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 September 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 October 31, 1999 - ------------------------------------ ------------------------------- Common Shares (par value $.60 per share) 447,673,131 shares AMERICAN EXPRESS COMPANY FORM 10-Q INDEX Page No. Part I. Financial Information: Consolidated Statements of Income - Three months ended September 30, 1999 and 1998 1 Consolidated Statements of Income - Nine months ended September 30, 1999 and 1998 2 Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 3 Consolidated Statements of Cash Flows - Nine months ended September 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 September 30, ----------------------- 1999 1998 ---- ---- <S> <C> <C> Revenues: Discount revenue $1,700 $1,522 Interest and dividends, net 804 802 Management and distribution fees 578 476 Net card fees 395 393 Travel commissions and fees 448 441 Other commissions and fees 464 405 Cardmember lending net finance charge revenue 348 338 Life and other insurance premiums 131 119 Other 443 291 ----- ----- Total 5,311 4,787 ----- ----- Expenses: Human resources 1,526 1,410 Provisions for losses and benefits: Annuities and investment certificates 297 323 Life insurance, international banking, and other 158 152 Charge card 222 148 Cardmember lending 187 224 Interest 262 256 Occupancy and equipment 327 300 Marketing and promotion 399 333 Professional services 324 291 Communications 128 123 Other 574 428 ----- ----- Total 4,404 3,988 ----- ----- Pretax income 907 799 Income tax provision 259 225 ----- ----- Net income $648 $574 ===== ===== Earnings Per Common Share: Basic $1.45 $1.27 ===== ===== Diluted $1.42 $1.25 ===== ===== Average common shares outstanding for earnings per common share (millions): Basic 446.0 451.6 ===== ===== Diluted 456.4 459.6 ===== ===== 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> Nine Months Ended September 30, ----------------------- 1999 1998 ---- ---- <S> <C> <C> Revenues: Discount revenue $4,875 $4,476 Interest and dividends, net 2,443 2,423 Management and distribution fees 1,653 1,376 Net card fees 1,191 1,189 Travel commissions and fees 1,342 1,195 Other commissions and fees 1,309 1,230 Cardmember lending net finance charge revenue 1,004 985 Life and other insurance premiums 381 346 Other 1,382 849 ------ ------ Total 15,580 14,069 ------ ------ Expenses: Human resources 4,457 3,971 Provisions for losses and benefits: Annuities and investment certificates 977 1,042 Life insurance, international banking, and other 479 666 Charge card 653 602 Cardmember lending 559 629 Interest 750 732 Occupancy and equipment 952 888 Marketing and promotion 1,049 899 Professional services 922 823 Communications 381 346 Other 1,808 1,259 ------ ------ Total 12,987 11,857 ------ ------ Pretax income 2,593 2,212 Income tax provision 724 601 ------ ------ Net income $1,869 $1,611 ===== ===== Earnings Per Common Share: Basic $4.18 $3.53 ==== ==== Diluted $4.09 $3.47 ==== ==== Average common shares outstanding for earnings per common share (millions): Basic 447.0 456.2 ===== ===== Diluted 456.4 464.9 ===== ===== Cash dividends declared per common share $0.675 $0.675 ===== ===== </TABLE> See notes to Consolidated Financial Statements. 2
<TABLE> AMERICAN EXPRESS COMPANY CONSOLIDATED BALANCE SHEETS (millions) (Unaudited) <CAPTION> September 30, December 31, 1999 1998 ---- ---- <S> <C> <C> Assets Cash and cash equivalents $5,102 $4,092 Accounts receivable and accrued interest: Cardmember receivables, less reserves: 1999, $674; 1998, $524 20,888 19,176 Other receivables, less reserves: 1999, $87; 1998, $75 3,515 3,048 Investments 42,183 41,299 Loans: Cardmember lending, less reserves: 1999, $531; 1998, $593 14,692 14,721 International banking, less reserves: 1999, $179; 1998, $214 4,909 5,404 Other, net 897 929 Separate account assets 28,896 27,349 Deferred acquisition costs 3,097 2,990 Land, buildings and equipment--at cost, less accumulated depreciation: 1999, $2,194; 1998, $2,067 1,908 1,637 Other assets 6,529 6,288 ------- ------- Total assets $132,616 $126,933 ======= ======= Liabilities and Shareholders' Equity Customers' deposits $10,124 $10,398 Travelers Cheques outstanding 6,362 5,823 Accounts payable 7,101 5,373 Insurance and annuity reserves: Fixed annuities 20,777 21,172 Life and disability policies 4,407 4,261 Investment certificate reserves 5,839 4,854 Short-term debt 24,683 22,605 Long-term debt 6,220 7,019 Separate account liabilities 28,896 27,349 Other liabilities 7,963 7,881 ------- ------- Total liabilities 122,372 116,735 ------- ------- 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 447.6 million shares in 1999 and 450.5 million shares in 1998 269 270 Capital surplus 5,094 4,809 Retained earnings 4,777 4,148 Other comprehensive income, net of tax: Net unrealized securities (losses) gains (286) 583 Foreign currency translation adjustments (110) (112) ------- ------- Accumulated other comprehensive income (396) 471 ------- ------- Total shareholders' equity 9,744 9,698 Total liabilities and shareholders' ------- ------- equity $132,616 $126,933 ======= ======= </TABLE> See notes to Consolidated Financial Statements. 3
<TABLE> AMERICAN EXPRESS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (millions) (Unaudited) <CAPTION> Nine Months Ended September 30, ----------------- 1999 1998 ---- ---- <S> <C> <C> Cash Flows from Operating Activities Net income $1,869 $1,611 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for losses and benefits 1,708 1,943 Depreciation, amortization, deferred taxes and other 157 (164) Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: Accounts receivable and accrued interest (557) (37) Other assets (193) 571 Accounts payable and other liabilities 2,508 220 Increase in Travelers Cheques outstanding 537 544 Increase in insurance reserves 130 122 ----- ----- Net cash provided by operating activities 6,159 4,810 ----- ----- Cash Flows from Investing Activities Sale of investments 2,648 1,464 Maturity and redemption of investments 4,920 4,837 Purchase of investments (9,662) (6,705) Net increase in Cardmember receivables (1,987) (599) Sale of Cardmember receivables/loans to Trust 3,489 1,683 Proceeds from repayment of loans 16,996 19,386 Issuance of loans (21,244) (20,950) Purchase of land, buildings and equipment (525) (237) Sale of land, buildings and equipment 8 22 Acquisitions, net of cash acquired (37) (353) ----- ----- Net cash used by investing activities (5,394) (1,452) ----- ----- Cash Flows from Financing Activities Net (decrease) increase in customers' deposits (349) 787 Sale of annuities and investment certificates 4,273 3,966 Redemption of annuities and investment certificates (3,829) (4,234) Net decrease in debt with maturities of three months or less (2,346) (348) Issuance of debt 13,276 6,388 Principal payments on debt (9,726) (6,092) Issuance of Trust preferred securities - 500 Issuance of American Express common shares 181 105 Repurchase of American Express common shares (896) (1,619) Dividends paid (303) (312) ----- ----- Net cash provided (used) by financing activities 281 (859) ----- ----- Effect of exchange rate changes on cash (36) (84) ----- ----- Net increase in cash and cash equivalents 1,010 2,415 Cash and cash equivalents at beginning of period 4,092 4,179 ----- ----- Cash and cash equivalents at end of period $5,102 $6,594 ===== ===== </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 $165 million and $164 million for the third quarter of 1999 and 1998, respectively, and $477 million and $487 million for the nine months ended September 30, 1999 and 1998, respectively. Interest and Dividends is presented net of interest expense of $108 million and $145 million for the third quarter of 1999 and 1998, respectively, and $339 million and $434 million for the nine months ended September 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
3.INVESTMENT SECURITIES <TABLE> The following is a summary of investments at September 30, 1999 and December 31, 1998: <CAPTION> September 30, December 31, (in millions) 1999 1998 ---- ---- <S> <C> <C> Held to Maturity, at amortized cost (fair value: 1999, $9,659; 1998, $11,144) $9,522 $10,526 Available for Sale, at fair value (cost: 1999, $28,918; 1998, $25,895) 28,451 26,764 Investment mortgage loans (fair value: 1999, $3,926; 1998, $4,089) 3,926 3,840 Trading 284 169 ------ ------ Total $42,183 $41,299 ====== ====== </TABLE> 4.COMPREHENSIVE INCOME <TABLE> 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 nine months ended September 30, 1999 and 1998 were as follows: <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------ ------------ (in millions) 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $648 $574 $1,869 $1,611 Change in: Net unrealized securities (losses) gains (275) 116 (869) 104 Foreign currency translation adjustments (11) (8) 2 (10) --- --- ----- ----- Total $362 $682 $1,002 $1,705 === === ===== ===== </TABLE> 5.TAXES AND INTEREST Net income taxes paid during the nine months ended September 30, 1999 and 1998 were approximately $272 million and $606 million, respectively. Interest paid during the nine months ended September 30, 1999 and 1998 was approximately $1.9 billion in each period. 6
6.EARNINGS PER SHARE <TABLE> The computations of basic and diluted earnings per common share (EPS) for the three and nine months ended September 30, 1999 and 1998 are as follows: <CAPTION> (in millions, except per Three Months Ended Nine Months Ended share amounts) September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Numerator: Net income $648 $574 $1,869 $1,611 Denominator: Denominator for basic EPS - weighted-average shares 446.0 451.6 447.0 456.2 Effect of dilutive securities: Stock Options and Restricted Stock Awards 10.4 7.9 9.4 8.6 Other - 0.1 - 0.1 ----- ----- ----- ----- Potentially dilutive common shares 10.4 8.0 9.4 8.7 ----- ----- ----- ----- Denominator for diluted EPS 456.4 459.6 456.4 464.9 ===== ===== ===== ===== Basic EPS $1.45 $1.27 $4.18 $3.53 ==== ==== ==== ==== Diluted EPS $1.42 $1.25 $4.09 $3.47 ==== ==== ==== ==== </TABLE> 7.SEGMENT INFORMATION <TABLE> Results for the Company's operating segments, based on management's internal reporting structure, are as follows: <CAPTION> REVENUES Three Months Ended Nine Months Ended September 30, September 30, ------------ ------------ (in millions) 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Travel Related Services $3,737 $3,339 $10,836 $9,692 American Express Financial Advisors 1,368 1,247 4,107 3,750 American Express Bank/ Travelers Cheque 261 255 767 764 Corporate and Other (55) (54) (130) (137) ----- ----- ------ ------ Total $5,311 $4,787 $15,580 $14,069 ===== ===== ====== ====== <CAPTION> NET INCOME Three Months Ended Nine Months Ended September 30, September 30, ------------ ------------ (in millions) 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Travel Related Services $413 $362 $1,187 $1,038 American Express Financial Advisors 240 211 696 609 American Express Bank/ Travelers Cheque 38 43 117 7 Corporate and Other (43) (42) (131) (43) --- --- ----- ----- Total $648 $574 $1,869 $1,611 === === ===== ===== </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 September 30, 1999 and the related consolidated statements of income for the three and nine-month periods ended September 30, 1999 and 1998 and consolidated statements of cash flows for the nine-month periods ended September 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 November 12, 1999 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 The Company's consolidated net income rose 13 percent and 16 percent and diluted earnings per share increased 14 percent and 18 percent in the three and nine-month periods ended September 30, 1999, respectively. The Company's return on equity was 25.3 percent. The nine-month results for 1998 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, nine- month income and diluted earnings per share increased 12 percent and 14 percent, respectively. Consolidated revenues grew 11 percent for the three and nine months ended September 30, 1999. Revenues, net of American Express Financial Advisors' (AEFA) provisions for losses and benefits, were up 12 percent for the three and nine months ended September 30, 1999, reflecting an increase in worldwide billed business and Cardmember loans, higher travel commissions and fees for the nine-month period, 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 and, for the nine months ended September 30, 1999, were partially offset by lower loss provisions. These results met the Company's long-term targets of 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 nine-month periods ended September 30, 1999, this amounted to benefits of $68 million and $194 million (net of amortization), respectively. Of these amounts, $49 million and $146 million related to Travel Related Services and $18 million and $41 million to American Express Financial Advisors for the three and nine-month periods ended September 30, 1999, respectively. These benefits were offset by increased investment spending and therefore had no material effect on net income. 9
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES In the first nine months of 1999, the Company repurchased 7.4 million common shares at an average price of $123.43 per share under its repurchase program. 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) 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. As of September 30, 1999, 3.7 million shares have been purchased pursuant to this agreement. 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 $495 million through September 30, 1999 and are estimated to be in the range of $22 - $48 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.* 10
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 Company does not directly control the remediation efforts of such parties, and therefore cannot provide assurances that they will be Y2K compliant. The failure of external parties to resolve their own Y2K issues in a timely manner could have a material adverse effect on the Company.* During the third quarter of 1999 our plans for targeted integrated testing of systems that support our most critical business functions, and independent validation of such testing, were completed. At this point, the Company is in the process of finalizing specific Y2K contingency plans and establishing plans to address our year-end activities related to Y2K. Our contingency planning effort, which addresses all critical systems and, to a lesser extent, certain non-critical systems, 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 and setting up manual back-up processes. 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. These phases are to be followed by a detailed year-end plan.* All four of the above 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. Going forward, our primary focus will be on planning year-end activities related to Y2K.* Such activities include the establishment of global command centers; scheduling the availability of key personnel; establishing additional roll-over management procedures, including proactive monitoring of select critical functions and assets; the development of Y2K incident tracking and reporting tools; and the establishment of specific Y2K-related communications.* Additionally, rehearsals of these year-end activities will be conducted during the fourth quarter of 1999.* 11
The Company will continue to refine its contingency and year-end 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, regulatory actions, 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, and the Company's 10-Q reports for the quarterly periods ended March 31, 1999 and June 30, 1999. - -------------------- * 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 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
<TABLE> Travel Related Services RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 <CAPTION> Statement of Income -------------------- (Unaudited) (Dollars in millions) Three Months Ended Nine Months Ended September 30, September 30, ------------ Percentage ------------ Percentage 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec) ---- ---- -------- ---- ---- -------- <S> <C> <C> <C> <C> <C> <C> Net Revenues: Discount Revenue $1,700 $1,522 11.7 % $4,875 $4,476 8.9 % Net Card Fees 395 393 0.4 1,191 1,189 0.2 Travel Commissions and Fees 448 441 1.4 1,342 1,195 12.3 Other Revenues 846 645 31.2 2,424 1,847 31.2 Lending: Finance Charge Revenue 513 502 2.3 1,481 1,472 0.6 Interest Expense 165 164 0.9 477 487 (2.2) ----- ----- ------ ----- Net Finance Charge Revenue 348 338 3.1 1,004 985 2.0 ----- ----- ------ ----- Total Net Revenues 3,737 3,339 11.9 10,836 9,692 11.8 ----- ----- ------ ----- Expenses: Marketing and Promotion 373 310 20.1 968 829 16.7 Provision for Losses and Claims: Charge Card 222 148 50.2 653 602 8.5 Lending 187 224 (16.6) 559 629 (11.2) Other 10 17 (40.5) 37 41 (9.6) ----- ----- ------ ----- Total 419 389 7.7 1,249 1,272 (1.8) ----- ----- ------ ----- Charge Card Interest Expense 208 199 4.4 589 598 (1.6) Net Discount Expense 105 170 (38.7) 378 480 (21.4) Human Resources 968 924 4.7 2,847 2,554 11.5 Other Operating Expenses 1,032 793 30.5 2,991 2,377 25.9 ----- ----- ------ ----- Total Expenses 3,105 2,785 11.5 9,022 8,110 11.2 ----- ----- ------ ----- Pretax Income 632 554 14.1 1,814 1,582 14.7 Income Tax Provision 219 192 14.1 627 544 15.3 ----- ----- ------ ----- Net Income $413 $362 14.1 $1,187 $1,038 14.4 ===== ===== ====== ===== </TABLE> <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 $55 million ($36 million after-tax) in the third quarter of 1999 and $154 million ($100 million after-tax) and $36 million ($23 million after-tax) for the nine months ended September 30, 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. <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> (Decrease) Increase in Net Card Fees $(4) $(2) $(4) $4 Increase in Other Revenues 116 83 384 238 Decrease in Lending Finance Charge Revenue (234) (134) (602) (343) Decrease in Lending Interest Expense 81 45 176 112 Increase in Marketing and Promotion Expense (33) - (91) (36) Decrease in Provision for Losses and Claims: Charge Card 25 76 115 201 Lending 125 39 295 133 Decrease in Charge Card Interest Expense 51 63 168 171 Increase in Net Discount Expense (105) (170) (378) (480) Increase in Other Operating Expenses (22) - (63) - --- --- --- --- Pretax Income $- $- $- $- === === === === </TABLE> 13
<TABLE> TRAVEL RELATED SERVICES Selected Statistical Information -------------------------------- (Unaudited) <CAPTION> (Amounts in billions, except where indicated) Three Months Ended Nine Months Ended September 30, September 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 29.2 29.5 (1.0)% 29.2 29.5 (1.0)% Outside the United States 15.6 14.6 6.9 15.6 14.6 6.9 ----- ----- ----- ----- Total 44.8 44.1 1.6 44.8 44.1 1.6 ===== ===== ===== ===== Basic Cards in Force (millions): United States 22.9 23.3 (1.6) 22.9 23.3 (1.6) Outside the United States 12.0 11.3 5.7 12.0 11.3 5.7 ----- ----- ----- ----- Total 34.9 34.6 0.8 34.9 34.6 0.8 ===== ===== ===== ===== Card Billed Business: United States $47.1 $41.5 13.5 $134.7 $121.4 10.9 Outside the United States 17.0 15.2 11.7 48.6 44.7 8.8 ----- ----- ----- ----- Total $64.1 $56.7 13.0 $183.3 $166.1 10.4 ===== ===== ===== ===== Average Discount Rate* 2.73% 2.72% - 2.73% 2.73% - Average Basic Cardmember Spending (dollars)* $1,935 $1,704 13.6 $5,653 $5,026 12.5 Average Fee per Card (dollars)* $38 $37 2.7 $39 $38 2.6 Travel Sales $5.5 $5.1 7.0 $16.9 $14.3 17.7 Travel Commissions and Fees/Sales** 8.1% 8.6% - 7.9% 8.4% - Owned and Managed Charge Card Receivables: Total Receivables $25.3 $23.3 8.8 $25.3 $23.3 8.8 90 Days Past Due as a % of Total 2.5% 2.7% - 2.5% 2.7% - Loss Reserves (millions) $907 $961 (5.6) $907 $961 (5.6) % of Receivables 3.6% 4.1% - 3.6% 4.1% - % of 90 Days Past Due 144% 151% - 144% 151% - Net Loss Ratio 0.41% 0.48% - 0.41% 0.47% - Owned and Managed U.S. Cardmember Lending: Total Loans $20.6 $15.4 33.8 $20.6 $15.4 33.8 Past Due Loans as a % of Total: 30-89 Days 2.0% 2.2% - 2.0% 2.2% - 90+ Days 0.8% 1.0% - 0.8% 1.0% - Loss Reserves (millions): Beginning Balance $602 $577 4.3 $619 $589 5.1 Provision 264 236 11.9 717 676 6.1 Net Charge-Offs/Other (230) (234) (1.8) (700) (686) 2.1 ----- ----- ----- ----- Ending Balance $636 $579 9.9 $636 $579 9.9 ===== ===== ===== ===== % of Loans 3.1% 3.8% - 3.1% 3.8% - % of Past Due 111% 118% - 111% 118% - Average Loans $19.8 $15.2 30.0 $18.0 $14.6 22.8 Net Write-Off Rate 4.7% 6.4% - 5.3% 6.5% - Net Interest Yield 8.5% 9.6% - 9.0% 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 for both the three and nine-month periods ended September 30, 1999 compared with a year ago. Net revenues increased 12 percent in both periods, reflecting higher billed business in the United States and internationally and strong growth in Cardmember loans; the nine-month period also benefited from higher travel commissions and fees. In the third quarter of 1999, TRS recognized a pretax gain of $55 million ($36 million after-tax) from the securitization of U.S. receivables. For the nine months ended September 30, 1999 and 1998, such gains were $154 million ($100 million after-tax) and $36 million ($23 million after-tax), respectively. These gains, and the previously mentioned benefit from software capitalization, 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 effect on net income or total expense in any period. The improvement in discount revenue for the three and nine months ended September 30, 1999 compared with a year ago is the result of 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. The growth in billed business continued to be primarily the result of increases in retail and "everyday spend" categories. Billed business increased despite a general tightening of corporate travel and entertainment expenses and the Company's decision to withdraw from the U.S. Government Card business. This decision resulted in the cancellation of 1.6 million U.S. Government cards in the fourth quarter of 1998, representing approximately $3.5 billion in annualized spending. Excluding the loss of the Government card business, total cards in force rose 2.3 million or 5 percent from a year ago, with about 900,000 of these cards added in the third quarter, and domestic billed business for the current quarter grew 16 percent from a year ago. Travel commissions and fees rose for the nine month period due to acquisitions during the latter half of 1998, which increased revenues and expenses but did not have a material effect on earnings. Other revenues also grew for the three and nine-months ended September 30, 1999, as a result of a higher level of securitized receivables, acquisitions and fee income. Lending net finance charge revenue on a managed basis, i.e., excluding securitizations, rose 18 percent for both the three and nine- month periods ended September 30, 1999 compared with a year ago. This increase is primarily due to 34 percent growth in worldwide managed lending balances, partially offset by lower net interest yields. Marketing and promotion expenses rose for the three and nine months ended September 30, 1999 as a result of business building initiatives. The provision for losses on the charge card portfolio grew for both the three and nine months ended September 30, 1999, due to higher volumes, partially offset by continued improvement in credit quality. The provision for the lending portfolio fell for both periods as a result of securitizing a greater portion of the loan portfolio 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, and merit increases. 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 Selected Balance Sheet Information ---------------------------------- <CAPTION> (Unaudited) (Dollars in billions, except percentages) September 30, December 31, Percentage September 30, Percentage 1999 1998 Inc/(Dec) 1998 Inc/(Dec) ------------ ----------- -------- ------------ -------- <S> <C> <C> <C> <C> <C> Accounts Receivable, net $23.2 $21.3 8.9 % $19.9 16.7 % U.S. Cardmember Loans $13.4 $13.7 (2.6) $12.4 8.1 Total Assets $48.7 $44.7 9.0 $42.4 14.8 Short-term Debt $26.3 $22.9 14.9 $21.5 22.4 Long-term Debt $4.5 $5.1 (11.7) $5.4 (16.7) Total Liabilities $43.3 $39.8 8.7 $37.2 16.1 Total Shareholder's Equity $5.4 $4.9 10.8 $5.2 5.4 Return on Average Equity* 29.3% 27.8% - 27.1% - Return on Average Assets* 3.3% 3.3% - 3.3% - </TABLE> * Computed based on the past twelve months of net income and excludes the effect of SFAS No. 115. In the first quarter of 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 the second and third quarters of 1999, the American Express Credit Account Master Trust securitized an additional $2.5 billion and $1.5 billion of loans, respectively, through the issuance of asset backed certificates. 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 the third quarter 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Statement of Income ------------------- (Unaudited) <CAPTION> (Dollars in millions) Three Months Ended Nine Months Ended September 30, September 30, ------------ Percentage ------------ Percentage 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec) ---- ---- -------- ---- ---- -------- <S> <C> <C> <C> <C> <C> <C> Net Revenues: Investment Income $566 $573 (1.3)% $1,776 $1,790 (0.8)% Management and Distribution Fees 578 476 21.6 1,653 1,376 20.2 Other Revenues 224 198 13.2 678 584 16.0 ----- ----- ----- ----- Total Revenues 1,368 1,247 9.7 4,107 3,750 9.5 Provision for Losses and Benefits: Annuities 251 280 (10.0) 795 868 (8.5) Insurance 135 122 10.1 392 365 7.7 Investment Certificates 46 43 6.0 182 174 4.4 ----- ----- ----- ----- Total 432 445 (2.9) 1,369 1,407 (2.7) ----- ----- ----- ----- Net Revenues 936 802 16.7 2,738 2,343 16.8 ----- ----- ----- ----- Expenses: Human Resources 456 384 18.5 1,302 1,123 15.9 Other Operating Expenses 130 110 18.3 421 332 26.7 ----- ----- ----- ----- Total Expenses 586 494 18.5 1,723 1,455 18.4 ----- ----- ----- ----- Pretax Income 350 308 14.0 1,015 888 14.3 Income Tax Provision 110 97 14.0 319 279 14.3 ----- ----- ----- ----- Net Income $240 $211 14.0 $696 $609 14.3 ===== ===== ===== ===== </TABLE> 17
<TABLE> AMERICAN EXPRESS FINANCIAL ADVISORS Selected Statistical Information -------------------------------- (Unaudited) <CAPTION> (Amounts in millions, except percentages and where indicated) Three Months Ended Nine Months Ended September 30, September 30, ------------ Percentage ------------ Percentage 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec) ---- ---- -------- ---- ---- -------- <S> <C> <C> <C> <C> <C> <C> Investments (billions) $30.7 $30.8 (0.2)% $30.7 $30.8 (0.2)% Client Contract Reserves (billions) $31.0 $30.2 2.7 $31.0 $30.2 2.7 Shareholder's Equity (billions) $3.9 $4.1 (5.7) $3.9 $4.1 (5.7) Return on Average Equity* 22.8% 22.4% - 22.8% 22.4% - Life Insurance in Force (billions) $86.3 $79.2 8.9 $86.3 $79.2 8.9 Deferred Annuities in Force (billions) $45.2 $39.6 14.1 $45.2 $39.6 14.1 Assets Owned, Managed or Administered (billions): Assets Managed for Institutions $48.3 $40.5 19.2 $48.3 $40.5 19.2 Assets Owned, Managed or Administered for Individuals: Owned Assets: Separate Account Assets 28.9 23.0 25.5 28.9 23.0 25.5 Other Owned Assets 38.1 37.0 3.2 38.1 37.0 3.2 ----- ----- ----- ----- Total Owned Assets 67.0 60.0 11.7 67.0 60.0 11.7 Managed Assets 92.9 76.8 20.9 92.9 76.8 20.9 Administered Assets 19.3 11.2 72.0 19.3 11.2 72.0 ----- ----- ----- ----- Total $227.5 $188.5 20.7 $227.5 $188.5 20.7 ===== ===== ===== ===== Market Appreciation (Depreciation) During the Period: Owned Assets: Separate Account Assets $(986) $(3,712) - $1,446 $(741) - Other Owned Assets $(273) $ 91 - $(872) $133 - Total Managed Assets $(5,226) $(10,595) - $2,726 $(706) - Sales of Selected Products: Mutual Funds $5,709 $5,262 8.5 $17,948 $15,830 13.4 Annuities $951 $648 46.6 $2,280 $2,002 13.9 Investment Certificates $926 $560 65.6 $2,364 $1,400 68.8 Life and Other Insurance Products $134 $102 32.1 $337 $289 16.4 Number of Financial Advisors 10,631 10,060 5.7 10,631 10,060 5.7 Fees from Financial Plans and Advice Services $22.3 $15.6 43.2 $66.4 $54.0 22.9 Percentage of Total Sales from Financial Plans and Advice Services 67.7% 65.4% - 66.5% 65.0% - </TABLE> * 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 nine-month periods ended September 30, 1999 increased 14 percent 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 market appreciation and net sales. Other revenues benefited from higher insurance premiums and financial planning and advice services fees. Investment income, net of provisions for losses and benefits, rose due to higher in-force levels and improved spreads on all product categories. Human resources expenses were higher, largely as a result of a volume- driven increase in advisors' compensation reflecting growth in sales and asset levels, and greater home office expenses reflecting client service and technology related initiatives. 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 Selected Balance Sheet Information ---------------------------------- (Unaudited) <CAPTION> (Amounts in billions, except percentages) September 30, December 31, Percentage September 30, Percentage 1999 1998 Inc/(Dec) 1998 Inc/(Dec) ------------ ----------- -------- ------------ -------- <S> <C> <C> <C> <C> <C> Investments $30.7 $30.9 (0.4)% $30.8 (0.2)% Separate Account Assets $28.9 $27.3 5.7 $23.0 25.5 Total Assets $67.0 $64.6 3.7 $60.0 11.7 Client Contract Reserves $31.0 $30.3 2.4 $30.2 2.7 Total Liabilities $63.1 $60.6 4.3 $55.9 13.0 Total Shareholder's Equity $3.9 $4.1 (4.5) $4.1 (5.7) Return on Average Equity* 22.8% 22.5% - 22.4% - </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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Statement of Income ------------------- (Unaudited) <CAPTION> (Dollars in millions) Three Months Ended Nine Months Ended September 30, September 30, ------------ Percentage ------------ Percentage 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec) ---- ---- -------- ---- ---- -------- <S> <C> <C> <C> <C> <C> <C> Net Revenues: Interest Income $181 $217 (16.3)% $557 $645 (13.5)% Interest Expense 106 143 (25.5) 334 429 (22.0) --- --- --- --- Net Interest Income 75 74 1.5 223 216 3.3 Travelers Cheque Investment Income 91 88 4.0 257 248 3.5 Foreign Exchange Income 17 30 (43.1) 50 113 (55.9) Commissions, Fees and Other Revenues 78 63 22.7 237 187 27.2 --- --- --- --- Total Net Revenues 261 255 2.5 767 764 0.4 --- --- --- --- Expenses: Human Resources 86 83 3.2 252 236 6.7 Other Operating Expenses 159 140 13.3 446 402 11.1 Provision for Losses 12 12 5.4 47 257 (81.8) --- --- --- --- Total Expenses 257 235 9.4 745 895 (16.8) --- --- --- --- Pretax Income/(Loss) 4 20 (78.7) 22 (131) - Income Tax Benefit (34) (23) 43.7 (95) (138) (31.9) --- --- --- --- Net Income $38 $43 (13.0) $117 $7 # === === === === <CAPTION> Selected Statistical Information -------------------------------- (Unaudited) (Amounts in billions, except percentages) Three Months Ended Nine Months Ended September 30, September 30, ------------ Percentage ------------ Percentage 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec) ---- ---- -------- ---- ---- -------- <S> <C> <C> <C> <C> <C> <C> American Express Bank: Assets Managed / Administered * $7.7 $5.7 33.6 % $7.7 $5.7 33.6 % Assets of Non-Consolidated Joint Ventures $2.4 $2.4 (2.1) $2.4 $2.4 (2.1) Travelers Cheque: Sales $7.3 $7.5 (1.9) $18.0 $18.7 (3.8) Average Outstanding $6.5 $6.4 2.9 $6.2 $6.0 2.5 Average Investments $6.2 $6.1 2.0 $5.9 $5.7 2.2 Tax equivalent yield 8.8% 8.8% - 8.8% 9.0% - </TABLE> # Denotes variance of more than 100%. * 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 third quarter of 1999, compared with $43 million a year ago. AEB/TC reported net income of $117 million compared with $7 million for the nine-month periods ended September 30, 1999 and 1998, respectively. The nine-month period ended September 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 substantially as currencies in key markets were less volatile. Commissions, fees and other revenues increased reflecting miscellaneous gains, trading activities and revenues from the individual oriented businesses. Operating expenses rose due to costs associated with expanding the consumer business in new markets and realigning business activities in certain countries. 22
<TABLE> AMERICAN EXPRESS BANK/TRAVELERS CHEQUE (AEB/TC) LIQUIDITY AND CAPITAL RESOURCES Selected Balance Sheet Information ---------------------------------- (Unaudited) <CAPTION> (Amounts in billions, except percentages and where indicated) September 30, December 31, Percentage September 30, Percentage 1999 1998 Inc/(Dec) 1998 Inc/(Dec) ---- ---- -------- ---- -------- <S> <C> <C> <C> <C> <C> Travelers Cheque Investments $6.1 $6.3 (2.4)% $6.5 (5.3)% Total Loans $5.1 $5.6 (9.5) $6.1 (16.8) Total Nonperforming Loans (millions) $181 $180 0.6 $239 (24.2) Other Nonperforming Assets (millions) $40 $63 (37.1) $92 (57.0) Reserve for Credit Losses (millions)* $204 $259 (21.2) $348 (41.3) Loan Loss Reserves as a Percentage of Total Loans 3.5% 3.8% - 4.6% - Total Assets $18.7 $18.5 1.3 $19.2 (2.3) Deposits $8.1 $8.3 (1.8) $8.7 (6.4) Travelers Cheques Outstanding $6.4 $5.8 9.3 $6.2 3.3 Total Liabilities $17.8 $17.3 2.7 $18.0 (1.0) Total Shareholder's Equity (millions) $956 $1,197 (20.1) $1,210 (21.0) Return on Average Assets** 0.83% 0.23% - 0.39% - Return on Average Common Equity** 17.7% 4.9% - 8.1% - Risk-Based Capital Ratios: Tier 1 9.9% 9.8% - 9.4% - Total 12.1% 12.6% - 12.2% - Leverage Ratio 5.5% 5.5% - 5.6% - * Allocation: Loans $179 $214 $279 Other Assets, primarily derivatives 23 43 66 Other Liabilities 2 2 3 --- --- --- Total Credit Loss Reserves $204 $259 $348 === === === </TABLE> ** Computed based on the past twelve months of net income and excludes the effect of SFAS No. 115. AEB had loans outstanding of $5.1 billion at September 30, 1999, down from $5.6 billion at December 31, 1998 and $6.1 billion at September 30, 1998. The reduction since third quarter 1998 resulted from a $1.1 billion decrease in corporate and correspondent bank loans and a $350 million increase in consumer and private banking loans (before the effect of asset sales and securitizations). Since December 31, 1998, corporate and correspondent bank loans fell by $690 million and consumer and private banking loans rose by $190 million. During the quarter, AEB securitized approximately $44 million of consumer loans in Hong Kong. This is in addition to the securitization of approximately $100 million of such loans during the second quarter of this year. As presented in the table below, there are other banking activities, such as forward contracts, various contingencies and market placements, which added approximately $7.7 billion to AEB's credit exposures at September 30, 1999 and 1998, compared with $7.6 billion at December 31, 1998. Other nonperforming assets declined primarily due to write-offs related to Indonesia, as anticipated when the provision was recorded in the first quarter of 1998. 23
<TABLE> American Express Bank Exposures By Country and Region (Unaudited) <CAPTION> ($ in billions) Net Guarantees 9/30/99 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 $0.8 $1.1 Indonesia 0.2 - - 0.1 0.4 0.4 Singapore 0.4 - 0.1 0.1 0.6 0.6 Korea 0.2 - - 0.2 0.4 0.3 Taiwan 0.3 - 0.1 - 0.4 0.5 China - - - - - - Japan - - - - 0.1 0.1 Thailand - - - - - - Other - - - 0.1 0.1 0.1 --- --- --- --- --- --- Total Asia/ Pacific Region** 1.8 $0.1 0.5 0.6 2.9 3.2 --- --- --- --- --- --- Chile 0.2 - - 0.1 0.3 0.4 Brazil 0.3 - - 0.1 0.3 0.4 Mexico 0.1 - - - 0.1 0.1 Peru - - - - - 0.1 Argentina 0.1 - - - 0.1 0.1 Other 0.2 - 0.1 0.1 0.4 0.4 --- --- --- --- --- --- Total Latin America** 0.8 - 0.1 0.3 1.3 1.4 --- --- --- --- --- --- India 0.3 - 0.1 0.3 0.7 0.8 Pakistan 0.1 - - 0.2 0.3 0.2 Other 0.1 - 0.1 0.1 0.2 0.2 --- --- --- --- --- --- Total Subcontinent** 0.4 - 0.2 0.6 1.2 1.2 --- --- --- --- --- --- Egypt 0.3 - - 0.2 0.6 0.7 Other 0.2 - 0.1 - 0.2 0.3 --- --- --- --- --- --- Total Middle East & Africa* 0.5 - 0.1 0.2 0.8 1.0 --- --- --- --- --- --- Total Europe*** 1.4 0.1 0.7 2.4 4.6 4.4 Total North America** 0.2 - 0.2 1.5 1.9 1.9 --- --- --- --- ---- ---- Total Worldwide** $5.1 $0.2 $1.8 $5.6 $12.8 $13.2 === === === === ==== ==== </TABLE> * Includes cash, placements and securities. ** Individual items may not add to totals due to rounding. *** Total exposures at 9/30/99 and 12/31/98 include $15 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 $43 and $131 million for the three and nine months ended September 30, 1999, compared with net expenses of $42 and $43 million in the same periods last year. The current year nine- 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 nine-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 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, adding new claims for conversion, recission of the financial advisors agreement and declaratory judgment and adding the Employee Benefits Action Committee as a defendant. 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 Company commenced an action, AMERICAN EXPRESS COMPANY V. THE UNITED STATES, on September 15, 1997 in the United States Court of Federal Claims (the "Court") seeking a refund from the United States of Federal income taxes paid (plus related interest) for the year 1987. The Company contends that the Internal Revenue Service abused its discretion by denying the Company's request to include annual fees from Cardmembers in taxable income ratably over the twelve-month period to which the fees relate rather than in full at the time they are billed. On July 30, 1999, the parties jointly submitted a Stipulation of Facts to the Court. On October 14, 1999, the Company filed a Motion for Summary Judgment, and a supporting brief. If the Company's position is sustained, it would receive interest on $198,649,152 of taxes paid for 1987 that should have been deferred to a subsequent period. The first matter described above was previously reported in the Company's Form 10-Q for the quarterly period ended June 30, 1999 and the second matter decribed above was previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 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 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. Form 8-K, dated October 25, 1999, Item 5, reporting the Company's earnings for the quarter ended September 30, 1999. 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: November 12, 1999 By /s/ Richard Karl Goeltz ------------------------- Richard Karl Goeltz Vice Chairman and Chief Financial Officer Date: November 12, 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 Amended and Restated American Express Company Supplemental Retirement Plan. 12 Computation in Support of Ratio of Earnings to Fixed Charges. 15 Letter re Unaudited Interim Financial Information. 27 Financial Data Schedule. E-1