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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
COMMISSION FILE NO. 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, NEW YORK 10285
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 640-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Shares (par value $0.20 per Share) New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
7.00% Cumulative Quarterly Income New York Stock Exchange
Preferred Securities, Series I of American
Express Company Capital Trust I (and the
guarantee of American Express Company
with respect thereto)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value, as of June 28, 2002, of voting shares held by
non-affiliates of the registrant was approximately $48.7 billion. Common
shares of the registrant outstanding at March 21, 2003 were 1,314,213,318.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV: Portions of Registrant's 2002 Annual Report to Shareholders.
Part III: Portions of Registrant's Proxy Statement dated March 11, 2003.
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TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER
PAGE
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PART I
1. Business................................................................... 1
Introduction.......................................................... 1
Travel Related Services............................................... 2
American Express Financial Advisors................................... 22
American Express Bank................................................. 45
Corporate and Other................................................... 57
Foreign Operations.................................................... 58
Important Factors Regarding Forward-Looking Statements................ 59
Segment Information and Classes of Similar Services................... 64
Executive Officers of the Company..................................... 64
Employees............................................................. 66
2. Properties................................................................. 66
3. Legal Proceedings.......................................................... 67
4. Submission of Matters to a Vote of Security Holders........................ 71
PART II
5. Market for Company's Common Equity and Related Stockholder Matters......... 71
6. Selected Financial Data.................................................... 72
7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.............................................................. 72
7a. Quantitative and Qualitative Disclosures About Market Risk................. 72
8. Financial Statements and Supplementary Data................................ 72
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 73
PART III
10. Directors and Executive Officers of the Company............................ 73
11. Executive Compensation..................................................... 73
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters............................................... 73
13. Certain Relationships and Related Transactions............................. 73
14. Controls and Procedures.................................................... 73
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 74
Signatures................................................................. 75
Certifications............................................................. 76
Index to Financial Statements.............................................. F-1
Consent of Independent Auditors............................................ F-2
Exhibit Index.............................................................. E-1
PART I
ITEM 1. BUSINESS
INTRODUCTION
American Express Company (including its subsidiaries, unless the context
indicates otherwise, the "Company") was founded in 1850 as a joint stock
association and was incorporated under the laws of the State of New York in
1965. The Company is primarily engaged in the business of providing travel
related services, financial advisory services and international banking services
throughout the world.*
The Company maintains an Investor Relations website on the Internet at
http://ir.americanexpress.com. The Company's filings with the Securities and
Exchange Commission ("SEC"), including its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those
reports are available free of charge as soon as reasonably practicable following
the time they are filed with or furnished to the SEC by clicking on the
"SEC Filings" link found on the Investor Relations homepage. Interested persons
are also able to access the Company's Investor Relations website through the
Company's main website at www.americanexpress.com by clicking on the "About
American Express" link, which is located at the bottom of the Company's
homepage.
American Express entered 2002 after one of the most challenging years in
its recent history. The Company established several important goals for the
year: to deliver solid earnings, improve the underlying economics of its
business, continue to lower certain risks in the business and increase its
investment in business-building activities. By the end of the year, management
believed that it had achieved significant success against these goals,
particularly in light of weak economies and financial markets around the world.
The Company's 2002 financial results reflected solid growth in the
Company's card businesses; lower expenses due to the success of ongoing
reengineering programs; strong credit quality with very low write-off rates in
the Company's charge card portfolio; and the benefits of lower funding costs
from historically low interest rates, which resulted in a benefit to the Company
of more than $500 million in interest savings. For a complete discussion of the
Company's financial results, see pages 26-84 of the Company's 2002 Annual Report
to Shareholders, which are incorporated herein by reference. For a discussion of
the Company's principal sources of revenue, see pages 58-59 of the Company's
2002 Annual Report to Shareholders. In 2003, the Company expects continued
uncertainty in the global economy and financial markets. In addition, the
ongoing war in Iraq, the threat of terrorism and other geopolitical uncertainty
could have a negative impact on the global economy, consumer confidence and the
Company's results.
During 2002, the Company undertook several measures to continue to
strengthen its business model so that it is more flexible and adaptable and less
reliant on good economic cycles
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* Various forward-looking statements are made in this 10-K Annual Report, which
generally include the words "believe," "expect," "anticipate," "optimistic,"
"plan," "intend," "aim," "will," "should," "could," "likely" and similar
expressions. Certain factors that may cause actual results to differ materially
from these forward-looking statements are discussed on pages 59-64.
Page 1
to deliver strong results. The Company continued its reengineering initiatives
and delivered over $1 billion in benefits while also improving major business
processes. It expanded the use of the Internet to serve customers and continued
to diversify card spending by lowering reliance on merchants in the travel and
entertainment sectors. It continued to focus on strengthening its balance sheet
and improving its risk profile by increasing reserves for card receivables and
merchant bankruptcies and continuing to lower its corporate lending balances
while building a more diversified consumer and private banking loan
portfolio. The Company developed new strategic relationships that enhanced
capabilities, and invested in business-building activities, which resulted in
the expansion of its card portfolio in the U.S. and internationally, as well
as growth in its Global Network Services business in international markets.
In addition to the measures the Company undertook to strengthen its
business, improve its risk profile and invest in business-building activities,
the Company also placed renewed emphasis on managing its business with integrity
and with the strong values that have guided it throughout its history. The
Company supported the various corporate governance reforms adopted under the
Sarbanes-Oxley Act of 2002 and proposed by the New York Stock Exchange. Though
many of the measures required by the new regulations were already in place at
the Company, the ethical failures uncovered at a number of companies in late
2001 and 2002 served to refocus management on ensuring that the Company strives
to meet its financial targets based on the Company's long-term interests rather
than on short-term, expedient solutions.
TRAVEL RELATED SERVICES
American Express Travel Related Services Company, Inc. (including its
subsidiaries, unless the context indicates otherwise, "TRS"), which includes the
Card, travel, merchant and network businesses, as well as the Travelers Cheque
and Prepaid Services group, provides a variety of products and services
worldwide, including, among others, global card network, issuing and processing
services, the American Express'r' Card, the American Express'r' Rewards Green
and American Express'r' Rewards Gold Cards, Blue from American Express'r', the
Optima'r' Card, the American Express'r' Cash Rebate Card, a number of co-brand
Cards, other consumer and corporate lending and banking products, American
Express'r' Travelers Cheques, prepaid card products, business expense management
products and services, corporate travel and travel management services, consumer
travel services, tax, accounting and business consulting services, a network of
automated teller machines ("ATMs"), magazine publishing, merchant transaction
processing and point of sale and back-office products and services. In certain
countries, partly owned affiliates and unaffiliated entities offer some of these
products and services under licenses from TRS.
As described more fully below, TRS' general purpose card network and card
issuing business are global in scope. TRS has the largest card issuing business
in the world based on charge volume. In 2002, TRS' charge volume was $311
billion, with approximately 25% coming from Cardmembers domiciled outside the
U.S. Cards are currently issued in 45 currencies, including cards issued by
third-party banks and other qualified institutions. Cards permit Cardmembers to
charge purchases of goods and services in most countries around the world at
establishments that have agreed to accept the Card, and to access cash through
ATMs at more than 500,000 locations worldwide. In 2002, TRS rolled out numerous
new Card products and entered into various co-brand and other Card arrangements
in the U.S. and many foreign
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countries. TRS added a net total of 2.1 million cards in force in 2002. Total
cards in force reached 57.3 million at the end of 2002. The global reach of
American Express' brand, card issuing capabilities and general purpose card
network position the Company well to take advantage of the growth opportunities
in the global payments services business, both in the U.S. and internationally.
TRS' business as a whole has not experienced significant seasonal
fluctuation, although Travelers Cheque sales and Travelers Cheques outstanding
tend to be greatest each year in the summer months, peaking in the third
quarter, and Card-billed business tends to be moderately higher in the fourth
quarter than in other quarters.
TRS places significant importance on its trademarks and service marks and
diligently protects its intellectual property rights around the world.
GLOBAL NETWORK SERVICES
TRS operates a global general purpose charge and credit card network.
Network functions include operations, service delivery, systems, authorization,
clearing, settlement and brand advertising and marketing; the development of new
and innovative products for the network; and establishing and enhancing
relationships with millions of merchants globally, both online and offline.
One of the key assets of TRS' network is the American Express brand, which
is one of the world's most highly recognized and respected brands. Cards bearing
the American Express logo ("Cards") are issued directly by TRS and by licensed
qualified institutions, and are accepted at ATMs and at all merchant locations
worldwide that accept the American Express Card. TRS issues the vast majority of
Cards on the American Express global network.
In 2002, TRS continued to expand its Global Network Services ("GNS")
business in which it authorizes third-party financial institutions to issue
American Express-branded cards that are accepted on the American Express
merchant network. The Company currently has 77 arrangements in place with banks
and other qualified institutions in 77 countries providing for Card issuance by
those entities. While some GNS arrangements have been in place for more than 20
years, the vast majority have been established since 1995. In 2002, the Company
signed eight new GNS partners, including Toyota Finance Company in Japan and
Samsung Card Company, Ltd. in Korea. Together, GNS partners launched 40 new
products during 2002. These partnerships increase TRS' market presence, drive
more transaction volume onto TRS' merchant network and significantly increase
the number of merchants accepting the American Express Card in selected markets.
TRS may charge fees and royalties for other services to banks and other
financial institutions. Conversely, TRS' partners benefit from association with
the American Express brand and access to TRS' network services. GNS continued to
show strong growth in billed business in 2002.
Local restrictive regulations governing the issuance of charge and credit
cards have not been a significant factor impacting TRS' arrangements with banks
and qualifying financial institutions in any country in which such arrangements
exist, because such banks and institutions generally are already licensed to
issue cards (e.g., Visa and MasterCard cards) prior to their
Page 3
issuing cards on the American Express network. Accordingly, TRS' GNS partners
have generally not had difficulty in obtaining appropriate government
authorization in the markets in which TRS has chosen to enter into these
partnership arrangements.
In May 1996, the Company invited banks and other qualified institutions in
the United States to begin issuing Cards on the American Express network. In
contrast to the situation outside the United States, there are no major U.S.
bank issuers on the American Express network in the United States. This
situation is the result of rules and policies of VISA USA, Inc. and MasterCard
International, Incorporated ("MasterCard") in the United States calling for
expulsion of members who issue American Express-branded cards. No banks have
been willing to forfeit membership in VISA USA, Inc. and/or MasterCard to issue
cards on the American Express network. In a lawsuit filed in October 1998
against VISA USA, Inc. and VISA International Corp. (collectively, "VISA") and
MasterCard, the U.S. Department of Justice alleged that these rules and policies
violate the antitrust laws of the United States. In October 2001, the trial
judge ruled in favor of the U.S. Department of Justice, holding that these rules
and policies do violate such laws. TRS views this decision as a major victory
for U.S. consumers because it will ultimately lead to more vigorous competition
and more innovative card products and services. However, VISA and MasterCard
have appealed this decision and have obtained a stay of the court's judgment
while the appeal is pending. Assuming the appeals court affirms the trial
court's decision, the Company expects to launch the GNS business in the U.S.
after the appeals process has been completed.
As a network, TRS encounters intense competition from other card networks.
Global competition comes from VISA, MasterCard, Diners Club, Discover Financial
Services, a business unit of Morgan Stanley & Co. (U.S. only), and JCB Co., Ltd.
(primarily in Japan). The principal competitive factors that affect the network
business are (i) the number of cards in force and amount of spending on these
cards; (ii) the quantity and quality of establishments that accept the cards;
(iii) the economic attractiveness to card issuers and merchant acquirers of
participating in the network; (iv) the success of targeted marketing and
promotional campaigns; (v) reputation and brand recognition; (vi) the ability to
develop and implement innovative systems and technologies cost effectively on a
global basis; (vii) the ability to develop and implement innovative types of
card products and support services for merchants, issuers and acquirers on the
network; (viii) success in implementation of strategies to reduce suppression --
when merchants that accept cards encourage a customer to use another card or
cash; (ix) the availability of alternative payment systems; and (x) the quality
of customer service.
GLOBAL MERCHANT SERVICES
During 2002, TRS continued its ongoing efforts to encourage consumers to
use the American Express Card as their card of choice for everyday spending at
establishments such as supermarkets, gas stations, drug stores and home
improvement stores, as well as for their travel and entertainment spending. TRS
also continued to increase the range of merchants in retail and everyday
spending categories that accept the Card. Key signings in the United States
included The Stop & Shop Supermarket Company, Dairy Queen, Time Warner Cable and
H&R Block. As of the end of 2002, TRS estimates that the merchant network in the
United States accommodated
Page 4
more than 95 percent of American Express Cardmembers' general purpose charge and
credit card spending.
As a result of the expansion of the types of merchants accepting charge and
credit cards and the utilization of a more discriminating approach to identify
and cancel inactive merchant accounts, in 2002, TRS continued to refine its
calculation of international merchant coverage. Based on this refinement, as of
the end of 2002, in markets in which TRS is the merchant acquirer, TRS'
international merchant coverage accommodated approximately 84 percent of
Cardmembers' general purpose charge and credit card spending, up from
approximately 83 percent a year ago. TRS continued to make strong progress
globally in signing key merchants and merchants in new industry categories,
including quick-service restaurants, government, utilities and
telecommunications. New signings in international markets included Mayne Group
Limited-Pharmacy Services in Australia; Canadian Tire; Cora Hypermarkets in
France; Arkio in Mexico; and NTT DoCoMo, a telecommunications provider in Japan.
Along with expanding merchant coverage, TRS also launched new card products and
promotions to build spending in retail and everyday locations.
During 2002, TRS completed the implementation of its various agreements
with JCB Co., Ltd., the largest card issuer and merchant acquirer in Japan,
whereby TRS became the third-party merchant acquirer for JCB card transactions
in Australia, Canada, India, Mexico, and New Zealand. As a result of these
agreements, over 150,000 TRS Service Establishments in those countries began
accepting the JCB card. During 2002, TRS also completed the second phase of
implementing the agreement under which JCB became the third-party merchant
acquirer for TRS in Japan. As a result of this implementation, over 500,000
additional merchants in Japan began accepting the Card, significantly expanding
the extent of American Express merchant coverage in the country.
TRS' objective is to achieve merchant coverage wherever and however
Cardmembers want to use the Card. TRS signs up new merchants through a number of
sales channels: a proprietary sales force, third-party sales agents, the
Internet, telemarketing and inbound "Want to Honor" calls (i.e., merchants
desiring to accept the Card contacting the Company directly).
TRS earns "discount revenue" from fees charged to "service establishments"
for accepting Cards where TRS is the "merchant acquirer." The discount, which is
the fee charged by the Company to the service establishment for accepting Cards,
is deducted from the amount of the payment that TRS pays to a service
establishment for charges submitted. A service establishment is defined as a
merchant that enters into an agreement to accept Cards as a method of payment
for goods and services. A merchant acquirer is the entity that maintains the
merchant Card acceptance relationship, receives all Card transactions from the
merchant and pays the merchant for these transactions. When a Cardmember
presents the Card for payment, the service establishment creates a record of
charge for the transaction and submits it to the merchant acquirer for payment.
The discount (i.e., value of charge times discount rate) is deducted from
payment to the service establishment and is recorded as discount revenue at the
time the transaction is captured. Where TRS acts as the merchant acquirer and
the Card presented at a service establishment is issued by a third-party bank or
financial institution, such as in the case of TRS' GNS partnership arrangements,
TRS will make financial settlement with the Card issuer. Such amounts shared are
recorded as a reduction of discount revenue. Where the merchant acquirer is a
third-party bank or financial institution, TRS also receives a portion of the
discount revenue charged to such service establishments. Such amounts shared
with and paid to TRS are recorded as discount revenue.
The discount rate, which is generally expressed as a percentage of the
amount charged on a Card, is contractually agreed with the service
establishment. The level of the discount rate charged is principally determined
by the value that is delivered to the service establishment and generally
includes a premium to other cards. Value is delivered to the service
establishment through higher spending Cardmembers, the volume of spending by all
Cardmembers and the
Page 5
insistence of Cardmembers to use their Cards when enrolled in loyalty or other
Card usage programs.
The discount rate varies with the type of participating establishment, the
charge volume, the timing and method of payment to the establishment, the method
of submission of charges and, in certain instances, the average charge amount
and the amount of information provided. TRS has generally been able to charge
higher discount rates to participating establishments than its competitors as a
result of TRS' attractive Cardmember base. While many establishments understand
this pricing in relation to the value provided, TRS has encountered
dissatisfaction from some establishments, as well as suppression of the Card's
use. TRS continues to devote significant resources to respond to this issue, and
has made progress by concentrating on acquiring merchants where Cardmembers want
to use the Card, providing better and earlier communication of the American
Express value proposition and, when necessary, by canceling merchants who
suppress usage of the American Express Card. Over time, the Company has
experienced some erosion in its discount rate, primarily reflecting its
business decision to expand its merchant coverage base to lower rate "everyday
spend" merchant categories, and the stronger than average growth rates in those
categories.
TRS focuses on understanding and addressing key factors that influence
merchant satisfaction, on executing programs that increase Card usage at
merchants and on strengthening its relationships with merchants through an
expanded roster of services that help them meet their business goals. In 2002,
TRS continued to offer value added front-office solutions designed to support
merchants' billing needs. These fee-based solutions include the Purchase Express
product that enables merchants to authorize and settle transactions from their
PCs and capture additional data required for Corporate Purchasing Card
transactions. TRS also continues to support merchant implementations on the
Automated Bill Payment Platform that allows merchants to bill Cardmembers on a
regular basis for repeated charges such as insurance premiums and subscriptions.
Wherever TRS manages both the acquiring relationship with merchants and
the Card-issuing side of the business, there is a "closed loop," which
distinguishes the American Express network from the bank card networks in that
there is access to information at both ends of the Card transaction. This
enables TRS to provide targeted marketing opportunities for merchants and
special offers to Cardmembers through a variety of channels.
During 2002, TRS continued to address credit quality issues on the merchant
side of its business and the growing risk related to merchant bankruptcies in
light of the difficult economy. To reduce this risk, particularly in the travel
industry where merchants may be paid by the Company well before the time they
actually render the services to Cardmembers, the Company holds payments to
service establishments where appropriate. In some cases, the Company has
lengthened the time between when the Card charges are submitted by the merchant
and when the Company pays the merchant and has taken other appropriate steps to
manage risk.
At year-end 2002, TRS was the sixth-largest owner/operator of ATMs in the
United States with more than 7,300 terminals, which are operated under the ATM
Axis'r' brand.
Page 6
In recent years there has been considerable interest on the part of a
number of government regulators around the world in the fees that merchants are
charged to accept credit cards. Most significantly, regulators in the United
Kingdom, European Union and Australia have conducted extensive investigations
into the way that VISA and MasterCard members collectively set the
"interchange," which is the fee paid to the card issuing bank and the
fundamental element of merchant pricing, and are imposing regulations on this
process. Regulators have also considered the industry practice of prohibiting
merchants from passing these fees along to consumers through surcharges on
credit card purchases. Although the regulatory focus has for the most part been
specifically on VISA and MasterCard, government regulation of the card
associations' pricing could ultimately affect all card service providers by
increasing pressure on the levels of interchange and merchant discount. Downward
movement of interchange and merchant discount may impact the relative economic
attractiveness to card issuers and merchant acquirers of participating in a
particular network, and may drive card service providers to look for other
sources of revenue such as annual card fees. In addition, any legal or
regulatory bar on the "no surcharging" rules may result in merchant surcharging
to consumers who choose to pay with credit and charge cards. As a result of
action taken by the Reserve Bank of Australia, merchants in Australia are
permitted to surcharge credit card transactions, including American Express Card
transactions, as of January 1, 2003.
CONSUMER CARD, SMALL BUSINESS AND CONSUMER TRAVEL SERVICES
As described above, TRS' Card business has a significant presence both in
the U.S. and internationally. TRS and its licensees offer individual consumers
charge cards such as the American Express'r' Card, the American Express'r' Gold
Card, the Platinum Card'r', and the ultra-premium Centurion'r' Card; revolving
credit cards such as Blue from American Express'r', the Optima'r' Card and the
recently launched American Express'r' Cash Rebate Card, among others; and a
variety of cards sponsored by and co-branded with other corporations and
institutions, such as the Delta SkyMiles'r' Credit Card from American Express,
American Express'r' Platinum Cash Rebate Card exclusively for Costco Members and
the American Express'r' Costco Business Card from OPEN: The Small Business
Network.
Charge Cards, which are marketed in the U.S. and many other countries and
carry no pre-set spending limits, are primarily designed as a method of payment
and not as a means of financing purchases of goods or services. Charges are
approved based on a variety of factors including a Cardmember's account history,
credit record and personal resources. Charge Cards generally require payment by
the Cardmember of the full amount billed each month, and no finance charges are
assessed. Charge Card accounts that are past due are subject, in most cases, to
a delinquency assessment and, if not brought to current status, may be canceled.
TRS and its licensees also offer a variety of revolving credit cards in the
United States and other countries. These cards have a range of different payment
terms, grace periods and rate and fee structures. Since late 1994, when the
Company began aggressively to expand its credit card business, its lending
balance growth has been among the top tier of card issuers. Much of this growth
has been due to the breadth of the Company's lending products, such as Blue from
Page 7
American Express and the Delta SkyMiles Credit Card from American Express, as
well as the increased number of Charge Cardmembers who have taken advantage of
the Company's "lending on charge" options (such as Sign & Travel). TRS continued
to bolster its proprietary business through the introduction of more than 100
new proprietary card products in 17 countries during 2002. These are cards that
American Express issues, either on its own or co-branded with partnering
institutions.
The wide array of new or enhanced international products included Blue
from American Express in Mexico and Indonesia (bringing the total number of
international "Blue" markets to 18), the American Express Tiger Woods Credit
Card in Canada, and co-branded cards with such high-value partners as Costco
in Puerto Rico, Alitalia in Italy and Shinsei Bank in Japan. TRS also acquired
a credit card portfolio from AMP Bank, one of Australia's leading financial
services companies.
American Express Centurion Bank ("Centurion Bank"), a wholly owned
subsidiary of TRS, issues Blue from American Express, the Optima Card, and all
other American Express-branded revolving credit cards in the United States and
owns most of the receivables arising from the use of these Cards. In addition,
Centurion Bank has outstanding lines of credit in association with certain
Charge Cards and offers unsecured loans to Cardmembers in connection with its
Sign & Travel and Extended Payment Option programs. The Sign & Travel'r' program
gives qualified U.S. Cardmembers the option of extended payments for airline,
cruise and certain travel charges that are purchased with the Charge Card. The
Extended Payment Option offers qualified U.S. Cardmembers the option of
extending payment for certain charges on the Charge Card in excess of a
specified amount. Centurion Bank is also the issuer of certain Charge Cards in
the U.S. Various flexible payment options are offered to Cardmembers in
international markets as well.
TRS issues Cards under co-brand agreements with selected commercial firms
and affinity programs with certain marketing partners. Examples of TRS'
co-brand arrangements include agreements with Aero Mexico, Air France, Loyalty
Management Group Canada, Inc. (Air Miles), Alitalia, British Airways, Costco,
Delta Airlines, Hilton Hotels, Madison Square Garden (New York Knicks/New York
Rangers), Shop Rite supermarkets, Singapore Airlines, SOGO - UNY (Hong Kong),
and Starwood Hotels & Resorts. The lengths of arrangements generally range
from 5 to 10 years. Cardmembers earn rewards provided by the commercial firms'
respective loyalty programs based upon their spending on the co-brand cards,
such as frequent flyer miles, hotel loyalty points and rebates. TRS makes
payments to the commercial firms with which it has co-brand card arrangements.
Payments by TRS are primarily based on the amount of Cardmember spending and
corresponding rewards earned on such spending, and, under certain
arrangements, on the number of accounts acquired and retained. TRS expenses
amounts due under co-brand arrangements in the month earned. Payment terms
vary by arrangement, but are monthly or quarterly. Once TRS makes payment to
the co-brand partner, as described above, the partner is solely liable with
respect to providing rewards to the Cardmember under the co-brand partner's
own loyalty program.
Affinity programs are generally designed as joint marketing arrangements
whereby TRS and the affinity partner create a program with joint branding and
offers designed to appeal to people with a relationship or affinity to a
particular partner-entity or association. In general, in an affinity
arrangement, TRS makes payments to the affinity partners that are primarily
based on
Page 8
the number of accounts acquired and retained through the affinity arrangement
and the amount of annual Cardmember spending on such cards. The lengths of such
arrangements generally range from 5 to 7 years.
The Company also issues Cards under arrangements with banks, primarily
outside the United States. Such bank distribution agreements involve the
offering of a standard Company product (issued by TRS or one of its
subsidiaries) to customers of the bank, generally with the bank's logo on the
card. In a bank distribution arrangement, the Company makes payments to the bank
partners that are primarily based on the number of accounts acquired and
retained through the arrangement and the amount of Cardmember spending on such
cards. The length of such arrangements generally range from 5 to 7 years. New
distribution agreements during 2002 were signed with Societe Generale in
France, Ban Regio in Mexico, Erste Bank in Austria and Joseph Leopold Bank in
the UK.
In addition to the payments to co-brand, affinity and bank partners
referred to above, the arrangements with such entities may contain other terms
unique to the arrangement with the partner, including an obligation on the part
of TRS to make payments under certain circumstances.
Many TRS Cardmembers, particularly Charge Card holders, are charged an
annual fee which varies based on the type of card, the number of cards for each
account, the currency in which the card is denominated and the country of
residence of the Cardmember. Many revolving credit cards are offered with no
annual fee. Each Cardmember must meet standards and criteria for
creditworthiness that are applied through a variety of means both at the time of
initial solicitation or application and on an ongoing basis during the Card
relationship. The Company uses sophisticated credit models and techniques in its
risk management operations.
Several products launched or renewed by TRS in the United States in the
last few years continued to make significant contributions to its results in
2002. In one major move, TRS enhanced its classic charge card lineup by
introducing the American Express Rewards Green and American Express Rewards Gold
cards for U.S. consumers. These cards offer automatic enrollment in the
MEMBERSHIP REWARDS'r' program and double points for everyday purchases at
supermarkets, gas stations, drugstores, home improvement stores and other
locations. Rewards-based products not only drive higher spending, they also have
very favorable economics in terms of Cardmember attrition, credit and payment
performance. Following their launch, the new American Express Rewards Green and
American Express Rewards Gold Charge Cards and the American Express Cash
Rebate Card had good early performance, together attracting almost 500,000 new
cards in 2002, with most coming in the fourth quarter. In addition to improving
TRS' U.S. consumer Charge Card offerings, these new cards provide Cardmembers
with enhanced opportunities to earn rewards and support TRS' efforts to drive
spending at everyday locations. TRS also launched the American Express Cash
Rebate Card for U.S. consumers. This card carries no annual fee and offers up to
five percent cash back, based on a Cardmember's annual spending and payment
activity.
In addition to these new product launches, TRS continued to grow its
existing rewards-based lending products in the U.S., such as its
co-brand portfolios with Delta Air Lines and Costco.
TRS also focused on expanding its MEMBERSHIP REWARDS program -- the largest
program of its kind, with more than nine million Cardmembers enrolled worldwide.
TRS continued to expand the array of choices in MEMBERSHIP REWARDS in 2002,
signing new partners in retail and
Page 9
entertainment categories including Banana Republic, Blockbuster, Broadway.com,
Cingular Wireless, Staples, Ticketmaster, The Home Depot and Toys "R" Us. About
1,200 redemption partners now participate in the MEMBERSHIP REWARDS program.
TRS' MEMBERSHIP REWARDS loyalty program continues to be a strong driver of
Cardmember retention and profitability.
TRS makes payments to merchants pursuant to contractual arrangements when
Cardmembers redeem their MEMBERSHIP REWARDS points and establishes reserves in
connection with estimated future redemptions. Due to higher charge volumes and
overall reward redemption costs, the expense of MEMBERSHIP REWARDS has increased
over the past several years and continues to grow. During 2002, TRS worked to
reduce program-related costs. Cardmembers can now handle online many
program-related activities, such as enrollment and point redemption. By offering
a broader range of redemption choices, TRS has improved customer satisfaction of
the MEMBERSHIP REWARDS program and lowered the average cost per point that is
redeemed. TRS will continue to seek ways to contain the overall cost of the
program and make changes to enhance its value to Cardmembers.
As in the United States, the MEMBERSHIP REWARDS program is a powerful
driver of Cardmember loyalty in the international consumer business. TRS now
offers MEMBERSHIP REWARDS in 30 countries. In 2002, TRS enhanced its rewards
programs in several markets, offering richer and more flexible choices that
enable Cardmembers to earn points more quickly. In addition to using the
Internet to support MEMBERSHIP REWARDS, TRS continued to deliver other online
tools to help its customers effectively manage their relationships with the
Company.
Throughout the world, Cardmembers have access to a variety of free and
fee-based special services and programs, depending on the type of Card they have
and their country of residence. These include the MEMBERSHIP REWARDS program,
Global Assist'r' Hotline, Buyer's Assurance Plan, Car Rental Loss and Damage
Insurance, Travel Accident Insurance, Purchase Protection Plan, Best Value
Guarantee, Emergency Card Replacement, Emergency Check Cashing Privileges,
Automatic Flight Insurance, Premium Baggage Protection, Private Payments'r',
Assured Reservations and Online Fraud Protection Guarantee. Certain Cards
provide Cardmembers with access to additional services, such as a Year-End
Summary of Charges Report. The Platinum Card, offered to certain Cardmembers in
the United States and in virtually all other countries in which TRS issues
Cards, provides access to additional and enhanced travel, financial, insurance,
personal assistance and other services. The Centurion Card, which is offered in
the U.S. and six other countries, is an ultra-premium charge card providing
highly personalized customer service and an array of travel, lifestyle and
financial benefits. Personal, Gold, Platinum Card and Centurion Cardmembers
receive the Customer Relationship Statement, which is used to communicate
special offers for products and services of both merchants and the Company. It
is now offered in the U.S. as well as in several international markets.
Examples of additional services offered for a fee to Cardmembers include
travel, accident and credit insurance products, a card registry and replacement
service, credit bureau monitoring and telecommunication services. Additional
services include a subscription service for magazines, a pre-paid legal service
and various merchandise-related offerings.
Page 10
Over the past ten years, TRS has significantly expanded the roster of
merchants who accept TRS' card products as well as the kinds of businesses that
accept the Card. As discussed above, in recent years, TRS has focused its
efforts on increasing the use of its Cards for everyday spending at such places
as supermarkets, gas stations and retailers, as well as for telecommunications
services. Consumers increasingly want to use cards for everyday purchases and
tend to maintain their level of spending in these areas, in contrast to spending
for certain kinds of travel and entertainment, even during periods of economic
weakness. In 1990, 65 percent of all of TRS' U.S. billings came from the travel
and entertainment sectors and 35 percent came from retail and other sectors. By
2002, that proportion was essentially reversed, with everyday spending
accounting for over 60 percent of the business billed on American Express Cards.
This shift resulted from the growth, over time, in the types of merchants who
began to accept charge and credit cards in response to consumers' increased
desire to use these cards for more of their purchases, and TRS' focus on
expanding Card acceptance to exploit these opportunities. In 2002, this shift
was important because of a decrease in spending in travel and entertainment
resulting from the overall economic and political environment.
As part of the Company-wide effort in 2002 to further reduce certain risks
to its balance sheet, TRS continued to maintain strong reserve coverage to
address credit quality in its charge card and lending portfolio. In this regard
TRS increased its reserve coverage of past due balances, which remained in
excess of 100 percent.
TRS is concerned about fraud throughout its Card operations. The Company
continues to take measures to address fraud issues, including investing in new
technologies and educating Cardmembers through fraud protection initiatives. The
Company had success in reducing known fraud in 2002.
TRS continues to make significant investments, both in the U.S. and
internationally, in its card processing system and infrastructure to allow
faster introduction and greater customization of products. TRS also is using
technology to develop and improve its service capabilities. For example, TRS
maintains a service delivery platform that its employees use in the card
business to support a variety of customer servicing and account management
activities such as account maintenance, updating of Cardmember information, the
addition of new cards to an account and customer satisfaction issues. In
international markets, TRS is building flexibility and enhancing its global
platforms and capabilities in revolving credit, its full service banking
platform and consumer payment options. See "Corporate and Other" for a
description of the Company's arrangement to outsource many of its technology
operations to IBM.
TRS is also a leading provider of financial and travel services to small
businesses (i.e., generally less than 100 employees and/or sales of $10 million
or less), a key growth area in the United States. In 2002, TRS took steps to
strengthen its competitive position in this customer segment by introducing a
new set of products, services, customer communications and partnerships, as well
as increasing the use of the Internet to meet the servicing needs of small
business owners in the United States. As part of this initiative, TRS' Small
Business Services Group created a new sub-brand and adopted a new name, OPEN:
The Small Business Network From American Express'sm' ("OSBN"). This network
provides a robust new set of products, services, online account management tools
and partnerships that offer everyday savings to small
Page 11
businesses. A nationwide advertising campaign supported this effort, reinforcing
American Express' commitment to serving small business owners.
New card products launched for small business owners in 2002 included the
Business Purchase Account'r' (charge), the Business Management Account'r'
(credit), and the Platinum Delta SkyMiles Business Credit Card. TRS also added
several new merchants to the EVERYDAY SAVINGS program for small business
cardmembers, including Cingular Wireless, Kinko's, Nextel and Staples.
TRS encounters substantial and increasingly intense competition with
respect to the Card issuing business. As a card issuer, TRS competes in the U.S.
with financial institutions (such as Citibank, Bank One/First USA, MBNA, JP
Morgan Chase and Capital One Financial) that are members of VISA and/or
MasterCard and that issue general purpose cards, primarily under revolving
credit plans, on one or both of those systems, and the Morgan Stanley affiliate
that issues the Discover Card on the Discover Business Services network. TRS
also encounters some very limited competition from businesses that issue their
own cards or otherwise extend credit to their customers, such as retailers and
airline associations, although these cards are not generally substitutes for
TRS' Cards because of their limited acceptance. As a result of consolidations
among banking and financial services companies and credit card portfolio
acquisitions by major card issuers, there are now a smaller number of
significant issuers and the largest issuers have continued to grow using their
greater resources, economies of scale and brand recognition to compete.
Competing card issuers offer a variety of products and services to attract
cardholders including premium cards with enhanced services or lines of credit,
airline frequent flyer program mileage credits and other reward or rebate
programs, "teaser" promotional interest rates for both card acquisition and
balance transfers, and co-branded arrangements with partners that offer benefits
to cardholders. Target customers are segmented based on factors such as
financial needs and preferences, brand loyalty, interest in rewards programs and
creditworthiness, and specific products are tailored to specific customer
segments.
Most financial institutions that offer demand deposit accounts also issue
debit cards to permit depositors to access their funds. Use of debit cards for
point of sale purchases has grown as many financial institutions have replaced
ATM cards with general purpose debit cards bearing either the VISA or MasterCard
logo and accepted wherever those branded credit cards are accepted. As a result,
the volume of transactions made with debit cards in the U.S. has continued to
increase significantly. Debit cards are marketed as replacements for cash and
checks, and transactions made with debit cards are typically for small dollar
amounts. While debit cards may be used instead of credit and charge cards for
certain kinds of transactions, they are not generally substitutes for credit or
charge cards. TRS does not currently offer point-of-sale debit card products
in any significant way.
The principal competitive factors that affect the Card-issuing business are
(i) the features and the quality of the services and products, including rewards
programs provided to Cardmembers; (ii) the number, spending characteristics and
credit performance of Cardmembers; (iii) the quantity and quality of the
establishments that accept a card; (iv) the cost of cards to
Page 12
Cardmembers; (v) the terms of payment available to Cardmembers; (vi) the number
and quality of other payment instruments available to Cardmembers; (vii) the
nature and quality of expense management data capture and reporting capability;
(viii) the success of targeted marketing and promotional campaigns; (ix)
reputation and brand recognition; (x) the ability of issuers to implement
operational and cost efficiencies; and (xi) the quality of customer service.
American Express Credit Corporation, a wholly owned subsidiary of TRS,
along with its subsidiaries ("Credco"), purchases most Charge Card receivables
arising from the use of cards issued in the United States and in designated
currencies outside the United States. Credco finances the purchase of
receivables principally through the issuance of commercial paper and the sale of
medium- and long-term notes. Centurion Bank finances its revolving credit
receivables through the sale of short- and medium-term notes and certificates of
deposit. TRS and Centurion Bank also fund receivables through asset
securitization programs, which comprises part of its financing strategy. The
Company utilizes the income from its securitization activities to help fund
certain marketing and promotion activities. The cost of funding Cardmember
receivables and loans is a major expense of Card operations. For a further
discussion of TRS' and Centurion Bank's securitization and other financing
activities, see pages 32-33, pages 36-37 and pages 41-42 under the caption
"Financial Review," and Note 4 on pages 66-67 of the Company's 2002 Annual
Report to Shareholders, which portions of such report are incorporated herein by
reference.
Centurion Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") for up to $100,000 per depositor. Centurion Bank is a
Utah-chartered industrial loan company regulated, supervised and regularly
examined by the Utah Department of Financial Institutions and the FDIC. Among
the activities of Centurion Bank that are regulated at the federal level are its
anti-money laundering compliance activities. The Company has taken steps to
maintain a compliance program consistent with applicable standards. For further
discussion of the anti-money laundering initiatives affecting the Company, see
page 58 hereof under the heading "Corporate and Other."
The Charge Card, ATM and consumer lending businesses are subject to
extensive regulation in the United States under a number of federal laws and
regulations, including the Equal Credit Opportunity Act (which generally
prohibits discrimination in the granting and handling of credit); the Fair
Credit Reporting Act (which, among other things, regulates use by creditors of
consumer credit reports and credit prescreening practices and requires certain
disclosures when an application for credit is rejected); the Truth in Lending
Act (which, among other things, requires extensive disclosure of the terms upon
which credit is granted); the Fair Credit Billing Act (which, among other
things, regulates the manner that billing inquiries are handled and specifies
certain billing requirements); the Fair Credit and Charge Card Disclosure Act
(which mandates certain disclosures on credit and charge card applications); and
the Electronic Funds Transfer Act (which regulates disclosures and settlement of
transactions for electronic funds transfers including those at ATMs). Certain
federal privacy-related laws and regulations govern the collection and use of
customer information by financial institutions (see page 57). Federal
legislation also regulates abusive debt collection practices. In addition, a
number of states and foreign countries have similar consumer credit protection,
disclosure and privacy-related laws. The application of federal and state
bankruptcy and debtor relief laws
Page 13
affect the Company to the extent that such laws result in amounts owed being
classified as delinquent and/or charged off as uncollectible. Card issuers and
card networks are subject to anti-money laundering and anti-terrorism
legislation, including the USA PATRIOT Act (see page 58 for a discussion of
this legislation and its effect on the Company's business). Centurion Bank is
subject to a variety of state and federal laws and regulations applicable to
FDIC-insured, state-chartered financial institutions. Changes in such laws and
regulations or in the regulatory application or judicial interpretation thereof
could impact the manner in which Centurion Bank conducts its business. The
Company regularly reviews and, as appropriate, refines its business practices in
light of existing and anticipated developments in laws, regulations and industry
trends so that it can continue to manage its business prudently and consistent
with regulatory requirements and expectations.
In January 2003, the Federal Financial Institutions Examination Council
(the "FFIEC"), an interagency body composed of the principal federal entities
that regulate banks and other financial institutions, issued in final form its
guidance on Credit Card Account Management and Loss Allowance Practices (the
"Guidance"). The Guidance covers five areas: (i) credit line management, (ii)
over-limit practices, (iii) minimum payment and negative amortization practices,
(iv) workout and forbearance practices, and (v) certain income (fee) recognition
and loss allowance practices.
The Guidance is generally applicable to all institutions under the
supervision of the federal bank regulatory agencies that comprise the FFIEC,
although it is primarily the result of the bank regulators' identifying in
recent examinations of other credit card lenders practices deemed by them to be
inappropriate, particularly, but not exclusively, with regard to subprime
lending programs. The Company does not have any lending programs that target the
subprime market. The Company does not believe that the Guidance will have any
material impact on the Company's businesses or practices, nor will the Guidance
mandate any changes to the Company's practices.
The American Express Consumer Travel business provides travel services to
consumers through: American Express-owned travel service offices; American
Express Representatives, which are travel offices independently owned by third
parties; and American Express Call Centers, which offer travel services to
Platinum Card'r', Centurion'r' Card and other Cardmembers. Through these
facilities, Cardmembers are able to receive service in person, by phone or by
fax, in addition to the Company's online servicing. The Consumer Travel business
also operates a wholesale travel business selling travel packages to other
retail travel agents. Since a large number of the Company's consumer and small
business Cardmembers are also active leisure travelers, TRS seeks to use its
consumer travel network to better serve its customers and grow the business
despite extremely challenging competitive pressures. See page 16 for a
discussion of competition in the travel industry.
TRS' travel network of more than 1,700 retail travel locations is important
in supporting the American Express brand and providing customer service
throughout the world. TRS continually evaluates this structure to determine the
best way to leverage the strength of the travel network. At the same time, TRS
is developing ways to better serve the travel consumer, including 1-800 type
services and Internet-based products and services.
Page 14
GLOBAL CORPORATE SERVICES
TRS' Global Corporate Services Group ("GCSG") provides Corporate Card,
Corporate Travel, Corporate Purchasing Card ("CPC") and consulting services to
businesses around the world. In addition to being a leading provider of such
services to large-market businesses, GCSG has a strong presence among middle-
market companies (those in the U.S. with annual revenues of $10 million to
$1 billion and annual travel and entertainment expenditures between $100,000
and $10 million). The corporate middle market is a rapidly expanding segment
that offers great opportunity for growth. In 2002, GCSG invested heavily in the
middle market, expanding marketing efforts and adding sales staff in 13
countries. It also launched the Savings at Work'sm' program, which provides U.S.
mid-sized firms with significant discounts on everyday products and services
such as office supplies and a range of business services, and it enhanced the
Company's product offerings to mid-sized firms in other parts of the world.
Companies are offered services through the American Express'r' Corporate
Card, which is a charge card issued to individuals through a corporate
account established by their employer for business purposes.
The CPC assists large- and middle-market companies in managing indirect
spending, including traditional purchasing administration expenses. The CPC is
used by corporations to buy everyday goods and services, such as office supplies
and industrial supplies and equipment, in 23 markets around the world. This type
of spending by corporations is less susceptible to downturns in difficult
economic times than is traditional travel and entertainment spending, and is
thereby helping to diversify the Company's spending mix. During 2002, TRS added
or expanded Corporate Card and Corporate Purchasing Card relationships around
the world including those with Accenture, Halliburton, Hilton Hotels, PepsiCo,
Procter & Gamble, Seagate Technology and Unisys Corporation.
Competition in the commercial card (Corporate Card and CPC) business is
increasingly intense at both the card network and card issuer levels. At the
network level, Diners Club remains a significant global competitor. In addition,
both VISA and MasterCard have stepped-up efforts to support card issuers such as
U.S. Bank, JP Morgan Chase, GE Financial Services and Citibank (in the U.S. and
globally), who are willing to build and support data collection and reporting
necessary to satisfy customer requirements. In the past few years, MasterCard
has promoted enhanced web-based support for its corporate card issuing members,
and VISA International supported the creation of a joint venture by a number of
its member banks from around the world to compete against GCSG and Diners Club
for the business of multinational companies. The key competitive factors in the
commercial card business are (i) the ability to capture and deliver detailed
transaction data and expense management reports; (ii) the number and types of
businesses that accept the cards; (iii) pricing; (iv) the range and
innovativeness of products and services to suit business needs; (v) quality of
customer services; and (vi) global presence. For a discussion of competition
relating to the Card issuing business, see pages 4 and 12.
Page 15
GCSG offers integrated commercial card and business travel services in the
United States and certain foreign countries to compete for the business traveler
and to provide client companies with a customized approach to managing their
travel and entertainment budgets. Clients are provided an information package to
plan, account for and control travel and entertainment expenses. CPC solutions
can also be packaged as complimentary expense management and reporting tools.
GCSG provides a wide variety of travel services to customers traveling for
business and is one of the leading business travel providers worldwide. For
corporate travel accounts, GCSG provides corporate travel policy consultation,
management information systems and group and incentive travel services in 37
markets worldwide, of which 31 are proprietary operations and six are managed
through joint ventures.
GCSG faces vigorous competition in the United States and abroad from
numerous other traditional and online travel management companies, as well as
from direct sales by airlines and other travel suppliers. Competition among
travel agencies is mainly based on price, service, convenience and proximity to
the customer. In addition, competition comes from corporate customers themselves
as many companies have become accredited as in-house corporate travel agents.
In 2001, five of the largest U.S. carriers launched Orbitz, an online
travel agency from which travelers are able to access information regarding a
large selection of airfares from many airlines, including web-only fares,
which may in some cases be lower than fares that can be obtained through
traditional travel agencies. The website also provides offers on car rentals
and other travel. In addition, Orbitz provides access to rates on hotel rooms
in both independent hotels and hotels in certain major national chains, which
may be lower than rates that could be obtained through traditional travel
agencies. While Orbitz is targeted primarily toward the leisure traveler,
business travelers are increasingly using Orbitz and other airline-owned
websites to gain access to web-only fares. Other online agencies, formerly
specializing in targeted sales to leisure travelers, such as Expedia and
Travelocity, have begun to pursue corporate travel customers, initially in the
small and mid-sized markets.
In 2002, GCSG expanded its presence in Asia by opening joint venture
operations through CITS (China International Travel Services) American Express
Travel Services Limited, launching business travel centers in Beijing and
Shanghai. This venture serves multinational, pan-regional and local corporations
traveling to and from the People's Republic of China. The CITS
Page 16
American Express partnership is the first corporate travel joint venture fully
licensed to sell both domestic and international airline tickets in China.
Airlines have continued efforts to reduce their distribution expenses. For
example, in March 2002, all of the major U.S. airlines and some international
carriers announced that they would no longer pay any "base" commissions to
travel agents for tickets sold in the U.S. and Canada for all domestic and
international travel. In addition, in 2002, airlines continued efforts to move
corporate customers to their own proprietary direct billing and payment
products, such as UATP, and made attempts to limit the use of credit and charge
cards for web-only corporate fares. In addition, airlines continue to maintain
and expand alliances for marketing, code share and other service delivery
purposes. Those actions and the impact of the economic slowdown have caused some
independent travel agencies to go out of business and, as referenced above,
forced others to seek consolidation opportunities. Consolidation of travel
agencies is expected to continue as agencies seek to better serve national and
multinational business travel clients and negotiate more effectively with the
airlines. It is also expected that travel agencies will continue to look for
expense reduction opportunities such as focusing on electronic ticketing and
interactive travel fulfillment solutions.
GCSG has historically received commissions and fees for ticketing and
reservations from airlines and other travel suppliers, and management and
transaction fees from certain corporate travel accounts. The ongoing trend of
airline alliances, airline websites permitting travelers to book business
directly and airline commission rate reductions continues to result in decreased
business travel revenue for travel companies and price increases for travelers,
fewer opportunities for data aggregation for corporations and greater pressure
on the GCSG travel business. Throughout 2002, GCSG, similar to other travel
management companies, tested and utilized on behalf of its customers multiple
technology tools to assure access to inventory and all airfares, formerly
classified as "web-only" fares. Late in 2002, GCSG announced its TravelBahn'sm'
Distribution Solution, a proprietary network alternative, which will provide
access to all American Airlines inventory and fares for American Express
corporate travel customers.
GCSG continues to modify its business model and invest in new technologies
to address these ongoing industry challenges. For example, GCSG has been
successful in its efforts to rely less on commission revenues from suppliers,
such as airlines or hotels, and now relies more on customers to pay transaction
fees for its travel services. In 2002, only 28 percent of U.S. corporate travel
revenues came from airlines, hotels, rental car companies and other suppliers,
and 72 percent came from customers. A few years ago, the mix was approximately
the reverse.
These changes to GCSG's sources of revenue enabled Corporate Travel to
successfully manage its business in one of the toughest years in recent history
for the business travel industry. The travel industry continues to be impacted
by world events and challenging economic conditions. Threat of war, terrorism
and a general economic downturn have depressed both business and leisure travel
and may continue to do so. In 2002, both United Airlines and USAir filed for
Chapter 11 bankruptcy protection in the U.S., while both airlines continue to
operate with reduced capacity in attempts to lower their cost base. 2002 also
saw the significant rise in popularity and profitability for the low-cost
carrier segment in the U.S., Europe and Asia. In the
Page 17
past, this segment had primarily focused on leisure travelers, while 2002 saw a
dramatic rise in the number and percentage of business travelers using these
low-cost airlines.
GCSG took advantage of the downturn in travel to step up sales efforts. It
was awarded the corporate travel business of companies including Monsanto
Company; Nestle USA; Nokia, Inc.; Panasonic; and The Shell Company of Australia
Limited.
As in other areas of the Company, GCSG has moved many of its business
processes and customer servicing online to reduce costs, improve processes and
enhance the quality of customer service. By year-end 2002, 16% of all corporate
travel transactions in the U.S. were conducted online. This online delivery
optimizes savings for corporate customers and enhances GCSG profitability
through lower-cost servicing. Expanding on the momentum from U.S. corporations
migration to booking their company travel online, GCSG opened two new
E-Fulfillment Centers in Europe -- in Stockholm and Nice -- to complement the
North American E-Fulfillment Center in Miami Lakes, Florida, which has been
operational since 2001. By shifting travel reservations from the telephone
onto a website, GCSG is able to improve substantially employee productivity and
drive down costs. Employees at online fulfillment centers process almost 7,000
transactions per year compared to approximately 1,400 for offline servicing.
Similarly, GCSG's Internet application for the corporate card segment,
Amex@Work, gives clients a faster, simpler way to work with the Company. During
2002, GCSG offered American Express @ Work'r' Expense Reporting and Purchase
Reconciliation, an online tool which helps companies and their employees track
and file expense reports and reconcile everyday purchases. TRS also enhanced
American Express @ Work by adding a searchable database that corporate travel
managers can access to keep track of employees' travel reservations. Over 11,000
corporate account administrators now go online to perform most of their account
maintenance, rather than contacting the Company by phone, fax or mail. Since its
launch in 1999, the percentage of corporate card maintenance transactions
completed online through Amex@Work has grown significantly and this channel now
handles 63 percent of such transactions.
GCSG has also developed relationships with a number of e-commerce firms to
provide a faster, more efficient way for customers to purchase office supplies
and related products using the CPC. In March 2002, GCSG announced that it has
entered into an agreement with IBM to jointly develop a web-based expense
reporting and reconciliation tool designed to reduce the cost of managing
everyday business expenses. Under the Agreement, GCSG plans to market the
application as part of its American Express @ Work suite of online expense
management tools.
GCSG, through its Consumer Travel International and Foreign Exchange
Services Group ("CTI & FES"), provides travel services, currency exchange and
Cardmember services through a retail network of American Express-owned and
franchised offices. CTI & FES expanded its global retail presence in Australia
and Southeast Asia, and extended its partnerships in India, Thailand, Turkey and
the United States. TRS further expanded its retail network through aggressive
growth at international airport locations; Paris' Charles de Gaulle airport and
London's Heathrow airport being notable recent additions to the network. CTI &
FES also provides electronic funds transfers through an international payments
service. Offered in the U.S., Australia and the UK, this service offers small
businesses and banking customers an Internet-based source to make payments to
foreign suppliers.
GLOBAL TRAVELERS CHEQUE AND PREPAID SERVICES
The Company, through its Global Travelers Cheque and Prepaid Services Group
("TCPS"), is a leading issuer of travelers checks. The Company also issues Money
Order and
Page 18
Official Check products in the United States, and the TravelFunds Direct'r'
product, which provides direct delivery of foreign bank notes and Travelers
Cheques in selected markets.
The American Express'r' Travelers Cheque ("Travelers Cheque" or "Cheque")
is sold as a safe and convenient alternative to currency. The Travelers Cheque
is a negotiable instrument, has no expiration date and is payable by the issuer
in the currency of issuance when presented for the purchase of goods and
services or for redemption. In 2002, TCPS launched enhanced services for
Travelers Cheque customers, including passport and credit replacement
assistance. Gift Cheques, a type of Travelers Cheque, are used for gift-giving
purposes.
Travelers Cheques are issued in eight currencies, including a
Euro-denominated Travelers Cheque, both directly by the Company and through
joint venture companies in which the Company generally holds an equity interest.
Gift Cheques are issued in two currencies, U.S. dollars and Canadian dollars. As
a result of the final conversion in early 2002 of certain European currencies to
the Euro, the Company ceased selling the French franc, German mark and Dutch
guilder Travelers Cheques as of the end of 2001. However, the Company will
continue to honor, redeem, and refund Cheques in these currencies for Euros,
since they do not expire.
American Express Travelers Cheques are sold through a broad network of
selling outlets worldwide, including travel offices of the Company, its
affiliates and representatives; travel agents; commercial banks; savings banks;
savings and loan associations; credit unions; and other financial, travel and
commercial businesses. The Company sometimes compensates selling outlets for
their sale of Travelers Cheques. In 2002, the Company's sale of Travelers
Cheques and Gift Cheques over the Internet continued to grow strongly. During
the year, overall Travelers Cheque sales decreased 6.2 percent globally, and
consumer Gift Cheque sales increased approximately 14 percent. While Gift Cheque
growth can be attributed to new advertising and marketing programs, it is
believed that the lag in Travelers Cheque sales was driven by the continuing
global economic slowdown and the reduction in both business and personal travel.
Partnerships with sellers continue to be critical to the Travelers Cheque
Group as TRS expands its sales distribution network. In 2002, TCPS lost the
account of the American Automobile Association, a major seller in the United
States, but gained a number of new sellers, including Abbey National in the UK;
Saudi American Bank; STA Travel in Germany; and Tokyo Credit Service.
The proceeds from sales of Travelers Cheques issued by the Company are
invested predominantly in highly-rated debt securities consisting primarily of
intermediate- and long-term state and municipal obligations.
Issuers of travelers checks and money orders are regulated under most
states' "money transmitter" laws. These laws require travelers check issuers to
obtain licenses, to meet certain safety and soundness criteria, to hold
outstanding proceeds of sale in highly rated and secure investments, and to
provide detailed reports. Many states audit Travelers Cheque and Money Order
licensees annually. In addition, Travelers Cheque and Money Order issuers are
required to
Page 19
comply with state and foreign unclaimed and abandoned property laws. The state
laws require issuers to pay to states the face amount of any Travelers Cheque or
Money Order that is uncashed or unredeemed after a specified period of years.
Outside the U.S., there are varying requirements, including some countries with
requirements similar to those in the U.S. On December 31, 2001, new federal
anti-money laundering regulations became effective. These regulations required,
among other things, the registration of traveler check and money order issuers
as "Money Service Businesses" and compliance with anti-money laundering
recording and reporting requirements by issuers and selling outlets. For a
discussion of other anti-money laundering legislative initiatives affecting the
Travelers Cheque Group, see page 58 under the heading "Corporate and Other."
Travelers Cheques compete with a wide variety of financial payment
products. Consumers may choose to use their credit or charge cards when they
travel instead of carrying Travelers Cheques, although a Travelers Cheque would
not typically be an acceptable substitute for most transactions made with credit
or charge cards. Other payment mechanisms that might substitute for Travelers
Cheques include cash, checks, other brands of travelers checks, debit cards and
cards accepted at national and international automated teller machine networks.
The principal competitive factors affecting the travelers check industry are (i)
the availability to the consumer of other forms of payment; (ii) the amount of
the fee charged to the consumer; (iii) the availability and acceptability of
travelers checks throughout the world; (iv) the compensation paid to, and
frequency of settlement by, selling outlets; (v) the accessibility of travelers
check sales and refunds; (vi) the success of marketing and promotional
campaigns; and (vii) the ability to service the check purchaser satisfactorily
if the checks are lost or stolen.
TCPS has also grown its Prepaid Card business. In 2002, the Group launched
a general retail gifting product, the American Express Gift Card, and continued
to offer the Be My Guest'r' Card, a Prepaid Card product used to give the gift
of restaurant dining. TCPS is continually looking into additional prepaid
products both individually and through partnerships with others.
OTHER PRODUCTS AND SERVICES
Interactive Services and New Businesses ("IS&NB") leverages interactive
technologies to develop new businesses and enhance existing businesses. IS&NB
leads and coordinates the deployment of the Company's enterprise-wide
interactive strategy with a focus on providing Internet and interactive
capabilities to meet customer needs.
The Company continued to leverage the Internet to lower costs and improve
service quality. During 2002, it expanded the number of services and
capabilities available to customers online and increased their utilization. For
example, within the U.S., approximately 80 percent of the Company's card
servicing transactions are now available online. The Company now has more online
interactions with customers than it does by telephone or in person.
At year-end, approximately nine million Cards were enrolled in "Manage Your
Card Account Service." This service enables Cardmembers to review and pay their
American Express bills electronically, view their Membership Rewards'r' accounts
and conduct various other
Page 20
functions quickly and securely online. The Company now has an online presence in
over 50 markets.
American Express Tax and Business Services Inc. ("TBS") is a tax,
accounting, consulting and business advisory firm focused primarily on small and
middle-market companies. TBS provides a wide range of services for a fee,
including tax planning and accounting, litigation support, business
reorganization, business advisory, business technology and other consulting
services. In addition, TBS has expertise in a variety of industries, including
health care, real estate, manufacturing and distribution, among others. TBS
employs CPAs but is not a licensed CPA firm. Attestation services for its
clients are available from licensed public accounting firms with whom TBS has
continuing professional services relationships. TBS has more than 50 offices in
17 states with approximately 2,700 employees.
TRS, through American Express Publishing, also publishes luxury lifestyle
magazines such as Travel+Leisure'r', T+L Family, a supplement to Travel+
Leisure, T&L Golf'r', Food & Wine'r' and Departures'r'; travel resources such
as SkyGuide'r'; business resources such as the American Express Appointment Book
and Fortune Small Business magazine; a variety of general interest, cooking,
travel, wine, financial and time management books; branded membership services;
as well as directly sold and licensed products. In 2002, American Express
Publishing introduced a Spanish language version of Travel + Leisure, the Blue
from American Express Appointment Book and SkyGuide GO, a supplement to SkyGuide
geared to business travelers. TRS also has a custom publishing group and is
expanding service-driven websites such as: travelandleisure.com,
foodandwine.com, departures.com, tlgolf.com, tlfamily.com and skyguide.net.
Page 21
AMERICAN EXPRESS FINANCIAL ADVISORS
OVERVIEW
The Company, through its American Express Financial Advisors business unit
("AEFA"), makes available a variety of financial products and services to help
individuals, businesses and institutions establish and achieve their financial
goals. This business unit principally includes American Express Financial
Corporation ("AEFC") and its subsidiaries and affiliates described below. At
December 31, 2002, AEFA maintained a nationwide field sales force of over 11,600
financial advisors, which represents a slight increase over 2001 and which
provided products and services to more than two million clients throughout the
U.S.
The core of AEFA's business is financial planning and advice. AEFA's
financial advisors work with retail clients to develop strong relationships
and long-term financial strategies. To fulfill the needs of its retail
clients, AEFA also develops and offers a broad array of financial products and
services, including annuities; a variety of insurance products, including life
insurance, disability income insurance and property and casualty insurance; a
variety of investment products, including investment certificates and mutual
funds; investment services, including wrap programs; a variety of
tax-qualified products, including individual retirement accounts,
employer-sponsored retirement plans and Section 529 college savings plans;
personal trust services; and retail securities brokerage, including online
direct brokerage services.
AEFA believes that its ability to provide broad-based products and
services on a relationship basis is a competitive advantage. Due to
significant volatility and an overall decline in the equity markets,
investment flow from AEFA's retail investors has slowed and many competitors
have also suffered significant declines. To compete, major brokerage firms are
attempting to move away from their historical transaction orientation and move
toward financial planning and advice, AEFA's historical focus and longstanding
strength. Unlike many of AEFA's competitors, whose field forces typically
comprise brokers who focus on completing transactions, many of AEFA's advisors
are Certified Financial Planner'r''pp'1 practitioners who also work closely
with clients to develop long-term financial plans. As a result, AEFA has a
client retention rate of 94 percent, and in 2002, the redemption rates in its
proprietary mutual fund product continued to compare favorably with industry
levels, even in light of the difficult environment AEFA faced during the year.
AEFA continues to invest considerably in the development of tools and
training for its advisors to further strengthen their ability to offer sound
advice and financial plans. During 2002, nearly 47 percent of new retail clients
had a financial plan developed for them by an AEFA advisor, up three percent
from 2001. As has been the case historically, clients with plans tend to buy
more products. In 2002, product sales generated through financial planning and
advice services were 73 percent of total advisor sales, up one percent from last
year.
----------
(1) Registered trademark of Certified Financial Planner Board of Standards,
Inc.
Page 22
AEFA also offers products and services directly to institutions, such as
asset management, institutional trust and custody, workplace-based financial
education and financial planning, and employee benefit plan administration. AEFA
also markets fixed and variable annuity and variable universal life insurance
products through third-party financial institutions.
In recent years, AEFA has increased its sale of non-proprietary products,
particularly mutual funds, to meet the demands of clients for a broader choice
of investment products. The sales of non-proprietary products on a stand-alone
basis generally are less profitable than proprietary sales. A significant
portion of AEFA's non-proprietary mutual fund sales are made in connection with
wrap programs where clients pay AEFA a fee that is typically a percentage of
assets under management, and which are more profitable than the sale of
non-proprietary products alone. In 2002, overall mutual fund sales by AEFA
decreased relative to the sale of fixed and variable annuities, which have a
lower return on equity.
In 2002, AEFA took various steps to support continued growth of its
business:
o It further refined the organizational structure for its field sales
force to reduce costs and improve focus and productivity.
o It took various actions to improve its asset management capability and
investment performance to increase the competitiveness of its
proprietary products, including:
- Launching 34 new products across its asset management, insurance
and annuity businesses, including four new equity and fixed
income internally managed mutual funds and four new sub-advised
equity mutual funds in the international, mid- and small-cap
categories by partnering with fund managers with proven track
records of strong performance;
- Increasing the strength and depth of its own investment talent,
including the hiring of a new Senior Vice President of Fixed
Income and several other experienced investment professionals and
the acquisition of a quantitative investment analysis firm. In
addition, in early 2003, AEFA reorganized its fixed income
investment management staff into teams responsible for research,
trading and portfolio management in specific fixed income
sectors; and
- Restructuring its U.S. equity investment operation by
establishing or expanding satellite offices in Boston, Cambridge,
New York and San Diego. Each of the satellite offices, in
addition to the Minneapolis office, is responsible for managing
several equity investment portfolios. Minneapolis continues to be
a center for both portfolio management and research.
In 2002, depressed equity market levels significantly impacted AEFA's
business. Among other areas, assets under management declined, as well as
management fees related to such assets, both due to depreciation in asset
values, as well as fund outflows, particularly those invested in growth-oriented
mutual funds. In 2002, other market-based events also impacted
Page 23
AEFA's business including the continuation of relatively high default rates in
the corporate debt markets. See "Impact of recent market volatility on Results
of Operations" on page 46 of the Annual Report to Shareholders, which is
incorporated by reference herein.
DISTRIBUTION OF PRODUCTS AND SERVICES
AEFA has three primary financial service distribution channels: retail,
which is comprised of financial advisors and direct access (online, telephone
and mail), institutional and third party.
RETAIL DISTRIBUTION
AEFA's largest distribution channel is its sales force of financial
advisors. Through this channel, AEFA offers financial planning and investment
advisory services (for which it charges a fee) to individuals and business
owners that may address six basic areas of financial planning: financial
position, protection, investment, income tax, retirement and estate planning.
AEFA's financial advisors provide clients with recommendations from a broad
array of proprietary and non-proprietary products and services.
AEFA's organizational structure provides advisors choices in how they
affiliate with the organization, with various levels of service, compensation
and branding. Advisors are able to choose an employee advisor platform, with
compensation being paid as a draw against commissions, a high level of support
and a lower payout rate; a branded independent advisor platform, structured as a
franchise system, in which advisors get a higher payout rate and can purchase
the support services they prefer; or an affiliated but unbranded broker-dealer
platform with a yet higher payout. The unbranded platform is Securities America,
Inc., a broker-dealer owned by AEFC. Securities America is a distributor of
mutual funds, annuities and insurance products, as well as individual securities
and wrap products. Securities America provided service to 1,434 advisors in
2002.
Approximately 24 percent of AEFA's 11,600 financial advisors are American
Express employees; about 64 percent are American Express-branded franchisees;
and about 12 percent are in the unbranded platform. AEFA believes it is the only
U.S. company to offer all three of these different career tracks for advisors,
which it considers a strategic advantage. During 2002, AEFA tightened the hiring
criteria for employee advisors so it could more effectively select applicants
who would have the greatest opportunity for success. At the same time, AEFA
focused on client acquisition and reducing costs in its system. AEFA further
improved the service and tools provided to franchisee advisors and further
aligned metrics and compensation.
AEFA believes it needs to continue its efforts to increase the size of its
dedicated field force to further enhance its ability to attract and serve new
clients and to compete effectively with the large sales forces of a few
competitors. In attracting and retaining members of the field force, AEFA
competes with financial planning firms, insurance companies, securities
broker-dealers and other financial institutions.
Consistent with the Company's goal of leveraging business development
across all of its units, AEFA continues to increase its sales to customers from
other American Express
Page 24
businesses. AEFA's Financial Education and Planning Services (FEPS) group
provides workplace financial education programs and an opportunity for advisor
referrals between the advisor channel and the 401(k) client base of American
Express Retirement Services and American Express Trust Company. With
institutional client approval, advisors present educational seminars in the
workplace to employee participants enrolled in the institutional client's
program. In 2002, AEFA enhanced these educational and referral activities with
401(k) clients representing 250 companies and over one million participants.
AEFA also has financial education relationships with 75 additional major U.S.
corporations and 500 smaller companies, also representing over one million
employees. Seventeen percent of AEFA's new retail clients in 2002 came from the
combination of these institutional relationships.
In 2002, AEFA also began to leverage other American Express relationships
with major companies to create alliances that help generate new financial
services clients. The first test of this strategy was a marketing alliance with
Costco, one of the largest merchants in the American Express network. The
AEFA/Costco Wholesale Program generates new advisor clients from the Costco
member base at a lower acquisition cost than traditional channels, while
providing Costco customers an array of member benefits. As a result of the
initial launch of the Costco alliance in 2002, five percent of AEFA's new
clients came from this relationship and 94 percent of advisor clients obtained
through the Costco relationship completed a financial plan.
AEFA also has taken steps to integrate its direct retail distribution
channel with the advisor channel. AEFA's online brokerage business, American
Express Brokerage, allows clients to purchase and sell securities online, obtain
research and information about a wide variety of securities, use asset
allocation and financial planning tools, contact an advisor, as well as have
access to more than 3,000 proprietary and non-proprietary mutual funds, among
other services.
The Internet also continues to be an important and cost effective tool for
acquiring new customers. The number of advisor leads generated via the Internet
increased significantly in 2002, at a substantially reduced cost versus
alternative channels. Additionally, the Internet has emerged as a significant
channel for service on the institutional and retail sides of the business.
In 2002, AEFA launched the American Express One'sm' Financial Account, an
integrated financial management account that combines clients' investment,
banking and lending relationships into a single account. The American Express
One Financial Account enables clients to access a single cash account to fund a
variety of financial transactions, including investments in mutual funds and
other securities. Additional features of the American Express One Financial
Account include unlimited check writing with overdraft protection, an American
Express'r' Gold Card, online bill payments, ATM access and a high-yield savings
account. By offering clients the benefits of "one-stop shopping," the American
Express One Financial Account enables AEFA to attract a larger share of its
clients' assets.
AEFA also introduced American Express Platinum Financial Services'r' in
2002 to better serve the company's most affluent clients. Clients eligible for
this offering have access to certain specialized products and services, and are
served by specially trained advisors, most of whom hold advanced planning
certifications. In 2002, AEFA trained over 750 top advisors to participate in
the program and existing clients who participated in the Platinum Financial
Services program committed an average of $150,000 in new money as a result.
Page 25
The Company also engages in the brokerage business in the United Kingdom
through American Express Financial Services Europe Ltd. ("AEFSE"). This business
has transformed into a more extensive provider of direct investment services,
and now offers, through a multi-currency account, customer trading in 11 stock
markets, tax wrappers and over 800 funds. AEFSE is part of the Company's Global
Brokerage and Membership B@nking'r' ("GBMB") unit, which also includes the
Company's U.S. brokerage services offered through AEFA and Membership B@nking
offered through Centurion Bank. GBMB is helping to coordinate the expansion of
the Company's financial services business in the U.S. and select international
markets by working closely with AEFA and TRS.
In 2002, AEFA announced a strategic alliance with Mitsui Mutual Life
Insurance Company (MMLIC) to license AEFA's financial planning business model in
Japan and transfer AEFA's Japanese direct mutual fund sales business. The AEFA
advice-based business model has been tailored for Japan and includes advisor and
leader training, marketing support and financial planning software. MMLIC
launched its financial planning Personal Money Management (PMM) service in
November 2002. MMLIC has exclusive use of the model through 2004. With this
strategic alliance, AEFA expects to gain experience in exporting advice
capabilities. As a result of this transaction, AEFA closed its retail operations
in Japan.
INSTITUTIONAL
American Express Asset Management Group Inc. ("AEAMG"), a subsidiary of
AEFC and an SEC registered investment adviser, directly or through operating
divisions or subsidiaries, provides investment management services to:
o Pension, profit-sharing, employee savings and endowment funds of
large- and medium-sized businesses, governmental units and other large
institutional clients;
o Smaller accounts of wealthy individuals and small institutional
clients, either directly to such clients or indirectly through wrap
programs sponsored by various affiliated and unaffiliated entities;
o Various special purpose vehicles that issue their own securities and
which are backed by high-yield bonds and bank loans (collateralized
debt obligations and secured loan trusts); and
o Various hedge funds structured as limited liability entities and
offshore corporations.
For its investment services, AEAMG generally receives fees which are
assessed on the basis of a percentage of the market value of assets under
management. Clients may also pay fees to AEAMG based on the performance of their
portfolio.
AEAMG owns a 50.1 percent interest in Kenwood Capital Management LLC
("Kenwood"), which provides investment management services to investment
companies, corporations, trusts, estates, charitable organizations and tax
qualified pension and profit sharing plans. Kenwood employs an active investment
strategy that is based on a disciplined approach to stock selection and
portfolio risk management, and seeks to achieve consistent excess returns
Page 26
relative to passive index benchmarks for the small-cap segment of the United
States' equity market. AEAMG also owns a 50.1 percent interest in Northwinds
Marketing Group LLC ("Northwinds"), a registered broker-dealer, which markets
investment management services of AEAMG and its affiliated investment advisers,
as well as certain non-affiliated investment advisers, to large institutions,
primarily union and public pension funds.
AEAMG also provides investment management services to hedge funds
structured as limited liability entities and offshore corporations. AEAMG's
direct or indirect subsidiaries serve as general manager and investment manager
of such entities. These subsidiaries also serve as commodity pool operators for
hedge funds that trade in futures and, accordingly, are registered with the
Commodity Futures Trading Commission ("CFTC") and the National Futures
Association ("NFA"). Other entities affiliated with AEAMG, which are also
subsidiaries of AEFC, jointly provide investment management and advisory
services to European equity hedge funds. AEAMG receives an investment management
fee, and may also receive a performance fee, for the services it provides to the
hedge funds. Portfolio managers and analysts for the hedge funds may, from time
to time, invest their own assets in the funds they manage. Investors in the
hedge funds include institutions, corporations, pension plans, and high net
worth individuals. Investors may be affiliates of AEFC. The hedge fund business
faced significant challenges in 2002 and, in the aggregate, the asset levels in
these funds declined. The business focused on repositioning for future growth.
In 2002, eight new funds (four strategies) were launched and four funds (two
strategies) were closed. Personnel changes were made, resulting in a net
increase in personnel dedicated to the hedge fund business.
AEAMG provides investment management services as collateral manager to
various special purpose vehicles that issue securities collateralized by a
pool of assets, i.e., collateralized debt obligations ("CDOs"). AEAMG also
provides investment management services to secured loan trusts ("SLTs"). AEAMG
is assessing the impact of FASB Interpretation No. 46, which addresses
potential consolidation of certain entities, including CDOs and SLTs. AEAMG or
one or more of its affiliated companies has invested its own money in such
vehicles, including in residual equity interests, which are illiquid and the
most subordinated (and accordingly, riskiest and most volatile) interests in
such vehicles. As of December 31, 2002, the carrying values of the CDO
residual tranches and SLT notes were $28 million and $684 million,
respectively. The return on such investments correlates to the performance of
portfolios of high-yield bonds and bank loans. Generally, the SLTs are
structured such that the principal amount of the loans in the reference
portfolio to which the SLTs correlate may be up to five times that of the par
amount of the notes held by AEFA. Deterioration in the value of high-yield
bonds or bank loans would likely result in deterioration of investment return
on the relevant CDO or SLT, as the case may be. In the event of significant
deterioration of a portfolio, the relevant CDO or SLT may be subject to early
liquidation, which could result in further deterioration of the investment
return, or in severe cases, loss of the carrying amount. Deterioration of a
portfolio would likely have a negative impact on collateral management fees.
During 2001, AEFA placed a majority of its rated CDO securities and
related accrued interest, as well as a relatively minor amount of other liquid
securities, having an aggregate book value of $905 million, into a
securitization trust. In return, the Company received $120 million in cash
(excluding transaction expenses) relating to sales to unaffiliated investors and
retained interests in the trust with allocated book amounts aggregating $785
million. As of December 31, 2002, the retained interests had a carrying value of
$754 million, of which $520 million is considered investment grade. The company
has no obligations, contingent or otherwise, to such unaffiliated investors.
At December 31, 2002, AEAMG managed securities portfolios in the U.S.
totaling $14.8 billion compared to $18.4 billion at December 31, 2001.
International investment management services are offered to domestic and
international institutional clients and mutual funds by other subsidiaries of
AEFC which have offices in
Page 27
London, Singapore and Tokyo. At December 31, 2002, these entities in the
aggregate managed $4.5 billion, of which $2.7 billion represents mutual fund
assets.
The institutional investment management business is highly competitive and
2002 was a challenging year in which there was an overall reduction in assets
under management. AEAMG and its affiliates must compete against a substantial
number of larger firms in seeking to acquire and maintain assets under
management. Competitive factors in this business include fees, investment
performance, including the quality and "track record" of portfolio managers,
global capabilities, range of portfolios offered and client service.
American Express Retirement Services ("AERS"), a business unit of American
Express Financial Advisors Inc., and American Express Trust Company ("AETC"),
together provide retirement plan-related services to mid- to large-size private
employers, governmental entities and unions. Together, AERS and AETC bundle a
variety of service offerings for clients, including a wide array of investment
options, participant education offerings, and both phone and Internet-based plan
servicing. The primary market is for retirement plans with at least $10 million
in assets. As noted in greater detail above, the FEPS group, which is a part of
the AERS business unit, provides workplace financial education programs and an
opportunity for advisor referrals between the advisor channel and the
institutional channel, which includes the client base of AERS and AETC.
AETC is a Minnesota chartered, limited service trust company which
primarily provides trustee, custodial, record keeping, investment management,
securities lending and common trust fund services for employer-sponsored
retirement plans, including pension, profit sharing, 401(k) and other qualified
and non-qualified employee retirement plans. Based upon recently published
industry figures, we believe that the Company, through AERS and AETC, is a
leading employer-sponsored retirement plan service provider in the United
States.
At December 31, 2002, AETC acted as directed trustee or custodian of 341
benefit plans which represent approximately $26.8 billion in assets managed or
administered, and approximately 1.1 million participants. This includes
approximately $5.3 billion invested in proprietary mutual funds, $4.0 billion
invested in non-proprietary mutual funds, $11.5 billion actively managed by
AETC through both separate investment accounts and collective investment
funds, $5.9 billion of assets administered by AETC, $69.1 million invested
through participant directed brokerage accounts, and $29.9 million invested in
annuities.
For its investment management services, AETC receives fees that are
generally based upon a percentage of the market value of assets under
management. AETC clients typically do not pay fees to AETC based on the
performance of their portfolio. AEFA, through AERS, will also receive revenues
based upon servicing agreements from both the proprietary and non-proprietary
mutual funds that are generally based upon a percentage of the market value of
assets invested in the mutual funds, and, in limited circumstances, may also
include revenues on a per participant basis. While AETC and AERS may also
receive fees which are assessed as a flat fee or on a per participant basis,
revenues are principally based upon the value of assets managed or administered,
which may fluctuate due to many factors, most notably due to net inflows or
outflows of assets and fluctuations within the equity and fixed-income markets.
Through its
Page 28
trustee and custodial services, AETC may enter into agreements to provide
services to qualified employer-sponsored retirement plans holding employer
stock.
The business climate for AERS and AETC is highly competitive. As with
AEAMG, AERS and AETC experienced a challenging year in 2002, reflecting an
overall decline in assets both managed and administered. AETC must compete
against a substantial number of larger firms in seeking to acquire and maintain
assets under management. Competitive factors in this business include fees,
record keeping and technological capabilities, investment performance and client
servicing.
AETC is primarily regulated by the Minnesota Department of Commerce
(Banking Division), and is subject to net capital requirements under Minnesota
law. AETC may not accept deposits or make personal or commercial loans. Because
AETC is a service provider to retirement plans, AETC is also subject to
oversight by the U.S. Department of Labor and the U.S. Department of Treasury,
particularly with respect to the Employee Retirement Income Security Act of 1974
("ERISA").
AETC also provides institutional asset custodial services to AEFC and the
AEFA affiliates providing mutual funds, investment certificates, asset
management and life insurance. At December 31, 2002, AETC's institutional assets
under custody are approximately $102.2 billion. AETC custody revenues are
principally based upon the value of assets in custody, which may fluctuate due
to many factors, most notably due to net inflows or outflows of assets and
fluctuations within the equity and fixed-income markets.
THIRD-PARTY DISTRIBUTION
In addition to the retail and institutional distribution channels, AEFA
continues to expand distribution by delivering proprietary insurance and annuity
products through non-affiliated representatives and agents of third-party
distributors. These products are offered through American Enterprise Life
Insurance Company ("American Enterprise Life") and its affiliate American
Centurion Life Assurance Company ("American Centurion Life"), both subsidiaries
of IDS Life Insurance Company ("IDS Life"). American Enterprise Life provides
financial institution clients with American Express-branded financial products
and services to support their retail insurance and annuity operations. It
distributes variable life insurance and fixed and variable annuity contracts,
primarily through regional and national financial institutions and regional
and/or independent broker-dealers, in all states except New York and New
Hampshire. American Centurion Life markets fixed and variable annuities in New
York.
During the year, AEFA continued to expand its network of third-party
distributors through American Enterprise Life and American Centurion Life and
its range of variable annuity products offered through them, resulting in
strong third-party sales efforts. (American Centurion Life also offers annuities
directly to consumers, generally persons holding an American Express'r' Card.)
American Enterprise Life improved its competitive position during the year,
increasing market share, substantially adding to its client base, and further
broadening its variable annuity product lineup. American Enterprise Life also
expanded and strengthened its distribution and technology capability. American
Enterprise Life competes directly with several other insurers in the third-party
distribution channel.
Page 29
ADDITIONAL CAPABILITIES
In 2002, AEFA continued to expand its securities brokerage services.
American Enterprise Investment Services Inc. ("AEIS"), a wholly owned subsidiary
of AEFC, provides securities execution and clearance services for approximately
963,000 retail and institutional clients of AEFA. AEIS holds over $42 billion in
assets for clients. AEIS is registered as a broker-dealer with the SEC, is a
member of the National Association of Securities Dealers, Inc. ("NASD") and the
Chicago Stock Exchange and is registered with appropriate states.
American Express Financial Advisors Inc. ("AEFAI"), AEFC's principal
marketing subsidiary, does business as a broker-dealer and investment advisor in
all 50 states, the District of Columbia and Puerto Rico. AEFAI is registered as
a broker-dealer and investment advisor regulated by the SEC and is a member of
the NASD. AEFA's financial advisors must obtain all required state and NASD
licenses.
AEFA also acts as custodian and broker for Individual Retirement Accounts,
Tax-Sheltered Custodial Accounts and other retirement plans for individuals and
small and mid-sized businesses. As of December 31, 2002, these tax-qualified
assets equaled $63.6 billion, which is in excess of 25% of all institutional and
retail assets owned, managed and administered by AEFA.
To increase its servicing flexibility, several AEFA processes were migrated
under the Global Infrastructure Optimization ("GIO") initiative and are serviced
by three separate vendors located in the Philippines and India. These service
centers provide front-end AEFA Mutual Fund and Brokerage call center services
and a variety of back office services including case management and pay by
phone. AEFA continues to maintain adequate staffing levels within the United
States to meet global uncertainties and volume fluctuations.
REGULATION
AEFA has experienced, and believes it will continue to be subject to,
increased regulatory oversight of the securities and commodities industries at
all levels. In 2002, the SEC and NASD heightened applicable requirements by
adopting several new regulations, including new books and records rules, new
anti-money laundering rules and new business continuity requirements. As a
provider of products and services to tax-qualified retirement plans and IRAs,
certain aspects of AEFA's business fall within the compliance oversight of the
U.S. Department of Labor ("DOL") and the U.S. Department of Treasury
("Treasury"), particularly with respect to the tax reporting requirements
applicable to such accounts. Compliance with these and other regulatory
requirements adds to the cost and complexity of operating AEFA's business. In
addition, the SEC, DOL, Treasury, self-regulatory organizations and state
securities and insurance regulators may conduct periodic examinations and
administrative proceedings, which may result in censure, fine, the issuance of
cease-and-desist orders or suspension or expulsion of a broker-dealer or an
investment advisor and its officers or employees. Individual investors also can
bring complaints against AEFA. Moreover, AEFA believes it is one of the first
financial
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institutions to structure itself as a franchise system. As such, AEFA is subject
to Federal Trade Commission and state franchise requirements.
COMPETITIVE ENVIRONMENT
Competition in the financial services industry focuses primarily on cost,
investment performance, yield, convenience, service, reliability, safety,
innovation, distribution systems, reputation and brand recognition. Competition
in this industry is very intense. AEFA competes with a variety of financial
institutions such as banks, securities brokers, mutual funds and insurance
companies. Some of these institutions are larger, have greater resources and are
more global than AEFA, and the continuing trend toward consolidation and
globalization in the financial services industry may increase the number of
these stronger competitors. Many of these financial institutions also have
products and services that increasingly cross over the traditional lines that
previously differentiated one type of institution from another, thereby
heightening competition for AEFA. The ability of certain financial institutions
to offer online investment and information services has also affected the
competitive landscape over the past few years. Reflecting the overall
competitive environment, certain financial institutions have continued to seek
to hire AEFA's financial advisors.
AEFA's business does not, as a whole, experience significant seasonal
fluctuations.
INSURANCE AND ANNUITIES
Life insurance and annuities are important AEFA products. AEFA sells these
products primarily through IDS Life. A wholly owned subsidiary of AEFC, IDS Life
is a stock life insurance company organized under Minnesota law.
IDS Life serves residents of all states except New York and distributes its
products exclusively through AEFA's retail distribution channel. IDS Life also
has four wholly owned subsidiaries that distribute their products through the
various AEFA distribution channels. IDS Life Insurance Company of New York ("IDS
Life of New York") serves New York residents and distributes its products
exclusively through the retail channel. American Enterprise Life, an Indiana
corporation, and American Centurion Life, a New York corporation, distribute
their products through the third-party distribution channel as discussed above.
American Partners Life Insurance Company ("American Partners Life"), an Arizona
corporation, distributes its products through the direct access channel outside
of New York. American Centurion Life also distributes through the direct access
channel in New York. IDS Life and its four insurance company subsidiaries are
referred to in this section as the "IDS Life Companies."
Business sold through AEFA's retail distribution channel for IDS Life and
IDS Life of New York represents the majority of the insurance and annuity
business for the IDS Life Companies. Business sold through third party
distribution for American Enterprise Life and American Centurion Life ranks
second. Business sold through the direct channel for American Partners Life
and American Centurion Life ranks a distant third.
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REGULATION
IDS Life, American Enterprise Life and American Partners Life are subject
to comprehensive regulation by the Minnesota Department of Commerce (Insurance
Division), the Indiana Department of Insurance, and the Arizona Department of
Insurance, respectively. American Centurion Life and IDS Life of New York are
regulated by the New York State Department of Insurance. The laws of the other
states in which these companies do business also regulate such matters as the
licensing of sales personnel and, in some cases, the marketing and contents of
insurance policies and annuity contracts. The primary purpose of such regulation
and supervision is to protect the interests of policyholders.
Regulatory scrutiny of market conduct practices of insurance companies,
including sales, marketing and replacements of life insurance and annuities and
"bonus" annuities, has increased significantly in recent years and is affecting
the manner in which companies approach various operational issues, including
compliance. The number of private lawsuits alleging violations of laws in
connection with insurance and annuity market conduct has increased. (See "Legal
Proceedings" below.) Virtually all states mandate participation in insurance
guaranty associations, which assess insurance companies in order to fund claims
of contract owners of insolvent insurance companies.
On the federal level, there is periodic interest in enacting new
regulations relating to various aspects of the insurance industry, including
taxation of annuities and life insurance policies, accounting procedures, as
well as the treatment of persons differently because of gender, with respect to
terms, conditions, rates or benefits of an insurance contract. New federal
regulation in any of these areas could potentially have an adverse effect upon
the IDS Life Companies. More specifically, recent federal legislative proposals
aimed at promoting tax-advantaged savings through Lifetime Savings Accounts and
Retirement Savings Account and the dividend exclusion proposal may adversely
impact IDS Life Companies' sales of annuity and life insurance products if
enacted.
RATINGS
The IDS Life Companies had consolidated assets at December 31, 2002 of
approximately $60 billion, based on generally accepted accounting principles,
and had total statutory capital and surplus as of December 31, 2002 of $2.4
billion.
IDS Life receives ratings from independent rating agencies. Generally, its
four insurance subsidiaries do not receive an individual rating, but receive the
same rating as IDS Life. These agencies evaluate the financial soundness and
claims-paying ability of insurance companies based on a number of different
factors. The ratings reflect each agency's estimation of the IDS Life Companies'
ability to meet their contractual obligations such as making annuity payouts and
paying death benefits and other distributions from the contracts. As such, the
ratings relate to the IDS Life Companies' general accounts and not to the
variable accounts. This information generally does not relate to the management
or performance of the variable subaccounts of the contracts.
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Ratings are important to maintaining public confidence in the IDS Life
Companies. Lowering of the IDS Life Companies' ratings could have a material
adverse effect on their ability to market their products and could lead to
increased surrenders of their products. Rating agencies continually review
the financial performance and condition of insurers. As of the end of 2002, IDS
Life was rated "A+" (Superior) by A.M. Best Company, Inc. and its claims-paying
ability/financial strength was rated "Aa3" (Excellent) by Moody's Investors
Service, Inc. (Moody's), and "AA" (Very Strong) by Fitch. In light of the
Company's desire to maintain these ratings, IDS Life's parent contributed $400
million of capital to IDS Life in 2002.
The foregoing ratings reflect each rating agency's opinion of the IDS Life
Companies' financial strength, operating performance and ability to meet its
obligations to contract owners. Such factors are of primary concern to contract
owners, agents and intermediaries, but also may be of interest to investors.
RISK BASED CAPITAL
The National Association of Insurance Commissioners ("NAIC") adopted Risk
Based Capital ("RBC") requirements for life insurance companies. The RBC
requirements are to be used as minimum capital requirements by the NAIC and
states to identify companies that merit further regulatory action. At December
31, 2002, IDS Life had total adjusted capital of approximately $2.6 billion.
As defined by the NAIC, total adjusted capital includes certain asset valuation
reserves excluded from the $2.4 billion of statutory capital and surplus
referred to above. The Minnesota Department of Commerce, IDS Life's insurance
regulator, requires insurance companies to maintain a minimum RBC called the
"authorized control level." If total adjusted capital fell below the
authorized control level, the Minnesota Department of Commerce would be
authorized to exercise management control over IDS Life. For IDS Life,
authorized control level capital was $435 million at December 31, 2002.
In addition, insurance companies are expected to maintain higher capital
at a level above that which would require a company to file an action plan with
the Department. This is referred to as the "company action level." For IDS Life,
company action level capital was $870 million at December 31, 2002.
As described above, IDS Life maintains levels of RBC far in excess of the
authorized control and company action levels required by the Minnesota
Department of Commerce. The level of capital maintained in IDS Life is thought
to be appropriate by management and is more commensurate with standards
necessary to maintain IDS Life's ratings with the various credit and
claims-paying rating agencies.
THE GENERAL ACCOUNT
Assets supporting contract values associated with fixed account life
insurance and annuity products, as well as those associated with fixed account
options under variable insurance and annuity products (collectively, the
"fixed accounts"), are part of an insurer's "general account." Under fixed
accounts, the insurer bears the investment risk. In investing their general
account assets, IDS Life Companies seek to maintain a dependable and targeted
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difference or "spread" between the interest rate earned on general account
assets and the interest rate the insurer credits to contract owners' fixed
accounts. This spread is a major driver of net income for the IDS Life
Companies.
The general account assets also include funds accumulated through insurance
premiums and cost of insurance charges. These premiums and charges are major
sources of revenue for IDS Life and IDS Life of New York.
In the general account, the IDS Life Companies primarily invest in fixed
income securities over a broad range of maturities for the purpose of providing
a targeted rate of return on their investments while controlling risk. The
majority of these fixed income securities are interest bearing investments such
as government obligations, mortgage backed obligations and various corporate
debt instruments. The IDS Life Companies do not invest in securities to generate
trading profits.
Each of the IDS Life Companies has an investment committee that meets
periodically to review models projecting different interest rate scenarios,
risk/return measures, and their effect on profitability. The committee also
reviews the distribution of assets in the portfolio by type and credit risk
sector. The objective of the committee is to structure the investment security
portfolio based upon the type and expected behavior of products in the
liability portfolio so as to meet contractual obligations and achieve targeted
levels of profitability within defined risk parameters.
The IDS Life Companies have the discretion to set the rate of interest
credited to contract owners' accounts. However, this discretion is limited by
the contract's guaranteed minimum interest rate. This rate varies among fixed
accounts and is as low as 3% and as high as 5%. (Approximately ten states have
adopted regulations providing for a guaranteed minimum interest rate that is
less than 3%. In some states it is as low as 1.5%; in other states it is tied
to an index. The NAIC recently adopted a model regulation providing for an
indexed guaranteed minimum interest rate, and it is anticipated that a number
of states will follow this model.) The interest rates credited to contract
owners' fixed accounts are generally reset at shorter intervals than the
maturity of underlying investments. Therefore, margins may be negatively
impacted by increases in the general level of interest rates. Part of the
investment committee's strategy includes the use of derivatives, such as
interest rate caps, swaps and floors, for risk management purposes. These
derivatives help protect margins by increasing investment returns if there is
a sudden and severe rise in interest rates, thereby mitigating the impact of
an increase in rates credited to contract owners' fixed accounts. Conversely,
in a low interest rate environment, such as that experienced recently, margins
may be negatively impacted as the interest rates available on the IDS Life
Companies' invested assets approach guaranteed minimum interest rates on the
insurance or annuity contracts. This negative impact may be compounded by the
fact that many of these interest bearing investments are callable or
prepayable by the issuer and calls and prepayments are more likely to occur in
a low interest rate environment.
The IDS Life Companies sold approximately $10.5 billion of their invested
assets during the year, on a consolidated basis. In addition, approximately $3
billion in assets were redeemed during the year. The cash generated by these
sales and redemptions has been or will be invested.
Page 34
THE VARIABLE ACCOUNTS
Variable insurance and annuity products offer variable account investment
options in addition to the fixed account options described above. Under variable
accounts, contract owners bear the investment risk. The variable accounts are
registered as unit investment trusts under the Investment Company Act of 1940.
Generally, the variable accounts consist of a number of subaccounts, each of
which invests in shares of a particular fund.
Contract owners can allocate their payments among variable subaccounts that
invest in underlying funds. The underlying funds are managed both by internal
and third-party money managers. Internally managed funds for the IDS Life
Companies' variable annuities include the 19 AXP'r' Variable Portfolio Funds.
Internally managed funds for the variable life business include the AXP Variable
Portfolio Funds and the seven IDS Life Series Fund portfolios. The IDS Life
Companies' variable life insurance and annuities also offer funds managed by
third-party money managers. For example, the investment advisers under the
American Express Retirement Advisor Advantage'r' Variable Annuity and the
American Express'r' Variable Universal Life IV/Variable Universal Life IV -
Estate Series include AIM Advisors Inc., Alliance Capital Management, L.P.,
American Century Investment Management, Inc., Calvert Asset Management Company,
Inc., Evergreen Investment Management Company, LLC., Fidelity Management &
Research Company, Franklin Mutual Advisers, LLC, Franklin Advisers, Inc.,
Franklin Advisory Services, LLC, Goldman Sachs Asset Management, L.P., INVESCO
Funds Group, Inc., Janus Capital, Lazard Asset Management, LLC, MFS Investment
Management, Pioneer Investment Management, Inc., Putnam Investment Management,
LLC, Strong Capital Management, Inc., Liberty Wanger Asset Management, L.P. and
Wells Fargo Funds Management, LLC. These funds invest in portfolios containing a
variety of securities including common stocks, bonds, managed assets and/or
short-term securities. The value of these subaccounts fluctuates with the
investment return of the funds in which the subaccounts invest. The IDS Life
Companies' major source of revenue from the variable products is the fees it
receives. These fees may include management and other fees from underlying
internally managed funds, revenues from underlying outside-managed funds and
mortality and expense risk fees from variable subaccounts.
Variable life insurance and annuities are "separate account" rather than
general account products. This means that state insurance law prohibits charging
variable accounts with liabilities of the general business. Under the
subaccounts of each variable account, the IDS Life Companies credit or charge
income, capital gains and capital losses only to that subaccount.
INSURANCE: PRODUCT FEATURES AND RISKS
The IDS Life Companies issue a wide range of insurance products including
variable life insurance, universal life insurance, traditional whole life and
term life insurance products, long-
Page 35
term care insurance and disability income insurance. The IDS Life Companies have
no short-duration life insurance liabilities. The companies issue only
non-participating contracts. IDS Property Casualty Insurance Company and AMEX
Assurance Company (collectively, "IDS Property Casualty") offer personal auto
and homeowner's insurance.
VARIABLE LIFE INSURANCE. IDS Life's and IDS Life of New York's biggest
selling life insurance products are variable life insurance policies. Retail
advisors of AEFA sell primarily IDS Life's and IDS Life of New York's variable
life insurance. Variable life insurance provides life insurance coverage along
with investment returns linked to the underlying investments the policyholder
chooses. These products also offer a fixed account with a guaranteed minimum
interest rate of 4% or 4.5%. IDS Life ranked fourth in variable life insurance
sales in 2002. Beginning in 1999 and 2000, respectively, IDS Life and IDS Life
of New York reinsured 80% of the mortality risk attributable to new sales of
individual flexible premium variable life insurance. This means that on these
more recent product sales, IDS Life and IDS Life of New York are at risk for
only 20% of each policy's death benefit from the first dollar of coverage. In
contrast and prior to this arrangement, IDS Life and IDS Life of New York
generally retained risk up to $750,000 on each insured life and reinsured only
amounts in excess of $750,000. Generally, the prior arrangement left IDS Life
and IDS Life of New York with more of the risk for the death benefit than the
more recent practice. Beginning in late 2002, IDS Life began reinsuring 90%
of the mortality risk on new sales of individual flexible premium variable life
and fixed universal life.
IDS Life's variable life insurance products include American Express'r'
Variable Universal Life IV/Variable Universal Life IV - Estate Series which are
individual flexible premium policies. The Estate Series policy is available to
policyholders with initial specified amounts of $1 million or more. These
policies were introduced in December 2002. IDS Life also issues American Express
Succession Select, a flexible premium survivorship policy that insures two
lives. Succession Select is often used for estate planning purposes. Finally,
IDS Life issues American Express'r' Single Premium Variable Life, an individual
single premium variable life insurance policy.
UNIVERSAL LIFE INSURANCE. IDS Life's and IDS Life of New York's universal
life insurance products provide life insurance coverage and cash value that
increases by a fixed interest rate. The rate is periodically reset according to
the terms of the policy at the discretion of the issuing company. Policies
issued by IDS Life and IDS Life of New York also provide a guaranteed minimum
interest rate, generally 4% or 4.5%, and a few as high as 5%.
IDS Life's universal life insurance products include Life Protection Plus,
Life Protection - Select and Life Protection Select'sm' - Estate Series. The
Estate Series policy is available to policyholders with initial specified
amounts of $1 million or more.
TRADITIONAL LIFE INSURANCE PRODUCTS. IDS Life's and IDS Life of New York's
traditional life insurance products include whole life insurance and term life
insurance. Whole
Page 36
life insurance combines a death benefit with a cash value that generally
increases gradually in amount over a period of years and does not pay a
dividend. IDS Life and IDS Life of New York have sold very little traditional
whole life insurance in recent years. Term life insurance provides only a death
benefit, does not build up cash value and does not pay a dividend. The
policyholder chooses the term of coverage at the time of issue. During the
chosen term, the company cannot raise premium rates even if claims experience
were to deteriorate. Beginning in 2001 and 2002, respectively, IDS Life and IDS
Life of New York have reinsured 90% of the mortality risk attributable to new
term insurance sales. This means that on these more recent product sales, IDS
Life and IDS Life of New York are at risk for only 10% of each policy's
death benefit from the first dollar of coverage. In contrast and prior to this
arrangement, IDS Life and IDS Life of New York generally retained risk up to
$750,000 on each insured life and reinsured only amounts in excess of $750,000.
Generally, the prior arrangement left IDS Life and IDS Life of New York with
more of the risk for the death benefit than the more recent practice.
LONG-TERM CARE INSURANCE. IDS Life and IDS Life of New York entered the
individual long-term care insurance ("LTC") market in 1989 and believe they have
a significant presence in this market. IDS Life's and IDS Life of New York's
long-term care insurance products provide benefits for documented nursing home,
assisted living or home or health care expenses. These products were sold on a
guaranteed renewable basis, whereby the owners retain the right to renew the
policies each year as long as premiums are paid, but the companies have the
right to increase premium rates on a going forward basis.
In recent years, IDS Life and IDS Life of New York have experienced greater
than expected claims and lower than expected lapse rates with respect to its LTC
block. To respond to this trend, the companies have pursued and are pursuing
many courses of action. As of December 31, 2002, IDS Life and IDS Life of New
York have discontinued underwriting LTC insurance. Retail advisors of AEFA will
now sell only non-proprietary LTC products offered by General Electric Capital
Assurance Company ("GECA"). IDS Life and IDS Life of New York are also expecting
to outsource claims administration in May 2003 to GECA.
DISABILITY INCOME. IDS Life and IDS Life of New York also issue disability
income ("DI") insurance. DI insurance provides monthly benefits to individuals
who are unable to earn income at either their occupation at time of disability
("own occupation") or at any suitable occupation ("any occupation"). Depending
upon occupational and medical underwriting criteria, applicants for DI insurance
can choose "own occupation" and "any occupation" coverage for varying benefit
periods up to age 65. Applicants may also choose various benefit riders to help
them integrate individual DI benefits with Social Security or similar benefit
plans and to help them protect their DI benefits from the risk of inflation. IDS
Life believes it has a significant presence in the DI market.
PROPERTY CASUALTY INSURANCE. IDS Property Casualty and its wholly owned
subsidiary, AMEX Assurance Company, provide personal auto and homeowner's
coverage to clients in 37 states and the District of Columbia. IDS Property
Casualty is regulated by the Commissioner of Insurance for Wisconsin. AMEX
Assurance Company, which also provides certain American Express Card related
insurance products, is regulated by the Commissioner of Insurance for Illinois.
IDS Property Casualty markets through alliances with financial institutions and
direct to American Express Cardmembers. IDS Property Casualty has a major
distribution agreement
Page 37
with Costco's affiliated insurance agency. As of December 31, 2002, this
arrangement offered IDS Property Casualty's auto insurance in 30 states and
homeowner's insurance in 29 states to Costco members.
INSURANCE RISKS. IDS Life's sales of individual life insurance in 2002, as
measured by scheduled annual premiums and excluding lump sum premiums, consisted
of 82% variable life, 8% universal life and 10% term life.
The insurance business is highly competitive, and competitors consist of
both stock and mutual insurance companies. Competitive factors applicable to the
insurance business include product features, the interest rates credited to
products, the charges deducted from the cash values of such products, investment
performance, the financial strength of the organization, distribution and
management expenses, claims paying ratings and the services provided to
policyholders.
For long-term profitability, it is crucial to ensure adequate pricing to
cover insurance risks and to accumulate adequate reserves. Reserves are a
measure of the assets that the IDS Life Companies estimate are needed now to
adequately provide for future benefits and expenses.
ANNUITIES: PRODUCT FEATURES AND RISKS
IDS Life and its subsidiaries offer variable and fixed annuities, immediate
and deferred, to a broad range of consumers through multiple distribution
channels. Retail advisors of AEFA can offer only IDS Life or IDS Life of New
York variable and fixed annuities and, in certain circumstances, variable and
fixed annuities offered by American Enterprise Life. Retail advisors do not
offer annuity products of AEFA's competitors. Annuities may be deferred, where
assets accumulate until the contract is surrendered, the contract owner dies, or
the contract owner begins receiving benefits under an annuity payout option; or
immediate, where payments begin within one year of issue and continue for life
or for a fixed period only.
IDS Life is one of the largest issuers of annuities in the United States.
In 2002, IDS Life, on a consolidated basis, ranked eleventh among the top
annuity writers. The IDS Life Companies posted annuity sales in 2002 of over
$7.3 billion, an increase of 60% across all distribution channels.
VARIABLE ANNUITIES. Like variable life insurance, variable annuities
provide contract owners with investment returns linked to the underlying
investments the contract owner chooses. These products also offer a fixed
account with a guaranteed minimum interest rate of 3% to 4%. One of IDS Life's
variable annuities, the American Express Retirement Advisor Advantage'r'
Variable Annuity was the fourth largest-selling annuity in the country in 2002.
FIXED ANNUITIES. The IDS Life Companies' fixed annuities provide cash value
that increases by a fixed interest rate. The rate is periodically reset
according to the terms of the contract at the discretion of the issuer. The
contracts provide a guaranteed minimum interest rate, generally 3% to 4%.
Page 38
ANNUITY RISKS. The relative proportion between fixed and variable annuities
sales is generally driven by the relative performance of the equity and fixed
income markets. In times of lackluster performance in equity markets, fixed
sales are generally stronger. In times of superior performance in equity
markets, variable sales are generally stronger. In addition, investment
management performance is critical to the profitability of an annuity business.
In past years, innovative features for annuity products have been
continually evolving. These features include minimum death benefit guarantees
that protect beneficiaries from a drop in death benefits due to performance of
the related underlying investments. IDS Life and its subsidiaries issue annuity
contracts with a variety of guaranteed minimum death benefit features. These
guarantees are supported by general account assets. The IDS Life Companies'
exposure to risk from these guarantees will generally increase when equity
markets decline.
The standard guaranteed minimum death benefit in the current "flagship"
annuity offered by IDS Life and IDS Life of New York, American Express
Retirement Advisor Advantage Variable Annuity, provides that if the contract
owner and annuitant are age 80 or younger on the date of death, the beneficiary
will receive the greatest of (i) the contract value, (ii) purchase payments
minus adjusted partial surrenders, or (iii) the contract value as of the most
recent sixth contract anniversary, plus purchase payments and minus adjusted
partial surrenders since that anniversary.
For additional protection, IDS Life and IDS Life of New York contract
owners may purchase a maximum anniversary value death benefit. IDS Life contract
owners also may purchase an enhanced earnings death benefit and an enhanced
earnings plus death benefit. These are optional benefits available for an
additional charge. The maximum anniversary value death benefit guarantees that
the death benefit will not be less than the highest contract value achieved on a
contract anniversary before the contract holder reaches the age of 81, adjusted
for partial withdrawals. The enhanced earnings death benefit riders are intended
to provide additional benefits to a beneficiary to offset expenses after the
contract owner's death. IDS Life and IDS Life of New York bear the risk that
protracted under-performance of the financial markets could result in guaranteed
minimum death benefits being higher than what accumulated contract owner account
balances would support. There can be no assurance that ultimate actual
experience will not differ from IDS Life's and IDS Life of New York's estimates.
American Enterprise Life and other subsidiaries of IDS Life also offer
variable annuities with a variety of guaranteed minimum death benefit features
and certain optional benefits.
To the extent that the guaranteed minimum death benefit is higher than the
current account value at the time of death, a cost is incurred by the issuer of
the policy. Current accounting literature does not prescribe advance recognition
of the projected future net costs associated with these guarantees, and
accordingly, IDS Life and its subsidiaries currently do not record a liability
corresponding to these future obligations for death benefits in excess of
annuity account value. At present, the amount paid in excess of contract value
is expensed when payable. Amounts expensed in 2002 and 2001 were $37 million and
$16 million, respectively. A proposed AICPA Statement of Position, "Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" (the "Proposed SOP"), would require the
recording of a liability for the expected net
Page 39
costs associated with these guarantees under certain circumstances, if adopted
as proposed. The impact of the Proposed SOP is currently being evaluated.
INSURANCE AND ANNUITIES: LIABILITIES AND RESERVES
INSURANCE LIABILITIES AND RESERVES. The liabilities for reported and unpaid
life insurance claims are equal to the death benefits payable under the
policies. For DI and LTC claims, unpaid claim liabilities are equal to benefit
amounts due and accrued. For life, DI, and LTC, liabilities for incurred but not
reported claims are estimated based on periodic analysis of the actual reported
historical claim lag. Where applicable, amounts recoverable from reinsurers
(i.e., other insurers who share in the risk of the products the IDS Life
Companies' offer) are separately recorded as receivables.
The claim adjustment expense reserves for DI and LTC are based on the claim
reserves. These reserves represent the expense of reviewing claims and making
benefit payment determinations. For life insurance, no claim adjustment expense
reserve is held.
Policy liabilities for fixed and variable universal life insurance are
accumulation values, i.e., the aggregate of the values contract holders have
on account.
Policy reserves for future benefits on term and whole life insurance are
based on the net level premium method, using anticipated mortality rates (the
likelihood of an insured's death), policy persistency rates and interest rates
earned on the assets supporting reserves. Anticipated mortality rates are based
on established industry mortality tables, with modifications based on the IDS
Life Companies' experience. Anticipated policy persistency rates vary by policy
form, issue age and policy duration. IDS Life and IDS Life of New York generally
anticipate persistency rates on level term and cash value plans to be better
than persistency on yearly renewable term insurance plans. Anticipated interest
rates on assets held to support reserves range from 4% to 10%, depending on
policy form, issue year and policy duration.
Liabilities for future DI and LTC policy benefits include both policy
reserves and claim reserves. IDS Life and IDS Life of New York base policy
reserves on the net level premium method, using anticipated morbidity rates
(meaning, claim frequency and severity), mortality rates (the likelihood of an
insured's death, which means no DI or LTC benefits will become payable), policy
persistency rates, and interest rates earned on the assets supporting reserves.
They base anticipated morbidity and mortality rates on established industry
morbidity and mortality tables. Anticipated policy persistency rates vary by
policy form, issue age, policy duration and, for DI policies, occupation class.
Anticipated interest rates on assets held to support DI and LTC policy reserves
are 3% to 9.5% at policy issue and level off at ultimate rates of 5% to 7% over
5 to 10 years.
IDS Life and IDS Life of New York calculate claim reserves for DI and LTC
based on claim continuance tables and anticipated interest rates earned on
assets supporting these reserves. They base anticipated
Page 40
claim continuance rates on established industry tables. Anticipated interest
rates on assets held to support claim reserves for both DI and LTC range from 5%
to 8%.
ANNUITY LIABILITIES. Liabilities for fixed and variable deferred annuities
are accumulation values, i.e., the aggregate of the values contract owners have
on account.
Liabilities for fixed annuities in a benefit or "payout" status are based
on established industry mortality tables and interest rates established in the
year of issue or commencement of payout. The latter range from 5% to 9.5%, with
an average rate of approximately 6.5%.
DEFERRED ACQUISITION COSTS ("DAC")
The IDS Life Insurance Companies defer the costs of acquiring new business
on the sale of insurance and annuity contracts, including for example, direct
sales commissions, related sales incentive bonuses and awards, and underwriting
costs, policy issue costs and other related costs. The DAC for universal life
and variable universal life insurance and certain installment annuities are
amortized as a percentage of the estimated gross profits expected to be realized
on the policies. DAC for other annuities are amortized using the interest
method. For traditional life, disability income and long-term care insurance
policies, the costs are amortized in proportion to premium revenue.
Amortization of DAC requires the use of certain assumptions including
interest margins, mortality rates, persistency rates, maintenance expense levels
and customer asset value growth rates for variable products. The customer asset
value growth rate is the rate at which contract values are assumed to appreciate
in the future. This rate is net of asset fees, and anticipates a blend of equity
and fixed income investments. Management routinely monitors a wide variety of
trends in the business, including comparisons of actual and assumed experience.
Management reviews and, where appropriate, adjusts its assumptions with respect
to customer asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency
rates, mortality rates, interest margins and maintenance expense levels, each
quarter. Unless management identifies a material deviation over the course of
the quarterly monitoring, management reviews and updates these DAC assumptions
annually in the third quarter of each year. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins used to
amortize DAC may also change. A change in the required amortization percentage
is applied retrospectively; an increase in amortization percentage will result
in an acceleration of DAC amortization while a decrease in amortization
percentage will result in a deceleration of DAC amortization. The impact on
results of operations of changing assumptions with respect to the amortization
of DAC can be either positive or negative in any particular period and is
reflected in the period that such changes are made.
During the third quarter of 2002, AEFA completed a comprehensive review of
its DAC-related practices that resulted in a net $44 million increase in
expenses for the quarter, of which $37 million related to the IDS Life Insurance
Companies. For a further discussion of DAC and the Company's review of its
DAC-related practices, see pages 45 through 46 under the caption
Page 41
"Financial Review" and Note 1 on pages 60 through 61 of the Company's 2002
Annual Report to Shareholders, which portions of such report are incorporated
herein by reference.
The DAC balances as of December 31, 2002 and 2001 for the various
insurance, annuity and other products sold by AEFA are set forth below (in
millions):
December 31,
---------------
2002 2001
------ ------
Life and health insurance $1,654 $1,571
Annuities 1,656 1,536
Other 473 545
------ ------
TOTAL $3,783 $3,652
INVESTMENT CERTIFICATES
American Express Certificate Company ("AECC"), a wholly owned subsidiary of
AEFC, issues face-amount investment certificates. AECC is registered as an
investment company under the Investment Company Act of 1940. AECC currently
issues 10 types of face-amount certificates. Owners of AECC certificates are
entitled to receive, at maturity, a stated amount of money equal to the
aggregate investments in the certificate plus interest at rates declared from
time to time by AECC. In addition, persons owning three types of certificates
may have their interest calculated in whole or in part based on any upward
movement in a broad-based stock market index up to a variable maximum return.
The certificates issued by AECC are not insured by any government agency. AEFC
acts as investment manager for AECC. Certificates are sold by AEFA's field
force. American Express Bank also distributes certificates.
AECC believes it is the largest issuer of face-amount certificates in the
United States. At December 31, 2002, it had approximately $5.2 billion in
assets. AECC's certificates compete with many other investments offered by
banks, savings and loan associations, credit unions, mutual funds, insurance
companies and similar financial institutions, which may be viewed by potential
customers as offering a comparable or superior combination of safety and return
on investment.
MUTUAL FUNDS
AEFA offers a variety of proprietary mutual funds, for which AEFAI acts as
principal underwriter (distributor of shares). AEFC acts as investment manager
and performs various administrative services. The American Express'r' Funds
consist of 58 retail mutual funds, with varied investment objectives and
include, for example, money market, taxable and tax-exempt bond and stock funds.
The American Express Funds, with combined assets at December 31, 2002 of $64
billion, was the 29th largest mutual fund family in the United States and,
excluding money market funds, was the 13th largest.
AEFC earns management fees for managing the assets of the proprietary
mutual funds based on the underlying asset values. Most of the proprietary
mutual funds have a performance incentive adjustment ("PIA"). This PIA adjusts
the level of management fees received, both upward and downward, based on the
specific fund's relative performance as measured against a designated
Page 42
external index. AEFA earns fees primarily for distributing the proprietary
mutual funds, point-of-sale fees (i.e., sales charges) and distribution fees
(12b-1 fees) based on a percentage of assets.
American Express Funds are sold in six classes. For most funds, shares are
sold in four classes - A, B, C and Y. Index Fund shares are sold in two classes
- D and E. Class A shares are sold at net asset value plus any applicable sales
charge. The maximum sales charge is 5.75% for equity funds and 4.75% for income
funds, with reduced sales charges for larger purchases. The sales charge may be
waived for certain purchases, including those made through an investment product
sponsored by AEFAI or another authorized financial intermediary. Class B shares
are sold with a contingent deferred sales charge or back-end load. The maximum
deferred sales charge is 5%, declining to no charge for shares held more than
six years. Class C shares do not have a front-end sales charge. A 1% contingent
deferred sales charge may apply to shares redeemed less than one year after
purchase. Class Y shares are primarily sold to institutional clients with no
load. There are two index funds, which are sold in two no-load classes. Class D
shares are sold with a 0.25% fee for distribution services, but without a sales
charge, through an investment product sponsored by AEFA or another authorized
financial institution. Class E shares are sold without a sales or distribution
fee through American Express brokerage accounts and qualifying institutional
accounts.
Fifteen of the American Express Funds are structured as feeder funds
investing in the Preferred Master Trust Group, a group of 15 master funds,
advised by AEFC. This feeder structure provides for potential development of
additional channels of distribution.
In addition to full-commission and discount brokerage firms, competitors
include other financial institutions, such as banks and insurance companies.
Trends in the market over the last decade, including the increased demand for
mutual funds by retail investors, expanded the number of competitors in the
industry. Some competitors are larger, more diversified and offer a greater
number of products, and may have an advantage in their ability to attract and
retain customers on the basis of one-stop shopping. The competitive factors
affecting the sale of mutual funds include sales charges ("loads") paid,
administrative expenses, services received, the ability to attract and retain a
network of third-party distributors, investment performance, fund ratings issued
by third-parties such as Morningstar, the variety of products and services
offered, the convenience to the investor, advertising and promotion campaigns,
and general market conditions. The funds compete with other investment products,
including funds that have no sales charge ("no-load" funds) and funds
distributed through independent brokerage firms, and exchange traded funds.
OTHER PRODUCTS AND SERVICES
AEFAI sponsors two wrap programs marketed through financial advisors,
marketing employees and third-party referrals. American Express'r' Wealth
Management Service is a professionally managed discretionary wrap account based
on model portfolios of individual securities. American Express'r' Strategic
Portfolio Service Advantage is a non-discretionary mutual fund and individual
security wrap program built around asset-allocation strategies. At December 31,
2002, assets in both wrap programs offered by AEFAI totaled $17.5 billion for
approximately 246,576 accounts.
Page 43
American Express Personal Trust Services, FSB ("AEPTS") is a federal
savings bank regulated and supervised by the Office of Thrift Supervision (the
"OTS"). AEPTS is a wholly owned subsidiary of AEFC and provides personal trust,
custodial, agency and investment management services to individual clients.
AEPTS is also registered with the SEC as an Investment Adviser. AEPTS is
authorized to transact business in all 50 states and the District of Columbia,
and utilizes AEFA as its primary distribution channel. AEPTS is based in
Minnesota and is regulated and supervised by the OTS, FDIC and SEC.
AEFA sells real estate investment trusts sponsored by other companies. In
2001, AEFA ceased selling managed futures limited partnerships in which an AEFC
subsidiary is a co-general partner but will continue servicing such limited
partnerships, which subjects AEFA and its affiliated co-general partner to
regulation by the CFTC.
AEFA and American Express Bank Ltd. operate a jointly owned subsidiary,
American Express International Deposit Company ("AEIDC"), in the Cayman Islands
to accept deposits from foreign clients of American Express Bank Ltd. AEIDC is
not regulated as a bank in the Cayman Islands but its activities are subject to
the review and supervision by the global consolidated supervisor of American
Express Bank Ltd., the New York State Banking Department.
AEFA continues to develop new products and modify existing products for
distribution through various distribution channels.
Page 44
AMERICAN EXPRESS BANK
The Company's American Express Bank business unit ("AEB") offers products
that meet the financial service needs of three primary client groups: retail
customers, wealthy individuals and financial institutions. AEB's operations are
conducted principally through American Express Bank Ltd., a wholly owned
indirect subsidiary of the Company, and its subsidiaries. AEB does not directly
or indirectly do business in the United States except as an incident to its
activities outside the United States. Accordingly, the following discussion
relating to AEB generally does not distinguish between United States and
non-United States based activities.
AEB's three primary business lines are Personal Financial Services ("PFS"),
The Private Bank and the Financial Institutions Group ("FIG"). PFS provides
consumer products in direct response to specific financial needs of retail
customers and includes interest-bearing deposits, unsecured lines of credit,
installment loans, money market funds, mortgage loans, auto loans and mutual
funds. The Private Bank focuses on wealthy individuals by providing such
customers with investment management, trust and estate planning and banking
services, including secured lending. FIG provides financial institution clients
with a wide range of correspondent banking products including international
payments processing (wire transfers and checks), trade-related payments and
financing, cash management, loans, extensions of credit and investment products,
including third-party distribution of AEB offshore mutual funds. AEB also
provides treasury and capital market products and services to its customers,
including foreign exchange, foreign exchange options, derivatives and interest
rate risk management products.
In 2002, AEB continued to shift its business focus from corporate clients
to individuals and financial institutions. This change aligns AEB's businesses
more closely with the rest of the Company and positions it to play a more
important role in the delivery of financial services on a global basis. Due in
part to this change in emphasis, AEB reduced its corporate banking and other
loans by $483 million at December 31, 2002 (as compared with $926 million at
December 31, 2001), increased its consumer and private banking loans by $544
million, and increased its FIG loans by $231 million. Loans outstanding
worldwide were approximately $5.6 billion at December 31, 2002 and $5.3 billion
at December 31, 2001. In 2002, AEB acquired the Latin American private banking
business of Schroder & Co. Trust Bank, Miami, to help AEB expand its Latin
American private banking franchise. During 2002, The Private Bank client
holdings rose 12 percent to a total of $13.9 billion, client volumes in PFS
increased 10 percent and FIG-related non-credit fee revenue increased by 10
percent.
AEB continued to broaden its offering of offshore mutual funds, hedge funds
and other managed products in 2002. AEB's fund products are sold by The Private
Bank and PFS business lines to individual customers and by FIG through
distributors in several foreign markets. AEB continued to expand the number of
third-party relationships in Europe and Asia. During 2002, AEB signed more than
50 distribution agreements in Europe and Asia for the sale of its own American
Express-branded products. AEB's assets under management in its fund products and
related managed accounts totaled approximately $3.1 billion at year-end.
Page 45
AEB also added a number of investment portfolios in 2002 to its existing
Luxembourg investment company umbrella fund and introduced new hedge fund
investment portfolios. In addition, AEB created a new Luxembourg umbrella fund
of funds, the American Express BestSelect Funds registered in Germany for sale
to German investors. AEB's affiliate, AEFA, provides investment management
services to many of the Luxembourg umbrella fund portfolios and to the hedge
funds.
AEB also continued to work closely with other parts of the Company to
cross-sell a range of payment, lending, insurance and financial service products
and build deeper relationships with affluent and pre-affluent consumer and small
business customers in key international markets. AEB markets its Private Bank
services to a highly selective group of Cardmembers outside the United States.
AEB offers credit products such as installment loans and revolving lines of
credit to both Cardmembers and non-Cardmembers in Germany, Greece, Hong Kong,
India, Singapore, Taiwan and the United Kingdom. AEB also markets a wide range
of investment and savings products to TRS Cardmembers and select non-cardmembers
in Germany, Greece, Hong Kong, India, Indonesia, Singapore and Taiwan. In
addition, AEFAI has contracted with AEB to act as subadvisor to most of AEB's
American Express Funds and the American Express Offshore Alternative Investment
Fund. As stated earlier, AEB has contracted with AECC to market AECC's
investment certificates, and operates a joint venture (AEIDC) with AEFC in the
Cayman Islands to accept deposits.
AEB has a global network with offices in 42 countries. Its worldwide
headquarters is located in New York City. It maintains an international banking
agency in New York City and facility offices in San Francisco, San Diego and Los
Angeles, California. Its wholly owned Edge Act subsidiary, American Express Bank
International ("AEBI"), is headquartered in Miami, Florida and has branches in
New York City and Miami.
AEB's business does not, as a whole, experience significant seasonal
fluctuations.
SELECTED FINANCIAL INFORMATION REGARDING AEB
Subject to certain requirements related to transactions with affiliates,
AEB provides banking services to the Company and its subsidiaries. AEB is only
one of many international and local banks used by the Company and its other
subsidiaries, which constitute only a few of AEB's many customers.
AEB's total assets were $13.2 billion at December 31, 2002 and $11.9
billion at December 31, 2001. Liquid assets, consisting of cash and deposits
with banks, trading account assets and investments, were $5.8 billion at
December 31, 2002 and $5.3 billion at December 31, 2001.
Page 46
The following table sets forth a summary of financial data for AEB at and
for each of the three years in the period ended December 31, 2002 (dollars in
millions):
2002 2001 2000
------- ------- -------
Net financial revenues $ 745 $ 649 $ 591
Non-interest expenses 624 663 558
Net income (loss) (a) 80 (13) 29
--------------------------------------------------------------------------
Cash and deposits with banks 2,420 2,215 2,165
Investments 3,169 3,044 2,517
Loans, net 5,466 5,157 5,206
Total assets 13,234 11,878 11,413
--------------------------------------------------------------------------
Customers' deposits 9,501 8,411 7,952
Shareholder's equity 947 761 754
--------------------------------------------------------------------------
Return on average assets (b) .67% (.11)% .26%
Return on average common equity (b) 11.5% (2.0)% 4.40%
--------------------------------------------------------------------------
Reserve for loan losses/total loans 2.70% 2.42% 2.56%
30+ days past due PFS loans as a % of total
PFS loans 5.4% 4.5% 6.0%
Total loans/deposits from customers 59.12% 62.83% 67.19%
Average common equity/average assets (b) 5.80% 5.51% 5.82%
Risk-based capital ratios (c):
Tier 1 10.9% 11.1% 10.1%
Total 11.4% 12.2% 11.4%
Leverage ratio (c) 5.3% 5.3% 5.9%
--------------------------------------------------------------------------
Average interest rates earned: (d)
Loans (e) 6.41% 7.32% 8.05%
Investments (f) 5.88% 6.49% 6.98%
Deposits with banks 2.15% 4.04% 5.79%
--------------------------------------------------------------------------
Total interest-earning assets (f) 5.44% 6.35% 7.29%
--------------------------------------------------------------------------
Average interest rates paid: (d)
Deposits from customers 2.38% 4.15% 5.65%
Borrowed funds, including long-term debt 3.46% 5.63% 6.64%
--------------------------------------------------------------------------
Total interest-bearing liabilities 2.55% 4.35% 5.78%
--------------------------------------------------------------------------
Net interest income/total average interest-
earning assets (f) 3.23% 2.75% 2.49%
--------------------------------------------------------------------------
(a) Included in 2002 net income is a net restructuring reserve reversal of $3
million ($2 million after-tax). Included in the 2001 net loss are
restructuring charges of $96 million ($65 million after-tax).
(b) Calculated excluding the effect of SFAS No. 115 and SFAS No. 133. The
Company adopted SFAS No. 133 on January 1, 2001.
(c) Based on the legal entity financial statements of American Express Bank
Ltd.
Page 47
(d) Based upon average balances and related interest income and expense,
including the effect of interest rate products where appropriate and
transactions with related parties.
(e) Interest rates have been calculated based upon average total loans,
including those on non-performing status.
(f) On a tax equivalent basis.
Page 48
The following tables set forth the composition of AEB's loan portfolio at
year end for each of the five years in the period ended December 31, 2002
(millions):
BY GEOGRAPHIC REGION (a) 2002 2001 2000 1999 1998
---------------------------------------------------------------------
Asia/Pacific $2,117 $2,052 $1,791 $1,698 $2,143
Europe 1,553 1,370 1,500 1,414 1,021
Indian Subcontinent 439 440 442 449 517
Latin America 801 871 856 824 1,107
North America 533 273 352 255 210
Middle East 94 197 302 346 544
Africa 80 82 100 111 77
---------------------------------------------------------------------
TOTAL $5,617 $5,285 $5,343 $5,097 $5,619
=====================================================================
2002
----------------------------
Due After Due
Due 1 Year After 5
Within Through 5 Years
BY TYPE AND MATURITY 1 Year Years (b) (b) 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------
Consumer and private
banking loans:
Loans secured by real
estate $ 2 $ 1 $394 $ 397 $ 486 $ 361 $ 255 $ 213
Installment, revolving
credit and other 2,857 481 0 3,338 2,705 1,839 1,637 1,429
------ ---- ---- ------ ------ ------ ------ ------
2,859 482 394 3,735 3,191 2,200 1,892 1,642
------ ---- ---- ------ ------ ------ ------ ------
Commercial loans:
Loans secured by real 51 10 0 61 139 157 141 302
estate
Loans to businesses (c) 129 97 81 307 732 1,397 1,508 1,997
Loans to banks and other
financial institutions 1,306 93 0 1,399 1,168 1,519 1,475 1,595
Loans to governments and
official institutions 23 6 0 29 28 34 37 46
------ ---- ---- ------ ------ ------ ------ ------
1,509 206 81 1,796 2,067 3,107 3,161 3,940
------ ---- ---- ------ ------ ------ ------ ------
All other loans (d) 82 4 0 86 27 36 44 37
------ ---- ---- ------ ------ ------ ------ ------
-----------------------------------------------------------------------------------------------------
Total $4,450 $692 $475 $5,617 $5,285 $5,343 $5,097 $5,619
=====================================================================================================
(a) Based primarily on the domicile of the borrower.
(b) Loans due after 1 year at fixed (predetermined) interest rates totaled $252
million, while those at floating (adjustable) interest rates totaled $915
million.
(c) Business loans, which accounted for approximately 5 percent of the
portfolio as of December 31, 2002, were distributed over 26 commercial and
industrial categories.
Page 49
(d) Included in 2002 is $37 million of loans resulting from a change in
ownership of AEB's Brazilian operations from that of a joint venture to a
consolidated subsidiary.
Page 50
The following tables present information about AEB's impaired (or
non-performing) loans. AEB defines an impaired loan as any loan (other than
certain smaller-balance consumer loans) on which the accrual of interest is
discontinued because the contractual payment of principal or interest has become
90 days past due or if, in management's opinion, the borrower is unlikely to
meet its contractual obligations (i.e., non-performing loans). For
smaller-balance consumer loans, management establishes reserves it believes to
be adequate to absorb credit losses inherent in the portfolio. Generally, these
loans are written off in full when an impairment is determined (e.g., borrower's
personal bankruptcy) or when the loan becomes 120 or 180 days past due,
depending on loan type. As stated above, for this portfolio of loans, 30+ day
past due rates were 5.4% at December 31, 2002, as compared with 4.5% at December
31, 2001.
(in millions: December 31,) 2002 2001 2000 1999 1998
----------------------------------------------------------------------------
Consumer loans $ -- $ -- $ -- $ -- $ 1
Real estate loans-commercial -- -- -- 7 9
Loans to businesses 103 116 135 149 151
Loans to financial institutions and other 16 7 2 12 19
----------------------------------------------------------------------------
TOTAL $119 $123 $137 $168 $180
============================================================================
December 31,
------------
(in millions) 2002 2001
---- ----
Recorded investment in impaired loans not requiring an allowance (a) $ 4 $ 2
Recorded investment in impaired loans requiring an allowance 115 121
---- ----
Total recorded investment in impaired loans $119 $123
==== ====
Credit reserves for impaired loans $ 73 $ 72
==== ====
December 31,
------------------
(in millions) 2002 2001 2000
---- ---- ----
Average recorded investment in impaired loans $121 $152 $166
Interest income recognized on a cash basis 1 -- 1
(a) These loans do not require a reserve for credit losses since the values of
the impaired loans equal or exceed the recorded investments in the loans.
In addition to the above, AEB had other non-performing assets totaling $15
million, $22 million, and $24 million at December 31, 2002, 2001 and 2000,
respectively. The 2002, 2001 and 2000 balances primarily consist of contingent
liabilities and matured foreign exchange and derivative contracts.
Page 51
The following table sets forth a summary of AEB's reserve for credit losses
at and for each of the five years in the period ended December 31, 2002 (dollars
in millions):
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Reserve for credit losses -
January 1, $148 $153 $189 $259 $137
Provision for credit losses (a) 147 91 28 29 238
Translation and other 10 (2) (4) 1 (4)
---- ---- ---- ---- ----
Subtotal 305 242 213 289 371
---- ---- ---- ---- ----
Write-offs:
Consumer loans (b) 115 38 19 25 19
Real estate loans-commercial -- -- -- 1 3
Loans to businesses (b) 39 72 43 50 72
Loans to banks and other financial
institutions 7 -- 2 14 2
Foreign exchange and derivative
contracts (c) -- 1 6 20 28
Recoveries:
Consumer loans (5) (6) (6) (7) -
Loans to businesses (8) (10) (3) (3) (5)
Loans to banks and other financial
institutions (1) (1) (1) -- --
All other loans -- -- -- -- (7)
---- ---- ---- ---- ----
Net write-offs (recoveries) 147 94 60 100 112
---- ---- ---- ---- ----
Reserve for credit losses $158 $148 $153 $189 $259
December 31, (d) ==== ==== ==== ==== ====
(a) The increases in 2002 and 2001 were due to credit loss provisions related
to business in the Asia/Pacific region, particularly Hong Kong. The
provision for 2001 includes a restructuring-related provision of $26
million relating to the further reduction of corporate lending activities
in parts of Asia, Latin America and Europe. The increase in 1998 was mainly
due to first quarter credit loss provision related to business in the
Asia/Pacific region, particularly Indonesia.
(b) The increases in 2002, 2001 and 1998 were primarily due to write-offs in
the Asia/Pacific region, primarily Hong Kong and Indonesia.
(c) The increase in 1998 was due to write-offs of Indonesian foreign exchange
and derivative contracts.
(d) Allocation:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Loans $151 $128 $137 $169 $214
Other assets, primarily derivatives 6 4 14 16 43
Other contingent liabilities 1 16 2 4 2
---- ---- ---- ---- ----
Total reserve for credit losses $158 $148 $153 $189 $259
==== ==== ==== ==== ====
Page 52
Interest income is recognized on an accrual basis. Loans other than certain
consumer loans are placed on non-performing status when payments of principal or
interest are 90 days past due or if, in management's opinion, the borrower is
unlikely to meet its contractual obligations. When loans are placed on
non-performing status, all previously accrued but unpaid interest is reversed
against current interest income. Cash receipts of interest on non-performing
loans are recognized either as interest income or as a reduction of principal,
based upon management's judgment as to the ultimate collectibility of principal.
Generally, a non-performing loan may be returned to performing status when all
contractual amounts due are reasonably assured of repayment within a reasonable
period and the borrower shows sustained repayment performance, in accordance
with the contractual terms of the loan or when the loan has become well secured
and is in the process of collection.
Credit card receivables, interest-earning advances under lines of credit
and other similar consumer loans are written off against the reserve for credit
losses upon reaching specified contractual delinquency stages, or earlier in the
event of the borrower's personal bankruptcy or if the loan is otherwise deemed
uncollectible. Interest income on these loans generally accrues until the loan
is written off.
AEB separately maintains and provides for reserves relating to credit
losses for loans, derivatives and other credit-related commitments. The reserve
is established by charging a provision for credit losses against income. The
amount charged to income is based upon several factors, including historical
credit loss experience in relation to outstanding credits, a continuous
assessment of the collectibility of each credit, and management evaluation of
exposures in each applicable country as related to current and anticipated
economic and political conditions. Management's assessment of the adequacy of
the reserve is inherently subjective, as significant estimates are required.
Amounts deemed uncollectible are charged against the reserve and subsequent
recoveries, if any, are credited to the reserve.
The reserve for credit losses related to loans is reported as a reduction
of loans. The reserve related to derivatives is reported as a reduction of
trading assets and the reserve related to other credit-related commitments is
reported in other liabilities.
RISKS
The global nature of AEB's business activities is such that concentrations
of credit to particular industries and geographic regions are not unusual. At
December 31, 2002, AEB had significant investments in certain on- and
off-balance sheet financial instruments, which were primarily represented by
deposits with banks, securities, loans, forward contracts, contractual amounts
of letters of credit (standby and commercial) and guarantees. The counterparties
to these financial instruments were primarily unrelated to AEB, and principally
consisted of banks and other financial institutions and various commercial and
industrial enterprises operating geographically within the Asia/Pacific region,
Europe, North America, Latin America and the Indian Subcontinent. AEB
continually monitors and actively manages its credit concentrations to reduce
the associated risk.
Page 53
In December 2001 and January 2002, the Argentine government mandated the
conversion of U.S. dollar denominated assets into Argentine pesos and
simultaneously devalued the peso. AEB's credit exposures to Argentina at
December 31, 2002 and 2001 were $28 million and $56 million, respectively, which
include loans of $17 million and $25 million, respectively.
During late 2001 and 2002, the Hong Kong market experienced a significant
increase in bankruptcy filings due to an economic slowdown and changes in Hong
Kong law regarding personal bankruptcy. Accordingly, during 2002 AEB
substantially increased its provision for consumer loan losses to reflect the
expectation of higher bankruptcy related write-offs. In addition, AEB took
certain actions to minimize the impact to its consumer loan portfolio, including
suspending all new loan originations in Hong Kong beginning in the first quarter
of 2002. Recent trends show that losses in this portfolio have begun to
stabilize. AEB continues to closely monitor this portfolio.
In an ongoing effort to mitigate the effects of AEB's credit risks, as well
as its decision to shift its business focus from corporations to individuals,
AEB continued to reduce its wholesale credit exposure in 2002, particularly with
respect to its Asia/Pacific commercial loan portfolio. AEB continues to
carefully monitor its credit exposures.
AEB's earnings are sensitive to fluctuations in interest rates, as it is
not always possible to match precisely the maturities of interest-related assets
and liabilities. However, strict earnings at risk limits are established at both
the country and overall bank level to limit AEB's exposure to interest rate
fluctuations. On occasion, AEB may decide to mismatch in anticipation of a
change in future interest rates in accordance with these guidelines. Term loans
extended by AEB include both floating and fixed interest rate loans.
Because AEB conducts significant business in emerging market countries and
in countries that are less politically and economically stable than those in the
United States or Western Europe, its Private Banking, PFS and correspondent
banking activities may be subject to greater credit and compliance risks than
are found in more well-developed jurisdictions. AEB continuously monitors its
exposures in such jurisdictions, and regularly evaluates its client base to
identify potential legal risks as a result of clients' use of AEB's banking
services.
For a discussion relating to AEB's use of derivative financial instruments,
see page 51 under the caption "Risk Management," and Note 9 on pages 70 through
72 of the Company's 2002 Annual Report to Shareholders, which portions of such
report are incorporated herein by reference.
COMPETITION
The banking services of AEB are subject to vigorous competition everywhere
AEB operates. Competitors include local and international banks whose assets
often exceed those of AEB, other financial institutions (including certain other
subsidiaries of the Company) and, in certain cases, governmental agencies.
Page 54
REGULATION
American Express Bank Ltd. ("AEBL") is a wholly owned direct subsidiary of
American Express Banking Corp. ("AEBC"). AEBC is a New York investment company
organized under Article XII of the New York Banking Law and is a wholly owned
direct subsidiary of the Company. AEBC, AEBL and AEBL's global network of
offices and subsidiaries are subject to the continuous supervision and
examination by the New York State Banking Department ("NYSBD") pursuant to the
New York Banking Law. AEBC does not directly engage in banking activities.
AEBL's branches, representative offices and subsidiaries are licensed and
regulated in the jurisdictions in which they do business and are subject to the
same local requirements as other competitors that have the same license. Within
the United States, AEBL's New York agency is supervised and regularly examined
by the NYSBD. In addition, the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") regulates, supervises and examines AEBI and the
California Department of Financial Institutions supervises and examines AEBL's
San Francisco, Los Angeles and San Diego facility offices.
Since AEBL does not do business in the United States, except as an incident
to its activities outside the United States, the Company's affiliation with AEBL
neither causes the Company to be subject to the provisions of the Bank Holding
Company Act of 1956, as amended, nor requires it to register as a bank holding
company under the Federal Reserve Board's Regulation Y. AEBL is not a member of
the Federal Reserve System, is not subject to supervision by the FDIC, and is
not subject to any of the restrictions imposed by the Competitive Equality
Banking Act of 1987 other than anti-tie-in rules with respect to transactions
involving products and services of certain of its affiliates. AEBL is not a
financial holding company under the Gramm-Leach-Bliley Act.
AEBL is required to comply with the Federal Reserve Board's risk-based
capital guidelines and complementary leverage constraint applicable to
state-chartered banks that are members of the Federal Reserve System. Pursuant
to the FDIC Improvement Act of 1991, the Federal Reserve Board, among other
federal banking agencies, adopted regulations defining levels of capital
adequacy. Under these regulations, a bank is deemed to be well capitalized if it
maintains a Tier 1 risk-based capital ratio of at least six percent, a total
risk-based capital ratio of at least 10.0 percent, and a leverage ratio of at
least five percent. Based on AEBL's total risk-based capital and leverage
ratios, which are set forth on page 47, AEBL is considered to be well
capitalized at December 31, 2002.
In recent years U.S. and foreign regulatory authorities, together with
international organizations, have raised increasing concerns over the ability of
criminal organizations and corrupt persons to use global financial
intermediaries to facilitate money laundering. In the U.S., the Secretary of the
Treasury has issued regulations pursuant to the USA PATRIOT Act that
specifically impact certain money laundering prevention activities of entities
involved, as AEBL is, in correspondent and private banking activities. AEBL has
taken steps as necessary to comply with these regulations, and increased its
compliance efforts to combat money laundering generally. AEBL may increase these
efforts to address further regulations expected under the
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USA PATRIOT Act as well as other evolving supervisory standards and requirements
in jurisdictions in which AEBL does business.
In January 2002 the Basel Committee on Banking Supervision (the "Basel
Committee") released a proposal for a new risk-based bank capital accord to
replace a prior accord that has been in effect since 1988. The Basel Committee
is comprised of representatives of central banks and certain bank supervisors
from the "Group of Ten" countries and establishes guidelines and recommendations
governing the prudential supervision of banking institutions. The proposal would
refine the current capital requirements for credit risk and market risk and
would add capital requirements for operational risk. Operational risk means the
risk of direct or indirect loss resulting from inadequate or failed internal
processes, people and systems or from external events. Member countries are
expected to implement the new accord by 2006, although the ultimate timing for a
new accord and specific capital requirements are uncertain. AEBL believes that
implementation of and compliance efforts required by the new accord, to the
extent applicable to AEBL, could increase minimum risk-based capital
requirements applicable to AEBL and result in certain changes to certain of
AEBL's information systems, processes and employee training.
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CORPORATE AND OTHER
The American Express brand and its attributes - trust, security, integrity,
quality and customer service - are key assets of the Company. The Company
continues to focus on the brand by educating employees about its attributes and
by further incorporating these attributes into its programs, products and
services.
During the year, the Company continued its strategy to obtain patents for
its businesses. In 2002, the Company filed more than 100 U.S. and foreign patent
applications.
The Company has devoted substantial resources to its global technology
platforms and undertaken significant efforts to protect and manage its
proprietary systems and the data collected and stored on such systems. In this
vein, the Company has continued to focus on ways to secure such systems from
"hackers" and other unauthorized users.
The Company uses information about its customers to develop products and
services and to provide personalized services. Regulatory activity in the areas
of privacy and data protection continues to grow worldwide and is generally
being driven by the growth of technology and concomitant concerns about the
rapid and widespread dissemination and use of information. Federal regulations
implementing the Gramm-Leach-Bliley Act ("GLBA") became effective on July 1,
2001. GLBA provides for disclosure of a financial institution's privacy policies
and practices and affords customers the right to "opt out" of the institution's
disclosure of their personal financial information to unaffiliated third parties
(with limited exceptions). This legislation does not preempt state laws that
afford greater privacy protections to consumers, and several states and
municipalities have adopted such legislation. The Company will continue its
efforts to safeguard the data entrusted to it in accordance with applicable law
and its internal data protection policies, including taking steps to reduce the
potential for identity theft, while seeking to properly collect and use data to
achieve its business objectives.
In addition, provisions of the Fair Credit Reporting Act that preempt
states from enacting legislation regarding the sharing of customer information
among affiliates and regarding certain uses of consumer report information
expire on January 1, 2004. Without further Congressional action, states would be
permitted to enact laws that place greater restrictions on how customer data may
be shared among Company affiliates and greater restrictions on the Company's use
of consumer report data. If such laws were enacted, complying with varying state
requirements might adversely affect the Company's ability to provide effectively
personalized services to its customers.
Federal privacy rules promulgated under the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA") will become effective on April 14,
2003. The rules address the privacy rights of health care customers and the
obligation of the Company when obtaining and using protected health information.
In addition, both HIPPA and GLBA regulations require the adoption of security
standards to safeguard the integrity, confidentiality and access of health and
financial customer data.
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In 2002, the Company outsourced most of its technology operations work to
IBM. This arrangement, which has a seven-year term with options to extend, will
enable the Company to benefit from IBM's expertise while lowering its
information technology costs. IBM has taken on responsibility for managing most
of the Company's day-to-day technology operations functions, including
mainframe, midrange and desktop systems; web hosting; database administration;
help desk services; and data center operations. The Company's Technologies
organization continues to retain its core technology competencies, including
information technology strategy, managing strategic relationships with
technologies' partners, developing and maintaining applications and databases,
and managing the technologies' portfolios of its businesses.
In the U.S., the USA PATRIOT Act (the "Patriot Act") was enacted in October
2001 in the wake of the September 11th terrorist attacks. The Patriot Act
contains a wide variety of provisions aimed at fighting terrorism, including
provisions aimed at attacking terrorists' ability to access and move funds used
in support of terrorist activities. Among other things, the Patriot Act directs
federal regulators, led by the Secretary of the Treasury, to promulgate
regulations or take other steps to require financial institutions to establish
anti-money laundering programs that meet certain standards, including expanded
reporting and enhanced information gathering and record-keeping requirements.
While the Company has long maintained money laundering prevention programs in
its businesses, the Secretary of the Treasury has issued regulations under the
Patriot Act applicable to certain of the Company's business activities conducted
within AEB, TRS, AEFA and their subsidiaries, prescribing minimum standards for
such anti-money laundering programs, and it is anticipated that further
regulations applicable to these and to certain of the Company's other businesses
will be issued in the future. For example, in April 2002, the U.S. Treasury
issued draft regulations applicable to operators of credit card networks (such
as Visa, MasterCard, Diners Club, Discover and American Express) that would
require credit card networks to have risk-based programs to screen institutions
that are licensed to issue cards or acquire transactions from merchants on their
networks, in order to help prevent these networks from being used for money
laundering and financing terrorist activities. The Company has initiated such a
program for its Global Network Services business. Treasury will also be issuing
regulations regarding customer identification requirements applicable to many of
the Company's businesses. The Company intends to take steps to comply with any
regulations that are ultimately promulgated. In addition, the Company will take
steps to comply with anti-money laundering initiatives adopted in other
jurisdictions in which it conducts business.
FOREIGN OPERATIONS
The Company derives a significant portion of its revenues from the use of
the Card, Travelers Cheques, travel and other financial products and services
in countries outside the United States and continues to broaden the use of
these products and services outside the United States. (For a discussion of
the Company's revenue by geographic region, see Note 18 to the Company's
Consolidated Financial Statement, which can be found on pages 80 through 82 of
the Company's Annual Report to Shareholders.) Political and economic conditions
in these countries (including the availability of foreign exchange for the
payment by the local card issuer of obligations arising out of local
Cardmembers' spending outside such country, for the payment of card bills by
Cardmembers who are billed in other than their local currency, and for the
remittance of the proceeds of Travelers Cheque sales) can have an effect on
the Company's revenues. Substantial and sudden devaluation of local
Cardmembers' currency can also affect their ability to make payments to the
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local issuer of the card in connection with spending outside the local country.
The majority of AEB's revenues are derived from business conducted in countries
outside the United States. Some of the risks attendant to those operations
include currency fluctuations and changes in political, economic and legal
environments in each such country.
As a result of its foreign operations, the Company is exposed to the
possibility that, because of foreign exchange rate fluctuations, assets and
liabilities denominated in currencies other than the United States dollar may be
realized in amounts greater or lesser than the United States dollar amounts at
which they are currently recorded in the Company's Consolidated Financial
Statements. Examples of transactions in which this may occur include the
purchase by Cardmembers of goods and services in a currency other than the
currency in which they are billed; the sale in one currency of a Travelers
Cheque denominated in a second currency; foreign exchange positions held by AEB
as a consequence of its client-related foreign exchange trading operations; and,
in most instances, investments in foreign operations. These risks, unless
properly monitored and managed, could have an adverse effect on the Company's
operations.
The Company's policy in this area is generally to monitor closely all
foreign exchange positions and to minimize foreign exchange gains and losses,
for example, by offsetting foreign currency assets with foreign currency
liabilities, as in the case of foreign currency loans and receivables, which are
financed in the same currency. An additional technique used to manage exposures
is the spot and forward purchase or sale of foreign currencies as a hedge of net
exposures in those currencies as, for example, in the case of the Cardmember and
Travelers Cheque transactions described above. Additionally, Cardmembers may be
charged in United States dollars for their spending outside their local country.
The Company's investments in foreign operations are hedged by forward exchange
contracts or by identifiable transactions, where appropriate.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Various forward-looking statements have been made in this Form 10-K Annual
Report. Forward-looking statements may also be made in the Company's other
reports filed with the SEC, in its press releases and in other documents. In
addition, from time to time, the Company through its management may make oral
forward-looking statements. Forward-looking statements are subject to risks and
uncertainties, including those identified below, which could cause actual
results to differ materially from such statements. The words "believe,"
"expect," "anticipate," "optimistic," "intend," "plan," "aim," "will," "should,"
"could," "likely" and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date on which they
are made. The Company undertakes no obligation to update publicly or revise any
forward-looking statements. Factors that could cause actual results to differ
materially from the Company's forward-looking statements include, but are not
limited to, the following:
The Company's ability to:
o successfully implement a business model that allows for significant
earnings growth based on revenue growth that is lower than historical
levels, including
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the ability to improve its operating expense to revenue ratio both in
the short-term and over time, which will depend in part on the
effectiveness of reengineering and other cost control initiatives, as
well as factors impacting the Company's revenues;
o grow its business and meet or exceed its return on equity target by
reinvesting approximately 35% of annually generated capital and
returning approximately 65% of such capital to shareholders, over
time, which will depend, in part, on the Company's ability to manage
its capital needs and the effect of business mix, acquisitions and
rating agency requirements;
o increase investment spending, which will depend in part on the equity
markets, other factors affecting revenues and the success of
reengineering programs, and capitalize on such investments to improve
business metrics;
o extend the value of the American Express brand, which historically has
been associated with the card and travel businesses (e.g., perception
of trust, security and quality service), to a broad range of financial
products and services in the financial services industry;
o manage credit risk related to consumer debt, business loans, merchant
bankruptcies and other credit exposures, both in the United States and
abroad, including unseasoned balances in TRS' lending portfolios;
o accurately estimate the provision for credit losses in the Company's
outstanding portfolio of loans and receivables;
o accurately estimate the fair value of the assets in the Company's
investment portfolio, and, in particular, those investments that are
not readily marketable;
o successfully achieve in a timely manner significant cost savings and
other benefits from the reengineering efforts being implemented or
considered by the Company, including cost management, structural and
strategic measures such as vendor, process, facilities and operations
consolidation, outsourcing functions (including, among others,
technologies operations), relocating certain functions to lower cost
overseas locations, moving internal and external functions to the
Internet to save costs, the scale-back of corporate lending in certain
regions, and planned staff reductions relating to certain of such
reengineering actions;
o successfully expand its online and offline distribution channels and
cross-selling for financial, travel, card and other products and
services to its customer base, both in the U.S. and internationally;
o participate in payment and other systems material to its businesses on
a fair and competitive basis;
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o control and manage operating, infrastructure, advertising and
promotion and other expenses as business expands or changes, including
balancing the need for longer term investment spending;
o accurately estimate the provision for the cost of the Company's
MEMBERSHIP REWARDS'r' program;
o invest successfully in, and compete at the leading edge of, technology
developments across all businesses, e.g., transaction processing, data
management, customer interactions and communications, travel
reservations systems, prepaid products, multi-application smart cards
and risk management systems;
o recover under its insurance policies for losses resulting from the
September 11th terrorist attacks;
o recognize evolutionary technology developments by competitors or
others which could hasten business model obsolescence or, because of
patent rights held by such competitors or others, limit or restrict
the Company's use of desired business technology or processes;
o develop and implement successfully enterprise-wide interactive
strategies;
o improve online customer satisfaction, website performance and online
availability for its customers and clients;
o effectively leverage its assets, such as its brand, customers and
international presence, in the Internet environment; and
o attract and retain qualified employees in all its businesses.
TRS' ability to:
o increase consumer and business spending and borrowing on its credit
and charge Cards and travel related services products, gain market
share and develop and issue new or enhanced products that capture
greater share of customers' total spending on Cards issued on its
network both in the United States and in its international operations;
o execute the Company's global corporate services strategy including
greater penetration of middle market companies, increasing capture of
non-T&E spending through greater use of the Company's corporate
purchasing card and other means, and further globalizing business
capabilities;
o manage credit risk and exposure in a challenging economic environment;
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o cost effectively manage and expand Cardmember benefits, including
MEMBERSHIP REWARDS;
o expand the Global Network Services business;
o enhance significantly its international operations, which will depend
in part on its ability to reduce expenses for reinvestment in the
international business and expand the proprietary and third
party-issued Card businesses;
o retain Cardmembers in consumer lending products after low introductory
rate periods have expired; and
o sustain premium discount rates, increase merchant coverage and reduce
suppression, all of which will depend in part on its ability to
maintain a customer base that appeals to merchants and to develop
deeper merchant relationships through creation of new products and
services.
AEFA's ability to:
o sell certain high-yield investments at expected values and within
anticipated timeframes and to maintain its high-yield portfolio at
certain levels in the future;
o improve investment performance in AEFA's businesses, including
attracting and retaining high-quality personnel;
o develop and roll out new and attractive products to clients in a
timely manner and effectively manage the economics in selling a
growing volume of non-proprietary products to clients;
o manage developments relating to AEFA's platform structure for
financial advisors, including the ability to increase advisor
productivity (including adding new clients), increase the growth of
productive new advisors and create efficiencies in the infrastructure;
o resolve the potential conflicts inherent in its growing multi-channel
delivery systems;
o obtain critical mass and operating efficiencies in the Global
Brokerage and Membership B@nking Unit and diversify sources of
revenue;
o make accurate assumptions used to determine the amount of amortization
of deferred acquisition costs ("DAC") with respect to sale of annuity,
insurance and certain mutual fund products;
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o respond effectively to fluctuation in the equity and fixed income
markets, a short-term financial market crash or a long-term financial
market decline or stagnation, or a prolonged period of relatively low
or high interest rates, any of which could affect the amount and types
of investment products sold by AEFA, AEFA's ability to earn target
spreads on fixed account liabilities, the level of management,
distribution and other fees received based on the market value of
managed assets, AEFA's ability to recover DAC as well as the timing of
that DAC amortization, and the level of guaranteed minimum death
benefits paid to clients;
o respond effectively to changes to or elimination of federal tax
benefits for AEFA's products and other changes in laws and regulations
(including those relating to the federal estate tax and retirement
savings laws) which could adversely affect sales of insurance and
annuity products;
o respond effectively if the independent directors of the mutual funds
managed by AEFA reduce the compensation paid to AEFA or terminate the
contracts to manage, distribute and/or service those funds;
In general:
o the impact on the Company's businesses and uncertainty created by the
September 11th terrorist attacks, and the potential negative effect on
the Company's businesses and infrastructure, including information
technology systems, of terrorist attacks or disasters in the future;
o the impact on the Company's businesses resulting from the war in Iraq
and its aftermath and other geopolitical uncertainty;
o relationships with third-party providers of various computer systems
and other services integral to the operations of the Company's
businesses;
o the triggering of obligations to make payments to certain co-brand
partners, merchants, vendors and customers under contractual
arrangements with such parties under certain circumstances;
o potential deterioration in the high-yield sector and other investment
areas, which could result in further losses in AEFA's investment
portfolio;
o credit trends and the rate of bankruptcies, which can affect spending
on card products, debt payments by individual and corporate customers
and businesses that accept the Company's card products, and returns on
the Company's investment portfolios;
o fluctuations in foreign currency exchange rates;
o a downturn in the Company's businesses and/or negative changes in the
Company's and its subsidiaries' credit ratings, which could result in
contingent payments under contracts, decreased liquidity and higher
borrowing costs;
Page 63
o the effect of fluctuating interest rates, which could affect AEFA's
spreads in the investment and insurance businesses and benefits
credited to clients' accounts, TRS' borrowing costs and TRS' and AEB's
return on lending products;
o changes in laws or government regulations, including tax laws
affecting the Company's businesses or that may impact the sales of the
products and services that it offers, and regulatory activity in the
areas of customer privacy, consumer protection, business continuity
and data protection;
o political or economic instability in certain regions or countries,
which could affect commercial or other lending activities, among other
businesses, or restrictions on convertibility of certain currencies;
o the costs and integration of acquisitions;
o competitive pressures in all of the Company's major businesses;
o the adoption of recently issued accounting rules related to the
consolidation of special-purpose entities, including those involving
collateralized debt obligations, secured loan trusts, mutual funds,
hedge funds and limited partnerships that the Company manages and/or
invests in, which could affect both the Company's balance sheet and
results of operations; and
o outcomes and costs associated with litigation and compliance and
regulatory matters.
SEGMENT INFORMATION AND CLASSES OF SIMILAR SERVICES
Information with respect to the Company's operating segments, geographic
operations and classes of similar services is set forth in Note 18 to the
Consolidated Financial Statements of the Company, which appears on pages 80
through 82 of the Company's 2002 Annual Report to Shareholders, which Note is
incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
All of the executive officers of the Company as of March 24, 2003, none of
whom has any family relationship with any other and none of whom became an
officer pursuant to any arrangement or understanding with any other person, are
listed below. Each of such officers was elected to serve until the next annual
election of officers or until his or her successor is elected
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and qualified. Each officer's age is indicated by the number in parentheses next
to his or her name.
KENNETH I. CHENAULT - Chairman and Chief Executive Officer;
Chairman and Chief Executive Officer, TRS
Mr. Chenault (51) has been Chairman of the Company since April 2001 and
Chief Executive Officer of the Company since January 2001. Prior thereto he had
been President and Chief Operating Officer of the Company since February 1997.
Prior to February 1997 he had been Vice Chairman of the Company since January
1995. He has also been Chairman of TRS since April 2001 and Chief Executive
Officer of TRS since February 1997.
JONATHAN S. LINEN - Vice Chairman
Mr. Linen (59) has been Vice Chairman of the Company since August 1993.
JAMES M. CRACCHIOLO - Group President, Global Financial Services;
President and Chief Executive Officer, AEFC;
Chairman and Chief Executive Officer, AEFA;
Chairman, AEB; President and CEO, TRS International
Mr. Cracchiolo (44) has been Group President, Global Financial Services of
the Company since June 2000, President and Chief Executive Officer of AEFC since
November, 2000, Chairman and Chief Executive Officer of AEFA since March 2001,
and President and Chief Executive Officer of TRS International since May 1998.
Prior thereto he had been President and CEO of AEFA since June, 2000. Prior
thereto he had been President, Global Network Services, TRS since February 1997.
GARY L. CRITTENDEN - Executive Vice President and Chief Financial Officer
Mr. Crittenden (49) has been Executive Vice President and Chief Financial
Officer of the Company since June 2000. Prior thereto he had been Senior Vice
President and Chief Financial Officer of Monsanto since September 1998. Prior
thereto he had been Chief Financial Officer at Sears Roebuck & Co.
URSULA F. FAIRBAIRN - Executive Vice President, Human Resources and Quality
Mrs. Fairbairn (60) has been Executive Vice President, Human Resources and
Quality of the Company since December 1996.
EDWARD P. GILLIGAN - Group President, Global Corporate Services, TRS
Mr. Gilligan (43) has been Group President, Global Corporate Services, TRS
since June 2000. Prior thereto he had been President, Corporate Services, TRS
since February 1996.
JOHN D. HAYES - Executive Vice President, Global Advertising
and Brand Management
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Mr. Hayes (48) has been Executive Vice President, Global Advertising and
Brand Management of the Company since May 1995.
DAVID C. HOUSE - Group President, Global Network and Establishment
Services and Travelers Cheque and Prepaid
Services Group, TRS
Mr. House (53) has been Group President, Global Network and Establishment
Services and Travelers Cheque and Prepaid Services Group, TRS since June 2000.
Prior thereto he had been President, TRS Establishment Services since October
1995.
ALFRED F. KELLY, JR. - Group President, U.S. Consumer and Small Business
Services, TRS
Mr. Kelly (44) has been Group President, U.S. Consumer and Small Business
Services, TRS since June 2000. Prior thereto he had been President, Consumer
Card Services Group, TRS since October 1998. Prior thereto he had been Executive
Vice President and General Manager of Consumer Marketing, TRS since February
1997.
LOUISE M. PARENT - Executive Vice President and General Counsel
Ms. Parent (52) has been Executive Vice President and General Counsel of
the Company since May 1993.
GLEN SALOW - Executive Vice President and Chief Information Officer
Mr. Salow (46) has been Executive Vice President and Chief Information
Officer of the Company since March 2000. Prior thereto he had been Senior Vice
President, E-Commerce, United States Card and Travel Services, TRS since
December 1999. Prior thereto he had been Senior Vice President, Information
Technology Strategy and Global Platform Development, TRS since April 1999. Prior
thereto he had been Senior Vice President, Technology Operations, TRS since
November 1997.
THOMAS SCHICK - Executive Vice President, Corporate Affairs and
Communications
Mr. Schick (56) has been Executive Vice President, Corporate Affairs and
Communications of the Company since March 1993.
EMPLOYEES
The Company had approximately 75,500 employees on December 31, 2002.
ITEM 2. PROPERTIES
The Company's headquarters is in a 51-story, 2.2 million square foot
building located in lower Manhattan, which also serves as the headquarters for
TRS and AEB. This building, which is on land leased from the Battery Park City
Authority for a term expiring in 2069, is one of four
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office buildings in a complex known as the World Financial Center. The Company
has a 48% ownership interest in the building. In 2002, an affiliate of
Brookfield Financial Properties acquired the 52 percent interest in the
building, which had previously been owned by Lehman Brothers Holdings Inc.
Due to its proximity to the World Trade Center, the Company's headquarters
was damaged as a result of the terrorist attacks of September 11th, 2001. As a
result of these events, the Company had to temporarily relocate its headquarters
and the Company entered into five new leases for approximately 750,000 square
feet of space in the New York, New Jersey and Connecticut area. The repair work
to the Company's headquarters was completed on schedule during 2002 and the
Company relocated back into the Company headquarters. The Company has commenced
efforts to sublease portions of the additional space in the tri-state area. The
Company further relocated back to the World Financial Center employees at its
Jersey City facility who had been permanently based at such location prior to
September 11th. The Company has commenced to sublease this space as well.
Other principal locations of TRS include: the American Express Service
Centers in Fort Lauderdale, Florida; Phoenix, Arizona; Greensboro, North
Carolina; Salt Lake City, Utah; and the Amex Canada Inc. headquarters in
Markham, Ontario, Canada, all of which are owned by the Company or its
subsidiaries. In November, 2000, a 99-year lease was entered into with the State
of Arizona for land in Phoenix; the Company completed construction in 2002 of
two office buildings with a total of 371,000 square feet at this site.
AEFA's three principal locations are its headquarters, the American Express
Financial Center, which the company leases, the Operations Center, which the
company owns, and the Client Service Center, which the company also owns; all
three locations are in Minneapolis, Minnesota. AEFA's lease term for the
American Express Financial Center, which began in November 2000, is for 20 years
with several options to extend the term. AEFA also owns Oak Ridge Conference
Center, a training facility and conference center in Chaska, Minnesota.
IDS Property Casualty, a subsidiary of AEFA, owns its corporate
headquarters in Green Bay, Wisconsin.
Generally, the Company and its subsidiaries lease the premises they occupy
in other locations. Facilities owned or occupied by the Company and its
subsidiaries are believed to be adequate for the purposes for which they are
used and are well maintained.
In February 2000, the Company entered into a 10-year agreement with
Trammell Crow Corporate Services, Inc. for facilities, project and transaction
management and other related services. The agreement covers North and South
America and parts of Europe.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in a number of legal and
arbitration proceedings, including class actions, concerning matters arising in
connection with the conduct
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of their respective business activities. The Company believes it has meritorious
defenses to each of these actions and intends to defend them vigorously. The
Company believes that it is not a party to, nor are any of its properties the
subject of, any pending legal or arbitration proceedings that would have a
material adverse effect on the Company's consolidated financial condition,
results of operations or liquidity. However, it is possible that the outcome of
any such proceedings could have a material impact on results of operations in
any particular reporting period as the proceedings are resolved. Certain legal
proceedings involving the Company are set forth below.
Beginning in mid-July 2002, 12 putative class action lawsuits were filed in
the United States District Court for the Southern District of New York. In
October 2002, these cases were consolidated under the caption IN RE AMERICAN
EXPRESS COMPANY SECURITIES LITIGATION. These lawsuits allege violations of the
federal securities laws and the common law in connection with alleged
misstatements regarding certain investments in high-yield bonds and write downs
in the 2000-2001 time frame. The purported class covers the period from July 18,
1999 to July 17, 2001. The actions seek unspecified compensatory damages as well
as disgorgement, punitive damages, attorneys fees and costs, and interest.
On October 2, 2002, a shareholder derivative suit was filed in the Supreme
Court of New York against certain former and present officers and directors of
the company. The company was also named as a nominal defendant. The matter is
captioned: LUKOWSKI V. AKERSON ET AL. The complaint alleges that the officers
and directors failed to exercise their duties and obligations in connection with
the Company's investments in high yield bonds and the subsequent write downs in
the 2000-2001 time frame. The action seeks damages against the officers and
directors on behalf of the Company.
On August 15, 2000, Roger M. Lindmark ("Lindmark") filed a putative class
action lawsuit against American Express Company, American Express Travel Related
Services Company, Inc. and American Express Centurion Bank ("AECB") in the
United States District Court for the Central District of California. The
complaint principally alleges that class members improperly were charged daily
compounded interest on the Optima line of credit cards and that AECB improperly
applied credits for returned merchandise against Optima balance transfer
balances. Lindmark asserts various claims including violation of the federal
Truth In Lending Act, breach of contract, fraud and unfair and deceptive
practices and violations of the California Consumer Legal Remedies Act. The
action seeks statutory and actual damages, restitution and injunctive relief.
Although the company believes it has meritorious defenses to this action, in
light of the inherent uncertainties and the burden and expense of lengthy
litigation, the Company reached an agreement to settle the lawsuit. On November
4, 2002 the court preliminarily approved the proposed settlement filed by the
parties. The proposed settlement provides for certification of two classes. The
first class, defined as the "finance charge" class, includes all customers who
incurred finance charges between August 1994 and September 2002. The proposed
settlement of the first class consists of a settlement fund in the amount of
$15,950,000 that will be distributed on a pro rata basis to those class members
who are entitled to a refund. The second class, defined as the "delayed notice"
class, includes all customers who did not receive change in terms notices and
who, as a result, incurred increased charges between
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September 2001 and September 2002. These class members will receive a refund of
charges affected by the terms changes that were incurred during the class
period. The Court is expected to hold a hearing to consider final approval of
the proposed settlement in April 2003. The Company has made appropriate reserves
for the settlement amounts.
In June 2002, British Airways filed an action in the United States District
Court for the Southern District of New York captioned BRITISH AIRWAYS PLC V.
AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY, INC. The action arose over
British Airways' decision not to accept any credit or charge cards (including
the American Express card) in the United Kingdom for payment of "corporate net
fares", which are privately negotiated fares with corporations. British Airways'
decision has the effect of requiring corporate customers who wish to use credit
or charge cards for U.K. corporate net fares to purchase tickets through travel
agents and pay a surcharge. The Company believes that British Airways' action is
a material breach of its Merchant Agreement with the Company. British Airways'
complaint asks the court for a declaration of whether its conduct is proper.
British Airways' complaint also seeks unspecified monetary damages, interest,
costs and attorney's fees. British Airways has also amended its original
complaint to add various claims alleging breaches by the Company of various
contracts with the Company. American Express has filed an Answer and
Counterclaim to the British Airways' complaint, and amended complaint, seeking
unspecified monetary damages, interest, punitive damages, costs, attorney's
fees, and injunctive relief.
On December 13, 1996, an action captioned LESA BENACQUISTO AND DANIEL
BENACQUISTO V. IDS LIFE INSURANCE COMPANY ("IDS LIFE") AND AMERICAN EXPRESS
FINANCIAL CORPORATION (the "Benacquisto Action") was commenced in Minnesota
state court. The action was brought by individuals who replaced an existing IDS
Life insurance policy with a new IDS Life policy. The plaintiffs purported to
represent a class consisting of all persons who replaced existing IDS Life
policies with new IDS Life policies from and after January 1, 1985. The
complaint put at issue various alleged sales practices and misrepresentations,
alleging breaches of fiduciary duties and alleged violations of consumer fraud
statutes.
A second action, captioned ARNOLD MORK, ISABELLA MORK, RONALD MELCHERT AND
SUSAN MELCHERT V. IDS LIFE INSURANCE COMPANY AND AMERICAN EXPRESS FINANCIAL
CORPORATION was commenced in the same court on March 21, 1997. A third action,
captioned, RICHARD W. AND ELIZABETH J. THORESEN V. AMERICAN EXPRESS FINANCIAL
CORPORATION, AMERICAN CENTURION LIFE ASSURANCE COMPANY, AMERICAN ENTERPRISE LIFE
INSURANCE COMPANY, AMERICAN PARTNERS LIFE INSURANCE COMPANY, IDS LIFE INSURANCE
COMPANY AND IDS LIFE INSURANCE COMPANY OF NEW YORK was commenced in Minnesota
state court on October 13, 1998. Such actions made allegations similar to those
made in the Benacquisto action, but with respect to certain annuity products as
opposed to life insurance policies.
In January 2000, AEFC reached an agreement in principle to settle the three
purported class actions described above. It is expected the settlement will
provide for $215 million of benefits to more than two million participants and
for release by class members of all insurance and annuity market conduct claims
dating back to 1985.
Page 69
In connection with the procedural disposition of the three purported class
actions, in August, 2000, an action captioned LESA BENACQUISTO, DANIEL
BENACQUISTO, RICHARD THORESEN, ELIZABETH THORESEN, ARNOLD MORK, ISABELLA MORK,
RONALD MELCHERT AND SUSAN MELCHERT V. AMERICAN EXPRESS FINANCIAL CORPORATION,
AMERICAN EXPRESS FINANCIAL ADVISORS, AMERICAN CENTURION LIFE ASSURANCE COMPANY,
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY, AMERICAN PARTNERS LIFE INSURANCE
COMPANY, IDS LIFE INSURANCE COMPANY AND IDS LIFE INSURANCE COMPANY OF NEW YORK
was commenced in the United States District Court for the District of Minnesota.
On September 18, 2000 the Minnesota state court and the United States
District Court for the District of Minnesota entered an order conditionally
certifying a class for settlement purposes and preliminarily approving the class
settlement described above for each of the state actions and the federal action.
The settlement was finally approved by the state and federal courts on May,
2001. The settlement benefits have been substantially administered to the class.
Numerous individuals opted out of the settlement described above and
therefore did not release their claims against AEFC and its subsidiaries. Some
of these class members who opted out were represented by counsel and presented
separate claims to AEFC and the Company. The majority of these opt out claims
were resolved in 2002.
In November 2002, a suit, captioned HARITOS ET AL. V. AMERICAN EXPRESS
FINANCIAL CORPORATION AND IDS LIFE INSURANCE COMPANY, was filed in the United
States District Court for District of Arizona. The suit is filed by plaintiffs
who purport to represent a class of all persons that have purchased financial
plans from AEFA advisors during an undefined class period. Plaintiffs allege
that the sale of the plans violate the Investment Advisers Act of 1940. The suit
seeks an unspecified amount of damages, rescission and injunctive relief. The
Company believes that it has meritorious defenses to this suit and intends to
defend this case vigorously.
Page 70
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for the Company's Common Shares is The New York Stock
Exchange under the trading symbol AXP. Its Common Shares are also listed in the
U.S. on the Chicago and Pacific Stock Exchanges. The Company had 51,601 common
shareholders of record at December 31, 2002. For price and dividend information
with respect to such Common Shares, see Note 22 to the Consolidated Financial
Statements on page 84 of the Company's 2002 Annual Report to Shareholders, which
Note is incorporated herein by reference.
In August 1999 and March 2000, the company entered into agreements under
which a financial institution purchased an aggregate 29.5 million shares of
the Company's common stock at an average purchase price of $50.41 per share.
Each of the agreements terminates after five years, at which time the Company
is required to deliver an amount equal to the original purchase price for the
shares. The Company may elect to settle this amount at any time (i)
physically, by paying cash against delivery of the shares held by the
financial institution or (ii) on a net cash or net share basis. During the
term of these agreements, the Company, on a monthly basis, either issues
shares to or receives shares from the financial institution so that the value
of the remaining shares held by the financial institution is equal to the
original aggregate purchase price for the shares. The Company may prepay
outstanding amounts at any time prior to the end of the five-year term. In the
first quarter of 2001, the Company elected to prepay $350 million of the
aggregate outstanding amount. In October and December 2002, the Company
elected to prepay an additional $200 million and $400 million, respectively,
of the aggregate outstanding amount.
In connection with these agreements, the Company issued, during the first
quarter of 2002, 805,335 common shares on February 5, 2002. In addition, during
the first quarter of 2002, an aggregate 4,744,705 shares were returned to the
Company, resulting in a net return to the Company of 3,939,370 common shares
during the first quarter.
In connection with these agreements, the Company issued, during the second
quarter of 2002, 43,753 common shares on May 3, 2002 and 4,258,030 common shares
on July 3, 2002. In addition, in May 2002, 1,211,953 shares were returned to the
Company, resulting in a net issuance of 3,089,830 common shares during the
second quarter.
In connection with these agreements, the Company issued, during the third
quarter of 2002, 1,971,689 shares common shares on August 5, 2002. Additionally,
5,474,399 common shares were issued on October 3, 2002. In addition, in
September 2002, 1,447,789 shares were returned to the Company, resulting in a
net issuance of 5,998,299 common shares during the second quarter.
Page 71
In connection with these agreements, on January 6, 2003, the Company issued
an aggregate 1,640,196 common shares in respect of the monthly settlement for
December 2002. In addition, during the fourth quarter of 2002, an aggregate
23,074,578 shares were returned to the Company (inclusive of the October and
December prepayments) in connection with these agreements, resulting in a net
return to the Company of 21,434,382 shares during the fourth quarter.
On March 26, 2003, the Company prepaid an additional $200 million of the
aggregate outstanding amount, which resulted in the return to the Company of an
aggregate 5,969,258 shares.
The issuances of common shares described above were exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof,
as a transaction not involving a public offering.
ITEM 6. SELECTED FINANCIAL DATA
The "Consolidated Five-Year Summary of Selected Financial Data" appearing
on page 87 of the Company's 2002 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information set forth under the heading "Financial Review" appearing on
pages 26 through 53 of the Company's 2002 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the heading "Risk Management" appearing
on pages 33 through 34, pages 42 through 43, pages 48 through 49, page 51 and
Note 9 to the Consolidated Financial Statements on pages 70 through 72 of the
Company's 2002 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The "Consolidated Financial Statements," the "Notes to Consolidated
Financial Statements" and the "Report of Ernst & Young LLP Independent Auditors"
appearing on pages 54 through 84 and 86 of the Company's 2002 Annual Report to
Shareholders are incorporated herein by reference.
Page 72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEMS 10, 11, 12 and 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS; CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
The Company filed with the SEC, within 120 days after the close of its
last fiscal year, a definitive proxy statement dated March 11, 2003, pursuant
to Regulation 14A, which involves the election of directors. The following
portions of such proxy statement are incorporated herein by reference: page 4
paragraph 3, sentence 1 -- material included under the heading "Corporate
Governance," page 6 -- material included under the heading "Corporate
Governance -- Audit Committee," pages 7 through 8 -- material included under
the heading "Compensation of Directors," pages 9 through 10 -- material
included under the heading "Ownership of Our Common Shares," pages 10 through
12 -- material included under the heading "Item 1 -- Election of Directors"
and pages 21 through 30 (excluding the portions titled "Performance Graph" on
page 25 and "Directors and Officers Liability Insurance" on page 30). In
addition, the Company has provided, under the caption "Executive Officers of
the Company" at pages 64 through 66 hereof, the information regarding
executive officers called for by Item 401(b) of Regulation S-K.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, the Company
carried out an evaluation under the supervision and with the participation of
the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of its disclosure controls
and procedures. Based on that evaluation, the CEO and CFO have concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms. Subsequent to the date of the CEO's and CFO's evaluation, there
were no significant changes in the Company's internal controls or in other
factors that could significantly affect the internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Page 73
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
See Index to Financial Statements on page F-1 hereof.
2. Financial Statement Schedules:
See Index to Financial Statements on page F-1 hereof.
3. Exhibits:
See Exhibit Index on pages E-1 through E-6 hereof.
(b) Reports on Form 8-K:
Form 8-K, dated October 28, 2002, Items 5 and 7, reporting the Company's
earnings for the quarter ended September 30, 2002, and including a Third
Quarter Earnings Supplement.
Form 8-K, dated November 7, 2002, Item 9, reporting on the presentation
delivered at the Forrester Research Executive Strategy Forum by Kenneth I.
Chenault, Chairman and Chief Executive Officer of the Company.
Form 8-K, dated November 19, 2002, Item 5, reporting on the Company's
authorization of the repurchase of additional shares as part of its share
repurchase program and declaration of its regular quarterly dividend.
Form 8-K, dated December 5, 2002, Item 9, adjusting certain data contained
in the Company's Form 8-K dated November 7, 2002 (relating to card enrollment in
the Company's online account service).
Form 8-K, dated December 16, 2002, Item 5, adjusting certain statistical
data contained in the Company's third quarter 2002 Form 10-Q filed on November
13, 2002 and Form 8-K filed on October 28, 2002 (relating to write-off rates).
Form 8-K, dated January 27, 2003, Items 5 and 7, reporting the Company's
2002 fourth quarter and full year earnings and including a 2002 Fourth
Quarter/Full Year Earnings Supplement.
Form 8-K, dated February 5, 2003, Item 9, reporting on a presentation
delivered to the financial analyst community by (i) Kenneth I. Chenault,
Chairman and Chief Executive Officer of the Company, (ii) James M. Cracchiolo,
Group President, Global Financial Services and Chairman and Chief Executive
Officer of American Express Financial Advisors ("AEFA"), (iii) Barry Murphy,
Executive Vice President -- U.S. Retail at AEFA, (iv) Barbara Fraser, Executive
Vice President -- Products and Corporate Marketing at AEFA, and (v) Ted
Truscott, Chief Information Officer at AEFA.
Form 8-K, dated March 6, 2003, Item 9, reporting on the posting on the
Company's website of the Company's 2002 Annual Report to Shareholders.
Page 74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN EXPRESS COMPANY
March 24, 2003 /s/ Gary L. Crittenden
----------------------
Gary L. Crittenden
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
/s/ Kenneth I. Chenault /s/ Peter R. Dolan
----------------------- ------------------
Kenneth I. Chenault Peter R. Dolan
Chairman, Chief Executive Officer and Director
Director
/s/ Gary L. Crittenden /s/ F. Ross Johnson
---------------------- -------------------
Gary L. Crittenden F. Ross Johnson
Executive Vice President and Director
Chief Financial Officer
/s/ Tom A. Iseghohi /s/ Vernon E. Jordan, Jr.
------------------- -------------------------
Tom A. Iseghohi Vernon E. Jordan, Jr.
Senior Vice President and Comptroller Director
/s/ Daniel F. Akerson /s/ Jan Leschly
--------------------- ---------------
Daniel F. Akerson Jan Leschly
Director Director
/s/ Edwin L. Artzt /s/ Richard A. McGinn
------------------ ---------------------
Edwin L. Artzt Richard A. McGinn
Director Director
/s/ Charlene Barshefsky /s/ Frank P. Popoff
----------------------- -------------------
Charlene Barshefsky Frank P. Popoff
Director Director
/s/ William G. Bowen /s/ Robert D. Walter
-------------------- --------------------
William G. Bowen Robert D. Walter
Director Director
March 24, 2003
Page 75
CERTIFICATION
I, Kenneth I. Chenault, certify that:
1. I have reviewed this annual report on Form 10-K of American Express
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Kenneth I. Chenault
--------------------------------
Kenneth I. Chenault
Chief Executive Officer
Page 76
CERTIFICATION
I, Gary L. Crittenden, certify that:
1. I have reviewed this annual report on Form 10-K of American Express
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Gary L. Crittenden
--------------------------------
Gary L. Crittenden
Chief Financial Officer
Page 77
AMERICAN EXPRESS COMPANY
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
(ITEM 14(a))
ANNUAL
REPORT TO
SHAREHOLDERS
FORM 10-K (PAGE)
--------- ------------
American Express Company and Subsidiaries:
Data incorporated by reference from attached 2002 Annual Report to
Shareholders:
Report of independent auditors....................................... 86
Consolidated statements of income for the three
years ended December 31, 2002.................................... 54
Consolidated balance sheets at December 31, 2002
and 2001......................................................... 55
Consolidated statements of cash flows for the
three years ended December 31, 2002.............................. 56
Consolidated statements of shareholders' equity for the
three years ended December 31, 2002.............................. 57
Notes to consolidated financial statements........................... 58-84
Consent of independent auditors......................................... F-2
Schedules:
I - Condensed financial information of the Company................... F-3 - F-6
II - Valuation and qualifying accounts for the three years ended
December 31, 2002............................................ F-7
All other schedules for American Express Company and subsidiaries have been
omitted since the required information is not present or not present in amounts
sufficient to require submission of the schedule, or because the information
required is included in the respective financial statements or notes thereto.
The consolidated financial statements of American Express Company
(including the report of independent auditors) listed in the above index, which
are included in the Annual Report to Shareholders for the year ended December
31, 2002, are hereby incorporated by reference. With the exception of the pages
listed in the above index, unless otherwise incorporated by reference elsewhere
in this Annual Report on Form 10-K, the 2002 Annual Report to Shareholders is
not to be deemed filed as part of this report.
F-1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on Form
10-K of American Express Company of our report dated January 27, 2003
(hereinafter referred to as our Report), included in the 2002 Annual Report to
Shareholders of American Express Company.
Our audits included the financial statement schedules of American Express
Company listed in Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 2-46918, No. 2-59230, No. 2-64285, No. 2-73954, No.
2-89680, No. 33-01771, No. 33-02980, No. 33-28721, No. 33-33552, No. 33-36422,
No. 33-48629, No. 33-62124, No. 33-65008, No. 33-53801, No. 333-12683, No.
333-41779, No. 333-52699, No. 333-73111, No. 333-38238, and No. 333-98479; Form
S-3 No. 2-89469, No. 33-43268, No. 33-50997, No. 333-32525, No. 333-45445, No.
333-47085, No. 333-55761 and No. 333-51828) and in the related Prospectuses of
our Report with respect to the consolidated financial statements and schedules
of American Express Company included and incorporated by reference in this
Annual Report on Form 10-K for the year ended December 31, 2002.
/s/ Ernst & Young LLP
New York, New York
March 24, 2003
F-2
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED STATEMENTS OF INCOME
(PARENT COMPANY ONLY)
(MILLIONS)
Years Ended December 31,
------------------------
2002 2001 2000
------ ------ ------
Revenues $ 241 $ 248 $ 290
------ ------ ------
Expenses:
Interest 339 347 341
Human resources 88 64 97
Other (a) 242 261 276
------ ------ ------
Total 669 672 714
------ ------ ------
Pretax loss (428) (424) (424)
Income tax benefit (209) (199) (188)
------ ------ ------
Net loss before equity in net income of subsidiaries
and affiliates (219) (225) (236)
Equity in net income of subsidiaries and affiliates 2,890 1,536 3,046
------ ------ ------
Net income $2,671 $1,311 $2,810
====== ====== ======
(a) 2001 includes restructuring charges of $14 million ($9 million after-tax).
See Notes to Condensed Financial Information of the Company on page F-6.
F-3
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
(MILLIONS, EXCEPT SHARE AMOUNTS)
December 31,
-----------------
2002 2001
------- -------
ASSETS
------
Cash and cash equivalents $ 9 $ 11
Equity in net assets of subsidiaries and affiliates 14,567 12,902
Accounts receivable and accrued interest, less
reserves 26 18
Land, buildings and equipment - at cost, less
accumulated depreciation: 2002, $80; 2001, $77 141 53
Due from subsidiaries 4,386 3,388
Other assets 292 256
------- -------
Total assets $19,421 $16,628
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable and other liabilities $ 724 $ 521
Long-term debt 2,745 2,120
Due to subsidiaries 1,576 1,435
Intercompany debentures 515 515
------- -------
Total liabilities 5,560 4,591
Shareholders' equity:
Common shares, $.20 par value, authorized 3.6 billion
shares; issued and outstanding 1,305 million shares in
2002 and 1,331 million shares in 2001 261 266
Capital surplus 5,675 5,527
Retained earnings 7,606 6,421
Other comprehensive income, net of tax:
Net unrealized securities gains (losses) 1,104 334
Net unrealized derivatives losses (538) (296)
Foreign currency translation adjustments (198) (112)
Minimum pension liability (49) (103)
------- -------
Accumulated other comprehensive income 319 (177)
------- -------
Total shareholders' equity 13,861 12,037
------- -------
Total liabilities and shareholders' equity $19,421 $16,628
======= =======
See Notes to Condensed Financial Information of the Company on page F-6.
F-4
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
(MILLIONS)
Years Ended December 31,
---------------------------
2002 2001 2000
------- ------- -------
Cash flows from operating activities: $ 2,671 $ 1,311 $ 2,810
Net income
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in net income of subsidiaries and affiliates (2,890) (1,536) (3,046)
Dividends received from subsidiaries and affiliates 1,812 1,006 2,139
Other operating activities (705) (486) (680)
------- ------- -------
Net cash provided by operating activities 888 295 1,223
------- ------- -------
Purchase of land, building and equipment (93) (16) --
------- ------- -------
Net cash used in investing activities (93) (16) --
------- ------- -------
Cash flows from financing activities:
Issuance of American Express common shares 161 84 226
Repurchase of American Express common shares (1,153) (626) (1,377)
Dividends paid (430) (424) (421)
Net increase in debt 625 696 333
------- ------- -------
Net cash used in financing activities (797) (270) (1,239)
------- ------- -------
Net (decrease) increase in cash and cash equivalents (2) 9 (16)
Cash and cash equivalents at beginning of year 11 2 18
------- ------- -------
Cash and cash equivalents at end of year $ 9 $ 11 $ 2
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized) in 2002, 2001 and 2000 was
$169 million, $116 million and $88 million, respectively. Net cash received for
income taxes in 2002, 2001 and 2000 was $231 million, $109 million and $376
million, respectively.
See Notes to Condensed Financial Information of the Company on page F-6.
F-5
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY
NOTES TO CONDENSED FINANCIAL INFORMATION OF THE COMPANY
(PARENT COMPANY ONLY)
1. Principles of Consolidation
The accompanying condensed financial statements include the accounts of
American Express Company and, on an equity basis, its subsidiaries and
affiliates. Parent Company revenues and expenses, other than human
resources expenses, are primarily related to intercompany transactions with
subsidiaries and affiliates. These financial statements should be read in
conjunction with the consolidated financial statements and the accompanying
notes thereto of the Company.
Certain amounts from prior years have been reclassified to conform to the
current presentation.
2. Long-term debt consists of (millions):
December 31,
---------------
2002 2001
------ ------
3 3/4% Notes due November 20, 2007 $ 744 $ --
5 1/2% Notes due September 12, 2006 1,003 1,000
6 3/4% Senior Debentures due June 23, 2004 500 500
6 7/8% Notes due November 1, 2005 498 497
8 5/8% Senior Debentures due 2022 -- 123
------ ------
$2,745 $2,120
====== ======
Aggregate annual maturities of long-term debt for the five years ending
December 31, 2007 are as follows (millions): 2003, $0; 2004, $500; 2005,
$498; 2006, $1,003; and 2007, $744.
3. Intercompany debentures consist solely of Junior Subordinated Debentures
issued to American Express Company Capital Trust I, a wholly owned
subsidiary of the Company. See Note 7 to the Consolidated Financial
Statements on page 69 of the Company's 2002 Annual Report to Shareholders
(which Note is incorporated herein by reference).
F-6
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II --VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2002
(MILLIONS)
Reserve for credit losses, Reserve for doubtful
loans and discounts accounts receivable
--------------------------- ----------------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ------- ------- -------
Balance at beginning of period $ 993 $ 796 $ 753 $ 1,166 $ 932 $ 806
Additions:
Charges to income 1,526 1,415 924 1,334 1,554(a) 1,365(a)
Recoveries of amounts previously
written-off 68 78 150 -- -- --
Deductions:
Charges for which reserves were
provided (1,361) (1,296) (1,031) (1,542) (1,320) (1,239)
------- ------- ------- ------- ------- -------
Balance at end of period $ 1,226 $ 993 $ 796 $ 958 $ 1,166 $ 932
======= ======= ======= ======= ======= =======
(a) Before recoveries on accounts previously written-off, which are
credited to income (millions): 2002 - $241, 2001 - $227 and
2000 - $214.
F-7
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report or, where
indicated, were already filed and are hereby incorporated by reference (*
indicates exhibits electronically filed herewith). Exhibits numbered 10.1
through 10.21, 10.28 through 10.37, 10.40 and 10.42 are management contracts or
compensatory plans or arrangements.
3.1 Company's Restated Certificate of Incorporation (incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement on
Form S-3, dated July 31, 1997 (Commission File No. 333-32525)).
3.2 Company's Certificate of Amendment of the Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 of the Company's Quarterly
Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
March 31, 2000).
3.3 Company's By-Laws, as amended through November 26, 2001 (incorporated
by reference to Exhibit 99.2B of the Company's Current Report on Form
8-K (Commission File No. 1-7657) dated November 26, 2001).
4. The instruments defining the rights of holders of long-term debt
securities of the Company and its subsidiaries are omitted pursuant to
Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company
hereby agrees to furnish copies of these instruments to the SEC upon
request.
10.1 American Express Company 1989 Long-Term Incentive Plan, as amended and
restated (incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended March 31, 1996).
10.2 Amendment of American Express Company 1989 Long-Term Incentive
Compensation Plan Master Agreement dated February 27, 1995
(incorporated by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
March 31, 2000).
10.3 American Express Company 1998 Incentive Compensation Plan, as amended
on April 22, 2002 (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q (Commission File No. 1-7657)
for the quarter ended March 31, 2002.
10.4 Amendment of American Express Company 1998 Incentive Compensation Plan
Master Agreement dated April 27, 1998 (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 1-7657) for the quarter ended March 31, 2000).
10.5 American Express Company Deferred Compensation Plan for Directors, as
amended effective July 28, 1997 (incorporated by reference to Exhibit
10.1 of the Company's
E-1
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended June 30, 1997).
10.6 Description of American Express Company Pay for Performance Deferral
Program (incorporated by reference to Exhibit 10.8 of the Company's
Quarterly Report on Form 10-Q (Commission File No. l-7657) for the
quarter ended March 31, 2000).
10.7 Amendment to American Express Company Pay for Performance Deferral
Program (incorporated by reference to Exhibit 10.9 of the Company's
Quarterly Report on Form 10-Q (Commission File No. l-7657) for the
quarter ended March 31, 2000).
10.8 American Express Company 1983 Stock Purchase Assistance Plan, as
amended (incorporated by reference to Exhibit 10.6 of the Company's
Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal
year ended December 31, 1988).
10.9 American Express Company Retirement Plan for Non-Employee Directors,
as amended (incorporated by reference to Exhibit 10.12 of the
Company's Annual Report on Form 10-K (Commission File No. 1-7657) for
the fiscal year ended December 31, 1988).
10.10 Certificate of Amendment of the American Express Company Retirement
Plan for Non-Employee Directors dated March 21, 1996 (incorporated by
reference to Exhibit 10.11 of the Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31,
1995).
10.11 American Express Key Executive Life Insurance Plan, as amended
(incorporated by reference to Exhibit 10.12 of the Company's Annual
Report on Form 10-K (Commission File No. 1-7657) for the fiscal year
ended December 31, 1991).
10.12 Amendment of American Express Company Key Executive Life Insurance
Plan (incorporated by reference to Exhibit 10.3 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended September 30, 1994).
10.13 Amendment of American Express Company Key Executive Life Insurance
Plan (incorporated by reference to Exhibit 10.4 of the Company's
Quarterly report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended March 31, 2000).
10.14 American Express Key Employee Charitable Award Program for Education
(incorporated by reference to Exhibit 10.13 of the Company's Annual
Report on Form 10-K (Commission File No. 1-7657) for the fiscal year
ended December 31, 1990).
10.15 American Express Directors' Charitable Award Program (incorporated by
reference to Exhibit 10.14 of the Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31,
1990).
10.16 Description of separate pension arrangement and loan agreement between
the Company and Harvey Golub (incorporated by reference to Exhibit
10.17 of the Company's Annual
E-2
Report on Form 10-K (Commission File No. 1-7657) for the fiscal year
ended December 31, 1988).
10.17 Shearson Lehman Brothers Capital Partners I Amended and Restated
Agreement of Limited Partnership (incorporated by reference to Exhibit
10.18 of the Company's Annual Report on Form 10-K (Commission File No.
1-7657) for the fiscal year ended December 31, 1988).
10.18 Shearson Lehman Hutton Capital Partners II, L.P. Amended and Restated
Agreement of Limited Partnership (incorporated by reference to Exhibit
10.19 of the Company's Annual Report on Form 10-K (Commission File No.
1-7657) for the fiscal year ended December 31, 1988).
10.19 American Express Company Salary/Bonus Deferral Plan (incorporated by
reference to Exhibit 10.20 of the Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31,
1988).
10.20 Amendment of American Express Company Salary/Bonus Deferral Plan
(incorporated by reference to Exhibit 10.4 of the Company's Quarterly
Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
September 30, 1994).
10.21 Amendment of American Express Salary/Bonus Deferral Plan (incorporated
by reference to Exhibit 10.5 of the Company's Quarterly report on Form
10-Q (Commission File No. 1-7657) for the quarter ended March 31,
2000).
10.22 Restated and Amended Agreement of Tenants-In-Common, dated May 27,
1994, by and among the Company, American Express Bank Ltd., American
Express Travel Related Services Company, Inc., Lehman Brothers Inc.,
Lehman Government Securities, Inc. and Lehman Commercial Paper
Incorporated (incorporated by reference to Exhibit 10.1 of Lehman
Brothers Holdings Inc.'s Transition Report on Form 10-K (Commission
File No. 1-9466) for the transition period from January 1, 1994 to
November 30, 1994).
10.23 Tax Allocation Agreement, dated May 27, 1994, between Lehman Brothers
Holdings Inc. and the Company (incorporated by reference to Exhibit
10.2 of Lehman Brothers Holdings Inc.'s Transition Report on Form 10-K
(Commission File No. 1-9466) for the transition period from January 1,
1994 to November 30, 1994).
10.24 Intercompany Agreement, dated May 27, 1994, between the Company and
Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit
10.3 of Lehman Brothers Holdings Inc.'s Transition Report on Form 10-K
(Commission File No. 1-9466) for the transition period from January 1,
1994 to November 30, 1994).
10.25 Purchase and Exchange Agreement, dated April 28, 1994, between Lehman
Brothers Holdings Inc. and the Company (incorporated by reference to
Exhibit 10.29 of Lehman Brothers Holdings Inc.'s Transition Report on
Form 10-K (Commission File No. 1-9466) for the transition period from
January 1, 1994 to November 30, 1994).
E-3
10.26 Registration Rights Agreement, dated as of May 27, 1994, between the
Company and Lehman Brothers Holdings Inc. (incorporated by reference
to Exhibit 10.30 of Lehman Brothers Holdings Inc.'s Transition Report
on Form 10-K (Commission File No. 1-9466) for the transition period
from January 1, 1994 to November 30, 1994).
10.27 Letter Agreement, dated January 30, 1998, between the Company and
Nippon Life Insurance Company (incorporated by reference to Exhibit
10.24 of the Company's Annual Report on Form 10-K (Commission File No.
1-7657) for the fiscal year ended December 31, 1997).
10.28 American Express Company 1993 Directors' Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.11 of the Company's Quarterly
Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
March 31, 2000).
10.29 American Express Senior Executive Severance Plan Effective January 1,
1994 (as amended and restated through May 1, 2000) (incorporated by
reference to Exhibit 10.10 of the Company's Quarterly Report on Form
10-Q (Commission File No. 1-7657) for the quarter ended March 31,
2000).
10.30 Amendments to the American Express Senior Executive Severance Plan,
effective November 26, 2001 (incorporated by reference to Exhibit
10.30 of the Company's Annual Report on Form 10-K (Commission File No.
1-7657) for the year ended December 31, 2001).
10.31 Amendment of Long-Term Incentive Awards under the American Express
Company 1979 and 1989 Long-Term Incentive Plans (incorporated by
reference to Exhibit 10.6 of the Company's Quarterly Report on Form
10-Q (Commission File No. 1-7657) for the quarter ended September 30,
1994).
10.32 Amendments of (i) Long-Term Incentive Awards under the American
Express Company 1979 and 1989 Long-Term Incentive Plans, (ii) the
American Express Senior Executive Severance Plan, (iii) the American
Express Supplemental Retirement Plan, (iv) the American Express
Salary/Bonus Deferral Plan, (v) the American Express Key Executive
Life Insurance Plan and (vi) the IDS Current Service Deferred
Compensation Plan (incorporated by reference to Exhibit 10.37 of the
Company's Annual Report on Form 10-K (Commission File No. 1-7657) for
the fiscal year ended December 31, 1997).
10.33 IDS Current Service Deferred Compensation Plan (incorporated by
reference to Exhibit 10.42 of the Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31,
1994).
10.34 Action to Amend IDS Current Service Deferred Compensation Plan
(incorporated by reference to Exhibit 10.7 of the Company's Quarterly
Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
March 31, 2000).
E-4
10.35 American Express Company Supplemental Retirement Plan Amended and
Restated Effective March 1, 1995 (incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q (Commission File
No. 1-7657) for the quarter ended September 30, 1999).
10.36 Amendment to American Express Company Supplemental Retirement Plan
Amended and Restated Effective March 1, 1995 (incorporated by
reference to Exhibit 10.3 of the Company's Quarterly Report on Form
10-Q (Commission File No. 1-7657) for the quarter ended March 31,
2000).
10.37 American Express Directors' Stock Plan (incorporated by reference to
Exhibit 4.4 of the Company's Registration Statement on Form S-8, dated
December 9, 1997 (Commission File No. 333-41779)).
10.38 American Express Annual Incentive Award Plan (incorporated by
reference to Exhibit 10.6 of the Company's Quarterly Report on Form
10-Q (Commission File No. 1-7657) for the quarter ended March 31,
2000).
10.39 Agreement dated February 27, 1995 between the Company and Berkshire
Hathaway Inc. (incorporated by reference to Exhibit 10.43 of the
Company's Annual Report on Form 10-K (Commission File No. 1-7657) for
the fiscal year ended December 31, 1994).
10.40 Agreement dated July 20, 1995 between the Company and Berkshire
Hathaway Inc. and its subsidiaries (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 1-7657) for the quarter ended September 30,
1995).
10.41 Letter agreement dated April 12, 1999 with Harvey Golub, the Company's
former Chairman and Chief Executive Officer (incorporated by reference
to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 1-7657) for the quarter ended June 30, 1999).
10.42 Amendment dated September 8, 2000 to the agreement dated February 27,
1995 between the Company and Berkshire Hathaway Inc. (incorporated by
reference to Exhibit 99.3 of the Company's Current Report on Form 8-K
(Commission File No. 1-7657) dated January 22, 2001).
10.43 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 (incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q (Commission File No. 1-7657)
for the quarter ended June 30, 1999).
10.44 Description of new hire payment to Gary L. Crittenden (incorporated by
reference to Exhibit 10.44 of the Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the year ended December 31, 2001).
E-5
*12 Computation in Support of Ratio of Earnings to Fixed Charges.
*13 Portions of the Company's 2002 Annual Report to Shareholders that are
incorporated herein by reference.
*21 Subsidiaries of the Company.
*23 Consent of Ernst & Young LLP (contained on page F-2 of this Annual
Report on Form 10-K).
*99.1 Certification of Kenneth I. Chenault, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
*99.2 Certification of Gary L. Crittenden, Chief Financial Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
E-6
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as........................'r'
The service mark symbol shall be expressed as...............................'sm'
Characters normally expressed as superscript shall be preceded by...........'pp'
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission File No. 1-7657
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American Express Company
(Exact name of Company as specified in charter)
E X H I B I T S
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