UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
--------------- ----------------
Commission file number 1-7657
AMERICAN EXPRESS COMPANY
------------------------
(Exact name of registrant as specified in its charter)
New York 13-4922250
------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
World Financial Center, 200 Vesey Street, New York, NY 10285
- - ----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 640-2000
-------------------
None
- - ----------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 31, 1998
- - ---------------------------------- -------------------------------
Common Shares (par value $.60 per share) 452,089,489 shares
AMERICAN EXPRESS COMPANY
FORM 10-Q
INDEX
PART I. Financial Information:
Consolidated Statements of Income - Three and 1-2
nine months ended September 30, 1998 and 1997
Consolidated Balance Sheets - September 30, 3
1998 and December 31, 1997
Consolidated Statements of Cash Flows - Nine 4
months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements 5-7
Management's Discussion and Analysis of 8-25
Financial Condition and Results of Operations
Review Report of Independent Accountants 26
Part II. Other Information 27
PART I--FINANCIAL INFORMATION
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
-----------------
1998 1997
---- ----
Net Revenues:
Discount revenue $1,522 $1,422
Interest and dividends, net 802 809
Net card fees 393 399
Travel commissions and fees 441 370
Other commissions and fees 405 381
Cardmember lending net finance charge
revenue 338 318
Management and distribution fees 476 391
Life and other insurance premiums 119 106
Other 291 304
----- -----
Total 4,787 4,500
----- -----
Expenses:
Human resources 1,385 1,190
Provisions for losses and benefits:
Annuities and investment certificates 323 355
International banking, life insurance
and other 152 143
Charge card 148 228
Cardmember lending 224 179
Interest 256 241
Occupancy and equipment 300 289
Marketing and promotion 333 308
Professional services 291 264
Communications 123 112
Other 453 473
----- -----
Total 3,988 3,782
----- -----
Pretax income 799 718
Income tax provision 225 194
----- -----
Net income $574 $524
===== =====
Earnings Per Common Share:
Basic $1.27 $1.13
===== =====
Diluted $1.25 $1.10
===== =====
Average common shares outstanding for
earnings per common share (millions):
Basic 451.6 463.0
===== =====
Diluted 459.6 477.9
===== =====
Cash dividends declared per
common share $0.225 $0.225
===== =====
See notes to Consolidated Financial Statements.
1
PART I--FINANCIAL INFORMATION
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share amounts)
(Unaudited)
Nine Months Ended
September 30,
-----------------
1998 1997
---- ----
Net Revenues:
Discount revenue $4,476 $4,136
Interest and dividends, net 2,423 2,381
Net card fees 1,189 1,206
Travel commissions and fees 1,195 1,087
Other commissions and fees 1,230 1,081
Cardmember lending net finance charge
revenue 985 910
Management and distribution fees 1,376 1,082
Life and other insurance premiums 346 314
Other 849 889
------ ------
Total 14,069 13,086
------ ------
Expenses:
Human resources 3,908 3,472
Provisions for losses and benefits:
Annuities and investment certificates 1,042 1,064
International banking, life insurance
and other 666 413
Charge card 602 658
Cardmember lending 629 577
Interest 732 674
Occupancy and equipment 888 847
Marketing and promotion 899 780
Professional services 823 730
Communications 346 336
Other 1,322 1,475
------ ------
Total 11,857 11,026
------ ------
Pretax income 2,212 2,060
Income tax provision 601 562
------ ------
Net income $1,611 $1,498
====== ======
Earnings Per Common Share:
Basic $3.53 $3.22
====== ======
Diluted $3.47 $3.12
====== ======
Average common shares outstanding for
earnings per common share (millions):
Basic 456.2 465.4
====== ======
Diluted 464.9 480.5
====== ======
Cash dividends declared per
common share $0.675 $0.675
====== ======
See notes to Consolidated Financial Statements.
2
AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS
(millions)
(Unaudited)
September 30, December 31,
Assets 1998 1997
- - ------ ------------- ------------
Cash and cash equivalents $6,594 $4,179
Accounts receivable and accrued interest:
Cardmember receivables, less reserves:
1998, $627; 1997, $640 18,352 19,275
Other receivables, less reserves:
1998, $74; 1997, $72 2,489 2,499
Investments 40,365 39,648
Loans:
Cardmember lending, less reserves:
1998, $541; 1997, $576 13,236 13,183
International banking, less reserves:
1998, $279; 1997, $131 5,836 6,062
Other, net 894 864
Separate account assets 23,033 23,215
Deferred acquisition costs 2,961 2,894
Land, buildings and equipment--at cost, less
accumulated depreciation: 1998, $1,976;
1997, $1,838 1,541 1,533
Other assets 5,613 6,651
------- -------
Total assets $120,914 $120,003
======= =======
Liabilities and Shareholders' Equity
- - ------------------------------------
Customers' deposits $ 10,032 $ 9,444
Travelers Cheques outstanding 6,160 5,634
Accounts payable 5,563 4,876
Insurance and annuity reserves:
Fixed annuities 21,296 22,112
Life and disability policies 4,203 4,053
Investment certificate reserves 4,721 4,149
Short-term debt 21,047 20,570
Long-term debt 7,324 7,873
Separate account liabilities 23,033 23,215
Other liabilities 7,632 8,503
------- -------
Total liabilities 111,011 110,429
Guaranteed preferred beneficial interest in
the Company's junior subordinated deferrable
interest debentures 500 -
Shareholders' equity:
Common shares, $.60 par value, authorized
1.2 billion shares; issued and outstanding
452.3 million shares in 1998 and 466.4
million shares in 1997 271 280
Capital surplus 4,604 4,624
Retained earnings 3,952 4,188
Other comprehensive income, net of tax:
Net unrealized securities gains 683 579
Foreign currency translation adjustments (107) (97)
------- -------
Accumulated other comprehensive income 576 482
------- -------
Total shareholders' equity 9,403 9,574
------- -------
Total liabilities and shareholders' equity $120,914 $120,003
======= =======
See notes to Consolidated Financial Statements.
3
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
(Unaudited)
Nine Months Ended
September 30,
------------------
1998 1997
---- ----
Cash Flows from Operating Activities
Net income $1,611 $1,498
Adjustments to reconcile net income to
net cash provided by operating activities:
Provisions for losses and benefits 1,943 1,706
Depreciation, amortization, deferred taxes and
other (164) 200
Changes in operating assets and liabilities,
net of effects of acquisitions and dispositions:
Accounts receivable and accrued interest (37) 252
Other assets 571 (216)
Accounts payable and other liabilities 220 334
Increase in Travelers Cheques outstanding 544 305
Increase in insurance reserves 122 98
------ ------
Net cash provided by operating activities 4,810 4,177
------ ------
Cash Flows from Investing Activities
Sale of investments 1,464 1,564
Maturity and redemption of investments 4,837 3,479
Purchase of investments (6,705) (5,740)
Net increase in Cardmember receivables (599) (1,252)
Cardmember loans/receivables sold to Trust, net 1,683 516
Proceeds from repayment of loans 19,386 18,594
Issuance of loans (20,950) (21,049)
Purchase of land, buildings and equipment (237) (249)
Sale of land, buildings and equipment 22 136
(Acquisitions)dispositions, net of cash
acquired/sold (353) 9
------ ------
Net cash used by investing activities (1,452) (3,992)
------ ------
Cash Flows from Financing Activities
Net increase in customers' deposits 787 633
Sale of annuities and investment certificates 3,966 4,518
Redemption of annuities and investment
certificates (4,234) (3,859)
Net decrease in debt with maturities of 3 months
or less (348) (1,027)
Issuance of debt 6,388 9,421
Principal payments on debt (6,092) (6,719)
Issuance of Trust preferred securities 500 -
Issuance of American Express common shares 105 149
Repurchase of American Express common shares (1,619) (924)
Dividends paid (312) (318)
------ ------
Net cash (used) provided by financing activities (859) 1,874
Effect of exchange rate changes on cash (84) (122)
------ ------
Net increase in cash and cash equivalents 2,415 1,937
Cash and cash equivalents at beginning of period 4,179 2,677
------ ------
Cash and cash equivalents at end of period $6,594 $4,614
====== ======
See notes to Consolidated Financial Statements.
4
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1.Basis of Presentation
The consolidated financial statements should be read in conjunction with
the financial statements in the Annual Report on Form 10-K of American
Express Company (the Company or American Express) for the year ended
December 31, 1997. Significant accounting policies disclosed therein
have not changed. Certain reclassifications of prior period amounts
have been made to conform to the current presentation.
Cardmember Lending Net Finance Charge Revenue is presented net of
interest expense of $164 million and $154 million for the third quarter
of 1998 and 1997, respectively, and $487 million and $451 million for
the nine months ended September 30, 1998 and 1997, respectively.
Interest and Dividends is presented net of interest expense of
$145 million and $150 million for the third quarter of 1998 and 1997,
respectively, and $434 million and $438 million for the nine months
ended September 30, 1998 and 1997, respectively, related primarily to
the Company's international banking operations.
The interim financial information in this report has not been audited.
In the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position and the consolidated
results of operations for the interim periods have been made. All
adjustments made were of a normal, recurring nature. Results of
operations reported for interim periods are not necessarily indicative
of results for the entire year.
2.Accounting Developments
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
and No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
Comprehensive Income
---------------------
SFAS No. 130 requires the display of comprehensive income and its
components. Comprehensive income is defined as the aggregate change in
shareholders' equity, excluding changes in ownership interests. For the
Company, it is the sum of net income and changes in (i) unrealized gains
or losses on available-for-sale securities and (ii) foreign currency
translation adjustments. The components of comprehensive income, net of
related tax, for the three and nine month periods ended September 30,
1998 and 1997 were as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
(in millions) 1998 1997 1998 1997
------------- -------------
Net income $574 $524 $1,611 $1,498
Change in:
Unrealized gains (losses)
on securities 116 135 104 158
Foreign currency translation
adjustments (8) 10 (10) (8)
---- ---- ----- -----
Total $682 $669 $1,705 $1,648
==== ==== ===== =====
5
Segment Information
-------------------
SFAS No. 131 redefines operating segments based on management's internal
reporting structure. Accordingly, the Travelers Cheque operation, which
was previously included in the Travel Related Services (TRS) segment, is
now reported with American Express Bank (the Bank). Prior year amounts
have been reclassified as set forth below to conform with the
requirements of SFAS No. 131.
Net Revenues Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
(in millions) 1998 1997 1998 1997
------------------ -------------------
Travel Related Services $3,339 $3,083 $9,692 $8,978
American Express
Financial Advisors 1,247 1,169 3,750 3,396
American Express Bank/
Travelers Cheque 255 290 764 841
Corporate and Other (54) (42) (137) (129)
----- ----- ------ ------
Total $4,787 $4,500 $14,069 $13,086
===== ===== ====== ======
Net Income Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
(in millions) 1998 1997 1998 1997
----------------- ------------------
Travel Related Services $362 $310 $1,038 $883
American Express
Financial Advisors 211 184 609 524
American Express Bank/
Travelers Cheque 43 67 7 206
Corporate and Other (42) (37) (43) (115)
--- --- ----- -----
Total $574 $524 $1,611 $1,498
=== === ===== =====
3.Earnings per Share
The computations of basic and diluted earnings per common share (EPS)
for the three and nine months ended September 30, 1998 and 1997 are as
follows:
(in millions, except per Three Months Ended Nine Months Ended
share amounts) September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
Numerator for basic and
diluted EPS $574 $524 $1,611 $1,498
Denominator:
Denominator for basic EPS -
weighted-average shares 451.6 463.0 456.2 465.4
Effect of dilutive securities:
Stock Options and Restricted
Stock Awards 7.9 8.6 8.6 8.8
5% Exchangeable Lehman
Brothers Holdings, Inc.
Preferred Shares - 6.2 - 6.2
Other 0.1 0.1 0.1 0.1
----- ----- ----- -----
Potentially dilutive common
shares 8.0 14.9 8.7 15.1
----- ----- ----- -----
Denominator for diluted EPS 459.6 477.9 464.9 480.5
----- ----- ----- -----
Basic EPS $1.27 $1.13 $3.53 $3.22
----- ----- ----- -----
Diluted EPS $1.25 $1.10 $3.47 $3.12
----- ----- ----- -----
6
4.Investment Securities
The following is a summary of investments at September 30, 1998 and
December 31, 1997:
September 30, December 31,
(in millions) 1998 1997
------------- ------------
Held to Maturity, at amortized cost
(fair value: 1998, $11,189; 1997,
$12,429) $10,422 $11,871
Available for Sale, at fair value
(cost: 1998, $24,793; 1997, $22,816) 25,857 23,727
Investment mortgage loans (fair value:
1998, $4,138; 1997, $4,026) 3,845 3,831
Trading 241 219
------ ------
Total $40,365 $39,648
====== ======
5.Taxes and Interest
Net income taxes paid during the nine months ended September 30, 1998
and 1997 were approximately $606 million and $627 million, respectively.
Interest paid during the nine months ended September 30, 1998 and 1997
was approximately $1.9 billion and $1.8 billion, respectively.
6.Cumulative Quarterly Income Preferred Shares
On July 16, 1998, American Express Company Capital Trust I, a subsidiary
of the Company established as a Delaware statutory business trust (the
Trust), completed a public offering of 20,000,000 shares (carrying value
of $500 million) of 7.0% Cumulative Quarterly Income Preferred Shares
(QUIPS) (liquidation preference of $25 per share). Proceeds of the
issue were invested in Junior Subordinated Debentures issued by the
Company due 2028 which represent the sole assets of the Trust. The
QUIPS are subject to mandatory redemption upon repayment of the Junior
Subordinated Debentures at maturity or their earlier redemption. The
Company has the option to redeem the Junior Subordinated Debentures, in
whole or in part, at any time on or after July 16, 2003, which will
result in the redemption of a corresponding amount of QUIPS. The
Company used the proceeds from the Junior Subordinated Debentures for
general corporate purposes. Distributions on the QUIPS are reported as
interest expense in the Consolidated Statements of Income.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consolidated Results Of Operations For The Three and Nine Months Ended
September 30, 1998 and 1997
The Company's consolidated net income rose 9.5 percent and 7.5 percent in
the three and nine month periods ended September 30, 1998, respectively.
Diluted earnings per share increased 14 percent and 11 percent for the
three and nine month periods ended September 30, 1998, respectively. These
results were in line with the Company's long-term targets of: 12-15 percent
earnings per share growth and a return on equity of 18-20 percent. The
Company did not reach its target of at least an 8 percent increase in
revenue. Consolidated revenues were 6.4 percent higher for the three
months ended September 30, 1998, and 7.5 percent higher for the nine
months ended September 30, 1998, reflecting growth in discount revenue
and net finance charge revenue, higher travel commissions and fees and
higher management and distribution fees. Revenue growth slowed due to
the continuing economic downturn in Asia, which contributed to declines in
revenues at American Express Bank. In addition, for the third quarter,
lower revenue growth at AEFA resulted from the decline in U.S. equity
markets. Higher travel commissions and fees primarily resulted from
acquisitions during the quarter, which increased revenues and expenses
but did not have a material effect on net income. Consolidated expenses
rose, primarily due to higher expenses related to human resources and
marketing and promotion, and for the nine month period, a higher provision
for losses.
The 1998 nine month results include, in the first quarter, a $213 million
($138 million after-tax) credit loss provision at AEB relating to its
Asia/Pacific portfolio and income of $106 million ($78 million after-tax)
comprising a $60 million gain ($39 million after-tax) from sales of common
stock of First Data Corporation and a $46 million preferred stock dividend
($39 million after-tax) based on earnings from Lehman Brothers.
Consolidated Liquidity and Capital Resources
In the first nine months of 1998, the Company repurchased 16.9 million
common shares at an average price of $97.32 per share and canceled
19.1 million common shares under its repurchase program.
In July 1998, American Express Company Capital Trust I, a subsidiary of the
Company created as a Delaware statutory business trust (the Trust), sold
20,000,000 shares (carrying value of $500 million) of 7.0% Cumulative
Quarterly Income Preferred Shares (QUIPS) (liquidation preference of $25
per share). Proceeds of the issue, which represent the sole assets of the
Trust, were invested in Junior Subordinated Debentures issued by the
Company, due 2028. The Company used the proceeds from the Junior
Subordinated Debentures for general corporate purposes. (See Note 6 to
Consolidated Financial Statements for further information.)
8
Accounting Development
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective January 1, 2000.
This Statement establishes accounting and reporting standards for
derivative instruments, including certain ones which are embedded in other
contracts, and for hedging activities. It requires an entity to recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. Changes in the fair value of a
derivative will be recorded either in the Statement of Income or
Shareholders' Equity, depending on the intended use of the derivative.
Based on the derivatives the Company currently has, the adoption of this
Statement is not expected to have a material effect on net income.<F1>
However, the actual effect will depend on the derivatives the Company has
in place at the time of adoption.
Year 2000
The Year 2000 (Y2K) issue is the result of computer programs having been
written using two digits rather than four to define a year. Some programs
may recognize a date using "00" as the year 1900 rather than 2000. This
misinterpretation could result in the failure of major systems or
miscalculations, which could have a material impact on the Company and its
businesses or subsidiaries through business interruption or shutdown,
financial loss, reputational damage and legal liability to third parties.
The Company began addressing the Y2K issue in 1995 and has established a
plan for resolution, which involves the remediation, decommissioning and
replacement of relevant systems, including mainframe, mid-range and desktop
computers, application software, operating systems, systems software, date
back-up archival and retrieval services, telephone and other communications
systems, and hardware peripherals and facilities dependent on embedded
technology. As a part of our plan, we have generally followed and utilized
the specific policies and guidelines established by the Federal Financial
Institutions Examination Council, as well as other U.S. and international
regulatory agencies. Additionally, we continue to participate in Y2K
related industry consortia sponsored by various partners and suppliers.
Progress is reviewed regularly with the Company's senior management and
Board of Directors.
Our Y2K compliance effort related to information technology (IT) systems is
divided into two initiatives. The first, which is the much larger
initiative, is known internally as "Millenniax," and relates to mainframe
and other technological systems maintained by the American Express
Technologies organization (AET). The second, known as "Business T," relates
to the technological assets that are owned, managed or maintained by the
Company's individual business units. Business T also encompasses the
remediation of non-IT systems. These initiatives involve a substantial
number of employees and external consultants. This multiple sourcing
approach is intended to mitigate the risk of becoming dependent on any one
vendor or resource. While the vast majority of our systems that require
_______________________________
[FN]
This is a forward-looking statement which is subject to risks and
uncertainties. Important factors that could cause results to differ
materially from the forward-looking statement include, among other things,
unanticipated changes in the volume, type, use and price of derivatives
held by the Company.
</FN>
9
modification are being remediated, in some cases we have chosen to migrate
to new applications that are already Y2K compliant.
The Company's plans for remediation with respect to Millenniax and
Business T include the following program phases: (i) employee awareness and
mobilization, (ii) inventory collection and assessment, (iii) impact
analysis, (iv) remediation/decommission, (v) testing and (vi)
implementation. As part of the first three phases, we have identified the
Company's mission-critical systems for purposes of prioritization. The
Company's goals are to substantially complete remediation of critical
systems by the end of 1998, complete testing of those systems by early
1999, and to continue compliance efforts, including but not limited to, the
testing of systems on an integrated basis and independent validation of
such testing, through 1999.** We are currently on schedule to meet these
goals. With respect to systems maintained by the Company, the first three
phases referred to above have been substantially completed for both
Millenniax and Business T. As of October 31, 1998, for Millenniax, the
remediation/decommission, testing and implementation phases are
approximately 80%, 65% and 55% complete, respectively. For Business T,
such phases are approximately 70%, 55% and 55% complete, respectively.
Certain critical systems have already been made Y2K compliant, such as the
Worldwide Credit Authorization System, and we have completed testing of the
global point of sale infrastructure. As a result, we have begun issuing
Year 2000 dated charge and credit cards.
Our most commonly used methodology for remediation is the sliding window.
Once an application/system has been remediated, we apply specific types of
tests, such as stress, regression, unit, future date and baseline to ensure
that the remediation process has achieved Y2K compliance while maintaining
the fundamental data processing integrity of the particular system. To
assist with remediation and testing, we are using various standardized
tools obtained from a variety of vendors.
The Company's cumulative costs since inception of the Y2K initiatives were
$311 million through September 30, 1998 and are estimated to be in the
range of $210 - $235 million for the remainder through 2000. ** These
include both remediation costs and costs related to replacements that were
or will be required as a result of Y2K. These costs, which are expensed as
incurred, relate to both Millenniax and Business T, and have not had, nor
are they expected to have, a material adverse impact on the Company's
results of operations or financial condition.** Costs related to
Millenniax, which represent most of the total Y2K costs of the Company, are
managed by and included in the Corporate and Other segment; costs related
to Business T are included in the business segments. Y2K costs related to
Millenniax represent 15%, 5% and 1% of the AET budget for the years 1998,
1999 and 2000, respectively. Millenniax costs have been substantially
offset by an earnings payout from Travelers Inc. related to the 1993 sale
of the Shearson Lehman Brothers Division, sales of securities and
adjustment of valuation allowances related to certain corporate assets.
The Company has not deferred other critical technology projects or
investment spending as a result of Y2K. However, because the Company must
continually prioritize the allocation of finite financial and human
resources, certain non-critical spending initiatives have been deferred.
10
The Company's major businesses are heavily dependent upon internal computer
systems, and all have significant interaction with systems of third
parties, both domestically and internationally. The Company is working
with key external parties, including merchants, clients, counterparties,
vendors, exchanges, utilities, suppliers, agents and regulatory agencies to
mitigate the potential risks to us of Y2K. The failure of external parties
to resolve their own Y2K issues in a timely manner could result in a
material financial risk to the Company. As part of our overall compliance
program, the Company is actively communicating with third parties through
face-to-face meetings and correspondence, on an ongoing basis, to ascertain
their state of readiness. Although numerous third parties have indicated
to us in writing that they are addressing their Y2K issues on a timely
basis, the readiness of third parties overall varies across the spectrum.
Because the Company's Y2K compliance is dependent on key third parties
being compliant on a timely basis, there can be no assurances that the
Company's efforts alone will resolve all Y2K issues.
At this point, the Company has not completed its assessment of reasonably
likely Y2K systems failures and related consequences. However, the Company
is in the process of preparing specific Y2K contingency plans for all key
American Express business units to mitigate the potential impact of such
failures. This effort is a full-scale initiative that includes both
internal and external experts under the guidance of a Company-wide steering
committee. Our contingency plans, which will be based in part on an
assessment of the magnitude and probability of potential risks, will
primarily focus on proactive steps to prevent Y2K failures from occurring,
or if they should occur, to detect them quickly, minimize their impact and
expedite their repair. The Y2K contingency plans will supplement disaster
recovery and business continuity plans already in place, and are expected
to include measures such as selecting alternative suppliers and channels of
distribution, and developing our own technology infrastructure in lieu of
those provided by third parties. Development of the Y2K contingency plans
is expected to be substantially complete by the end of the first quarter of
1999, and will continue to be refined throughout 1999 as additional
information related to our exposures is gathered. **
Statements in this Y2K discussion marked with two asterisks are
forward-looking statements which are subject to risks and uncertainties.
Important factors that could cause results to differ materially from these
forward-looking statements include, among other things, the ability of the
Company to successfully identify systems containing two-digit codes, the
nature and amount of programming required to fix the affected systems, the
costs of labor and consultants related to such efforts, the continued
availability of such resources, and the ability of third parties that
interface with the Company to successfully address their Y2K issues.
11
Euro Conversion
On January 1, 1999, certain member countries of the European Union are
scheduled to establish fixed conversion rates between their local
currencies and the European Union's common currency (the euro). The Company
has established a comprehensive plan to achieve a successful and timely
transition to the euro. This plan, which is managed by a dedicated cross-
functional team of individuals, includes modifying our systems to comply
with related technological requirements, such as the need to prepare
customer statements, process transactions and accept payments in euros, and
taking certain operational steps to maintain our competitiveness in the
marketplace. Certain consequences have been identified as a result of the
euro conversion, including loss of foreign exchange revenues on
transactions between participating currencies and an increase in
competitive products offered by other financial institutions. At the same
time, conversion to the euro may create business opportunities, including
new fee generating products and services such as the euro travelers cheque,
and potential cost savings as business processes are consolidated and
reengineered. The transition to the euro, including related conversion
costs, which are expensed as incurred, has not had, nor is it expected to
have, a material adverse impact on the Company's results of operations or
financial condition.<F1>
_______________________________
[FN]
This is a forward-looking statement which is subject to risks and
uncertainties. Important factors that could cause results to differ
materially from the forward-looking statement include, among other things,
the ability of the Company and third parties it relies upon to remediate
systems in a timely and cost effective manner, and competitiveness of the
Company's new products in the euro market.
</FN>
12
Travel Related Services
Results of Operations For The Three and Nine Months Ended September 30,
1998 and 1997
Statement of Income
-------------------
(Unaudited)
(Dollars in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ Percentage ------------------ Percentage
1998 1997 Inc/(Dec) 1998 1997 Inc/(Dec)
------------------------------- -------------------------------
Net Revenues:
Discount Revenue $1,522 $1,422 7.0 % $4,476 $4,136 8.2 %
Net Card Fees 393 399 (1.3) 1,189 1,206 (1.4)
Travel Commissions and Fees 441 370 19.4 1,195 1,087 10.0
Other Revenues 645 574 12.2 1,847 1,639 12.7
Lending:
Finance Charge Revenue 502 472 6.3 1,472 1,361 8.2
Interest Expense 164 154 6.3 487 451 8.2
----- ----- ----- -----
Net Finance Charge Revenue 338 318 6.2 985 910 8.2
----- ----- ----- -----
Total Net Revenues 3,339 3,083 8.3 9,692 8,978 8.0
----- ----- ----- -----
Expenses:
Marketing and Promotion 310 290 7.1 829 718 15.6
Provision for Losses and Claims:
Charge Card 148 228 (35.4) 602 658 (8.5)
Lending 224 179 24.9 629 577 8.9
Other 17 14 31.8 41 43 (3.9)
----- ----- ----- -----
Total 389 421 (7.6) 1,272 1,278 (0.5)
----- ----- ----- -----
Charge Card Interest Expense 199 186 6.8 598 530 13.0
Net Discount Expense 170 142 20.3 480 458 4.8
Human Resources 924 776 19.1 2,554 2,271 12.5
Other Operating Expenses 793 799 (0.8) 2,377 2,377 -
----- ----- ----- -----
Total Expenses 2,785 2,614 6.6 8,110 7,632 6.3
----- ----- ----- -----
Pretax Income 554 469 18.0 1,582 1,346 17.5
Income Tax Provision 192 159 20.3 544 463 17.4
----- ----- ----- -----
Net Income $362 $310 16.9 $1,038 $ 883 17.6
===== ===== ===== =====
The following table, which is presented for analytical purposes only, presents the effect on the above Statement
of Income related to TRS' securitized receivables. It includes pretax gains of $36 million ($23 million after-tax)
and $37 million ($24 million after-tax) in the second quarter of 1998 and the third quarter of 1997, respectively,
related to the securitizations of U.S. receivables, which were recognized in accordance with Statement of Financial
Accounting Standards No. 125. These gains were invested in additional Marketing and Promotion expenses which have
also been included in the table below and had no material effect on net income or total expenses in either quarter.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1998 1997 1998 1997
------------------- -----------------
(Decrease) Increase in Net Card Fees $(2) $(4) $4 $(5)
Increase in Other Revenues 83 60 238 154
Decrease in Lending Finance Charge Revenue (134) (76) (343) (171)
Decrease in Lending Interest Expense 45 23 112 57
Increase in Marketing and Promotion Expense - (37) (36) (37)
Decrease in Provision for Losses and Claims:
Charge Card 76 56 201 193
Lending 39 64 133 91
Decrease in Charge Card Interest Expense 63 56 171 176
Increase in Net Discount Expense (170) (142) (480) (458)
----- ----- ----- -----
Pretax Income $ - $ - $ - $ -
===== ===== ===== =====
13
Travel Related Services
Selected Statistical Information
--------------------------------
(Unaudited)
(Amounts in billions, except where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- Percentage --------------------- Percentage
1998 1997 Inc/(Dec) 1998 1997 Inc/(Dec)
--------------------------------- ---------------------------------
Total Cards in Force (millions):
United States 29.5 29.6 (0.3)% 29.5 29.6 (0.3)%
Outside the United States 14.6 12.8 13.8 14.6 12.8 13.8
---- ---- ---- ----
Total 44.1 42.4 4.0 44.1 42.4 4.0
==== ==== ==== ====
Basic Cards in Force (millions):
United States 23.3 23.2 0.6 23.3 23.2 0.6
Outside the United States 11.3 9.8 14.5 11.3 9.8 14.5
---- ---- ---- ----
Total 34.6 33.0 4.7 34.6 33.0 4.7
==== ==== ==== ====
Card Billed Business:
United States $41.5 $38.0 9.1 $121.4 $109.8 10.5
Outside the United States 15.2 14.7 3.6 44.7 42.7 4.7
---- ---- ----- -----
Total $56.7 $52.7 7.6 $166.1 $152.5 8.9
==== ==== ===== =====
Average Discount Rate* 2.72% 2.72% - 2.73% 2.74% -
Average Basic Cardmember
Spending (dollars)* $1,704 $1,616 5.4 $5,026 $4,734 6.2
Average Fee per Card (dollars)* $37 $38 (2.6) $38 $39 (2.6)
Travel Sales $5.1 $4.2 22.8 $14.3 $12.6 14.0
Travel Commissions and Fees/Sales** 8.6% 8.8% - 8.4% 8.6% -
Owned and Managed Charge Card
Receivables:
Total Receivables $23.3 $22.5 3.2 $23.3 $22.5 3.2
90 Days Past Due as a % of Total 2.7% 3.2% - 2.7% 3.2% -
Loss Reserves (millions) $961 $970 (0.9) $961 $970 (0.9)
% of Receivables 4.1% 4.3% - 4.1% 4.3% -
% of 90 Days Past Due 151% 133% - 151% 133% -
Net Loss Ratio 0.48% 0.52% - 0.47% 0.51% -
Owned and Managed U.S. Cardmember
Lending:
Total Loans $15.4 $13.5 14.1 $15.4 $13.5 14.1
Past Due Loans as a % of Total:
30-89 Days 2.2% 2.5% - 2.2% 2.5% -
90+ Days 1.0% 1.1% - 1.0% 1.1% -
Loss Reserves (millions):
Beginning Balance $577 $534 8.1 $589 $488 20.8
Provision 236 220 7.0 676 620 9.0
Net Charge-Offs/Other (234) (198) 17.9 (686) (552) 24.3
---- ---- ---- ----
Ending Balance $579 $556 4.1 $579 $556 4.1
==== ==== ==== ====
% of Loans 3.8% 4.1% - 3.8% 4.1% -
% of Past Due 118% 115% - 118% 115% -
Average Loans $15.2 $13.4 13.5 $14.6 $13.1 11.4
Net Write-Off Rate 6.4% 6.5% - 6.5% 5.9% -
Net Interest Yield 9.6% 9.4% - 9.5% 9.0% -
Note: Owned and managed Cardmember receivables and loans include securitized
assets not reflected in the consolidated balance sheet.
* Computed excluding Cards issued by strategic alliance partners and
independent operators as well as business billed on those Cards.
** Computed from information provided herein.
14
Travel Related Services
Travel Related Services' (TRS) net income rose 17 percent and 18 percent
for the three and nine months ended September 30, 1998, respectively,
compared with a year ago. Net revenues increased 8 percent in both
periods, reflecting higher billed business in the United States and
internationally, and growth in cardmember loans and travel commissions and
fees. In the second quarter of 1998 and the third quarter of 1997, TRS
recognized pretax gains of $36 million ($23 million after-tax) and $37
million ($24 million after-tax), respectively, from the securitizations of
U.S. receivables; this treatment is required by Statement of Financial
Accounting Standards No. 125. These gains were invested in additional
Marketing and Promotion expenses and had no material effect on net
income or total expenses in either period.
The improvement in discount revenue resulted from higher billed business,
which arose from a greater number of cards outstanding and higher spending
per basic Cardmember. The increase in Cardmember spending is due in part
to the benefits of rewards programs and expanded merchant coverage. This
increase came despite the slowdown in many international markets and
general tightening by corporations of travel and entertainment expenses.
Travel commissions and fees were higher, primarily due to acquisitions
during the third quarter, which increased revenues and expenses but did not
have a material effect on earnings.
Lending net finance charge revenue, excluding securitizations, rose by 15
percent and 19 percent for the three and nine months ended September 30,
1998, respectively, compared with a year ago. The increase for the third
quarter was largely due to the growth in worldwide lending balances, while
the nine month increase reflects both higher worldwide lending balances and
wider interest margins.
Provisions for losses on charge cards declined for the three and nine
months ended September 30, 1998 primarily as a result of improved loss
rates. Provisions for the lending portfolio rose for both periods. For the
third quarter, this increase was largely due to the positive effect of
securitizing a portion of the portfolio a year ago, and a higher level of
loans outstanding. For the nine-month period, this growth was primarily
volume driven, as the effect of the 1998 and 1997 securitizations are
approximately the same. Human resource expenses increased as a result of
higher employee levels, in part due to third quarter acquisitions, merit
increases and greater contract programmer costs for technology related
projects. Other operating expenses were essentially flat, with higher
costs for loyalty programs mitigated by the benefits of ongoing cost
containment efforts. Also included in other operating expenses for the
third quarter was a gain related to the formation of an international
joint venture, which was offset by additional business building initiatives.
15
Travel Related Services
Liquidity and Capital Resources
Selected Balance Sheet Information
----------------------------------
(Unaudited)
(Dollars in billions, except percentages)
September 30, December 31, Percentage September 30, Percentage
1998 1997 Inc/(Dec) 1997 Inc/(Dec)
----------------------------------------- --------------------------
Accounts Receivable, net $19.9 $20.5 (2.8)% $19.0 4.6%
U.S. Cardmember Loans $12.4 $12.6 (1.4) $11.5 7.8
Total Assets $42.4 $40.7 4.2 $38.6 10.0
Short-term debt $21.5 $20.9 2.5 $19.2 12.0
Long-term debt $5.4 $6.0 (9.1) $6.1 (10.4)
Total Liabilities $37.2 $36.1 3.2 $33.7 10.6
Total Shareholder's Equity $5.2 $4.6 11.5 $4.9 5.6
Return on Average Equity* 27.1% 25.1% - 24.8% -
Return on Average Assets* 3.3% 3.0% - 3.1% -
* Computed based on the past twelve months of net income and excludes the
effect of SFAS No. 115. September 30, 1997 also excludes a fourth quarter
1996 restructuring charge of $125 million (after-tax).
In February 1998, American Express Credit Corporation (Credco), a wholly
owned subsidiary of TRS, issued $150 million 1.125% Cash Exchangeable Notes
due February, 2003. These Notes are exchangeable for an amount in cash
which is linked to the price of the common stock of the Company. Credco
has entered into hedging agreements designed to fully hedge its obligations
under these Notes.
In May 1998, the American Express Master Trust issued an additional $1
billion Class A Fixed Rate Accounts Receivable Trust Certificates. The
securitized assets consist of receivables generated under designated
American Express Card, Gold Card, and Platinum Card consumer accounts. In
September 1998, $300 million Class A Fixed Rate Accounts Receivable Trust
Certificates matured from the charge card securitization portfolio.
In June 1998, the American Express Credit Account Master Trust (the Trust)
securitized an additional $1 billion of loans through the public issuance
of two classes of investor certificates and a privately placed collateral
interest in the assets of the Trust. The securitized assets consist of
loans arising in a portfolio of designated Optima Card, Optima Line of
Credit and Sign and Travel revolving credit accounts owned by American
Express Centurion Bank, a wholly owned subsidiary of TRS.
16
American Express Financial Advisors
Results of Operations For The Three and Nine Months Ended September 30,
1998 and 1997
Statement of Income
-------------------
(Unaudited)
(Amounts in millions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ Percentage ------------------ Percentage
1998 1997 Inc/(Dec) 1998 1997 Inc/(Dec)
-------------------------------- ---------------------------------
Revenues:
Investment Income $573 $587 (2.4)% $1,790 $1,744 2.6%
Management and Distribution Fees 476 391 21.8 1,376 1,082 27.1
Other Revenues 198 191 3.6 584 570 2.5
----- ----- ----- -----
Total Revenues 1,247 1,169 6.6 3,750 3,396 10.4
----- ----- ----- -----
Expenses:
Provision for Losses and Benefits:
Annuities 280 307 (8.9) 868 917 (5.3)
Insurance 122 114 7.6 365 331 10.1
Investment Certificates 43 48 (9.8) 174 147 18.5
----- ----- ----- -----
Total 445 469 (5.0) 1,407 1,395 0.9
----- ----- ----- -----
Human Resources 360 313 14.8 1,060 907 16.9
Other Operating Expenses 134 126 6.5 395 332 19.0
----- ----- ----- -----
Total Expenses 939 908 3.4 2,862 2,634 8.7
----- ----- ----- -----
Pretax Income 308 261 17.7 888 762 16.5
Income Tax Provision 97 77 25.3 279 238 17.0
----- ----- ----- -----
Net Income $211 $184 14.6 $609 $524 16.2
===== ===== ===== =====
17
American Express Financial Advisors
Selected Statistical Information
--------------------------------
(Unaudited)
(Amounts in millions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- Percentage -------------------- Percentage
1998 1997 Inc/(Dec) 1998 1997 Inc/(Dec)
------------------------------- ----------------------------------
Revenues, Net of Provisions $802 $701 14.4% $2,343 $2,001 17.1%
Investments (billions) $30.8 $29.9 3.0 $30.8 $29.9 3.0
Client Contract Reserves (billions) $30.2 $29.8 1.3 $30.2 $29.8 1.3
Shareholder's Equity (billions) $4.1 $3.6 14.4 $4.1 $3.6 14.4
Return on Average Equity* 22.4% 21.6% - 22.4% 21.6% -
Life Insurance in force (billions) $79.2 $72.8 8.9 $79.2 $72.8 8.9
Deferred Annuities in force (billions) $39.6 $40.6 (2.5) $39.6 $40.6 (2.5)
Assets Owned, Managed or Administered
(billions):
Assets managed for institutions $40.5 $41.0 (1.0) $40.5 $41.0 (1.0)
Assets owned, managed or administered
for individuals:
Owned Assets:
Separate Account Assets 23.0 23.2 (0.8) 23.0 23.2 (0.8)
Other Owned Assets 37.0 36.0 2.6 37.0 36.0 2.6
----- ----- ------ ------
Total Owned Assets 60.0 59.2 1.3 60.0 59.2 1.3
Managed Assets 76.8 71.5 7.4 76.8 71.5 7.4
Administered Assets 11.2 7.4 50.0 11.2 7.4 50.0
------ ------ ------ ------
Total $188.5 $179.1 5.2 $188.5 $179.1 5.2
====== ====== ====== ======
Market Appreciation (Depreciation) During
the Period:
Owned Assets:
Separate Account Assets $(3,712) $1,843 - $(741) $3,559 -
Other Owned Assets $91 $195 (52.7) $133 $216 (38.5)
Total Managed Assets $(10,595) $5,368 - $(706) $12,150 -
Sales of Selected Products:
Mutual Funds $5,262 $4,496 17.0 $15,830 $12,616 25.5
Annuities $648 $861 (24.7) $2,002 $2,678 (25.3)
Investment Certificates $560 $295 89.4 $1,400 $771 81.7
Life and Other Insurance Products $102 $103 (1.2) $289 $306 (5.5)
Number of Financial Advisors** 10,060 8,592 17.1 10,060 8,592 17.1
Fees from Financial Plans (millions) $15.6 $15.5 0.4 $54.0 $44.1 22.5
Product Sales Generated from Financial
Plans as a Percentage of Total Sales 65.4% 66.5% - 65.0% 65.8% -
* Computed based on the past twelve months of net income and excludes the
effect of SFAS No. 115.
** Includes 1,105 advisors from the acquisition of Securities America in the
first quarter of 1998.
18
American Express Financial Advisors
American Express Financial Advisors' (AEFA) revenue and earnings growth for
the three and nine month periods ended September 30, 1998 was due to higher
management fees from increased managed asset levels and greater
distribution fees driven by mutual fund sales and higher asset levels.
Managed assets rose since the prior year due to net sales, offset in part
by market depreciation during the third quarter of 1998.
Investment income reflects higher asset levels, partially offset by lower
yields in the third quarter. Other revenues benefited from higher life
insurance premiums.
The provision for annuities declined due to lower in-force levels and
accrual rates. The provision for insurance benefits rose, reflecting
greater policies in force and unfavorable claims experience in life
insurance. The increased provision for investment certificates reflects
higher in-force levels and accrual rates. This increase was offset by a
decline in the provision for the stock market certificate product during
the quarter, which was offset by a corresponding reduction in investment
income, with minimal impact on net income.
Human resource expenses rose as a result of a volume-driven increase in
advisors' compensation reflecting growth in sales and asset levels. The
rise in other operating expenses is due to increased spending on systems
technology, advertising and other costs related to higher business volumes.
19
American Express Financial Advisors
Liquidity and Capital Resources
Selected Balance Sheet Information
---------------------------------
(Unaudited)
(Amounts in billions, except percentages)
September 30, December 31, Percentage September 30, Percentage
1998 1997 Inc/(Dec) 1997 Inc/(Dec)
------------ ----------- ---------- ------------ ----------
Investments $30.8 $30.7 0.3% $29.9 3.0%
Separate Account Assets $23.0 $23.2 (0.8) $23.2 (0.8)
Total Assets $60.0 $59.8 0.3 $59.2 1.3
Client Contract Reserves $30.3 $30.2 0.3 $29.8 1.3
Total Liabilities $55.9 $56.1 (0.4) $55.6 0.4
Total Shareholder's Equity $4.1 $3.7 10.7 $3.6 14.4
Return on Average Equity* 22.4% 21.8% - 21.6% -
* Computed based on the past twelve months of net income and excludes the effect
of SFAS No. 115.
Separate account assets and liabilities were relatively unchanged since
December 31, 1997 as net sales were offset by market depreciation.
20
American Express Bank/Travelers Cheque (AEB/TC)
Results of Operations For The Three and Nine Months Ended September 30, 1998
and 1997
Statement of Income
-------------------
(Unaudited)
(Amounts in millions, except percentages)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- Percentage ----------------- Percentage
1998 1997 Inc/(Dec) 1998 1997 Inc/(Dec)
------------------------------ ----------------------------
Net Revenues:
Interest Income $217 $230 (6.0)% $645 $674 (4.4)%
Interest Expense 143 148 (3.2) 429 431 (0.7)
---- ---- ---- ----
Net Interest Income 74 82 (11.0) 216 243 (11.0)
Travelers Cheque Investment Income 88 87 0.9 248 251 (1.3)
Foreign Exchange Income 30 23 29.7 113 63 79.6
Commissions, Fees and Other Revenues 63 98 (34.3) 187 284 (34.3)
---- ---- ---- ----
Total Net Revenues 255 290 (12.0) 764 841 (9.2)
---- ---- ---- ----
Expenses:
Human Resources 83 76 8.2 236 225 5.1
Other Operating Expenses 140 139 1.4 402 393 2.0
Provision for Losses 12 16 (26.5) 257 33 #
---- ---- ---- ----
Total Expenses 235 231 1.8 895 651 37.3
---- ---- ---- ----
Pretax Income/(Loss) 20 59 (66.1) (131) 190 -
Income Tax Benefit (23) (8) # (138) (16) #
---- ---- ---- ----
Net Income $43 $67 (35.5) $7 $206 (96.5)
==== ==== ==== ====
Selected Statistical Information
--------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ Percentage ----------------- Percentage
1998 1997 Inc/(Dec) 1998 1997 Inc/(Dec)
----------------------------- ----------------------------
American Express Bank:
Assets Managed / Administered * $5.7 $5.1 12.1% $5.7 $5.1 12.1%
Assets of Non-Consolidated Joint
Ventures $2.4 $1.6 50.6 $2.4 $1.6 50.6
Travelers Cheque:
Sales $7.8 $8.1 (3.0) $19.0 $19.8 (3.8)
Average Outstanding $6.4 $6.4 0.3 $6.0 $6.0 (0.3)
Average Investments $6.1 $6.0 2.0 $5.7 $5.7 0.9
Tax equivalent yield 8.8% 9.0% - 9.0% 9.2% -
# Denotes variance of more than 100%.
* Includes assets managed by American Express Financial Advisors.
21
American Express Bank/Travelers Cheque (AEB/TC)
Net income declined for the three and nine month periods ended September
30, 1998. The nine month period ended September 30, 1998 included a $213
million ($138 million after-tax) credit loss provision related to AEB's
business in the Asia/Pacific region, particularly Indonesia. The prior
year's results included approximately $24 million ($16 million after-tax)
in each quarter related to increased recognition of recoveries on abandoned
property related to the TC business. These recoveries are included in
commissions, fees and other revenues.
The continuing economic downturn in Asia contributed to reduced net
interest income and commissions, fees and other revenues. This decline
was partly offset by higher foreign exchange trading revenues, primarily in
Asia.
22
American Express Bank/Travelers Cheque (AEB/TC)
Liquidity and Capital Resources
Selected Balance Sheet Information
----------------------------------
(Unaudited)
(Amounts in billions, except percentages and where indicated)
September 30, December 31, Percentage September 30, Percentage
1998 1997 Inc/(Dec) 1997 Inc/(Dec)
------------- ------------ ----------- ------------- -----------
Travelers Cheque Investments $6.5 $5.9 9.1% $6.2 4.0%
Total Loans $6.1 $6.2 (1.2) $6.5 (6.3)
Total Nonperforming Loans (millions) $239 $47 # $60 #
Other Nonperforming Assets (millions) $92 $11 # $5 #
Reserve for Credit Losses (millions)* $348 $137 # $129 #
Loan Loss Reserves as a
Percentage of Total Loans 4.6% 2.1% - 1.9% -
Total Assets $19.2 $19.7 (2.3) $20.1 (4.4)
Deposits $8.7 $8.5 1.7 $9.0 (3.5)
Travelers Cheques Outstanding $6.2 $5.6 9.3 $6.1 0.4
Total Liabilities $18.0 $18.4 (2.3) $18.9 (4.8)
Total Shareholder's Equity (millions) $1,210 $1,248 (3.0) $1,203 0.6
Return on Average Assets** 0.39% 1.40% - 1.35% -
Return on Average Common Equity** 8.1% 28.7% - 27.5% -
Risk-Based Capital Ratios:
Tier 1 9.4% 8.8% - 8.6% -
Total 12.2% 12.3% - 11.6% -
Leverage Ratio 5.6% 5.3% - 5.4% -
# Denotes variance of more than 100%.
* Allocation:
Loans $279 $131 $127
Other Assets, primarily derivatives 66 6 2
Other Liabilities 3 - -
---- ---- ---
Total Credit Loss Reserves $348 $137 $129
==== ==== ===
** Computed based on the past twelve months of net income and excludes the
effect of SFAS No. 115.
AEB/TC total assets declined from year end primarily due to lower unrealized
gains on foreign exchange and derivatives contracts in Asia. As presented in the
table below, AEB had approximately $6.1 billion outstanding in worldwide loans
at September 30, 1998, down from $6.2 billion at December 31, 1997. Within these
total loans, consumer and private banking loans increased approximately $0.3
billion, largely in the Asia/Pacific region. This increase was offset by a
decline primarily in commercial loans. In addition, there are other banking
activities, such as securities, unrealized gains on foreign exchange and
derivative contracts, various contingencies and market placements, which added
approximately $7.7 billion to AEB's credit exposures at September 30, 1998
(compared with $8.1 billion at December 31, 1997). The decline in these other
exposures from year end mainly reflects lower exposures in the Asia/Pacific
region. American Express has taken steps to ensure that AEB remains well
capitalized, as defined by regulatory guidelines. In April 1998, American
Express purchased $225 million of deferred tax assets from AEB, thereby reducing
non-qualifying assets and increasing regulatory capital. American Express
expects to be able to utilize these deferred tax assets over time within its
consolidated tax return and, therefore, realize full value.
23
American Express Bank
Exposures By Country and Region
(Unaudited)
($ in billions)
Net
FX Guarantees 9/30/98 12/31/97
and and Total Total
Country Loans Derivatives Contingents Other Exposure* Exposure*
-------- ----- ----------- ----------- ----- -------- ---------
(A) (B) (B)
Hong Kong $1.0 - $0.1 $0.1 $1.2 $1.0
Indonesia 0.3 $0.1 0.1 0.1 0.5 0.9
Singapore 0.4 - 0.1 - 0.6 0.6
Korea 0.2 - 0.1 0.2 0.4 0.7
Taiwan 0.3 0.1 0.1 0.1 0.6 0.5
China 0.1 - - - 0.1 0.1
Japan - - - - 0.1 0.2
Thailand - - - - - 0.1
Other 0.1 - - 0.1 0.2 0.2
Total Asia/ --- --- --- --- ---- ----
Pacific Region* 2.4 0.2 0.5 0.6 3.7 4.3
--- --- --- --- ---- ----
Chile 0.4 - - 0.1 0.5 0.5
Brazil 0.3 - - 0.1 0.4 0.5
Mexico 0.1 - - - 0.1 0.1
Peru 0.1 - - - 0.1 0.1
Argentina 0.1 - - - 0.1 0.1
Other 0.2 - - 0.1 0.3 0.2
Total Latin --- --- --- --- ---- ----
America* 1.2 - - 0.4 1.6 1.5
--- --- --- --- ---- ----
India 0.3 - 0.1 0.4 0.8 1.0
Pakistan 0.1 - - 0.1 0.2 0.5
Other 0.1 - 0.1 0.1 0.3 0.3
Total Sub --- --- --- --- ---- ----
Continent* 0.5 - 0.2 0.6 1.3 1.7
--- --- --- --- ---- ----
Egypt 0.5 - - 0.3 0.8 0.7
Other 0.1 - 0.2 - 0.3 0.3
Total Middle --- --- --- --- ---- ----
East & Africa* 0.6 - 0.2 0.3 1.1 0.9
--- --- --- --- ---- ----
Total Europe 1.1 0.1 1.2 2.1 4.5(C) 3.9
Total North
America - 0.1 0.1 1.4 1.6 1.9
--- --- --- --- ---- ----
Total
Worldwide* $6.1 $0.4 $2.0 $5.3 $13.8 $14.3
=== === === === ==== ====
* Individual items may not add to totals due to rounding.
(A) Includes cash, placements and securities.
(B) Includes cross-border and local exposures and does not net local funding
or liabilities against any local exposure as allowed by the Federal
Financial Institutions Examination Council (FFIEC).
(C) Includes $35 million of exposures to Russia.
24
Corporate and Other
Corporate and Other had net expenses of $42 million and $43 million for the
three months and nine months ended September 30, 1998, respectively,
compared with net expenses of $37 million and $115 million in the same
periods last year. Included in Other Expenses for the nine months ended
September 30, 1998 is income in the first quarter of $106 million ($78
million after-tax) comprising a $60 million gain ($39 million after-tax)
from sales of common stock of First Data Corporation and a $46 million
preferred stock dividend ($39 million after-tax) based on earnings from
Lehman Brothers.
25
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Shareholders and Board of Directors
American Express Company
We have reviewed the accompanying consolidated balance sheet of American
Express Company (the "Company") as of September 30, 1998 and the related
consolidated statements of income for the three and nine-month periods
ended September 30, 1998 and 1997 and consolidated statements of cash
flows for the nine-month periods ended September 30, 1998 and 1997. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of expressing an
opinion regarding the consolidated financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for the year then ended (not presented herein), and
in our report dated February 5, 1998, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 1997
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/Ernst & Young LLP
New York, New York
November 13, 1998
26
PART II. OTHER INFORMATION
AMERICAN EXPRESS COMPANY
Item 1. Legal Proceedings
On December 13, 1996, an action entitled LESA BENACQUISTO AND DANIEL
BENACQUISTO V. IDS LIFE INSURANCE COMPANY ("IDS LIFE") AND AMERICAN EXPRESS
FINANCIAL CORPORATION was commenced in Minnesota state court. The action is
brought by individuals who replaced an existing IDS Life insurance policy with
a new IDS Life policy. The plaintiffs purport 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 puts at issue various
alleged sales practices and misrepresentations, alleged breaches of fiduciary
duties and alleged violations of consumer fraud statutes. Plaintiffs seek
damages in an unspecified amount and also seek to establish a claims resolution
facility for the determination of individual issues. IDS Life and American
Express Financial Corporation filed an answer to the complaint on
February 18, 1997, denying the allegations. A second action, entitled 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. In addition to claims that are included in the
Benacquisto lawsuit, the second action includes an allegation of improper
replacement of an existing IDS Life annuity contract. It seeks similar relief
to the initial lawsuit. A third action, 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 filed in the same court on October 13, 1998 alleging that the
sale of annuities in tax-deferred contributory retirement investment plans
(e.g. IRAs) is never appropriate. Plaintiffs seek damages in an unspecified
amount, including restitution of allegedly lost investment earnings and
restoration of contract values.
The first two matters described above were previously reported in the
registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page E-1 hereof.
(b) Reports on Form 8-K:
Form 8-K, dated July 27, 1998, Item 5, relating to the
registrant's earnings for the quarter ended June 30, 1998.
Form 8-K, dated August 5, 1998, Item 5, reporting certain
information from speeches presented by Harvey Golub, the
Company's Chairman and Chief Executive Officer, and Steve
Alesio, President of American Express Small Business
Services, on August 5, 1998, to the financial community.
Form 8-K, dated October 26, 1998, Item 5, relating to
the registrant's earnings for the quarter ended
September 30, 1998.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMERICAN EXPRESS COMPANY
------------------------
(Registrant)
Date: November 13, 1998 By /s/ Richard Karl Goeltz
-----------------------
Richard Karl Goeltz
Vice Chairman and
Chief Financial Officer
Date: November 13, 1998 By /s/ Daniel T. Henry
-----------------------
Daniel T. Henry
Senior Vice President and
Comptroller
(Chief Accounting Officer)
28
EXHIBIT INDEX
-------------
The following exhibits are filed as part of this Quarterly Report:
Exhibit Description
------- -----------
12 Computation in Support of Ratio of Earnings to Fixed Charges.
15 Letter re Unaudited Interim Financial Information.
27 Financial Data Schedule.
E-1