The American Express Company, often abbreviated Amex, AmEx, AX or Amexco, is a global provider of financial services based in New York City, USA. The company is best known for its charge card, credit card, and traveler's cheque businesses.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to ---------------- ---------------- Commission file number 1-7657 AMERICAN EXPRESS COMPANY (Exact name of registrant as specified in its charter) New York 13-4922250 -------------- ----------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) World Financial Center, 200 Vesey Street, New York, NY 10285 - ----------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 640-2000 -------------- None - ----------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 31, 1999 - ---------------------------------------- ----------------------------- Common Shares (par value $.60 per share) 449,281,998 shares
AMERICAN EXPRESS COMPANY FORM 10-Q INDEX Part I. Financial Information: Consolidated Statements of Income - Three months ended June 30, 1999 and 1998 1 Consolidated Statements of Income - Six months ended June 30, 1999 and 1998 2 Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 3 Consolidated Statements of Cash Flows - Six months ended June 30, 1999 and 1998 4 Notes to Consolidated Financial Statements 5-7 Review Report of Independent Accountants 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-25 Part II. Other Information 26
<TABLE> PART I--FINANCIAL INFORMATION AMERICAN EXPRESS COMPANY CONSOLIDATED STATEMENTS OF INCOME (dollars in millions, except per share amounts) (Unaudited) <CAPTION> Three Months Ended June 30, ---------- 1999 1998 Revenues: ---- ---- <S> <C> <C> Discount revenue $1,662 $1,525 Interest and dividends, net 844 811 Management and distribution fees 553 482 Net card fees 393 398 Travel commissions and fees 469 403 Other commissions and fees 428 416 Cardmember lending net finance charge revenue 309 330 Life and other insurance premiums 127 115 Other 513 281 ----- ----- Total 5,298 4,761 ----- ----- Expenses: Human resources 1,499 1,327 Provisions for losses and benefits: Annuities and investment certificates 346 350 Life insurance, international banking, and other 164 150 Charge card 249 236 Cardmember lending 137 187 Interest 255 250 Occupancy and equipment 316 304 Marketing and promotion 354 301 Professional services 317 264 Communications 131 114 Other 635 478 ----- ----- Total 4,403 3,961 ----- ----- Pretax income 895 800 Income tax provision 249 222 ---- ---- Net income $646 $578 ==== ==== Earnings Per Common Share: Basic $1.44 $1.27 ==== ==== Diluted $1.41 $1.24 ==== ==== Average common shares outstanding for earnings per common share (millions): Basic 447.4 456.3 ===== ===== Diluted 457.1 465.3 ===== ===== Cash dividends declared per common share $0.225 $0.225 ===== ===== </TABLE> See notes to Consolidated Financial Statements. 1
<TABLE> PART I--FINANCIAL INFORMATION AMERICAN EXPRESS COMPANY CONSOLIDATED STATEMENTS OF INCOME (dollars in millions, except per share amounts) (Unaudited) <CAPTION> Six Months Ended June 30, -------- 1999 1998 Revenues: ---- ---- <S> <C> <C> Discount revenue $3,175 $2,955 Interest and dividends, net 1,639 1,621 Management and distribution fees 1,075 900 Net card fees 796 796 Travel commissions and fees 895 754 Other commissions and fees 845 825 Cardmember lending net finance charge revenue 656 647 Life and other insurance premiums 251 228 Other 937 556 ------ ----- Total 10,269 9,282 ------ ----- Expenses: Human resources 2,930 2,561 Provisions for losses and benefits: Annuities and investment certificates 679 720 Life insurance, international banking, and other 321 515 Charge card 431 454 Cardmember lending 372 405 Interest 489 476 Occupancy and equipment 624 588 Marketing and promotion 650 566 Professional services 598 494 Communications 252 223 Other 1,236 867 ------ ----- Total 8,582 7,869 ------ ----- Pretax income 1,687 1,413 Income tax provision 466 376 ------ ----- Net income $1,221 $1,037 ====== ===== Earnings Per Common Share: Basic $2.73 $2.26 ====== ===== Diluted $2.67 $2.22 ====== ===== Average common shares outstanding for earnings per common share (millions): Basic 447.5 458.4 ====== ===== Diluted 456.5 467.4 ====== ===== Cash dividends declared per common share $0.45 $0.45 ===== ===== </TABLE> See notes to Consolidated Financial Statements. 2
<TABLE> AMERICAN EXPRESS COMPANY CONSOLIDATED BALANCE SHEETS (millions) (Unaudited) <CAPTION> June 30, December 31, Assets 1999 1998 - ------ ---- ---- <S> <C> <C> Cash and cash equivalents $6,096 $4,092 Accounts receivable and accrued interest: Cardmember receivables, less reserves: 1999, $643; 1998, $524 19,430 19,176 Other receivables, less reserves: 1999, $86; 1998, $75 3,514 3,048 Investments 42,247 41,299 Loans: Cardmember lending, less reserves: 1999, $530; 1998, $593 13,912 14,721 International banking, less reserves: 1999, $217; 1998, $214 5,012 5,404 Other, net 965 929 Separate account assets 30,061 27,349 Deferred acquisition costs 3,059 2,990 Land, buildings and equipment--at cost, less accumulated depreciation: 1999, $2,123; 1998, $2,067 1,795 1,637 Other assets 6,361 6,288 ------- ------- Total assets $132,452 $126,933 ======= ======= Liabilities and Shareholders' Equity Customers' deposits $9,062 $10,398 Travelers Cheques outstanding 6,325 5,823 Accounts payable 6,895 5,373 Insurance and annuity reserves: Fixed annuities 20,938 21,172 Life and disability policies 4,365 4,261 Investment certificate reserves 5,462 4,854 Short-term debt 24,785 22,605 Long-term debt 6,505 7,019 Separate account liabilities 30,061 27,349 Other liabilities 7,792 7,881 ------- ------- Total liabilities 122,190 116,735 ======= ======= Guaranteed preferred beneficial interests in the Company's junior subordinated deferrable interest debentures 500 500 Shareholders' equity: Common shares, $.60 par value, authorized 1.2 billion shares; issued and outstanding 449.0 million shares in 1999 and 450.5 million shares in 1998 269 270 Capital surplus 5,044 4,809 Retained earnings 4,559 4,148 Other comprehensive income, net of tax: Net unrealized securities (losses) gains (11) 583 Foreign currency translation adjustments (99) (112) ------- ------- Accumulated other comprehensive income (110) 471 ------- ------- Total shareholders' equity 9,762 9,698 Total liabilities and shareholders' equity ------- ------- $132,452 $126,933 ======= ======= </TABLE> See notes to Consolidated Financial Statements. 3
<TABLE> AMERICAN EXPRESS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (millions) (Unaudited) <CAPTION> Six Months Ended June 30, -------- 1999 1998 ---- ---- <S> <C> <C> Cash Flows from Operating Activities Net income $1,221 $1,037 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for losses and benefits 1,137 1,427 Depreciation, amortization, deferred taxes and other 144 9 Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: Accounts receivable and accrued interest (499) (142) Other assets 86 151 Accounts payable and other liabilities 1,779 697 Increase in Travelers Cheques outstanding 504 666 Increase in insurance reserves 86 78 ----- ----- Net cash provided by operating activities 4,458 3,923 ----- ----- Cash Flows from Investing Activities Sale of investments 1,390 1,074 Maturity and redemption of investments 3,367 3,431 Purchase of investments (6,534) (5,400) Net increase in Cardmember receivables (981) (386) Sale of Cardmember receivables/loans to Trust 2,492 1,995 Proceeds from repayment of loans 10,684 14,071 Issuance of loans (12,529) (14,991) Purchase of land, buildings and equipment (332) (133) Sale of land, buildings and equipment 8 10 Acquisitions, net of cash acquired (27) (313) ----- ----- Net cash provided by investing activities (2,462) (642) ----- ----- Cash Flows from Financing Activities Net (decrease) increase in customers' deposits (1,283) 132 Sale of annuities and investment certificates 2,790 2,647 Redemption of annuities and investment certificates (2,521) (2,884) Net (decrease) in debt with maturities of three months or less (2,214) (2,542) Issuance of debt 10,007 3,768 Principal payments on debt (6,093) (3,794) Issuance of American Express common shares 137 88 Repurchase of American Express common shares (634) (1,130) Dividends paid (202) (209) ----- ----- Net cash used by financing activities (13) (3,924) ----- ----- Effect of exchange rate changes on cash 21 (35) ----- ----- Net increase (decrease) in cash and cash equivalents 2,004 (678) Cash and cash equivalents at beginning of period 4,092 4,179 ----- ----- Cash and cash equivalents at end of period $6,096 $3,501 ===== ===== </TABLE> See notes to Consolidated Financial Statements. 4
AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated financial statements should be read in conjunction with the financial statements in the Annual Report on Form 10-K of American Express Company (the Company or American Express) for the year ended December 31, 1998. Significant accounting policies disclosed therein have not changed. 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 $156 million and $163 million for the second quarter of 1999 and 1998, respectively, and $312 million and $324 million for the six months ended June 30, 1999 and 1998, respectively. Interest and Dividends is presented net of interest expense of $110 million and $151 million for the second quarter of 1999 and 1998, respectively, and $231 million and $294 million for the six months ended June 30, 1999 and 1998, respectively, related primarily to the Company's international banking operations. The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the consolidated results of operations for the interim periods have been made. All adjustments made were of a normal, recurring nature. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. 2. Accounting Development In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP, which has been adopted prospectively as of January 1, 1999, requires the capitalization of certain costs incurred after the date of adoption to develop or obtain software for internal use. The Company's policy had been to expense such costs as incurred. The amounts capitalized will be amortized straight line over a five-year period. See the consolidated section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further information. 5
<TABLE> 3. Investment Securities The following is a summary of investments at June 30, 1999 and December 31, 1998: <CAPTION> June 30, December 31, 1999 1998 (in millions) ---- ---- <S> <C> <C> Held to Maturity, at amortized cost (fair value: 1999, $9,948; 1998, $11,144) $9,731 $10,526 Available for Sale, at fair value (cost: 1999, $28,160; 1998, $25,895) 28,127 26,764 Investment mortgage loans (fair value: 1999, $3,953; 1998, $4,089) 3,941 3,840 Trading 448 169 ------ ------ Total $42,247 $41,299 ======= ======= </TABLE> 4. 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 and (ii) foreign currency translation adjustments. The components of comprehensive income, net of related tax, for the three and six months ended June 30, 1999 and 1998 were as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ------- -------- (in millions) 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $646 $578 $1,221 $1,037 Change in: Net unrealized securities (losses) gains (384) 5 (594) (12) Foreign currency translation adjustments 1 - 13 (2) ---- ---- ---- ----- Total $263 $583 $640 $1,023 ==== ==== ==== ====== </TABLE> 5. Taxes and Interest Net income taxes paid during the six months ended June 30, 1999 and 1998 were approximately $225 million and $415 million, respectively. Interest paid during the six months ended June 30, 1999 and 1998 was approximately $1.2 billion and $1.1 billion, respectively. 6
<TABLE> 6. Earnings per Share The computations of basic and diluted earnings per common share (EPS) for the three and six months ended June 30, 1999 and 1998 are as follows: <CAPTION> (in millions, except per Three Months Ended Six Months Ended share amounts) June 30, June 30, -------- -------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Numerator: Net income $646 $578 $1,221 $1,037 Denominator: Denominator for basic EPS - weighted-average shares 447.4 456.3 447.5 458.4 Effect of dilutive securities: Stock Options and Restricted Stock Awards 9.7 8.9 9.0 8.9 Other - 0.1 - 0.1 ----- ----- ----- ----- Potentially dilutive common shares 9.7 9.0 9.0 9.0 ----- ----- ----- ----- Denominator for diluted EPS 457.1 465.3 456.5 467.4 ----- ----- ----- ----- Basic EPS $1.44 $1.27 $2.73 $2.26 ----- ----- ----- ----- Diluted EPS $1.41 $1.24 $2.67 $2.22 ----- ----- ----- ----- </TABLE> <TABLE> 7. Segment Information Results for the Company's operating segments, based on management's internal reporting structure, are as follows: <CAPTION> Revenues Three Months Ended Six Months Ended June 30, June 30, ------- ------- (in millions) 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Travel Related Services $3,678 $3,270 $7,099 $6,353 American Express Financial Advisors 1,394 1,282 2,739 2,503 American Express Bank/ Travelers Cheque 259 251 506 508 Corporate and Other (33) (42) (75) (82) ----- ----- ------ ----- Total $5,298 $4,761 $10,269 $9,282 ===== ===== ====== ===== <CAPTION> Net Income Three Months Ended Six Months Ended June 30, June 30, ------- ------- (in millions) 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Travel Related Services $411 $360 $774 $676 American Express Financial Advisors 242 212 456 398 American Express Bank/ Travelers Cheque 38 47 79 (36) Corporate and Other (45) (41) (88) (1) --- --- ----- ----- Total $646 $578 $1,221 $1,037 === === ===== ===== </TABLE> 7
INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Shareholders and Board of Directors American Express Company We have reviewed the accompanying consolidated balance sheet of American Express Company (the "Company") as of June 30, 1999 and the related consolidated statements of income for the three and six-month periods ended June 30, 1999 and 1998 and consolidated statements of cash flows for the six-month periods ended June 30, 1999 and 1998. 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 generally accepted auditing standards, 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of the Company as of December 31, 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated February 4, 1999, 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, 1998 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/Ernst & Young LLP New York, New York August 13, 1999 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Results Of Operations For The Three and Six Months Ended June 30, 1999 - ---------------------------------------------------------------------- The Company's consolidated net income rose 12 percent and 18 percent while diluted earnings per share increased 14 percent and 20 percent in the three and six-month periods ended June 30, 1999, respectively. The Company's return on equity was 25.3 percent. The year-ago six-month results included several first quarter items: a $138 million ($213 million pretax) credit loss provision at American Express Bank relating to its Asia/Pacific portfolio and income in the Corporate and Other segment of $78 million ($106 million pretax) comprising a gain from the sale of First Data Corporation shares and a preferred stock dividend based on Lehman Brothers earnings. Excluding these items, six-month income and diluted earnings per share increased 11 percent and 14 percent, respectively. Consolidated revenues grew 11 percent for the three and six months ended June 30, 1999. Revenues, net of American Express Financial Advisors' (AEFA) provisions for losses and benefits, were up 12 percent for the three and six months ended June 30, 1999, reflecting an increase in worldwide billed business and Cardmember loans, higher travel commissions and fees, greater management and distribution fees and wider investment margins at AEFA. The growth in travel commissions and fees resulted from acquisitions during the latter part of 1998, which increased revenues and expenses but did not have a material effect on net income. Consolidated expenses rose, primarily due to higher expenses related to human resources and marketing and promotion expenses to support business building initiatives and acquisitions, partially offset by lower loss provisions. These results were in line with or exceeded the Company's long-term targets of achieving, on average and over time: 12-15 percent earnings per share growth, at least 8 percent revenue growth and a return on equity of 18-20 percent. Due to a change in accounting rules, the Company is required to capitalize software costs rather than expense them as incurred, which had been the Company's practice. For the three and six-month periods ended June 30, 1999, this amounted to benefits of $67 million and $126 million (net of amortization), respectively. Of these amounts, $51 million and $98 million related to Travel Related Services and $12 million and $22 million to American Express Financial Advisors for the three and six-month periods ended June 30, 1999, respectively. These benefits were offset by increased investment spending and therefore had no effect on net income. Consolidated Liquidity and Capital Resources - -------------------------------------------- In the first half of 1999, the Company repurchased 5.0 million common shares at an average price of $119.88 per share under its repurchase program. 9
In the third quarter of 1999 the Company entered into an agreement under which a third party will purchase up to 7 million Company common shares in the open market over a period of up to eight months. During the term of the agreement the Company will periodically issue shares to or receive shares from the third party so that the value of the shares held by the third party equals the original purchase price for the shares. At maturity in five years, the Company is required to deliver to the third party an amount equal to such original purchase price. The Company may elect to settle this amount (i) physically, by paying cash against delivery of the shares held by the third party or (ii) on a net cash or net share basis. The Company may also prepay outstanding amounts at any time prior to the end of the five-year term. The foregoing is separate from the Company's previously authorized share repurchase program. Year 2000 - --------- The Company began addressing the Year 2000 (Y2K) issue in 1995 and has established a plan for resolution, which involves the remediation, decommissioning and replacement of relevant systems, including mainframe, mid-range and desktop computers, application software, operating systems, systems software, data back-up archival and retrieval services, telephone and other communications systems, and hardware peripherals and facilities dependent on embedded technology. The Y2K compliance effort is divided into two initiatives. The first, known as "Millenniax," relates to mainframe and other technological systems maintained by the American Express Technologies organization (AET). The second, known as "Business T," relates to the technological assets that are owned, managed or maintained by the Company's individual business and staff units. Our plans for remediation of the Y2K issue include the following program phases: (i) employee awareness and mobilization, (ii) inventory collection and assessment, (iii) impact analysis, (iv) remediation/decommission, (v) testing and (vi) implementation. With respect to the Millenniax systems and Business T assets, all of the program phases referred to above are at least 99 percent complete. The Company's cumulative costs since inception of the Y2K initiatives were $471 million through June 30, 1999 and are estimated to be in the range of $46 - - $72 million for the remainder through 2000.* These costs, which are expensed as incurred, relate to both Millenniax and Business T, and have not had, nor are they expected to have, a material adverse impact on the Company's results of operations or financial condition.* Y2K costs related to Millenniax represent 6 percent and 1 percent of the AET budget for the years 1999 and 2000, respectively.* The Company's major businesses are heavily dependent upon internal computer systems, and all have significant interaction with systems of third parties, both domestically and internationally. The Company is working with key external parties, including merchants, clients, counterparties, vendors, exchanges, utilities, suppliers, agents and regulatory agencies to mitigate the potential risks to us of Y2K. As part of our overall compliance program, the Company is actively communicating with third parties through face-to-face meetings and correspondence, on an ongoing basis, to ascertain their state of readiness. Although numerous third parties have indicated to us in writing that they are addressing their Y2K issues on a timely basis, the readiness of third parties overall varies across the spectrum. The failure of external parties to resolve their own Y2K issues in a timely manner could result in a material financial risk to the Company.* 10
At this point, with remediation and testing of individual internal systems substantially complete, the Company's primary focus is on performing additional targeted integration testing of systems that support our most critical business functions, independent validation of such testing and completing Y2K contingency plans for all critical systems and, to a lesser extent, certain non-critical systems. A substantial portion of the integrated testing and related validation has been completed, with the remainder scheduled to be completed during the third quarter of 1999.* The contingency planning effort is a full-scale initiative that includes both internal and external experts under the guidance of a Company-wide steering committee. Our contingency plans, which are based in part on an assessment of the magnitude and probability of potential risks, primarily focus on proactive steps to prevent Y2K-related failures from occurring, or if they should occur, detecting them quickly, minimizing their impact and expediting their repair. The Y2K contingency plans supplement disaster recovery and business continuity plans already in place, and include measures such as selecting alternative suppliers and channels of distribution, setting up manual back-up processes, creating command centers, establishing additional roll-over management procedures and scheduling the availability of key personnel. Our Y2K contingency plans have been developed generally in accordance with guidelines established by the Federal Financial Institutions Examination Council. This effort is divided into four phases: (i) establishing organizational planning guidelines, (ii) completing a business impact analysis, (iii) developing the contingency plans and (iv) validating and verifying the contingency plans. The first three of these phases have essentially been completed, and have identified and assessed the need for, and developed, Y2K contingency plans for the Company's most critical core business functions. Such functions include, but are not limited to, credit authorization, Cardmember billing, merchant payment, client investments, funds transfer, securities settlement and travel reservations. These contingency plans also address third party systems that the Company's businesses interface with and rely upon, such as international telecommunications networks and utilities, global financial payment and clearing systems, and airline and other travel systems. The final phase of our contingency planning, which will include validation and verification of the contingency plans, will take place during the third quarter of 1999.* The Company will continue to refine its contingency planning activities throughout 1999 as additional information related to our exposures is gathered.* To the extent that there are Y2K failures that affect major internal processes or third party systems that the Company relies upon, including but not limited to those described above, such failures could have a material impact on the Company and its businesses or subsidiaries through business interruption or shutdown, financial loss, reputational damage and legal liability to third parties.* At this point it appears that some of the major industries in certain countries outside the United States, such as telecommunications and utilities, have made less progress in the Y2K compliance effort and, as a result, may present a somewhat greater exposure to the Company.* For additional information relating to the Y2K issue, see pages 22 and 23 of the Company's 1998 annual report to shareholders, which is incorporated by reference in the Company's 1998 10-K report. * Statements in this Y2K discussion marked with an asterisk are forward-looking statements which are subject to risks and uncertainties. Important factors that could cause results to differ materially from these forward-looking statements include, among other things, the ability of the Company 11
to successfully identify all systems containing two-digit codes, the nature and amount of programming and other resources required to fix and test the affected systems, the costs of labor and consultants related to such efforts as well as those involving the development and implementation of contingency plans, the continued availability of such personnel, the ability of third parties that interface with the Company to successfully address their Y2K issues, and the ability of the Company to assess potential internal and external Y2K exposures and develop effective contingency plans in connection therewith. 12
Travel Related Services Results of Operations For The Three and Six Months Ended June 30, 1999 and 1998 <TABLE> <CAPTION> Statement of Income ------------------- (Unaudited) (Dollars in millions) Three Months Ended Six Months Ended June 30, June 30, ----------------------------- Percentage ---------------------- Percentage 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec) ----------------------------------------- ------------------------------------ <S> <C> <C> <C> <C> <C> <C> Net Revenues: Discount Revenue $ 1,662 $ 1,525 9.0 % $ 3,175 $ 2,955 7.5 % Net Card Fees 393 398 (1.4) 796 796 - Travel Commissions and Fees 469 403 16.2 895 754 18.7 Other Revenues 845 614 37.8 1,577 1,201 31.2 Lending: Finance Charge Revenue 465 493 (5.6) 968 971 (0.3) Interest Expense 156 163 (4.3) 312 324 (3.7) ----------------------------- ---------------------------- Net Finance Charge Revenue 309 330 (6.3) 656 647 1.4 ----------------------------- ---------------------------- Total Net Revenues 3,678 3,270 12.5 7,099 6,353 11.7 ----------------------------- ---------------------------- Expenses: Marketing and Promotion 325 275 18.4 595 519 14.7 Provision for Losses and Claims: Charge Card 249 236 5.2 431 454 (5.1) Lending 137 187 (26.6) 372 405 (8.2) Other 14 11 17.4 27 24 11.9 ----------------------------- ---------------------------- Total 400 434 (8.1) 830 883 (6.0) ----------------------------- ---------------------------- Charge Card Interest Expense 198 203 (2.3) 381 399 (4.6) Net Discount Expense 131 170 (23.1) 273 310 (11.8) Human Resources 968 843 14.9 1,880 1,630 15.4 Other Operating Expenses 1,028 799 28.7 1,958 1,584 23.6 ----------------------------- ---------------------------- Total Expenses 3,050 2,724 12.0 5,917 5,325 11.1 ----------------------------- ---------------------------- Pretax Income 628 546 15.0 1,182 1,028 15.0 Income Tax Provision 217 186 16.8 408 352 15.9 ----------------------------- ---------------------------- Net Income $ 411 $ 360 14.0 $ 774 $ 676 14.5 ============================= ============================ </TABLE> The following table, which is presented for analytical purposes only, presents the effect on the above Statement of Income related to TRS' securitized receivables. It includes pretax gains of $99 million ($64 million after-tax) and $36 million ($23 million after-tax) in the second quarter of 1999 and 1998, respectively, related to the securitization of U.S. lending receivables, which were recognized in accordance with Statement of Financial Accounting Standards No. 125. These gains were invested in additional Marketing and Promotion expenses in both years and other business building initiatives in 1999 and had no material effect on Net Income or Total Expenses in any period. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ---------------------------- 1999 1998 1999 1998 ----------------------------- ---------------------------- <S> <C> <C> <C> <C> Increase in Net Card Fees - $ 5 - $ 5 Increase in Other Revenues $ 176 78 $ 267 155 Decrease in Lending Finance Charge Revenue (219) (102) (368) (208) Decrease in Lending Interest Expense 52 34 96 67 Increase in Marketing and Promotion Expense (58) (36) (58) (36) Decrease in Provision for Losses and Claims: Charge Card 39 71 90 125 Lending 123 64 170 94 Decrease in Charge Card Interest Expense 59 56 117 108 Increase in Net Discount Expense (131) (170) (273) (310) Increase in Other Operating Expenses (41) - (41) - ----------------------------- ---------------------------- Pretax Income $ - $ - $ - $ - ============================= ============================ </TABLE> 13
Travel Related Services <TABLE> <CAPTION> Selected Statistical Information -------------------------------- (Unaudited) (Amounts in billions, except where indicated) Three Months Ended Six Months Ended June 30, June 30, ------------------------- Percentage ---------------------------- Percentage 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec) -------------------------------------- ------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Total Cards in Force (millions): United States 28.7 29.6 (3.0)% 28.7 29.6 (3.0)% Outside the United States 15.2 14.2 6.8 15.2 14.2 6.8 ========================= ========================= Total 43.9 43.8 0.2 43.9 43.8 0.2 ========================= ========================= Basic Cards in Force (millions): United States 22.5 23.3 (3.6) 22.5 23.3 (3.6) Outside the United States 11.7 11.0 6.1 11.7 11.0 6.1 ========================= ========================= Total 34.2 34.3 (0.4) 34.2 34.3 (0.4) ========================= ========================= Card Billed Business: United States $ 46.0 $ 41.4 11.0 $ 87.6 $ 79.9 9.6 Outside the United States 16.4 15.4 7.3 31.6 29.5 7.3 ========================= ========================= Total $ 62.4 $ 56.8 10.0 $ 119.2 $ 109.4 9.0 ========================= ========================= Average Discount Rate* 2.73% 2.72% - 2.73% 2.73% - Average Basic Cardmember Spending (dollars)* $ 1,933 $ 1,717 12.6 $ 3,714 $ 3,313 12.1 Average Fee per Card (dollars)* $ 38 $ 38 - $ 39 $ 38 2.6 Travel Sales $ 6.0 $ 4.9 22.3 $ 11.4 $ 9.2 23.7 Travel Commissions and Fees/Sales** 7.8% 8.2% - 7.9% 8.2% - Owned and Managed Charge Card Receivables: Total Receivables $ 24.6 $ 23.4 5.3 $ 24.6 $ 23.4 5.3 90 Days Past Due as a % of Total 2.6% 3.1% - 2.6% 3.1% - Loss Reserves (millions) $ 932 $ 1,015 (8.2) $ 932 $ 1,015 (8.2) % of Receivables 3.8% 4.3% - 3.8% 4.3% - % of 90 Days Past Due 148% 142% - 148% 142% - Net Loss Ratio 0.39% 0.46% - 0.41% 0.46% - Owned and Managed U.S. Cardmember Lending: Total Loans $ 18.3 $ 14.8 23.2 $ 18.3 $ 14.8 23.2 Past Due Loans as a % of Total: 30-89 Days 1.8% 2.3% - 1.8% 2.3% - 90+ Days 0.9% 1.1% - 0.9% 1.1% - Loss Reserves (millions): Beginning Balance $ 623 $ 591 5.5 $ 619 $ 589 5.1 Provision 209 219 (4.4) 453 440 3.0 Net Charge-Offs/Other (230) (233) (0.8) (470) (452) 4.1 ========================= ========================= Ending Balance $ 602 $ 577 4.3 $ 602 $ 577 4.3 ========================= ========================= % of Loans 3.3% 3.9% - 3.3% 3.9% - % of Past Due 124% 115% - 124% 115% - Average Loans $ 17.4 $ 14.5 20.5 $ 17.1 $ 14.3 18.9 Net Write-Off Rate 5.3% 6.6% - 5.6% 6.5% - Net Interest Yield 9.3% 9.5% - 9.3% 9.5% - </TABLE> Note: Owned and managed Cardmember receivables and loans include securitized assets not reflected in the Consolidated Balance Sheet. * Computed excluding Cards issued by strategic alliance partners and independent operators as well as business billed on those Cards. ** Computed from information provided herein. 14
Travel Related Services - ----------------------- Travel Related Services' (TRS) net income rose 14 percent and 15 percent for the three and six-month periods ended June 30, 1999, respectively, compared with a year ago. Net revenues increased 12 percent in both periods, reflecting higher billed business in the United States and internationally, growth in Cardmember loans and higher travel commissions and fees. In the second quarter of 1999 and 1998, TRS recognized pretax gains of $99 million ($64 million after-tax) and $36 million ($23 million after-tax), respectively, from the securitization of U.S. receivables. These gains were invested in marketing and promotion related to card acquisition and, in 1999, Internet activities and other business building initiatives as well and, therefore, had no material impact on net income or total expense in either period. The improvement in discount revenue in the three and six-month periods ended June 30, 1999 compared with a year ago resulted from higher billed business. The growth in billed business reflects higher spending per Cardmember in each period, which rose due to several factors, including the benefits of rewards programs and expanded merchant coverage. Billed business increased, despite a general tightening of corporate travel and entertainment expenses and the cancellation of 1.6 million U.S. Government cards in the fourth quarter of 1998, representing approximately $3.5 billion in annualized spending, due to the Company's decision to withdraw from this business. Excluding the loss of the Government card business, total cards in force rose 1.7 million, with about one million of these cards added in the current quarter; in addition, domestic billed business for the current quarter grew 14% from a year ago excluding the loss of this business. The growth in billed business continued to be primarily the result of increases in retail and "everyday spend" categories; airline billings were relatively flat. The increase in travel commissions and fees in each period was driven by acquisitions during the latter half of 1998, which increased revenues and expenses but did not have a material effect on earnings. Other revenues also increased for the three and six months ended June 30, 1999, as a result of a higher level of securitized receivables, acquisitions, core business growth and higher lending assessments and fees. Lending net finance charge revenue, excluding securitizations, rose 19 percent and 18 percent for the three and six months ended June 30, 1999, respectively, compared with a year ago. This increase is primarily due to a 24 percent growth in managed worldwide lending balances, partially offset by lower net interest yields. Marketing and promotion expenses rose for the three and six months ended June 30, 1999 as a result of business building initiatives. The provision for losses on the charge card portfolio grew for the three months ended June 30, 1999, but fell for the six-month period ended June 30, 1999. The increase for the current quarter is due to higher volume, partly offset by a continued improvement in credit quality; the decline for the six-month period is due to improved loss rates. The provision for the lending portfolio fell for the three and six months ended June 30, 1999 as a result of securitizing a portion of the loan portfolio in the current quarter and improved loss rates, which more than offset the effect of higher loan volumes. Human resource costs rose in both periods, mainly due to a higher average number of employees, resulting from acquisitions and increased business volumes, merit increases and greater contract programmer costs for technology related projects. Other operating expenses also grew in both periods, in part from the cost of Cardmember loyalty programs, business growth and investment spending. 15
<TABLE> Travel Related Services Liquidity and Capital Resources <CAPTION> Selected Balance Sheet Information ---------------------------------- (Unaudited) (Dollars in billions, except percentages) June 30, December 31, Percentage June 30, Percentage 1999 1998 Inc/(Dec) 1998 Inc/(Dec) -------------------- ------------------- ---------------- -------------------- ------------- <S> <C> <C> <C> <C> <C> Accounts Receivable, net $ 21.7 $ 21.3 1.8 % $ 19.4 11.7 % U.S. Cardmember Loans $ 12.8 $ 13.7 (7.1) $ 11.8 7.9 Total Assets $ 46.9 $ 44.7 5.0 $ 38.9 20.7 Short-term Debt $ 25.8 $ 22.9 12.8 $ 18.1 43.0 Long-term Debt $ 4.8 $ 5.1 (6.1) $ 5.9 (19.0) Total Liabilities $ 41.6 $ 39.8 4.7 $ 33.9 22.8 Total Shareholder's Equity $ 5.3 $ 4.9 7.7 $ 5.0 6.4 Return on Average Equity* 28.8% 27.8% - 26.5% - Return on Average Assets* 3.3% 3.3% - 3.2% - </TABLE> * Computed based on the past twelve months of net income and excludes the effect of SFAS No. 115. In January 1999, TRS issued and sold, exclusively outside the United States and to non-U.S. persons, $500 million 5.625% Fixed Rate Notes. These notes are listed on the Luxembourg Stock Exchange and will mature in 2004. In April and May 1999, the American Express Credit Account Master Trust (the Trust) securitized an additional $1 billion and $1.5 billion of loans, respectively, through the issuance of asset backed certificates. The Trust expects to securitize an additional $1 billion of loans at a closing expected to occur in August 1999. The securitized assets consist of loans arising in a portfolio of designated Optima Card, Optima Line of Credit and Sign and Travel/Special Purchase revolving credit accounts owned by American Express Centurion Bank, a wholly-owned subsidiary of TRS. In July 1999, $500 million Class A Fixed Rate Accounts Receivable Trust Certificates matured from the charge card securitization portfolio. 16
<TABLE> American Express Financial Advisors Results of Operations For The Three and Six Months Ended June 30, 1999 and 1998 <CAPTION> Statement of Income ------------------- (Unaudited) (Dollars in millions) Three Months Ended Six Months Ended June 30, June 30, ------------------------- Percentage -------------------------- Percentage 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec) -------------------------------------- ------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net Revenues: Investment Income $ 615 $ 603 1.9 % $ 1,210 $ 1,216 (0.5)% Management and Distribution Fees 553 482 14.6 1,075 900 19.4 Other Revenues 226 197 15.3 454 387 17.4 ------------------------- ------------------------- Total Revenues 1,394 1,282 8.7 2,739 2,503 9.4 Provision for Losses and Benefits: Annuities 273 292 (6.5) 543 589 (7.7) Insurance 132 125 5.8 258 242 6.4 Investment Certificates 73 58 24.4 136 131 3.9 ------------------------- ------------------------- Total 478 475 0.5 937 962 (2.6) ------------------------- ------------------------- Net Revenues 916 807 13.6 1,802 1,541 16.9 ------------------------- ------------------------- Expenses: Human Resources 430 388 11.0 846 738 14.6 Other Operating Expenses 133 110 20.8 291 223 30.8 ------------------------- ------------------------- Total Expenses 563 498 13.2 1,137 961 18.3 ------------------------- ------------------------- Pretax Income 353 309 14.2 665 580 14.5 Income Tax Provision 111 97 14.3 209 182 14.5 ------------------------- ------------------------- Net Income $ 242 $ 212 14.2 $ 456 $ 398 14.5 ========================= ========================= </TABLE> 17
<TABLE> American Express Financial Advisors Selected Statistical Information -------------------------------- (Unaudited) (Amounts in millions, except percentages and where indicated) <CAPTION> Three Months Ended Six Months Ended June 30, June 30, -------------------------- Percentage ----------------------------- Percentage 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec) ----------------------------------------- ----------------------------------------- <S> <C> <C> <C> <C> <C> <C> Investments (billions) $ 30.7 $31.0 (1.2) % $30.7 $31.0 (1.2)% Client Contract Reserves (billions) $ 30.8 $30.2 2.0 $30.8 $30.2 2.0 Shareholder's Equity (billions) $ 4.0 $ 4.0 (0.3) $ 4.0 $ 4.0 (0.3) Return on Average Equity* 22.8% 22.3% - 22.8% 22.3% - Life Insurance in Force (billions) $ 84.6 $77.8 8.7 $84.6 $77.8 8.7 Deferred Annuities in Force (billions) $ 44.8 $43.5 3.0 $44.8 $43.5 3.0 Assets Owned, Managed or Administered (billions): Assets Managed for Institutions $ 49.9 $44.0 13.3 $49.9 $44.0 13.3 Assets Owned, Managed or Administered for Individuals: Owned Assets: Separate Account Assets 30.1 26.6 13.1 30.1 26.6 13.1 Other Owned Assets 37.8 37.2 1.7 37.8 37.2 1.7 --------------------------- ----------------------------- Total Owned Assets 67.9 63.8 6.5 67.9 63.8 6.5 Managed Assets 96.3 83.0 16.2 96.3 83.0 16.2 Administered Assets 18.3 11.2 62.5 18.3 11.2 62.5 --------------------------- ----------------------------- Total $232.4 $ 202.0 15.1 $ 232.4 $ 202.0 15.1 =========================== ============================= Market Appreciation (Depreciation) During the Period: Owned Assets: Separate Account Assets $1,520 $ 361 # $ 2,432 $ 2,971 (18.1) Other Owned Assets $ (395) $ 24 - $(599) $ 42 - Total Managed Assets $5,063 $ 1,045 # $ 7,952 $ 9,889 (19.6) Sales of Selected Products: Mutual Funds $6,207 $ 5,474 13.4 $12,239 $10,569 15.8 Annuities $ 750 $ 702 6.8 $ 1,329 $ 1,353 (1.8) Investment Certificates $ 777 $ 383 # $ 1,438 $ 841 71.0 Life and Other Insurance Products $ 110 $ 104 5.8 $ 202 $ 187 7.9 Number of Financial Advisors 10,489 9,869 6.3 10,489 9,869 6.3 Fees from Financial Plans $ 22.8 $20.9 9.2 $44.1 $38.4 14.7 Product Sales Generated from Financial Plans as a Percentage of Total Sales 65.2% 64.7% - 65.8% 64.9% - </TABLE> # Denotes variances of more than 100%. * Computed based on the past twelve months of net income and excludes the effect of SFAS No. 115. 18
American Express Financial Advisors American Express Financial Advisors' (AEFA) net income for the three and six-month periods ended June 30, 1999 rose 14 percent and 15 percent, respectively, from a year ago. Net revenues and earnings grew due to higher fee revenues and wider investment margins. Management fees rose as a result of increased managed asset levels, including separate account assets, and distribution fees grew reflecting record mutual fund sales and higher asset levels. Managed assets rose since last year reflecting positive net sales and market appreciation. Other revenues benefited from higher insurance premiums and financial planning fees. Investment income, net of provisions for losses and benefits, rose due to improved spreads on all product categories and higher in-force levels of insurance and certificate products. Human resource expenses rose, largely as a result of a volume-driven increase in advisors' compensation reflecting growth in sales and asset levels. The rise in other operating expenses is primarily due to increased costs related to higher business volumes and investments to build the business. 19
<TABLE> American Express Financial Advisors Liquidity and Capital Resources <CAPTION> Selected Balance Sheet Information ---------------------------------- (Unaudited) (Amounts in billions, except percentages) June 30, December 31, Percentage June 30, Percentage 1999 1998 Inc/(Dec) 1998 Inc/(Dec) -------------- -------------- ------------- ------------ --------- <S> <C> <C> <C> <C> <C> Investments $ 30.7 $ 30.9 (0.6)% $ 31.0 (1.2)% Separate Account Assets $ 30.1 $ 27.3 9.9 $ 26.6 13.1 Total Assets $ 67.9 $ 64.6 5.1 $ 63.8 6.5 Client Contract Reserves $ 30.8 $ 30.3 1.6 $ 30.2 2.0 Total Liabilities $ 63.9 $ 60.6 5.7 $ 59.8 6.9 Total Shareholder's Equity $ 4.0 $ 4.1 (3.3) $ 4.0 (0.3) Return on Average Equity* 22.8% 22.5% - 22.3% - </TABLE> * Computed based on the past twelve months of net income and excludes the effect of SFAS No. 115. Separate account assets and liabilities increased from December 31, 1998, primarily reflecting market appreciation. 20
<TABLE> American Express Bank/Travelers Cheque (AEB/TC) Results of Operations For The Three and Six Months Ended June 30, 1999 and 1998 <CAPTION> Statement of Income ------------------- (Unaudited) (Amounts in millions, except percentages) Three Months Ended Six Months Ended June 30, June 30, ---------------------------- Percentage ----------------------------- Percentage 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec) ------------------------------------------- ----------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net Revenues: Interest Income $ 183 $ 218 (16.1)% $ 376 $ 428 (12.1)% Interest Expense 108 147 (26.2) 228 286 (20.2) ---------------------------- ----------------------------- Net Interest Income 75 71 4.8 148 142 4.2 Travelers Cheque Investment Income 86 80 7.4 166 161 3.2 Foreign Exchange Income 14 35 (58.6) 33 83 (60.5) Commissions, Fees and Other Revenues 84 65 28.6 159 122 29.6 ---------------------------- ----------------------------- Total Net Revenues 259 251 3.0 506 508 (0.6) ---------------------------- ----------------------------- Expenses: Human Resources 85 79 6.6 166 153 8.5 Other Operating Expenses 150 136 10.3 287 261 9.9 Provision for Losses 18 13 38.7 35 245 (85.9) ---------------------------- ----------------------------- Total Expenses 253 228 10.7 488 659 (26.1) ---------------------------- ----------------------------- Pretax Income/(Loss) 6 23 (73.9) 18 (151) - Income Tax Benefit (32) (24) 35.5 (61) (115) (47.1) ---------------------------- ----------------------------- Net Income/(Loss) $ 38 $ 47 (18.1) $ 79 $ (36) - ============================ ============================= </TABLE> <TABLE> <CAPTION> Selected Statistical Information -------------------------------- Three Months Ended Six Months Ended June 30, June 30, -------------------------- Percentage ----------------------------- Percentage 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec) ----------------------------------------- ------------------------------------------- <S> <C> <C> <C> <C> <C> <C> American Express Bank: Assets Managed / Administered * $ 7.0 $ 5.6 25.0 % $ 7.0 $ 5.6 25.0 % Assets of Non-Consolidated Joint Ventures $ 2.2 $ 2.7 (20.3) $ 2.2 $ 2.7 (20.3) Travelers Cheque: Sales $ 6.1 $ 6.4 (5.7) $10.6 $11.2 (5.1) Average Outstanding $ 6.1 $ 6.0 1.2 $ 6.0 $ 5.8 2.2 Average Investments $ 5.7 $ 5.7 1.4 $ 5.7 $ 5.6 2.3 Tax equivalent yield 8.8% 9.0% - 8.8% 9.1% - </TABLE> * Includes assets managed by American Express Financial Advisors. 21
American Express Bank/Travelers Cheque (AEB/TC) AEB/TC reported net income of $38 million for the second quarter of 1999, compared with $47 million a year ago. AEB/TC reported net income of $79 million compared with a loss of $36 million for the six-month periods ended June 30, 1999 and 1998, respectively. The six-month period ended June 30, 1998 included a $138 million ($213 million pretax) credit loss provision related to AEB's business in the Asia/Pacific region, particularly Indonesia. Travelers Cheque results were in line with the prior year. Foreign exchange income declined due to reduced spreads, resulting from increased stability in currency markets, particularly in Asia. Commissions, fees and other revenues increased in part due to higher Private Banking and Correspondent Banking fees and losses in the prior year on Indonesian securities positions. Operating expenses rose due to costs associated with new consumer product introductions and realigning business activities in certain countries. 22
<TABLE> American Express Bank/Travelers Cheque (AEB/TC) Liquidity and Capital Resources <CAPTION> Selected Balance Sheet Information (Unaudited) (Amounts in billions, except percentages and where indicated) June 30, December 31, Percentage June 30, Percentage 1999 1998 Inc/(Dec) 1998 Inc/(Dec) ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Travelers Cheque Investments $ 6.3 $ 6.3 1.0 % $ 6.5 (2.1)% Total Loans $ 5.2 $ 5.6 (7.0) $ 6.1 (14.9) Total Nonperforming Loans (millions) $ 210 $ 180 16.3 $ 205 2.1 Other Nonperforming Assets (millions) $ 55 $ 63 (12.9) $ 73 (24.5) Reserve for Credit Losses (millions)* $ 249 $ 259 (3.7) $ 350 (28.7) Loan Loss Reserves as a Percentage of Total Loans 4.1% 3.8% - 4.3% - Total Assets $ 18.7 $ 18.5 1.1 $ 18.8 (0.5) Deposits $ 8.0 $ 8.3 (3.4) $ 8.1 (1.6) Travelers Cheques Outstanding $ 6.3 $ 5.8 8.6 $ 6.3 0.2 Total Liabilities $ 17.7 $ 17.3 2.1 $ 17.7 - Total Shareholder's Equity (millions) $ 1,048 $ 1,197 (12.4) $ 1,135 (7.7) Return on Average Assets** 0.86% 0.23% - 0.50% - Return on Average Common Equity** 18.5% 4.9% - 10.4% - Risk-Based Capital Ratios: Tier 1 9.8% 9.8% - 9.2% - Total 12.1% 12.6% - 12.2% - Leverage Ratio 5.7% 5.5% - 5.6% - * Allocation: Loans $ 216 $ 214 $ 265 Other Assets, primarily derivatives 32 43 84 Other Liabilities 1 2 1 ============= ============= ============= Total Credit Loss Reserves $ 249 $ 259 $ 350 ============= ============= ============= </TABLE> ** Computed based on the past twelve months of net income and excludes the effect of SFAS No. 115. AEB had loans outstanding of $5.2 billion at June 30, 1999, down from $5.6 billion at December 31, 1998 and $6.1 billion at June 30, 1998. The reduction since second quarter 1998 resulted from a $1.1 billion decrease in corporate and correspondent bank loans and a $260 million increase in consumer and private banking loans. Since December 31, 1998, corporate and correspondent bank loans fell by $460 million and consumer and private banking loans rose by $110 million. During the quarter, AEB securitized approximately $100 million of consumer loans in Hong Kong. As presented in the table below, there are other banking activities, such as forward contracts, various contingencies and market placements, which added approximately $7.6 billion to AEB's credit exposures at June 30, 1999 (compared with $7.2 million at June 30, 1998 and unchanged from December 31, 1998). Other nonperforming assets declined due to write-offs related to Indonesia, as anticipated in the provision recorded in the first quarter of 1998. 23
<TABLE> American Express Bank Exposures By Country and Region (Unaudited) <CAPTION> ($ in billions) Net Guarantees 6/30/99 12/31/98 FX and and Total Total Country Loans Derivatives Contingents Other* Exposure** Exposure** ------- ----- ----------- ----------- ------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Hong Kong $0.6 - $0.2 $0.1 $0.9 $1.1 Indonesia 0.2 - - 0.2 0.4 0.4 Singapore 0.4 - 0.1 0.1 0.5 0.6 Korea 0.1 - 0.1 0.2 0.4 0.3 Taiwan 0.3 - 0.1 0.1 0.5 0.5 China - - - - - - Japan - - - - 0.1 0.1 Thailand - - - - - - Other - - - 0.1 0.2 0.1 ------- ------- ------- ------- ------- ------- Total Asia/Pacific Region** 1.8 $0.1 0.5 0.8 3.2 3.2 ------- ------- ------- ------- ------- ------- Chile 0.3 - - 0.1 0.4 0.4 Brazil 0.3 - - 0.1 0.3 0.4 Mexico 0.1 - - - 0.1 0.1 Peru 0.1 - - - 0.1 0.1 Argentina 0.1 - - - 0.1 0.1 Other 0.2 - 0.1 0.1 0.4 0.4 ------- ------- ------- ------- ------- ------- Total Latin America** 1.0 - 0.1 0.2 1.3 1.4 ------- ------- ------- ------- ------- ------- India 0.3 - 0.1 0.4 0.8 0.8 Pakistan 0.1 - - 0.1 0.2 0.2 Other 0.1 - 0.1 0.1 0.2 0.2 ------- ------- ------- ------- ------- ------- Total Subcontinent** 0.5 - 0.2 0.5 1.2 1.2 ------- ------- ------- ------- ------- ------- Egypt 0.4 - - 0.2 0.7 0.7 Other 0.2 - 0.1 - 0.3 0.3 ------- ------- ------- ------- ------- ------- Total Middle East & Africa** 0.5 - 0.1 0.3 0.9 1.0 ------- ------- ------- ------- ------- ------- Total Europe*** 1.3 0.1 0.7 2.2 4.3 4.4 Total North America** 0.2 - 0.1 1.4 1.8 1.9 ------- ------- ------- ------- ------- ------- Total Worldwide** $5.2 $0.2 $1.8 $5.5 $12.8 $13.2 ======= ======= ======= ======= ======= ======= </TABLE> * Includes cash, placements and securities. ** Individual items may not add to totals due to rounding. *** Total exposures at 6/30/99 and 12/31/98 include $12 million and $20 million of exposures to Russia, respectively. Note: Includes cross-border and local exposure and does not net local funding or liabilities against any local exposure. 24
Corporate and Other Corporate and Other reported net expenses of $45 and $88 million for the three and six months ended June 30, 1999, compared with net expenses of $41 and $1 million in the same periods last year. The current year six-month results include a $39 million ($46 million pretax) preferred stock dividend based on earnings from Lehman Brothers, which was offset by expenses related to the Year 2000 issue and business building initiatives. The prior year six-month results included income of $78 million ($106 million pretax) comprising a $39 million ($60 million pretax) gain from sales of common stock of First Data Corporation and an equivalent Lehman Brothers dividend. 25
PART II. OTHER INFORMATION AMERICAN EXPRESS COMPANY Item 1. Legal Proceedings On March 29, 1999 an action entitled LAMBERT V. AMERICAN EXPRESS FINANCIAL CORPORATION; AMERICAN EXPRESS FINANCIAL ADVISORS INC.; IDS LIFE INSURANCE AGENCIES, INC.; IDS LIFE INSURANCE COMPANY; AMERICAN EXPRESS PLAN COMMITTEE; CAREER DISTRIBUTORS PLAN COMMITTEE AND JOHN/JANE DOES 1-20 ("Companies") commenced in U.S. District Court, District of Minnesota, Fourth Division. The sole named plaintiff purports to represent a class consisting of financial advisors who were independent contractors from January 1, 1993 to the present. The complaint alleges class members were misclassified as independent contractors and seeks retroactive coverage in all employee health, welfare, retirement and compensation plans, and payment of FICA and FUTA taxes. The complaint also alleges violation of ERISA, breach of contract, breach of duty of good faith and fair dealing and unjust enrichment. The complaint was amended on July 26, 1999, adding three plaintiffs making new claims for conversion and declaratory judgment. The defendants filed a motion to dismiss all claims on July 30, 1999. The Company believes it has meritorious defenses to such action and intends to pursue them vigorously. The matter described above was previously reported in the Company's Form 10-Q for the quarterly period ended March 31, 1999. Item 4. Submission of Matters to a Vote of Security Holders For information relating to the matters voted upon at the Company's annual meeting for shareholders held on April 26, 1999, see Item 4 on page 24 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, which is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on page E-1 hereof. (b) Reports on Form 8-K: Form 8-K, dated April 22, 1999, Item 5, reporting the Company's earnings for the quarter ended March 31, 1999. Form 8-K, dated April 26, 1999, Item 5, reporting the Company's chief executive officer succession plans. Form 8-K, dated July 26, 1999, Item 5, reporting the Company's earnings for the quarter ended June 30, 1999. Form 8-K, dated July 29, 1999, Item 5, reporting the retirement of the Company's vice chairman and chief financial officer. Form 8-K, dated August 4, 1999, Item 5, reporting certain information from presentations to the financial community on August 4, 1999 by Harvey Golub, the Company's Chairman and Chief Executive Officer, and other officers of the Company. 26
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN EXPRESS COMPANY ------------------------ (Registrant) Date: August 13, 1999 By /s/ Richard Karl Goeltz ----------------------- ------------------------ Richard Karl Goeltz Vice Chairman and Chief Financial Officer Date: August 13, 1999 /s/ Daniel T. Henry ----------------------- ----------------------- Daniel T. Henry Senior Vice President and Comptroller (Chief Accounting Officer)
EXHIBIT INDEX The following exhibits are filed as part of this Quarterly Report: Exhibit Description ------- ----------- 10.1 Letter agreement dated April 12, 1999 with Harvey Golub, the Company's Chairman and Chief Executive Officer. 10.2 Description of a special grant of a stock option and restricted stock award to Kenneth I. Chenault, the Company's President and Chief Operating Officer. 12 Computation in Support of Ratio of Earnings to Fixed Charges. 15 Letter re Unaudited Interim Financial Information. 27 Financial Data Schedule. E-1