 results is a third quarter net $44 million expense increase related to
DAC as described below. Similarly, 2001 results included a first quarter $67
million expense increase due to an adjustment to the factors used in the
amortization of DAC for variable insurance and annuity products due to a
decline in equity markets. Human resource expenses declined four percent. This
decrease is primarily due to the 2001 DAC adjustment of which $39 million is
included in human resource expenses. In addition, higher incentive
compensation expenses were more than offset by the benefits of reengineering
and cost containment initiatives within the home office where the average
number of employees was down 15 percent. Other operating expenses increased 23
percent due to a higher level of investment activities related to various
strategic, reengineering, technology and product development projects, the
impact of the technology outsourcing agreement with IBM, and a higher minority
interest expense related to a premium deposits joint venture (with AEB).
Included in current year other operating expenses are the net expense
increases related to DAC. Prior year other operating expenses included $28
million of increased DAC expense. 2001 expenses include a restructuring charge
of $62 million and one-time costs of $11 million related to the September 11th
terrorist attacks. 2002 results include a pretax benefit of $7 million related
to third quarter 2001 disaster recovery reserves to reflect lower than
anticipated insured loss claims.
25
DEFERRED ACQUISITION COSTS
AEFA's DAC represents the cost of acquiring new business, principally sales
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 percentage of the liabilities associated with the products. For mutual
fund products, DAC are generally amortized over fixed periods on a
straight-line basis, adjusting for persistency.
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. As actual experience
differs from the current assumptions, management considers on a quarterly
basis the need to change key assumptions underlying the amortization models
prospectively. For example, if the stock market trend rose or declined
appreciably, it could impact assumptions made about customer asset value
growth rates and result in an adjustment to income, either positively or
negatively. The impact on results of operations of changing prospective
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.
During the third quarter, AEFA completed a comprehensive review of its DAC
related practices. This review, which included benchmarking assistance from an
industry specialist, analyzed various historical AEFA DAC dynamics in addition
to the industry benchmarks. The specific areas reviewed included costs
deferred, customer asset value growth rates, including reversion to mean
assumptions, DAC amortization periods, mortality rates and product
persistency. As a result of this review, AEFA made certain revisions related
to DAC that resulted in a net $44 million increase in expenses this quarter.
This net expense increase reflected revisions within three key drivers of DAC.
- - AEFA reset its customer asset value growth rate assumptions for variable
annuity and variable life products to anticipate near-term and long-term
market performance consistent with long-term historical averages. The
customer asset value growth rate is the rate at which contract values are
assumed to appreciate in the future. AEFA is now projecting growth in
customer contract values at 7%. This rate is net of asset fees, and
anticipates a blend of equity and fixed income investments. Prior to
resetting these assumptions, AEFA was projecting long-term customer asset
value growth at 7.5% and near-term growth at approximately twice that rate.
The impact of resetting these assumptions, along with the impact of
unfavorable third quarter equity market performance, was an acceleration of
$173 million pretax of DAC amortization.
Going forward, AEFA intends to continue to use a mean reversion method as a
guideline in setting the near-term customer asset value growth rate, also
referred to as the mean reversion rate. In periods when market performance
results in actual contract value growth at a rate different than that
assumed, AEFA will re-assess the near-term rate in order to continue to
project its best estimate of long-term growth. For example, if actual
contract value growth during the fourth quarter is less than 7% on an
annualized basis, AEFA would increase the mean reversion rate assumed over
the near term to the rate needed to achieve the long-term growth rate of 7%
by the end of that period, assuming this long-term view is still
appropriate.
- - AEFA also revised its persistency assumptions for certain annuity products
and persistency and mortality assumptions for universal and variable
universal life insurance products, to better reflect actual experience and
future expectations. As part of this, AEFA observed that the persistency of
advisor-distributed fixed annuity business supported an amortization period
longer than the 10 years AEFA had been using as the approximate life of
this business. As a result, AEFA extended the amortization period to 15
years and increased the DAC balance accordingly. This change, along with
revised assumptions projecting more favorable persistency and mortality
rates, resulted in a decrease in DAC expense of $155 million pretax in the
quarter.
26
- - Finally, AEFA reviewed its acquisition costs to clarify those costs that
vary with and are primarily related to the acquisition of new and renewable
annuity and insurance contracts, or are incremental and vary directly with
the acquisition of back-end loaded mutual funds. AEFA revised the types and
amounts of costs deferred, in part to reflect the impact of advisor
platform changes and the effects of related reengineering. This resulted in
an increase in expense of $26 million pretax recognized during the
quarter.
The first two categories of revised assumptions relating to customer asset
value growth rates, DAC amortization periods, mortality rates and insurance
and annuity lapse rates should reduce the risk of adverse DAC adjustments
going forward. The third revised category, relating to the types and amounts
of costs deferred, will somewhat increase ongoing expenses, although these
additional expenses should be offset to some extent as reengineering and other
cost control initiatives are expected to mitigate their impact.
IMPACT OF RECENT MARKET VOLATILITY ON RESULTS OF OPERATIONS
Various aspects of AEFA's business can be significantly impacted by equity
levels and other market-based factors. One of these items is the management
and distribution fee revenue which is based on the market value of certain
managed assets. Other areas impacted by market volatility involve deferred
acquisitions costs (as noted above), structured investments and the variable
annuity guaranteed minimum death benefit feature. The value of AEFA's
structured investment portfolio is impacted by various market factors. These
investments include collateralized debt obligations and structured loan trusts
(backed by high-yield bonds and bank loans), which are held by AEFA through
interests in special purpose entities. The carrying value of these investments
is based on cash flow projections, which are affected by factors such as
default rates, persistency of defaults, recovery rates and interest rates,
among others. The current valuation of these investments assumes high levels
of near-term defaults, relative to historical default rates. Persistency of or
increases in these default rates could result in negative adjustments to the
market values of these investments in the future, which would adversely impact
results of operations. Conversely, a decline in the default rates would result
in higher values and would benefit future results of operations.
The majority of the variable annuity contracts offered by AEFA contain
guaranteed minimum death benefit (GMDB) provisions. At time of issue, these
contracts typically guarantee the death benefit payable will not be less than
the amount invested, regardless of the performance of the customer's account.
Most contracts also provide for some type of periodic adjustment of the
guaranteed amount based on the change in value of the contract. A large
portion of AEFA's contracts containing a GMDB provision adjust once every
six years. The periodic adjustment of these contracts can either increase
or decrease the guaranteed amount though not below the amount invested
adjusted for withdrawals. When market values of the customer's accounts
decline, the death benefit payable on a contract with a GMDB may exceed the
accumulated contract value. Currently, the amount paid in excess of contract
value is expensed in the period the payment occurs.
27
AMERICAN EXPRESS FINANCIAL ADVISORS
LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION
(Unaudited)
(Dollars in billions, except percentages)
September 30, December 31, Percentage September 30, Percentage
2002 2001 Inc/(Dec) 2001 Inc/(Dec)
-------------- ------------- ----------- -------------- -----------
Investments* $35.8 $33.6 6.5% $32.9 8.9%
Separate Account Assets $21.1 $27.3 (22.9) $24.3 (13.5)
Total Owned Assets $68.9 $71.5 (3.6) $66.8 3.1
Client Contract Reserves $36.1 $32.8 10.2 $32.6 10.8
Total Liabilities $62.7 $66.1 (5.1) $61.3 2.4
Total Shareholder's Equity $ 6.2 $ 5.4 14.5 $ 5.5 11.5
Return on Average Equity** 11.9% 1.0% - 2.7% -
* Excludes cash, derivatives, short term and other investments.
** Computed on a trailing 12-month basis excluding the effect on
Shareholder's Equity of unrealized gains or losses related to SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
Investments increased compared to September 30, 2001 primarily as a result of
positive net cash flows and in part due to unrealized appreciation of the
investment portfolio. High-yield investments are six percent of the total
investment portfolio, up from four percent at December 31, 2001 and September
30, 2001. Going forward, AEFA continues to target a high-yield level of
approximately seven percent of the investment portfolio.
Separate account assets decreased from prior year as well as from December 31,
2001 mainly due to market depreciation.
Client contract reserves increased eleven percent when compared to September
30, 2001 primarily as a result of positive cash sales and flows in fixed
annuities and investment certificates.
28
AMERICAN EXPRESS BANK
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
----------------------- -----------------------
2002 2001 Inc/(Dec) 2002 2001 Inc/(Dec)
--------- --------- ----------- --------- --------- -----------
Net Revenues:
Interest Income $158 $174 (9.0)% $450 $544 (17.4)%
Interest Expense 63 98 (35.2) 181 331 (45.2)
--------- --------- --------- ---------
Net Interest Income 95 76 24.7 269 213 25.9
Commissions and Fees 54 51 7.2 157 154 2.5
Foreign Exchange Income & Other Revenue 50 38 31.8 131 114 14.2
--------- --------- --------- ---------
Total Net Revenues 199 165 20.9 557 481 15.6
--------- --------- --------- ---------
Expenses:
Human Resources 62 60 1.3 177 185 (4.4)
Other Operating Expenses 64 69 (5.3) 181 198 (8.8)
Provision for Losses:
Ongoing 37 14 # 116 44 #
Restructuring Related - 26 - - 26 -
--------- --------- --------- ---------
Total Provision 37 40 (7.3) 116 70 66.2
Restructuring Charges (2) 58 - (2) 58 -
--------- --------- --------- ---------
Total Expenses 161 227 (29.0) 472 511 (7.7)
--------- --------- --------- ---------
Pretax Income (loss) 38 (62) - 85 (30) -
Income Tax Provision (benefit) 13 (19) - 29 (8) -
--------- --------- --------- ---------
Net Income (loss) $ 25 $(43) - $ 56 $(22) -
========= ========= ========= =========
# - Denotes variance of more than 100%.
SELECTED STATISTICAL INFORMATION
(Unaudited)
(Dollars in billions) Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
----------------------- -----------------------
2002 2001 Inc/(Dec) 2002 2001 Inc/(Dec)
--------- --------- ----------- --------- --------- -----------
Assets Managed */ Administered $12.2 $11.3 7.6 % $12.2 $11.3 7.6 %
Assets of Non-Consolidated Joint
Ventures $ 1.8 $ 2.0 (8.8)% $ 1.8 $ 2.0 (8.8)%
* Includes assets managed by American Express Financial Advisors.
American Express Bank (AEB) reported net income of $25 million and $56 million
for the three and nine months ended September 30, 2002, respectively, compared
with net losses of $43 million and $22 million for the same periods a year
ago. AEB results for the third quarter 2002 included a net benefit of $2
million pretax ($1 million after-tax) consisting of a $6 million pretax
reversal adjustment to the restructuring reserves established last year and,
to further rationalize AEB operations, a $4 million pretax 2002 restructuring
charge consisting of $2 million of severance costs and $2 million of other
charges. Included in 2001 results were $84 million pretax ($57 million
after-tax) of the restructuring charge noted earlier. Excluding these items,
AEB's net income increased 67 percent versus the third quarter of last year.
29
AEB's revenues continued to benefit from strong performance in private banking
and personal financial services. Net revenues increased 21 percent and 16
percent in the three and nine-month periods, respectively, primarily due to
lower funding costs and higher foreign exchange and other income. Results for
both periods reflect lower combined human resources and other operating expenses
due to reduced costs related to reengineering activities and tighter expense
controls. These benefits were offset by higher provisions for losses, which were
primarily due to higher write-offs in the consumer lending portfolio in Hong
Kong.
LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION
(Unaudited)
(Dollars in billions, except where indicated) September 30, December 31, Percentage September 30, Percentage
2002 2001 Inc/(Dec) 2001 Inc/(Dec)
-------------- ------------ ---------- ------------- ----------
Total Assets $ 12.0 $ 11.9 1.4% $ 12.8 (5.8)%
Total Liabilities $ 11.1 $ 11.1 0.3 $ 12.0 (7.2)
Total Shareholder's Equity (millions) $ 899 $ 761 18.1 $ 771 16.5
Return on Average Common Equity (A) 9.8% (2.0)% - (2.4)% -
Return on Average Assets (B) 0.55% (0.11)% - (0.13)% -
Total Loans $ 5.5 $ 5.3 4.6 $ 5.6 (0.5)
Total Non-performing Loans (millions) (C) $ 120 $ 123 (1.8) $ 133 (9.8)
Other Non-performing Assets (millions) $ 17 $ 22 (21.6) $ 2 #
Reserve for Credit Losses (millions) (D) $ 166 $ 148 12.1 $ 149 11.4
Loan Loss Reserves as a
Percentage of Total Loans 2.8% 2.4% - 2.6% -
Total Personal Financial Services (PFS)
Loans $ 1.6 $ 1.6 0.5 $ 1.5 9.7
30+ Days Past Due PFS Loans as a % of Total 4.9% 4.5% - 5.2% -
Deposits $ 8.6 $ 8.4 1.9 $ 8.7 (1.1)
Risk-Based Capital Ratios:
Tier 1 10.2% 11.1% - 9.9% -
Total 10.9% 12.2% - 10.6% -
Leverage Ratio 5.3% 5.3% - 5.4% -
(A) Computed on a trailing 12-month basis excluding the effect on
Shareholder's Equity of unrealized gains or losses related to SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
(B) Computed on a trailing 12-month basis excluding the effect on total assets
of unrealized gains or losses related to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to the
extent they directly affect Shareholder's Equity.
(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 $ 156 $ 128 $ 144
Other Assets, primarily derivatives 9 4 3
Other Liabilities 1 16 2
---- ---- ----
Total Reserve for Credit Losses $ 166 $ 148 $ 149
==== ==== ====
AEB had loans outstanding of $5.5 billion at September 30, 2002, up from $5.3
billion at December 31, 2001 but down from $5.6 billion at September 30, 2001.
The decrease since the third quarter of 2001 resulted from a $800 million
decrease in corporate banking loans, which was partially offset by a $100
million increase in financial institution loans and a $600 million increase in
consumer and private banking loans. Since December 31, 2001, corporate banking
loans decreased by $500 million, financial institution loans increased by $200
million and consumer and private banking loans increased by $500 million. As
of September 30, 2002, consumer and private banking loans comprised 66 percent
of total loans versus 60 percent at December 31, 2001 and 55 percent at
30
September 30, 2001. Corporate banking loans comprised nine percent of total
loans as of September 30, 2002 versus 18 percent at December 31, 2001 and 22
percent at September 30, 2001.
Total non-performing loans of $120 million at September 30, 2002 decreased
from $123 million at December 31, 2001 and $133 million at September 30, 2001
as AEB continues to wind down its corporate banking business. The decrease
from the prior year is primarily due to loan payments and write-offs, mainly
in Indonesia, India and Egypt, partially offset by net downgrades of the risk
status of various loans. During the first nine months of 2002, loan payments
and write-offs were also partially offset by downgrades.
Other banking activities, such as securities, unrealized gains on foreign
exchange and derivatives contracts, various contingencies and market
placements added approximately $7.2 billion and $8.0 billion to AEB's credit
exposures at September 30, 2002 and 2001, respectively. In December 2001 and
January 2002, the Argentine government mandated the conversion of dollar
denominated assets into pesos and simultaneously devalued the peso. AEB's
credit exposures to Argentina at September 30, 2002 were $37 million, which
included loans of $25 million.
CORPORATE AND OTHER
Corporate and Other reported net expenses of $43 million and $132 million for
the three and nine months ended September 30, 2002, respectively, compared
with net expenses of $52 million and $143 million in the same periods a year
ago. Third quarter 2002 results included the final preferred stock dividend
based on earnings from Lehman Brothers for the six months ended May 31, 2002
of $23 million pretax ($20 million after-tax). In addition, both 2001 and 2002
first quarter results included the $46 million annual preferred stock dividend
from Lehman Brothers. The dividends were offset by expenses related to
business building initiatives in both years. 2001 results included
restructuring charges of $11 million pretax ($7 million after-tax).
ACCOUNTING DEVELOPMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." Generally, SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized as incurred, whereas EITF Issue No. 94-3 required such a liability
to be recognized at the time that an entity committed to an exit plan. The
company is currently evaluating the provisions of the new rule, which is
effective for exit or disposal activities that are initiated after December
31, 2002. The new rule will primarily affect the company if and when
management commits to future exit or disposal plans.
The FASB is currently considering rules that could affect the future
accounting for special purpose vehicles. Such rules could potentially
include within their scope collateralized debt obligations, structured
loan trusts, mutual funds, hedge funds and limited partnerships that the
company manages and/or invests in. The effect could include adjustments to
current carrying values and/or consolidation of underlying assets and
liabilities. While such rules would not change the economic value inherent in
these operations, the financial statement effect of any changes cannot be
determined until the rules are finalized.
31
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, the Company
carried out an evaluation under the supervision and with the participation of
the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of its disclosure
controls and procedures. Based on that evaluation, the CEO and CFO have
concluded that the Company's disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
The CEO and CFO also note that subsequent to the date of their evaluation,
there were no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
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 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 to increase investment spending in the second
half of 2002, which will depend in part on the equity markets and other
factors affecting revenues, and the ability to capitalize on such investments
to improve business metrics; fluctuation in the equity markets, which can
affect the amount and types of investment products sold by AEFA, the market
value of its managed assets, management and distribution fees received based
on those assets and the amount of amortization of DAC; potential deterioration
in AEFA's high-yield and other investments, which could result in further
losses in AEFA's investment portfolio; the ability of AEFA to sell certain
high-yield investments at expected values and within anticipated timeframes
and to maintain its high-yield portfolio at certain levels in the future;
developments relating to AEFA's platform structure for financial advisors,
including the ability to increase advisor productivity, increase the growth of
productive new advisors and create efficiencies in the infrastructure; AEFA's
ability to roll out new and attractive products in a timely manner and
effectively manage the economics in selling a growing volume of
non-proprietary products; investment performance in AEFA's businesses; the
success, timeliness and financial impact, including costs, cost savings and
other benefits, of reengineering initiatives being implemented or considered
by the company, including cost management, structural and strategic measures
such as vendor, process, facilities and operations consolidation, outsourcing
(including, among others, technologies operations), relocating certain
functions to lower cost overseas locations, moving internal and external
functions to the Internet to save costs, the scale-back of corporate lending
in certain regions, and planned staff reductions relating to certain of such
reengineering actions; the ability to control and manage operating,
infrastructure,
32
advertising and promotion and other expenses as business expands or changes,
including balancing the need for longer-term investment spending; the impact
on the company's businesses and uncertainty created by the September 11th
terrorist attacks, and the potential negative effect on the company's
businesses and infrastructure, including information technology systems, of
any such attacks or disaster in the future; the impact on the company's
businesses resulting from a war with Iraq; the company's ability to recover
under its insurance policies for losses resulting from the September 11th
terrorist attacks; consumer and business spending on the company's travel
related services products, particularly credit and charge cards and growth in
card lending balances, which depend in part on the ability to issue new and
enhanced card products and increase revenues from such products, attract new
Cardholders, capture a greater share of existing Cardholders' spending,
sustain premium discount rates, increase merchant coverage, retain Cardmembers
after low introductory lending rates have expired, and expand the global
network services business; the ability to execute the company's global
corporate services strategy, including greater penetration of middle market
companies, increasing capture of non-T&E spending through greater use of the
company's purchasing card and other means, and further globalizing business
capabilities; 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 expanding the company's on-line and off-line
distribution channels and cross-selling financial, travel, card and other
products and services to its customer base, both in the U.S. and abroad;
effectively leveraging the company's assets, such as its brand, customers
and international presence, in the Internet environment; investing in and
competing at the leading edge of technology across all businesses; 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;
increasing competition in all of the company's major businesses;
fluctuations in interest rates, which impact the company's borrowing costs,
return on lending products and spreads in the investment and insurance
businesses; credit trends and the rate of bankruptcies, which can affect
spending on card products, debt payments by individual and corporate
customers and businesses that accept the company's card products
and returns on the company's investment portfolios; foreign currency exchange
rates; political or economic instability in certain regions or countries,
which could affect lending activities, among other businesses; legal and
regulatory developments, such as in the areas of consumer privacy and data
protection; acquisitions; the outcome of accounting proposals related to the
consolidation of special purpose entities, including those involving
collateralized debt obligations, structured loan trusts, mututal funds, hedge
funds and limited partnerships that the company manages and/or invests in,
which could affect both the company's balance sheet and results of operations;
and outcomes in litigation. 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, 2001, and its other reports filed with
the SEC.
33
PART II. OTHER INFORMATION
AMERICAN EXPRESS COMPANY
Item 1. Legal Proceedings
On August 15, 2000, Roger M. Lindmark ("Lindmark") filed a putative
class action lawsuit against American Express Company, American Express
Travel Related Services Company, Inc. 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 the Optima
line of credit cards and that AECB improperly applied credits for
returned merchandise against Optima balance transfer balances. Lindmark
asserts 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 seeks statutory and actual damages, restitution and
injunctive relief. Although the company believes it has 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 November 4, 2002 the court
preliminarily approved the proposed settlement filed by the parties. The
proposed 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. These class
members will receive a refund of charges affected by the terms changes
that were incurred during the class period. The Court is expected to
hold a hearing to consider final approval of the proposed settlement in
April 2003.
Beginning in mid-July 2002, twelve 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 believes that it has meritorious defenses to
these suits and intends to defend these cases vigorously.
Reference is made to Item 3. Legal Proceedings in the company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001, and
the Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2002, for information on the above and other legal proceedings.
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 alleges 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 seeks damages against the officers and
directors on behalf of the company.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) In August 1999 and March 2000, the company entered into agreements
with a financial institution under which an aggregate 29 million
company common shares were purchased on behalf of the financial
institution at an average purchase price of $50.41 per share. Each
of the agreements terminates after five years, at which time the
company is required to deliver an amount equal to the
34
original purchase price for the shares. The company may elect to
settle this amount (i) physically, by paying cash against delivery
of the shares held on behalf of 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, issues shares or
receives shares so that the value of the shares held on behalf of
the financial institution equals the original purchase price for the
shares. The company may prepay outstanding amounts at any time prior
to the end of the five-year term. In the first quarter of 2001, the
company elected to prepay $350 million of the aggregate outstanding
amount. In October 2002, the company elected to prepay an additional
$200 million of the aggregate outstanding amount.
In connection with these agreements, the company issued, during the
third quarter of 2002, 1,971,689 common shares on August 5, 2002.
Additionally, 5,474,399 common shares were issued on October 3,
2002. In addition, in September 2002, 1,447,789 shares were returned
to the company, resulting in a net issuance of 5,998,299 common
shares during the third quarter. The issuances of common shares were
exempt from registration under the Securities Act of 1933 pursuant
to Section 4(2) thereof, as a transaction not involving a public
offering.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page E-1 hereof.
(b) Reports on Form 8-K:
Form 8-K, dated July 22, 2002, Items 5 and 7, reporting the
company's earnings for the quarter ended June 30, 2002, and
including a Second Quarter Earnings Supplement.
Form 8-K, dated July 22, 2002, Item 5, announcing the election of
Robert D. Walter to its Board of Directors.
Form 8-K, dated July 31, 2002, Item 9, reporting certain information
from presentations to the financial community on July 31, 2002 by
Kenneth I. Chenault, Chairman and Chief Executive Officer of the
company, and Gary L. Crittenden, Executive Vice President and Chief
Financial Officer of the company.
Form 8-K, dated August 12, 2002, Items 7 and 9, furnishing the sworn
statements of Kenneth I. Chenault and Gary L. Crittenden that were
submitted to the Securities and Exchange Commission pursuant to
Order No. 4-460.
Form 8-K, dated October 28, 2002, Items 5 and 7, reporting the
company's earnings for the quarter ended September 30, 2002, and
including a Third Quarter Earnings Supplement.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN EXPRESS COMPANY
(Registrant)
Date: November 13, 2002 By /s/ Gary L. Crittenden
----------------------------
Gary L. Crittenden
Executive Vice President and
Chief Financial Officer
Date: November 13, 2002 By /s/ Thomas A. Iseghohi
------------------------
Thomas A. Iseghohi
Senior Vice President and
Comptroller
(Principal Accounting Officer)
36
CERTIFICATION
I, Kenneth I. Chenault, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
Express Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Kenneth I. Chenault
---------------------------
Kenneth I. Chenault
Chief Executive Officer
CERTIFICATION
I, Gary L. Crittenden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
Express Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Gary L. Crittenden
--------------------------
Gary L. Crittenden
Chief Financial Officer
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.
99.1 Certification of Kenneth I. Chenault pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification Gary L. Crittenden pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
E-1