AMERICAN EXPRESS CO — Interim / Quarterly Report 2000

Aug 11, 2000

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, 2000 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, 2000 - ------------------------------------ ----------------------------- Common Shares (par value $.20 per share) 1,331,880,207 shares AMERICAN EXPRESS COMPANY FORM 10-Q INDEX Page No. Part I. Financial Information: Consolidated Statements of Income - Three months ended June 30, 2000 and 1999 1 Consolidated Statements of Income - Six months ended June 30, 2000 and 1999 2 Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3 Consolidated Statements of Cash Flows - Six months ended June 30, 2000 and 1999 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 9-24 Part II. Other Information 25

See notes to Consolidated Financial Statements. 1

See notes to Consolidated Financial Statements. 2

See notes to Consolidated Financial Statements. 3

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, 1999. 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 $258 million and $156 million for the second quarter of 2000 and 1999, respectively, and $490 million and $312 million for the six months ended June 30, 2000 and 1999, respectively. Interest and dividends is presented net of interest expense of $141 million and $110 million for the second quarter of 2000 and 1999, respectively, and $274 million and $231 million for the six months ended June 30, 2000 and 1999, 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. During the second quarter of 2000, the company's shareholders approved an increase in authorized shares to effectuate a three-for-one stock split for shareholders of record as of April 25, 2000. All of the information in this financial report reflects the effect of the stock split.

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1. Taxes and Interest Net income taxes paid during the six months ended June 30, 2000 and 1999 were approximately $346 million and $225 million, respectively. Interest paid during the six months ended June 30, 2000 and 1999 was approximately $1.7 billion and $1.2 billion, respectively.

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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, 2000 and the related consolidated statements of income for the three and six-month periods ended June 30, 2000 and 1999 and consolidated statements of cash flows for the six-month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of the Company as of December 31, 1999, 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 3, 2000, 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, 1999 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/Ernst & Young LLP New York, New York August 11, 2000 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, 2000 The company's consolidated net income rose 15 percent and 14 percent and diluted earnings per share rose 15 percent and 16 percent in the three and six-month periods ended June 30, 2000, respectively. The company's return on equity was 25.5 percent. Consolidated net revenues on a managed basis grew 16 percent for both the three and six-month periods ended June 30, 2000, reflecting an increase in worldwide billed business and Cardmember loans at Travel Related Services (TRS) and greater management and distribution fees at American Express Financial Advisors (AEFA). Consolidated expenses rose due to greater marketing and promotion and interest costs, larger provisions for losses, and higher human resource and operating expenses. The increases were principally due to greater volume and business building initiatives. 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. This financial review is presented on the basis used by management to evaluate operations. It differs in two respects from the accompanying financial statements, which are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). First, results are presented as if there had been no asset securitizations at TRS. This format is generally termed on a "managed basis." Second, revenues are shown net of AEFA's provisions for annuities, insurance and investment certificate products, which are essentially spread businesses. Consolidated Liquidity and Capital Resources In the first six months of 2000, the company repurchased 13.8 million common shares at an average price of $49.51 per share under its repurchase program. In the first quarter of 2000, the company entered into an agreement under which a third party will purchase up to 9 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. As of June 30, 2000, 1,161,800 shares have been 9 purchased pursuant to this agreement. The foregoing is in addition to a similar agreement entered into in August 1999 under which a third party purchased 21 million of the company's common shares at an average purchase price of approximately $49 per share. During the first six months of 2000, net settlements under the August 1999 agreement resulted in the company receiving 1,186,337 shares. These agreements, which partially offset the company's exposure from its stock option program, are separate from the company's previously authorized share repurchase program. Other Matters During the second quarter of 2000, the company's shareholders approved an increase in authorized shares to effectuate a three-for-one stock split for shareholders of record as of April 25, 2000. All of the information in this financial report reflects the effect of the stock split. Beginning in the third quarter of 2000, the Travelers Cheque operations, which are currently included in the American Express Bank/Travelers Cheque segment, will be reported in the same segment as TRS, to reflect recent organizational changes. 10

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(A) Computed from proprietary card activities only. (B) This data relates to Visa and Eurocards issued in connection with joint venture activities. (C) Computed from information provided herein. # Denotes variance of more than 100%. 12 Travel Related Services Travel Related Services' (TRS) net income rose 15 percent for both the three and six-month periods ended June 30, 2000 compared with a year ago. Net revenues increased 17 percent in both periods, reflecting higher billed business as well as strong growth in Cardmember loans. The improvement in discount revenue for the three and six-month periods ended June 30, 2000, compared with a year ago, is the result of higher billed business, reflecting an increase of 5.5 million cards in force, up 12 percent from a year ago, and greater average spending per Cardmember, partially offset by a decline in the discount rate in the second quarter of 2000. The higher spending was driven by several factors, including 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; the rate of growth in airline billings also continued to improve. The increase in cards in force reflects more proactive consumer card and small business services activities over the past year, including the successful launch of Blue and co-branded Costco cards. The decline in the second quarter discount rate from a year ago reflects the cumulative impact on our mix of business of stronger than average growth in lower rate retail and other "everyday spend" merchant categories. Growth in travel commissions and fees reflects new fees related to certain client services, which were partly offset by continued cost containment efforts by airlines and corporate clients. The net interest yield on Cardmember loans decreased for the three and six-month periods ended June 30, 2000 compared with a year ago, reflecting a higher percentage of loan balances on introductory rates and a broader mix of lower rate products. Other revenues increased for both periods, reflecting higher fee income, greater foreign exchange conversion revenue and acquisitions. The provision for losses on the charge card and lending portfolios grew for the three and six-month periods ended June 30, 2000 as a result of higher volume, partly offset by a continued improvement in credit quality in the lending portfolio. Charge Card interest expense rose for both periods due to higher volumes and increased borrowing costs. Marketing and promotion expenses rose in both periods as a result of increased card acquisition and media advertising activities. Human resource expenses increased for both periods as a result of a higher average number of employees and merit increases. Other operating expenses increased on higher costs related to business growth, Cardmember loyalty programs and various business building initiatives. Included in other operating expenses for the current quarter was a gain on the sale of an international leisure travel business; other operating expenses for the six-month period ended June 30, 2000 also included a gain on an investment in an Internet company that TRS was required to write-up when that company was acquired by a third party. These gains were offset by increased spending on Internet activities in both periods and other business building initiatives in the current quarter and, therefore, had no material impact on net income or total expenses in either period. 13

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• Computed based on the past twelve months of net income and excludes the effect of SFAS No. 115. In the first and second quarters of 2000, the American Express Credit Account Master Trust (the Trust) securitized $1 billion and $2.2 billion of loans, respectively, through the public issuance of investor certificates. The securitized assets consist of loans arising in a portfolio of designated consumer American Express credit card, Optima Line of Credit and Sign & Travel/Special Purchase Account revolving credit accounts or features and, in the future, may include other charge or credit accounts or features or products. In the first quarter of 2000, American Express Credit Corporation (Credco), a wholly-owned subsidiary of TRS, called $150 million 1.125% Cash Exchangeable Notes due 2003. These notes were exchangeable for an amount in cash which was linked to the price of the common shares of American Express. Credco had entered into agreements to fully hedge its obligations. Accordingly, the related hedging agreements were called at the same time. 15

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Note: In the first quarter of 2000, reporting of data related to cash sales and assets owned, managed and administered was revised to better reflect AEFA's multiple sales channel strategy and broadening of its product portfolio through additional non-proprietary offerings. 17 American Express Financial Advisors American Express Financial Advisors' (AEFA) net income rose 14 percent for both the three and six-month periods ended June 30, 2000 compared with a year ago. Net revenues and earnings grew in both periods due to greater fee revenues. Management fees rose as a result of increased managed asset levels, including separate account assets; distribution fees also grew reflecting greater mutual fund sales and asset levels. The increase in managed assets from a year ago reflects positive net sales and market appreciation over the past twelve months, despite market depreciation during the second quarter of 2000. Investment income, net of provisions for losses and benefits, decreased in both periods due to a lower average yield on invested assets, partly offset by a higher average level of invested assets; additionally, the six-month period includes losses related to the high-yield investment portfolio. Other revenues benefited from higher insurance premiums and greater fees from financial planning and advice services. Human resources expenses rose for both the three and six-month periods ended June 30, 2000, largely as a result of an increase in advisors' compensation, reflecting growth in sales, asset levels, the new advisor platforms, and the number of financial advisors. Other operating expenses also increased from year-ago levels due to higher business volumes and ongoing investments to build the business. 18

• 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, 1999, primarily due to higher net sales. 19

• Includes assets managed by American Express Financial Advisors. 20 American Express Bank/Travelers Cheque (AEB/TC) AEB/TC net income for the three and six-month periods ended June 30, 2000 rose 6% and 1%, respectively, from a year ago. Net income at American Express Bank rose for both periods. Net interest income declined from a year ago, primarily due to the effects of a lower loan portfolio and higher funding costs. Commissions and fees grew on greater Private Banking, Correspondent Banking and Personal Financial Services fees. Foreign exchange income and other revenue declined due to lower security gains and joint venture earnings in the second quarter of 2000; additionally, the decline for the six-month period reflects a decrease in client related trading activities due to the stabilization of currencies in key markets. Human resources expenses declined for both periods from a year ago, reflecting personnel reductions as AEB rationalizes certain country activities. Travelers Cheque results for the second quarter of 2000 rose slightly from a year ago but were essentially flat for the six-month period. Results for both periods reflect strong sales and greater investment income, as well as higher other operating expenses on increased business building initiatives. 21

AEB had loans outstanding of $5.1 billion at June 30, 2000, unchanged from December 31, 1999, and down from $5.2 billion at June 30, 1999. The reduction since second quarter 1999 resulted from a $330 million decrease in corporate and correspondent banking loans, partially offset by an increase in consumer and private banking loans of $153 million ($500 million excluding the effect of asset sales and securitizations in the consumer loan portfolio). Since December 31, 1999, corporate and correspondent bank loans fell by $40 million and consumer and private banking loans rose by $24 million. As of June 30, 2000, consumer and private banking loans comprised 37% of total loans versus 35% at December 31, 1999 and 33% at June 30, 1999. 22 As presented in the table below, there are other banking activities, such as forward contracts, various contingencies and market placements, which added approximately $7.2 billion to AEB's credit exposures at June 30, 2000, compared with $7.6 billion at both June 30, 1999 and December 31, 1999. Of the $7.2 billion of additional exposures at June 30, 2000, $4.8 billion were relatively less risky cash and securities related balances.

• Includes cash, placements and securities. ** Individual items may not add to totals due to rounding. *** Total exposures at 6/30/00 and 12/31/99 include $5 million and $11 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. 23 Corporate and Other Corporate and Other reported net expenses of $47 million and $92 million for the three and six months ended June 30, 2000, respectively, compared with net expenses of $45 million and $88 million in the same periods a year ago. Results for the current quarter include an investment gain that was offset by expenses related to business building initiatives during the quarter. The six-month results for both years include a preferred stock dividend based on earnings from Lehman Brothers, which was offset by expenses related to business building initiatives in both years and by Y2K expenses a year ago. 24 PART II. OTHER INFORMATION AMERICAN EXPRESS COMPANY ITEM 1. LEGAL PROCEEDINGS The Company commenced an action, AMERICAN EXPRESS COMPANY V. THE UNITED STATES, on September 16, 1997 in the United States Court of Federal Claims (the "Court") seeking a refund from the United States of Federal income taxes paid (plus related interest) for the year 1987. The Company contends that the Internal Revenue Service abused its discretion by denying the Company's request to include annual fees from Cardmembers in taxable income ratably over the twelve-month period to which the fees relate rather than in full at the time they are billed. On June 30, 2000, the Court entered a judgment in favor of the Internal Revenue Service. The Company filed a notice of appeal with the United States Court of Appeals for the Federal Circuit on July 19, 2000. Since October 1, 1999, eight former female financial advisors at American Express Financial Advisors ("AEFA") have filed charges with the Equal Employment Opportunity Commission ("EEOC"), including class claims on behalf of all women advisors at AEFA, alleging that they and other women were discriminated against in hiring, assignment of work, distribution of leads, training and promotions. Five of the charges were filed with the EEOC in Minnesota, two in New Jersey and one in Michigan. The claimants are seeking monetary and injunctive relief. AEFA is responding to all charges. If this matter is not resolved at the EEOC and is filed in Federal Court, AEFA intends to vigorously defend the charges. The two matters described above were previously reported in the Company's Form 10-Q for the quarter ended March 30, 2000. 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 BENEFIT PLAN COMMITTEE, CAREER DISTRIBUTORS PLAN COMMITTEE AND JOHN/JANE DOES 1-20 was commenced in U.S. District Court, District of Minnesota, Fourth Division. The original 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, rescission of the financial advisors agreement and declaratory judgment and adding the Company's Employee Benefits Administration Committee as a defendant. The parties are actively engaged in discovery. The plaintiff's motion for class certification was filed on July 31, 2000. The Company intends to file its motion opposing class certification on August 31, 2000. The Company believes it has meritorious defenses to such action and intends to pursue them vigorously. This matter was previously reported in the Company's Form 10-K for the year ended December 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 24, 2000, see Item 4 on page 24 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, 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 26, 2000, Item 5, reporting the Company's earnings for the quarter ended March 31, 2000 and including a First Quarter Earnings Supplement. Form 8-K, dated April 27, 2000, Item 5, announcing the appointment of Gary Crittenden as its Executive Vice President and Chief Financial Officer. Form 8-K, dated May 3, 2000, Item 5, 1) announcing a leave of absence of Steve Alesio, President of the Small Business Services group, and resulting organizational changes and 2) making publicly available a consolidated five-year and quarterly summary of restated common share statistics to reflect the Company's recent 3-for-1 stock split. Form 8-K, dated June 27, 2000, Item 5, announcing a number of organizational changes. Form 8-K, dated July 24, 2000, Item 5, reporting the Company's earnings for the quarter ended June 30, 2000 and including a Second Quarter Earnings Supplement. Form 8-K/A, dated July 24, 2000, Item 5, amending the Company's earnings for the quarter ended June 30, 2000 and including a Second Quarter Earnings Supplement. Form 8-K, dated August 2, 2000, Item 5, reporting certain information from presentations to the financial community on August 2, 2000 by Harvey Golub, the Company's Chairman and Chief Executive Officer, and Ken Chenault, the Company's President and Chief Operating Officer. 25 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 11, 2000 By /s/ Gary L. Crittenden ----------------------- ------------------------ Gary L. Crittenden Executive Vice President and Chief Financial Officer Date: August 11, 2000 /s/ Daniel T. Henry ----------------------- ----------------------- Daniel T. Henry Senior Vice President and Comptroller (Chief Accounting Officer) 26 EXHIBIT INDEX The following exhibits are filed as part of this Quarterly Report: Exhibit Description ------- ----------- 12 Computation in Support of Ratio of Earnings to Fixed Charges. 15 Letter re Unaudited Interim Financial Information. 27 Financial Data Schedule. E-1