AMERICAN EXPRESS CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

or

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ________ to ________

Commission file number 1-7657

AMERICAN EXPRESS COMPANY
------------------------
(Exact name of registrant as specified in its charter)

NEW YORK 13-4922250
- ------------------------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

WORLD FINANCIAL CENTER, 200 VESEY STREET, NEW YORK, NY 10285
- ------------------------------------------------------ ------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (212) 640-2000
----------------------------------------------

None
- ------------------------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding at April 22, 2005
- ------------------------------------------------------ -----------------------------
Common Shares (par value $.20 per share) 1,245,899,187 shares

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share amounts)
(Unaudited)

See Notes to Consolidated Financial Statements.

1

AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS
(millions, except share data)
(Unaudited)

See Notes to Consolidated Financial Statements.

2

AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
(Unaudited)

See Notes to Consolidated Financial Statements.

3

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements should be read in
conjunction with the financial statements which are incorporated by
reference in the Annual Report on Form 10-K of American Express Company
(the Company or American Express) for the year ended December 31, 2004.
Certain reclassifications of prior period amounts have been made to
conform to the current presentation.

The interim financial information in this report has not been audited. In
the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position and the consolidated
results of operations for the interim periods have been made. All
adjustments made were of a normal, recurring nature. Results of
operations reported for interim periods are not necessarily indicative of
results for the entire year.

On February 1, 2005, the Company announced plans to pursue a spin-off of
American Express Financial Advisors (AEFA) to shareholders. Shareholders
would receive 100 percent of the common shares of American Express
Financial Corporation (AEFC), through which the financial advisors
business is conducted. The transaction is intended to be tax-free to
shareholders and is expected to be completed late in the third quarter of
2005, subject to certain conditions, including necessary regulatory
approvals and the receipt of a favorable tax ruling and/or opinion, as
well as final board approval. See Note 23 in the Company's Annual Report
on Form 10-K for the year ended December 31, 2004 for further discussion
of the proposed spin-off. All discussions that follow describe the
Company's business and organization as currently structured.

Net investment income is presented net of interest expense of $71 million
and $51 million for the first quarters of 2005 and 2004, respectively,
related primarily to the Company's international banking operations.
Cardmember lending net finance charge revenue is presented net of
interest expense of $178 million and $127 million for the first quarters
of 2005 and 2004, respectively.

At both March 31, 2005 and December 31, 2004, cash and cash equivalents
included $1.0 billion segregated in special bank accounts for the benefit
of customers.

The Company had securitized cardmember receivables totaling $1.1 billion
and $1.9 billion at March 31, 2005 and December 31, 2004, respectively,
which were included in cardmember receivables on the Consolidated Balance
Sheets as they did not qualify for off-balance sheet treatment under
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities;" likewise, an equal amount of debt was included in long-term
debt.

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), "Share-Based Payment (SFAS No. 123(R))."
Under a rule issued by the Securities and Exchange Commission (SEC) in
April 2005, SFAS No. 123(R) is now effective for public companies for
annual, rather than interim, periods that begin after June 15, 2005. SFAS
No. 123(R) requires entities to measure and recognize the cost of
employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited
exceptions). As noted in Note 2 below, the Company adopted, in January
2003, the fair value recognition provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123), prospectively for all stock
options granted after December 31, 2002. Substantially all stock options
for which intrinsic value accounting was continued under Accounting
Principles Board (APB) Opinion No. 25 will have vested by June 30, 2005.
SFAS No. 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. The requirement will reduce net operating cash flows and
increase net financing cash flows in periods after the effective date. In
March 2005, the SEC also issued Staff Accounting Bulletin No. 107 (SAB
No. 107), which summarizes the staff's views regarding share-based
payment arrangements for public companies. The Company is currently
evaluating the impact of SFAS No. 123(R) and

4

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

SAB No. 107 on the Company's results of operations and financial position
but does not expect that the impact will be material.

In December 2004, the FASB issued FASB Staff Position (FSP) FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 (the Act)" (FSP
FAS 109-2), which would allow additional time beyond the financial
reporting period of enactment to evaluate the effect of the Act on the
Company's plan for reinvestment or repatriation of foreign earnings for
purposes of calculating the income tax provision. The Act contains a
provision that permits an 85% dividends received deduction for qualified
repatriations of earnings that would otherwise be permanently reinvested
outside the United States. The Company does not plan to reinvest or
repatriate any foreign earnings as a result of the Act.

Effective January 1, 2004, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts" (SOP 03-1). SOP 03-1
provides guidance on: (i) the classification and valuation of
long-duration contract liabilities; (ii) the accounting for sales
inducements; and (iii) separate account presentation and valuation.

The adoption of SOP 03-1 as of January 1, 2004 resulted in a cumulative
effect of accounting change that reduced first quarter 2004 results by
$71 million ($109 million pretax). The cumulative effect of accounting
change consisted of: (i) $43 million pretax from establishing additional
liabilities for certain variable annuity guaranteed benefits ($33
million) and from considering these liabilities in valuing deferred
acquisition costs (DAC) and deferred sales inducement costs associated
with those contracts ($10 million) and (ii) $66 million pretax from
establishing additional liabilities for certain variable universal life
and single pay universal life insurance contracts under which contractual
cost of insurance charges are expected to be less than future death
benefits ($92 million) and from considering these liabilities in valuing
DAC associated with those contracts ($26 million offset). Prior to the
adoption of SOP 03-1, amounts paid in excess of contract value were
expensed when payable. The Company's accounting for separate accounts was
already consistent with the provisions of SOP 03-1 and, therefore, there
was no impact related to this requirement.

In November 2003, the FASB ratified a consensus on the disclosure
provisions of Emerging Issues Task Force (EITF) Issue 03-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain
Investments" (EITF 03-1). The Company complied with the disclosure
provisions of this rule in the Consolidated Financial Statements included
in its Annual Report on Form 10-K for the years ended December 31, 2004
and 2003. In March 2004, the FASB reached a consensus regarding the
application of a three-step impairment model to determine whether
investments accounted for in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS No. 115),
and other cost method investments are other-than-temporarily impaired.
However, with the issuance of FSP EITF 03-1-1, "Effective Date of
Paragraphs 10-20 of EITF 03-1," on September 30, 2004, the provisions of
the consensus relating to the measurement and recognition of
other-than-temporary impairments will be deferred pending further
clarification from the FASB. The remaining provisions of this rule, which
primarily relate to disclosure requirements, are required to be applied
prospectively to all current and future investments accounted for in
accordance with SFAS No. 115 and other cost method investments. The
Company will evaluate the potential impact of EITF 03-1 after the FASB
completes its reassessment.

2. STOCK-BASED COMPENSATION

At March 31, 2005, the Company has two stock-based employee compensation
plans, which are described more fully in Note 15 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2004. Effective
January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 123 for all stock options granted after December
31, 2002. For the three months ended March 31, 2005 and 2004, the Company
expensed $23 million and $13 million after-tax, respectively, related to
stock options granted January 1, 2003 or later.

5

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amended APB
Opinion No. 28, "Interim Financial Reporting," to require disclosure
about the pro forma effects of SFAS No. 123 on reported net income of
stock-based compensation accounted for under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The following table
illustrates the effect on net income and earnings per common share (EPS)
assuming the Company had followed the fair value recognition provisions
of SFAS No. 123 for all outstanding and unvested stock options and other
stock-based compensation for the three months ended March 31, 2005 and
2004:

3. INVESTMENTS

The following is a summary of investments at March 31, 2005 and December
31, 2004:

(a) The carrying value of these assets is at amortized cost, net of
reserves totaling $56 million at both March 31, 2005 and
December 31, 2004.

Gross realized gains and losses on sales and losses recognized for
other-than-temporary impairments of securities classified as
Available-for-Sale, using the specific identification method, were as
follows for the three months ended March 31, 2005 and 2004:

6

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. GUARANTEES

The Company, through its Travel Related Services (TRS) operating segment,
provides cardmember protection plans that cover losses associated with
purchased products, as well as certain other guarantees in the ordinary
course of business that are within the scope of FASB Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" (FIN 45). In the
hypothetical scenario that all claims occur within the next 12 months,
the aggregate maximum amount of undiscounted future payments associated
with such guarantees would not exceed $91 billion at both March 31, 2005
and December 31, 2004. The total amount of related liability accrued at
March 31, 2005 and December 31, 2004 for such programs was $239 million
and $257 million, respectively, which management believes to be adequate
based on actual experience. The Company generally has no collateral or
other recourse provisions related to these guarantees. Expenses relating
to actual claims under these guarantees were approximately $7 million
and $6 million for the three months ended March 31, 2005 and 2004,
respectively.

The Company, through its American Express Bank (AEB) operating segment,
provides various guarantees to its customers in the ordinary course of
business that are also within the scope of FIN 45, including financial
letters of credit, performance guarantees and financial guarantees.
Generally, guarantees range in term from three months to one year. AEB
receives a fee related to these guarantees, many of which help to
facilitate customer cross-border transactions. At March 31, 2005, AEB
held $790 million of collateral supporting these guarantees. The
following table provides information related to such guarantees as of
March 31, 2005 and December 31, 2004:

5. COMPREHENSIVE INCOME

Comprehensive income is defined as the aggregate change in shareholders'
equity, excluding changes in ownership interests. It is the sum of net
income and changes in (i) unrealized gains or losses on
Available-for-Sale securities, (ii) unrealized gains or losses on
derivatives, (iii) foreign currency translation adjustments and (iv)
minimum pension liability adjustment. The components of comprehensive
income, net of related tax, for the three months ended March 31, 2005 and
2004 were as follows:

7

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. RETIREMENT PLANS

The components of the net pension cost for all defined benefit plans
accounted for under SFAS No. 87, "Employers' Accounting for Pensions,"
are as follows:

The net periodic postretirement benefit expense recognized for the three
months ended March 31, 2005 and 2004 was $10 million and $11 million,
respectively.

7. TAXES AND INTEREST

Net income taxes paid by the Company during the three months ended March
31, 2005 and 2004 were approximately $172 million and $55 million,
respectively. The Company paid interest of approximately $429 million and
$311 million during the three months ended March 31, 2005 and 2004,
respectively.

8. EARNINGS PER COMMON SHARE

Basic EPS is computed using the average actual shares outstanding during
the period. Diluted EPS is basic EPS adjusted for the dilutive effect of
stock options, restricted stock awards and other financial instruments
that may be converted into common shares. The computations of basic and
diluted EPS for the three months ended March 31, 2005 and 2004 are as
follows:

8

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

For the three months ended March 31, 2005 and 2004, the dilutive effect
of stock options excludes 18 million and 11 million options,
respectively, from the computation of diluted EPS because to do so would
have been antidilutive. As discussed in Footnote 1 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004, the
convertible debentures issued in November 2003 will not affect the
computation of EPS unless the Company's common share price exceeds the
base conversion price (currently $69.41 per share). In that scenario,
the Company would reflect the additional common shares in the
calculation of diluted earnings per share using the treasury stock
method. The maximum number of shares issuable under the debentures is
16.7 million.

9. SEGMENT INFORMATION

The Company is principally engaged in providing travel-related, financial
services and international banking services throughout the world. TRS'
products and services include, among others, charge cards, cardmember
lending products, Travelers Cheques and corporate and consumer travel
services. AEFA is comprised primarily of asset management and insurance
businesses whose products are principally offered through its network of
over 12,000 financial advisors. AEB's products and services include
providing private, financial institution and corporate banking; personal
financial services and global trading. The Company operates on a global
basis, although the principal market for financial advisory services is
the United States.

The following table presents certain information regarding these
operating segments, based on management's evaluation and internal
reporting structure, for the three months ended March 31, 2005 and 2004.
For certain income statement items that are affected by asset
securitizations at TRS, data are provided on both a GAAP basis, as well
as on a managed basis, which excludes the effect of securitizations.
Pretax income and net income are the same under both a GAAP and managed
basis. See TRS Results of Operations section of MD&A for further
information regarding the effect of securitizations on the financial
statements.

9

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

* RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 REFLECT A $109
MILLION NON-CASH PRETAX CHARGE ($71 MILLION AFTER-TAX) RELATED TO THE
JANUARY 1, 2004 ADOPTION OF SOP 03-1.

10. RESTRUCTURING CHARGES

As discussed in Note 22 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2004, the Company recorded aggregate
restructuring charges of $102 million ($66 million after-tax) for
initiatives executed during 2004. During the first quarter of 2005, the
Company recorded additional charges of $10 million relating principally
to the restructuring activities associated with its business travel
operations. The following table summarizes by category the Company's
aggregate restructuring charge activity for the three months ended March
31, 2005:

10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

American Express Company is engaged in a variety of businesses comprising
three operating segments: Travel Related Services (TRS), American Express
Financial Advisors (AEFA) and American Express Bank (AEB).

TRS includes a broad range of products including charge and credit cards;
stored value products such as Travelers Cheques, Travelers Cheque funds cards
and gift cards; travel agency services and travel, entertainment and
purchasing expense management services; network services and merchant
acquisition and merchant processing for our network partners and proprietary
payments businesses. TRS' various products are sold globally to diverse
customer groups, including consumers, small businesses, mid-market companies,
large corporations and banking institutions. These products are sold through
various channels including direct mail, on-line applications, targeted
sales-forces and direct response advertising.

TRS generates revenue from a variety of sources including global payments,
such as charge and credit cards, travel services and stored value products,
including Travelers Cheques. Charge and credit cards generate revenue for the
Company primarily in three different ways:

- - Discount revenue, the Company's largest single revenue source, which
represents fees charged to merchants when cardmembers use their cards to
purchase goods and services on our network,
- - Finance charge revenue, which is earned on outstanding balances related
to the cardmember lending portfolio, and
- - Card fees, which are earned for annual membership, and other commissions
and fees such as foreign exchange conversion fees and card-related fees
and assessments.

In addition to operating costs associated with these activities, other major
expense categories are expenses related to marketing and reward programs that
add new cardmembers, promote cardmember loyalty and spending and provisions
for anticipated cardmember credit and fraud losses. During the first quarter
of 2005, the TRS segment accounted for approximately 74 percent and 85 percent
of the Company's total revenues and net income, respectively.

AEFA is comprised primarily of asset management and insurance businesses whose
products are principally offered through its network of over 12,000 financial
advisors.

AEFA earns management and distribution fees on mutual funds, wrap products,
assets managed for institutions and separate accounts. AEFA's insurance and
annuity products generate revenue through premiums and other charges collected
from policyholders and contractholders and through investment income earned on
owned assets supporting these products. AEFA incurs various operating costs,
principally provision for losses and benefits for annuities, investment
certificates and insurance products.

On February 1, 2005, the Company announced plans to pursue a spin-off of AEFA
to shareholders. Shareholders would receive 100 percent of the common shares
of American Express Financial Corporation (AEFC), through which the financial
advisors business is conducted. The transaction is intended to be tax-free to
shareholders and is expected to be completed late in the third quarter of
2005, subject to certain conditions, including necessary regulatory approvals
and the receipt of a favorable tax ruling and/or opinion, as well as final
board approval. Expenses related to this spin-off will be reflected in each
quarter as incurred. See Note 23 in the Company's Annual Report on Form 10-K
for the year ended December 31, 2004 for further discussion of the proposed
spin-off. All discussions that follow describe the Company's business and
organization as currently structured.

AEB offers financial products and services to retail customers, wealthy
individuals and financial institutions outside the United States that generate
interest income, commissions and fees, foreign exchange income and other
revenue. In addition to various operating costs, AEB recognizes provisions for
credit losses, mainly on its outstanding loans.

11

The Company follows accounting principles generally accepted in the United
States (GAAP). In addition to information provided on a GAAP basis, the
Company discloses certain data on a "managed basis." This information, which
should be read only as a supplement to GAAP information, assumes there have
been no securitization transactions at TRS, i.e., as if all securitized
cardmember loans and related income effects are reflected in the Company's
balance sheets and income statements. See the TRS Results of Operations
section for further discussion of this approach.

Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. See the
"Forward-Looking Statements" section below.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005
AND 2004

The Company's consolidated net income rose 19 percent to $946 million and
diluted earnings per share (EPS) rose 23 percent to $0.75 in the three-month
period ended March 31, 2005 as compared to a year ago. The Company's
consolidated income before the prior year's accounting change rose 9 percent
and diluted EPS before accounting change rose 14 percent. On a trailing
12-month basis, return on average shareholders' equity was 22.8 percent.

Net income and EPS for the three months ended March 31, 2004 reflect the $71
million ($109 million pretax) or $0.05 per diluted share impact of the
Company's adoption of the American Institute of Certified Public Accountants
(AICPA) Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1). SOP 03-1 requires insurance enterprises to
establish liabilities for benefits that may become payable under variable
annuity death benefit guarantees or other insurance or annuity contract
provisions. Previous to the adoption of SOP 03-1, these costs were expensed
when payable.

Both the Company's revenues and expenses are affected by changes in the
relative values of non-U.S. currencies to the U.S. dollar. The currency rate
changes increased both revenue and expense growth by approximately 1
percentage point for the three months ended March 31, 2005.

The following discussion is presented on a basis consistent with GAAP unless
otherwise noted.

REVENUES
Consolidated revenues for the three months ended March 31, 2005 were $7.6
billion, up 10 percent from $6.9 billion in the same period a year ago
reflecting 11 percent growth at TRS, 8 percent growth at AEFA and a 1 percent
decline at AEB. As discussed in further detail below, the increase in the
first quarter was due primarily to higher discount revenue, increased net
securitization income, higher net investment income and greater cardmember
lending net finance charge revenue.

Discount revenue at TRS rose 13 percent to $2.7 billion as compared to a year
ago as a result of a 15 percent increase in worldwide billed business,
reflecting a 10 percent increase in average cardmember spending per
proprietary basic card and 7 percent growth in cards-in-force, offset in part
by a lower discount rate.

Net investment income of $803 million increased 8 percent over the year ago
period primarily as a result of a 12 percent increase at AEFA that was
partially offset by lower net interest income at AEB. The increase at AEFA
reflects higher levels of invested assets and the effect of net investment
gains in 2005 compared to net investment losses in 2004.

Cardmember lending net finance charge revenue at TRS of $592 million rose 9
percent, reflecting 5 percent growth in the average balance of the owned
cardmember lending portfolio and a higher portfolio yield.

Net securitization income of $316 million increased 38 percent for the three
months ended March 31, 2005 versus the same period a year ago primarily due to
a greater average balance of securitized loans, a higher portfolio yield and a
decrease in portfolio write-offs, partially offset by greater interest expense
due to a higher coupon rate paid to certificate holders.

12

EXPENSES
Consolidated expenses for the three months ended March 31, 2005 were $6.2
billion, up 9 percent from $5.7 billion for the same period in 2004 reflecting
increases of 8 percent at TRS and 15 percent at AEFA and a decline of 1
percent at AEB. As discussed in further detail below, the increase in the
first quarter of 2005 was primarily driven by higher marketing, promotion,
rewards and cardmember services expenses, greater human resources costs,
greater provisions for losses and benefits and increased interest expense,
which were partially offset by lower other operating expenses. Consolidated
expenses include $22 million related to the AEFA spin-off. Also included in
consolidated expenses are $21 million of charges recorded in connection with
initiatives relating principally to the continuation of the restructuring of
the TRS' business travel operations and reengineering of certain functions
within the Company's finance group and banking operations.

Human resources expenses increased 12 percent to $2.0 billion due to increased
costs related to management incentives, including the impact of an additional
incremental year of higher stock-based compensation expenses, merit increases
and employee benefit expenses. The higher stock-based compensation expense
from stock options reflects the Company's decision to expense stock options
beginning in 2003, partially offset by the decision to issue fewer stock
options. Higher expense related to restricted stock awards reflects
the Company's decision to modify compensation practices and use restricted
stock awards in place of stock options for middle management. The increase
in human resources expenses also includes the first quarter 2004 impact of
the $44 million deferred acquisition cost (DAC) valuation benefit at AEFA
reflecting a portion of the benefit of the lengthening of amortization periods
for certain insurance and annuity products in conjunction with the adoption of
SOP 03-1. The total DAC valuation benefit of $66 million (including the $22
million benefit noted below) and the impact of the adoption of SOP 03-1 are
discussed in the AEFA Results of Operations section below.

Marketing, promotion, rewards and cardmember services expenses increased 30
percent to $1.4 billion versus a year ago primarily due to a 29 percent
increase at TRS, reflecting both higher marketing and promotion expenses and,
to a lesser extent, greater reward costs. The increase in marketing and
promotion expenses was primarily driven by the Company's recent global brand
advertising campaign and continued focus on business-building initiatives.
Rewards costs reflect strong volume growth, higher redemption rates and the
continued increase in cardmember loyalty program participation. Management
believes, based on historical experience, that cardmembers enrolled in rewards
and co-brand programs yield higher spend, better retention, stronger credit
performance and greater profit for the Company.

Total provisions for losses and benefits increased 8 percent to $1.1 billion
over last year, primarily resulting from increases in the charge card and
lending provisions at TRS and increased interest credited on investment
certificates at AEFA. Other expenses decreased 24 percent to $413 million
primarily reflecting decreased expenses at TRS as a result of the third
quarter 2004 sale of the ATM business, a positive change in reserves resulting
from various control improvements and reduced printing and supplies expenses.
These decreases were partially offset by $35 million (after tax) of expenses
related to securities industry regulatory matters at AEFA (see Mutual Fund
Industry Developments below for further discussion) and the impact of the $22
million DAC valuation benefit in the first quarter 2004 at AEFA.

The effective tax rate was 31 percent for both the three-month periods ended
March 31, 2005 and 2004.

As previously disclosed, the Company expects to incur expenses related to the
proposed tax-free spin-off of AEFA, which cumulatively will be significant.
The transaction is expected to occur late in the third quarter of this year.
Separately, the Company also continues to engage in various reengineering
activities, which are expected to result in significant expenses during the next
several quarters. In addition, the Company is working with tax authorities to
complete tax audits for certain prior years, the completion of which are
expected to result in the Company's recognizing significant benefits later this
year.

13

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

CAPITAL STRATEGY
The Company believes allocating capital to its growing businesses with a
return on risk-adjusted equity in excess of their cost of capital will
continue to build shareholder value. The Company's philosophy is to retain
earnings sufficient to enable it to meet its growth objectives, and, to the
extent capital exceeds investment opportunities, return excess capital to
shareholders. Assuming the Company achieves its financial objectives of 12 to
15 percent EPS growth, 18 to 20 percent return on equity and 8 percent revenue
growth, on average and over time, it will seek to return to shareholders an
average of 65 percent of capital generated, subject to business mix,
acquisitions and rating agency requirements. Assuming the completion of the
AEFA spin-off discussed above, the Company plans to raise its return on equity
target to 28 to 30 percent while maintaining a 65 percent payout of free
capital generated. During the quarter, the Company paid $150 million in
dividends and continued share repurchases as discussed below.

SHARE REPURCHASES
The Company has in place a share repurchase program to return equity capital
in excess of its business needs to shareholders. These share repurchases are
made to both offset the issuance of new shares as part of employee
compensation plans and to reduce shares outstanding. The Company repurchases
its common shares primarily by open market purchases using several brokers at
competitive commission and fee rates. In addition, common shares may also be
purchased from the Company-sponsored Incentive Savings Program (ISP) to
facilitate the ISP's required disposal of shares when employee-directed
activity results in an excess common share position. Such purchases are made
at market price without commissions or other fees. During the first quarter of
2005, the Company repurchased 12.3 million common shares at an average price
of $53.86. Since the inception of the share repurchase program in September
1994, 507.8 million shares have been acquired under total authorizations to
repurchase up to 570 million shares, including purchases made under past
agreements with third parties. The lower repurchase activity during the first
quarter 2005 compared to recent quarters reflects a more measured approach to
repurchases as the Company evaluates the capital implications of the
anticipated AEFA spin-off.

CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
The Company generated net cash provided by operating activities in amounts
greater than net income for both the three months ended March 31, 2005 and
2004 primarily due to provisions for losses and benefits, which represent
expenses in the Consolidated Statements of Income but do not require cash at
the time of provision. Similarly, depreciation and amortization represent
non-cash expenses. In addition, net cash was provided by fluctuations in other
operating assets and liabilities. These accounts vary significantly in the
normal course of business due to the amount and timing of various payments.

Management believes cash flows from operations, available cash balances and
short-term borrowings will be sufficient to fund the Company's operating
liquidity needs.

CASH FLOWS FROM INVESTING ACTIVITIES
The Company's investing activities primarily include funding TRS' cardmember
loans and receivables and AEFA's Available-for-Sale investment portfolio.

For the three months ended March 31, 2005, net cash was provided by investing
activities primarily due to the net decrease in cardmember receivables and
loans, partially offset by net maturities of cardmember loans within the
securitization trust. For the three months ended March 31, 2004, net cash was
used in investing activities primarily due to the cumulative benefit of sales
of annuities, insurance and certificate products at AEFA, partially offset by
decreases in cardmember receivables and loans.

CASH FLOWS FROM FINANCING ACTIVITIES
The Company's financing activities primarily include the issuance of debt and
AEFA's sale of annuities and investment certificates, in addition to taking
customer deposits. The Company also regularly repurchases its common shares.

14

Net cash used in financing activities for the three months ended March 31,
2005 was greater compared to the same period in 2004 primarily due to a larger
net decrease in total debt and a net decrease in customer deposits in 2005
versus a net increase in 2004, partially offset by increased net sales of
annuities and investment certificates and a reduced amount of share repurchase
activity.

PARENT COMPANY FUNDING
At March 31, 2005, the Parent Company had $4.3 billion of debt or equity
securities available for issuance under shelf registrations filed with the
Securities and Exchange Commission (SEC). In addition, TRS; American Express
Centurion Bank (Centurion Bank), a wholly-owned subsidiary of TRS; American
Express Credit Corporation (Credco), a wholly-owned subsidiary of TRS;
American Express Overseas Credit Corporation Limited, a wholly-owned
subsidiary of Credco; and AEB have established programs for the issuance,
outside the United States, of debt instruments to be listed on the Luxembourg
Stock Exchange. The maximum aggregate principal amount of debt instruments
outstanding at any one time under the program will not exceed $6.0 billion. At
March 31, 2005, $3.3 billion was outstanding under this program.

The Board of Directors authorized a Parent Company commercial paper program
supported by the multi-purpose committed bank credit facility discussed below.
There was no Parent Company commercial paper outstanding as of March 31, 2005
and no borrowings have been made under its bank credit facility. As of March
31, 2005, the Company maintained total committed bank lines of credit totaling
$13.9 billion, which included $1.96 billion allocated to the Parent Company.
During April 2005 the Company renewed and extended a total of $7 billion of
these committed credit line facilities. In connection with the renewal and
extension, the Company renegotiated the consolidated tangible net worth
covenant contained therein (as well as in the remaining credit facility
containing such covenant) to provide for an adjustment upon completion of
the proposed spin-off of the shares of AEFC. This covenant is applicable only
to the Parent Company's credit lines. Under the terms of this covenant, the
Parent Company's right to borrow under the credit facilities is subject to the
Company's maintaining consolidated tangible net worth (as defined under the
credit facilities) of not less than $9 billion until the completion of the
proposed spin-off. After completion of the proposed spin-off, the amount
required under the consolidated tangible net worth covenant would be reduced by
approximately 70% of AEFC's pre-spin-off contribution to the Company's
consolidated tangible net worth.

15

TRAVEL RELATED SERVICES

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

STATEMENTS OF INCOME

TRS reported net income of $801 million for the three month period ended March
31, 2004, a 20 percent increase from $665 million for the same period a year
ago.

The following management discussion includes information on both a GAAP basis
and managed basis. The Company presents TRS information on a managed basis
because that is the way the Company's management views and manages the
business. It differs from the accompanying financial statements, which are
prepared in accordance with GAAP, as managed basis presentation assumes there
have been no securitization transactions, i.e., as if all securitized
cardmember loans and related income effects are reflected in the Company's
balance sheet and income statement, respectively. Management believes that the
trends in the Company's cardmember lending business are more accurately
portrayed by evaluating the performance of both securitized and
non-securitized cardmember loans. Asset securitization is just one of several
ways the Company funds cardmember loans. Use of a managed basis presentation,
including non-securitized and securitized cardmember loans, presents a more
accurate picture of the key dynamics of the cardmember lending business,
avoiding distortions due to the mix of funding sources at any particular point
in time. For example, irrespective of the mix, it is important for management
and investors to

16

see metrics, such as changes in delinquencies and write-off rates, for the
entire cardmember lending portfolio because it is more representative of the
economics of the aggregate cardmember relationships and ongoing business
performance and trends over time. It is also important for investors to see
the overall growth of cardmember loans and related revenue and changes in
market share, which are significant metrics in evaluating the Company's
performance and which can only be properly assessed when all non-securitized
and securitized cardmember loans are viewed together on a managed basis.

On a GAAP basis, results reflect finance charge revenue on the owned loan
portfolio as well as finance charge revenue on the retained seller's interest
from securitization activity. GAAP basis results also include investment
income on the Company's investments in other subordinated retained interests
from loan securitization issuances.

TRS' owned portfolio is primarily comprised of cardmember receivables
generated by the Company's charge card products and unsecuritized cardmember
loans. The Company securitizes cardmember loans as part of its financing
strategy; consequently, the level of unsecuritized cardmember loans is
primarily a function of the Company's financing requirements. As a portfolio,
unsecuritized cardmember loans tend to be less seasoned than securitized
loans, primarily because of the lead time required to designate and securitize
each loan. The Company does not currently securitize international loans.
Delinquency, reserve coverage and net write-off rates have historically been
broadly comparable between the Company's owned and managed portfolios.

On a GAAP basis, results reflect net securitization income, which is comprised
of the non-credit provision components of the net gains and charges from
securitization activities, the amortization and related impairment charges, if
any, of the interest-only strip, excess spread related to securitized loans,
net finance charge revenue on retained interests in securitized loans, and
servicing income, net of related discounts or fees. Excess spread, which is
the net positive cash flow from interest and fee collections allocated to the
investor's interests after deducting the interest paid on investor
certificates, credit losses, contractual servicing fees and other expenses is
recognized in securitization income as it is earned. Net securitization income
of $316 million increased 38 percent for the three months ended March 31, 2005
versus the same period a year ago primarily due to a greater average balance
of securitized loans, a higher portfolio yield and a decrease in the portfolio
write-offs, partially offset by greater interest expense due to a higher
coupon rate paid to certificate holders. See Selected Statistical Information
below for data relating to TRS' owned loan portfolio.

During the three months ended March 31, 2005 and 2004, TRS recognized net
gains, including the credit components, of $6 million ($4 million after-tax)
and $8 million ($5 million after-tax), respectively, from net securitization
activities. For the three months ended March 31, 2005, the net gains consisted
of $41 million of income from the securitization of $1.2 billion of cardmember
loans, including the impact of the related credit reserves on the sold loans.
This amount was partially offset by $35 million of charges related to the
maturity of $1.0 billion of previously outstanding issuances. For the three
months ended March 31, 2004, the net gains consisted of $39 million of income
from the securitization of $800 million of cardmember loans, including the
impact of the related credit reserves on the sold loans. This amount was
partially offset by $31 million of charges related to changes in interest-only
strip assumptions.

Management views any net gains from securitizations as discretionary benefits
to be used for card acquisition expenses, which are reflected in both
marketing, promotion, rewards and cardmember services and other operating
expenses. Consequently, the managed basis presentation for the three months
ended March 31, 2005 and 2004 assumes that the impact of this net activity was
offset by higher marketing, promotion, rewards and cardmember services
expenses of $4 million and $4 million, respectively, and other operating
expenses of $2 million and $4 million, respectively. Accordingly, the
incremental expenses, as well as the impact of this net activity, have been
eliminated. The following tables reconcile the GAAP basis for certain TRS
income statement line items to the managed basis information, where different.

17

GAAP BASIS TO MANAGED BASIS RECONCILIATION -- EFFECT OF SECURITIZATIONS

THREE MONTHS ENDED MARCH 31, (Dollars in millions)

18

SELECTED STATISTICAL INFORMATION

* Cards billed business and cards-in-force include activities related to
proprietary cards and cards issued under network partnership agreements.
Average basic cardmember spending and average fee per card are computed
from proprietary card activities only.

19

SELECTED STATISTICAL INFORMATION (CONTINUED)

# - Denotes a variance of more than 100%.

20

The following discussion of TRS' results is presented on a managed basis.

Revenues and expenses are affected by changes in the relative values of
non-U.S. currencies to the U.S. dollar. The currency rate changes increased
both revenue and expense growth by approximately 1 percentage point for the
three months ended March 31, 2005.

REVENUES
TRS' net revenues increased 9 percent to $5.8 billion primarily due to higher
discount revenue, increased cardmember lending net finance charge revenue and
greater other commissions and fees.

Discount revenue of $2.7 billion rose 13 percent compared to a year ago as a
result of a 15 percent increase in billed business partially offset by a lower
discount rate. The decrease in the discount rate primarily reflects changes in
the mix of spending between various merchant segments due to the cumulative
impact of stronger than average growth in the lower rate retail and other
"everyday spend" merchant categories (e.g., supermarkets, discounters, etc.).
As previously indicated, based on the Company's business strategy, it expects
to see continued changes in the mix of business. This, combined with
volume-related pricing discounts and selective repricing initiatives, will
probably continue to result in some discount rate erosion over time.

The 15 percent increase in billed business to $109.3 billion resulted from a
10 percent increase in spending per proprietary basic card worldwide and 7
percent growth in cards-in-force. U.S. billed business rose 14 percent to
$79.6 billion reflecting 13 percent growth within the consumer card business,
17 percent growth in small business services volume and a 7 percent increase
within corporate services. U.S. non-T&E related volume categories, which
represented approximately 66 percent of U.S. billed business during the first
three months of 2005, increased 17 percent over the same period a year ago
while U.S. T&E volumes rose 8 percent reflecting continued improvement in all
T&E industries during the quarter. Total billed business outside the United
States, excluding the impact of foreign exchange translation, was up 13
percent reflecting a growth rate in the mid-teens in Latin America and Canada
and high single-digit growth in Europe and Asia. Worldwide airline related
volumes, which represented 13 percent of total billed business volumes during
the quarter, rose 9 percent as a result of 14 percent growth in transaction
volumes, partially offset by a 5 percent decrease in the average airline
charge. Additionally, global network volumes grew over 35 percent as compared
to the year ago period.

U.S. cards-in-force rose 9 percent to 40.3 million reflecting the benefit of
continued strong card acquisition spending and an improved average customer
retention level within the proprietary issuing business, as well as growth in
U.S. network cards. Non-U.S. cards-in-force increased 5 percent to 25.8
million due to growth in both proprietary and network partnership cards.

Cardmember lending net finance charge revenue of $1.1 billion rose 6 percent
on 4 percent growth in average balance of the managed lending portfolio and a
higher portfolio yield. The net interest yield on the managed worldwide
lending portfolio increased to 8.8% from 8.7% in 2004 reflecting a lower
proportion of the U.S. portfolio on introductory or promotional rates,
increased finance charge rates, partially offset by rising funding costs.

Net card fees of $498 million increased 6 percent versus a year ago,
reflecting the growth in cards-in-force. The average annual fee per
proprietary card-in-force was $35 for both the three months ended March 31,
2005 and 2004. Other commissions and fees increased 9 percent to $616 million
on greater volume-related foreign exchange conversion fees and higher
card-related assessments and network partner-related fees.

EXPENSES
TRS' total expenses increased 6 percent to $4.6 billion primarily due to
higher marketing, promotion, rewards and cardmember services expenses and
greater human resources expenses, partially offset by reduced provisions for
losses and lower other operating expenses.

Marketing, promotion, rewards and cardmember services expenses of $1.3 billion
increased 29 percent compared to the prior year, reflecting substantially
higher marketing and promotion expenses and, to a lesser extent, greater
reward costs. The increase in marketing and promotion expenses is primarily
due to the Company's ongoing global

21

brand advertising campaign and continued focus on business building
initiatives. The growth in rewards costs is attributable to strong volume
growth, a higher redemption rate and the continued increase in cardmember
loyalty program participation.

The provision for losses on charge card products increased 9 percent to $215
million, which reflects the effect of higher volumes partially offset by a
lower provision rate. The lower provision rate is primarily due to strong
credit quality as reflected in an improved past due rate and net loss ratio.
The provision for losses on the worldwide lending portfolio decreased 12
percent to $507 million despite growth in loans outstanding due to
well-controlled credit practices. The net write-off rate for the worldwide
lending portfolio was 4.1% for the three months ended March 31, 2005 as
compared to 4.6% for the same period a year ago.

Human resources expenses of $1.1 billion increased 7 percent versus last year
due to greater management incentive expenses, increased employee benefit costs
and merit increases. Other operating expenses decreased 24 percent to $308
million reflecting lower expenses as a result of the third quarter 2004 sale
of the ATM business, a positive change in reserves resulting from various
control improvements and reduced printing and supplies expenses.

The effective tax rate was 32 percent for both the three-month periods ended
March 31, 2005 and 2004.

AIRLINE INDUSTRY MATTERS
Historically, the Company has not experienced significant revenue declines
resulting from a particular airline's scaling-back or closure of operations
due to bankruptcy or other financial challenges because the volumes generated
from the airline are typically shifted to other participants in the industry
that accept the Company's card products. Nonetheless, the Company is exposed
to business and credit risk in the airline industry primarily through business
arrangements where the Company has remitted payment to the airline for a
cardmember purchase of tickets that have not yet been used or "flown". This
creates a potential exposure for the Company in the event that the cardmember
is not able to use the ticket and the Company, based on the facts and
circumstances, credits the cardmember for the unused ticket. Historically,
this type of exposure has not generated any significant losses for the Company
because of the need for an airline that is operating under bankruptcy
protection to continue accepting credit and charge cards and honoring requests
for credits and refunds in the ordinary course in furtherance of its
reorganization and its formal assumption, with bankruptcy court approval, of
its card acceptance agreement, including approval of the Company's right to
hold cash to cover these potential exposures to provide credits to
cardmembers. Typically, as an airline's financial situation deteriorates the
Company increases cash held to protect itself in the event of an ultimate
liquidation of the airline. The Company's goal in these distressed situations
is to hold sufficient cash over time to ensure that upon liquidation the cash
held is equivalent to the credit exposure related to any unused tickets.

As previously disclosed, during the fourth quarter of 2004, the Company
announced that it signed agreements with Delta Air Lines to extend its
co-brand, Membership Rewards and merchant partnerships. The agreements will
extend these partnerships into the next decade. The prepayment has a
three-year term, is fully collateralized by a pool of assets and is subject to
certain conditions. The Company prepaid $250 million of Delta SkyMiles rewards
points in the fourth quarter of 2004 and prepaid the remaining $250 million of
Delta SkyMiles rewards points in the first quarter of 2005. In addition to the
prepayment, the Company has commitments to loan Delta up to an aggregate $75
million under a senior secured facility arranged by GE Commercial Finance, a
portion of which is in the form of a term loan and a portion of which is in
the form of a revolving line of credit. As of March 31, 2005, approximately $70
million was outstanding under this facility. Both the prepayment and the senior
secured facility have a three-year term, are fully collateralized by a pool of
assets and are subject to certain conditions.

22

LIQUIDITY AND CAPITAL RESOURCES

SELECTED BALANCE SHEET INFORMATION
(GAAP Basis)

(Dollars in billions, except percentages)

* Computed on a trailing 12-month basis using total shareholder's equity as
included in the Consolidated Financial Statements prepared in accordance
with GAAP.
** Computed on a trailing 12-month basis using total assets as included in
the Consolidated Financial Statements prepared in accordance with GAAP.

Net accounts receivable and cardmember loans increased as compared to March
31, 2004, primarily as a result of higher average cardmember spending and an
increase in the number of cards-in-force, and decreased as compared to
December 31, 2004, primarily as a result of seasonal spending at year-end.

Total debt increased as compared to March 31, 2004 primarily as a result of
increased funding requirements due to increases in cardmember receivable and
loan balances as noted above. Similarly, total debt decreased from December
31, 2004 primarily as a result of the reduction in cardmember receivables and
loans from seasonal high levels.

TRS funds its cardmember receivables and loans using various funding sources,
such as short- and long-term debt, medium-term notes, and sales of cardmember
receivables and loans in securitizations. As of March 31, 2005, Credco had the
ability to issue approximately $7.2 billion of debt securities under shelf
registration statements filed with the SEC.

In April 2005, the Company renewed and extended a total of $7 billion of its
committed credit line facilities. The committed credit facilities, which total
$13.4 billion, include the U.S. $2.3 billion Australian Credit Facility
discussed below. As contemplated, in the second quarter of 2004, Credco
borrowed $1.47 billion under these facilities as part of a change in local
funding strategy for business in Canada. Of the $13.4 billion available for
borrowing, Credco may borrow a maximum amount of $12.6 billion (including
amounts outstanding), with a commensurate reduction in the amount available
to the Parent Company. Centurion Bank and American Express Bank, FSB (FSB),
both wholly-owned subsidiaries of TRS, may each borrow a maximum amount of
$400 million. These facilities expire as follows (billions): 2006, $2.0;
2009, $6.4; and 2010, $5.0. The availability of the credit lines to Credco,
Centurion Bank and the FSB is subject to their compliance with certain
financial covenants, which do not include the previously referenced tangible
net worth covenant that is applicable only to the Parent Company's borrowings
on its credit lines.

In the third quarter of 2004, Credco entered into a new 5-year multi-bank
credit facility for Australian $3.25 billion (approximately U.S. $2.3 billion)
and borrowed Australian $2.7 billion (approximately U.S. $1.9 billion) under
this credit facility to provide an alternate funding source for business in
Australia.

Credco's ability to borrow under its credit facilities is subject to its
maintenance of a 1.25 ratio of combined earnings and fixed charges to fixed
charges. These credit facilities do not condition borrowing on the absence
of a

23

material adverse change. The facilities may not be terminated should there
be a change in the Company's credit rating.

In the fourth quarter of 2003, the Company began a program to develop a
liquidity portfolio to provide back-up liquidity, primarily for the commercial
paper program