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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.
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