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American Express Company 2001 Annual Report
re:2001
American Express Company Annual Report

Table of contents

  • Page 1
    re:2001 American Express Company Annual Report American Express Company 2 0 01 Annual Report

  • Page 2
    ... REPORT, WHICH GENERALLY INCLUDE THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "OPTIMISTIC," "INTEND," "AIM," "WILL," "SHOULD," "COULD" AND SIMILAR EXPRESSIONS. CERTAIN FACTORS THAT MAY AFFECT THESE FORWARD-LOOKING STATEMENTS, INCLUDING AMERICAN EXPRESS COMPANY'S ABILITY TO ACHIEVE ITS GOALS REFERRED...

  • Page 3
    WE D E D I C AT E THIS ANNUAL REPORT TO THE MEMORY OF OUR 11 AMERICAN EXPRESS COLLEAGU ES WHO DIED IN THE AT TA C K S ON THE WORLD TRADE CENTER ON SEPTEMBER 11: YVONNE BONOMO ❚ G E N NADY B O YA R S K Y ❚ LUCY C R I FA S I ❚ BRIDGET E S P O S ITO LISA K E A R N...

  • Page 4
    ... of Shareholders' Equity (b) (c) Net revenues (managed basis) are total revenues as reported under U.S. Generally Accepted Accounting Principles (GAAP), net of American Express Financial Advisors' provision for losses and benefits, and exclude the effects of Travel Related Services' asset...

  • Page 5
    2001 was a year unlike any other in American Express Company's history. The nature and magnitude of the challenges we faced were unprecedented. As we have throughout our history, we are resolving these challenges with resilience and strength. We did not meet our long-term financial objectives. We ...

  • Page 6
    To our shareholders: In many ways, 2001 was one of the most challenging years American Express has seen in its 151-year history. During the first half of the year, we were confronted with a weakening economy, depressed equity markets, historically high default rates for high-yield securities and a ...

  • Page 7
    ...year, we are reducing our staffing levels by approximately 16 percent or 14,500 jobs; and $350 T O TA L R E T U R N T O S H A R E H O L D E R S Cumulative Value of $100 invested on December 31, 1996 ❚ American Express ❚ S&P financial index ❚ S&P 500 index ❚ The one-time costs and business...

  • Page 8
    ... generally in line with that of our competitors, particularly diversified financial companies and financial services firms. Several key business indicators - notably lending balances, consumer billings and earnings from our financial services business (excluding high-yield losses and related charges...

  • Page 9
    ... in AEFA's high-yield investment portfolio, ensuring strong reserve ratios for our card businesses, adding to the reserves related to credit exposures for merchants in the travel industry, and significantly shifting American Express Bank's (AEB) loan exposure away from corporate lending to consumer...

  • Page 10
    ... Throughout 2001, weak equity markets led to lower asset levels and lower sales of investment products. As a result, assets owned, managed or administered by American Express Financial Advisors declined 8 percent. AEFA reported net income for 2001 of $52 million, down from $1.03 billion a year ago...

  • Page 11
    ... and sales of our annuity products decreased 4 percent. Net new money flowing into managed accounts continued to remain positive, however, despite the difficult economic environment. A M E R I CA N E X P R E S S BA N K AEB reported a 2001 net loss of $13 million in 2001, compared with net income...

  • Page 12
    ...re:positioning American Express for long-term, sustainable growth. Our progress in this area continued during 2001 with the signings of several key merchants outside the travel and entertainment industries, including Pathmark Supermarkets, REI (sporting goods), PayPal (online payment service) and...

  • Page 13
    ...short-term economic swings. Lending products, on the other hand, produce revenues as customers build up loan balances and pay them down over time. When credit exposure is managed prudently, the interest revenue from these products tends to be a less volatile source of earnings. At year-end 2001, our...

  • Page 14
    ...mail or in person. An example of this is American Express @ Work®, our desktop portal that helps our business customers manage their Corporate Card and Corporate Purchasing Card programs online. Just two years after its launch in the United States, American Express @ Work now handles more than half...

  • Page 15
    ... base over the past several years. We are also seeing strong results from our partnership with British Airways, which led to the 2001 launch of three new cobrand credit cards for British Airways UK Executive Club members. Membership Rewards , American Express' industry-leading loyalty program, has...

  • Page 16
    .... to convert their distributors to American Express, we achieved the largest new seller signing in the history of our Travelers Cheque business. Further expanding our potential sales volume are our agreements with HSBC, which began selling our products globally in early 2002, U.S. Bancorp, Australia...

  • Page 17
    ... commissions paid by suppliers such as airlines or hotels. Starting in the mid 1990s, however, the airlines sharply reduced their commission rates. In response, we redesigned the business and now rely on customers to pay transaction fees for our travel services, rather than having our revenue based...

  • Page 18
    ... of past due balances in excess of 100 percent. To reduce the risk associated with merchant bankruptcies in a difficult economy - particularly in the travel industry where merchants may be paid by American Express prior to rendering the actual services to cardmembers - we hold reserves to cover...

  • Page 19
    ..., moderate and long terms. EXPANDING OUR CARD BUSINESS IN INTERNATIONAL MARKETS In the consumer, small business and commercial card areas, we are investing significant resources in a number of key international markets. Many countries have much lower charge and credit card usage rates than those in...

  • Page 20
    ... the world for helping companies manage their travel, entertainment and purchasing expenses. Worldwide, we have card relationships with more than 100,000 firms, and the total keeps growing. For example, we introduced our Corporate Purchasing Card in a number of key international markets, signing on...

  • Page 21
    ...participating American Express Travel Service locations. In addition, we are strengthening the appeal of our premium products - the Centurion Card and Platinum Card and Equinox Fitness Clubs. ® ® OPEN: The Small Business Network SM signals our broadened commitment to helping small business owners...

  • Page 22
    ... to helping small business owners succeed. The campaign underscored the greater control over payment and financing that we provide customers. In the commercial card area, we serve about 70 percent of the Fortune 500 U.S. companies. We have a strong presence among middle-market companies (those with...

  • Page 23
    ...our long-term financial targets is not predicated on U.S. banks being able to issue cards on our network. GROWING RETAIL FINANCIAL SERVICES As part of our long-term vision, we aim to make American Express as well known and successful in financial services as we are in the card and travel businesses...

  • Page 24
    ... this year. American Express Platinum Financial Services - a new offering targeted to affluent clients - provides a variety of personalized, premium products and services, such as advice on tax-advantaged investing, estate planning, trusts and charitable giving, as well a fee-waived Platinum Card...

  • Page 25
    ..., including the hiring of a new chief investment officer, research director, head of risk and, early in 2002, adding several new investment managers to our team. American Express Bank is another key element in our strategy to grow our retail financial services business. As cited earlier, we have...

  • Page 26
    ... relocate our New York staff to a number of interim facilities. We decided, however, to return to New York. American Express Tower has been our company's home for 15 years, and our corporate headquarters has been located in lower Manhattan for most of our history. This April, we plan to reestablish...

  • Page 27
    ...100 Best Companies for Working Mothers," Globe & Mail's "The 35 Best Companies to Work for in Canada," and The Sunday Times' "50 Best Companies to Work for in 2001" in the United Kingdom. Board of Directors We continue to benefit from the wise counsel and guidance of our Board of Directors. In 2001...

  • Page 28
    a x p _ 26 Summary We took many fundamental steps to strengthen our business in 2001. While we expect the economy to remain weak this year, we are confident that American Express is in a strong position to grow over the moderate and long term. We have a number of exceptional assets - including our ...

  • Page 29
    Financial Index 28 Financial Review 48 Consolidated Statements of Income 49 Consolidated Balance Sheets 50 Consolidated Statements of Cash Flows 51 Consolidated Statements of Shareholders' Equity 52 Notes to Consolidated Financial Statements 76 Report of Management 77 Report of Ernst...

  • Page 30
    ... declined 35 percent. 2001 results also included losses of $1.01 billion ($669 million after-tax) recorded in the first half of the year related to the write down and sale of some high-yield securities and the reduction of risk within American Express Financial Advisors' (AEFA) investment portfolio...

  • Page 31
    ...costs and business interruption losses related to the September 11th terrorist attacks. These losses included provisions for credit exposures to travel industry service establishments and insurance claims, as well as approximately $8 million of waived finance charges and late fees. The company also...

  • Page 32
    ...'s deferred acquisition costs (DAC) represent costs of acquiring new business, principally sales and other distribution and underwriting costs, that have been deferred on the sale of annuity, insurance, and certain mutual fund and other long-term products. DACs are amortized over the lives of the...

  • Page 33
    ... the company's transactions with its executive officers, such as use of American Express Cards and AEFA financial services, are on terms and conditions available to its employees generally. The following table presents certain contingencies and commitments of the company relating to long-term debt...

  • Page 34
    ... short-term funding needs relating to shareholder dividends and other general corporate purposes. These are generally met through an intercompany dividend policy. The Board of Directors has authorized a Parent Company commercial paper program that is supported by a $1.9 billion multi-purpose credit...

  • Page 35
    ... market rates of interest on its funding of Charge Card and fixed rate lending products. Notwithstanding the unrealized losses, the company expects a year-over-year benefit from lower interest rates in 2002 that is in excess of $400 million. TRS' foreign exchange risk arising from cross-currency...

  • Page 36
    ... forward contracts, foreign currency options, interest rate swaps, futures, and forward rate agreements. Generally, they are used to manage specific interest rate and foreign exchange exposures related to deposits, long-term debt, equity, loans and securities holdings. The negative effect of a 100...

  • Page 37
    .... The committee evaluates current market conditions and determines AEB's tactics within risk limits approved by AEB's Board of Directors. AEB's treasury and risk management issue policies and control procedures and delegate risk limits throughout AEB's regional trading centers. T R AV E L R E L AT...

  • Page 38
    ... as significantly weaker T&E spending during the year. Conversely, discount revenue rose 15 percent in 2000 due to higher worldwide billed business. Net card fees increased slightly in 2001 and 2000, reï¬,ecting growth in cards-in-force. Lending net finance charge revenue rose 32 percent and 23...

  • Page 39
    ... rate* Average basic Cardmember spending (dollars)* Average fee per card -managed (dollars)* Non-Amex brand:** Cards-in-force (millions) Billed business Travel sales Travel commissions and fees/sales Travelers Cheque: Sales Average outstandings Average investments Tax equivalent yield Managed Charge...

  • Page 40
    .... Year Ended December 31, (Millions) Managed Basis 2001 Securitization Effect GAAP Basis Net revenues: Net card fees Lending net finance charge revenue Other revenues Total net revenues Expenses: Marketing and promotion Provision for losses and claims: Charge card Lending Charge card interest...

  • Page 41
    ... FINANCIAL REVIEW Year Ended December 31, (Millions) Managed Basis 2000 Securitization Effect GAAP Basis Net revenues: Net card fees Lending net finance charge revenue Other revenues Total net revenues Expenses: Marketing and promotion Provision for losses and claims: Charge card Lending Charge...

  • Page 42
    ... consist of loans arising in a portfolio of designated consumer American Express credit card, Optima Line of Credit and Sign & Travel/Extended Payment Option revolving credit accounts or features owned by American Express Centurion Bank (Centurion Bank), a wholly-owned subsidiary of TRS, and, in...

  • Page 43
    ...: Investment income Management and distribution fees Other revenues Total revenues Provision for losses and benefits: Annuities Insurance Investment certificates Total Net revenues Expenses: Human resources Other operating expenses Restructuring charges Disaster recovery charge Total expenses...

  • Page 44
    ... to write down high-yield securities. Management and distribution fees declined 13 percent in 2001 due to lower average assets under management and weaker sales, particularly in mutual fund products, reï¬,ecting the negative impact of weak equity market conditions throughout the year. Conversely, in...

  • Page 45
    ... account assets Other owned assets Managed assets Cash sales: Mutual funds Annuities Investment certificates Life and other insurance products Institutional Other Total cash sales Number of financial advisors Fees from financial plans and advice services (thousands) Percentage of total sales...

  • Page 46
    ... annuity and variable life insurance contract holders. AEFA earns investment management, administration and other fees from the related accounts. In light of the investment losses recorded during the first half of 2001, AEFA received a capital contribution of $490 million from the Parent Company...

  • Page 47
    ... in corporate banking, and lower mutual fund fees within the financial institution business, partially offset by higher loan volumes in PFS. In 2000, commissions and fees increased, reï¬,ecting growth in private banking, PFS, and the financial institution business. In 2001, foreign exchange income...

  • Page 48
    ... stock dividend based on earnings from Lehman Brothers. The dividend was offset by business building initiatives in each year, and costs related to the Y2K issue in 1999. O T H E R R E P O R T I N G M AT T E R S ACCOUNTING DEVELOPMENTS In June 2001, the Financial Accounting Standards Board...

  • Page 49
    ...insurance businesses; 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; foreign currency exchange rates...

  • Page 50
    ... N Y Years Ended December 31, (Millions, except per share amounts) 2001 2000 1999 Revenues Discount revenue Interest and dividends, net Management and distribution fees Net card fees Travel commissions and fees Other commissions and fees Cardmember lending net finance charge revenue Life and...

  • Page 51
    ...574 2,506 7,129 $ 151,100 $ 154,423 Customers' deposits Travelers Cheques outstanding Accounts payable Insurance and annuity reserves: Fixed annuities Life and disability policies Investment certificate reserves Short-term debt Long-term debt Separate account liabilities Other liabilities Total...

  • Page 52
    ...746) Net increase in customers' deposits Sale of annuities and investment certificates Redemption of annuities and investment certificates Net (decrease) increase in debt with maturities of three months or less Issuance of debt Principal payments on debt Issuance of American Express common shares...

  • Page 53
    ... Foreign currency translation adjustments Minimum pension liability adjustment Total comprehensive income Repurchase of common shares Other changes, primarily employee plans Cash dividends declared: Common, $.32 per share Balances at December 31, 2001 See notes to consolidated financial statements...

  • Page 54
    ... American Express Financial Advisors' (AEFA) deferred acquisition costs (DAC) represent costs of acquiring new business, principally sales and other distribution and underwriting costs, that have been deferred on the sale of annuity, insurance, and certain mutual fund and other long-term products...

  • Page 55
    ... of variable annuity and variable life insurance contract holders. The company receives investment management fees, mortality and expense assurance fees, minimum death benefit guarantee fees and cost of insurance charges from the related accounts. CASH AND CASH EQUIVALENTS At December 31, 2001 and...

  • Page 56
    ... outlays related to these charges. The pretax charge and employee reductions by operating segment are as follows: Restructuring Charges (Dollars in millions) Pretax After-tax Employee Reductions(a) Travel Related Services American Express Financial Advisors American Express Bank Corporate and...

  • Page 57
    ... or bankruptcy. Fair value is generally based on quoted market prices. However, the company's investment portfolio also contains structured investments of various asset quality, including Collateralized Debt Obligations (CDOs) and Structured Loan Trusts (backed by high-yield bonds and bank loans...

  • Page 58
    ... Life Insurance company (Nippon Life) acquired 72 shares of Lehman's redeemable voting preferred stock for a nominal dollar amount. This security entitles its holders to receive an aggregate annual dividend of 50 percent of Lehman's net income in excess of $400 million for each of eight years ending...

  • Page 59
    ... loans: Commercial and industrial Loans to banks and other institutions Mortgage and real estate Other, principally policyholders' loans Less: Reserves for credit losses Total 993 $ 26,440 Note: American Express Financial Advisors (AEFA) mortgage loans of $4.0 billion and $4.1 billion in 2001 and...

  • Page 60
    ... those assets' cash ï¬,ows to third party investors. The company continues to service the accounts and receives a fee for doing so; the fair value and carrying amount of these future servicing fees, net of related costs, are not material. Each new sale of securitized loans results in the removal of...

  • Page 61
    ... covered by interest rate swaps. The year-end weighted average effective interest rates were 4.6% and 6.4% for 2001 and 2000, respectively. The company generally paid fixed rates of interest under the terms of interest rate swaps. Unused lines of credit to support commercial paper borrowings were...

  • Page 62
    ..., with a predominant index of LIBOR (London Interbank Offered Rate). The company paid interest (net of amounts capitalized) of $2.8 billion, $3.6 billion and $2.6 billion in 2001, 2000 and 1999, respectively. Aggregate annual maturities of long-term debt for the five years ending December 31, 2006...

  • Page 63
    ...341 Shares outstanding at beginning of year Repurchases of common shares Net settlements pursuant to third party share purchase agreements Other, primarily employee benefit plans Shares outstanding at end of year The Board of Directors is authorized to permit the company to issue up to 20 million...

  • Page 64
    ...ts of lower market rates of interest on its funding of Charge Card and fixed rate lending products. Currently, the longest period of time over which the company is hedging exposure to the variability in future cash ï¬,ows is 5 years and relates to funding of foreign currency denominated receivables...

  • Page 65
    ...the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. Such foreign currency forward contracts entered into by the company generally mature within one year. In addition, for selected major overseas markets, the company uses foreign currency forward...

  • Page 66
    ... cash requirements. The company's Charge Card products have no preset spending limit and are not reï¬,ected in unused credit available to Cardmembers. The company issues commercial and other letters of credit to facilitate the short-term trade-related needs of its banking clients, which typically...

  • Page 67
    ...surrender charges and related loans. For variable rate long-term debt that reprices within a year, fair values approximate carrying values. For other long-term debt, fair value is estimated using either quoted market prices or discounted cash ï¬,ows based on the company's current borrowing rates for...

  • Page 68
    ..., options granted generally vest at 33 1⁄3 percent per year beginning with the second anniversary of the grant date. The company also sponsors the American Express Incentive Savings Plan, under which purchases of the company's common shares are made by or on behalf of participating employees. In...

  • Page 69
    ... on the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2001, 2000 and 1999, respectively: 2001 Dividend yield Expected volatility Risk-free interest rate Expected life of stock option 0.8% 31% 4.9% 5 years 2000 1.1% 29...

  • Page 70
    ..., the company sponsors an unfunded non-qualified Supplemental Retirement Plan (the SRP) for certain highly compensated employees to replace the benefit that cannot be provided by the Plan. The SRP generally parallels the Plan but offers different payment options. Most employees outside the United...

  • Page 71
    ...1,480 Fair value of plan assets, October 1 prior year Actual return on plan assets Employer contributions Benefits paid Settlements/Curtailments Foreign currency exchange rate changes Fair value of plan assets at September 30, The following table reconciles the plans' funded status to the amounts...

  • Page 72
    ... and the market-related value of assets are amortized over the average remaining service period of active participants. The weighted average assumptions used in the company's defined benefit plans were: 2001 Discount rates Rates of increase in compensation levels Expected long-term rates of return...

  • Page 73
    ... company during 2001, 2000 and 1999 were $545 million, $858 million and $392 million, respectively, and include estimated tax payments and cash settlements relating to prior tax years. The items comprising comprehensive income in the Consolidated Statements of Shareholders' Equity are presented net...

  • Page 74
    ... related, financial advisory and international banking services throughout the world. TRS' products and services include, among others, Charge Cards, Cardmember lending products, Travelers Cheques, and corporate and consumer travel services. AEFA's services and products include financial planning...

  • Page 75
    ...) Travel Related Services American Express Financial Advisors American Express Bank Corporate and Other Adjustments and Eliminations Consolidated 2001 Net revenues (managed basis) Revenues (GAAP basis) Interest and dividends, net Cardmember lending net finance charge revenue: Managed basis...

  • Page 76
    ... have not had any effect on the company's shareholder dividend policy and management does not anticipate any effect in the future. At December 31, 2001, the aggregate amount of net assets of subsidiaries that may be transferred to the Parent Company was approximately $8.6 billion. Should speci...

  • Page 77
    ... 56.50 39.83 Quarters Ended Net revenues (managed basis) Revenues (GAAP basis) Pretax income Net income(a) Earnings per common share:(a) Basic Diluted Cash dividends declared per common share Common share price: High Low (a) 2001 results include three significant items: (1) charges of $826 million...

  • Page 78
    ... lines of responsibility, policies and procedures; (ii) a Code of Conduct; and (iii) the careful selection and training of employees. Internal auditors monitor and assess the effectiveness of the internal control system and report their findings to management and the Board of Directors throughout...

  • Page 79
    ... AND BOARD OF DIRECTORS OF AMERICAN EXPRESS COMPANY We have audited the accompanying consolidated balance sheets of American Express Company as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity, and cash ï¬,ows for each of the three years in...

  • Page 80
    ... Cash dividends declared per share Book value per share: Actual Pro forma(c) Market price per share: High Low Close Average common shares outstanding for earnings per share: Basic Diluted Shares outstanding at year end OTHER STATISTICS Number of employees at year end: United States Outside United...

  • Page 81
    ... SMALL BUSINESS SERVICES Jonathan S. Linen Vice Chairman AMERICAN EXPRESS COMPANY Ursula F. Fairbairn Executive Vice President HUMAN RESOURCES AND QUALITY John D. Hayes Executive Vice President GLOBAL ADVERTISING AND B RAND M ANAGEMENT Louise M. Parent Executive Vice President and General Counsel...

  • Page 82
    ... Chairman and Chief Executive Officer BRISTOL-MYERS SQUIBB COMPANY Beverly Sills Greenough* Chairman LINCOLN CENTER FOR THE PERFORMING ARTS F. Ross Johnson Chairman and Chief Executive Officer RJM GROUP Vernon E. Jordan, Jr. Senior Managing Director LAZARD INC. *Having reached retirement age, Ms...

  • Page 83
    ... E S TO R I N Q U I R I E S OPEN: The Small Business Network OPTIMA ® ® PLATINUM CARD SIGN & TRAVEL ® Ernst & Young LLP 787 Seventh Avenue New York, NY 10019 ©2002 American Express Company. All rights reserved. Written shareholder inquiries may be sent either to Mellon Investor Services LLC...

  • Page 84
    American Express Company 200 Vesey Street New York, NY 10285 212.640.2000 www.americanexpress.com