UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File No. 1-7657
American Express Company
(Exact name of registrant as specified in its charter)
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New York
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13-4922250
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(State or other jurisdiction of incorporation or
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(I.R.S. Employer
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organization)
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Identification No.)
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World Financial Center
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200 Vesey Street
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New York, New York
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10285
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (212) 640-2000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Shares (par value $0.20 per Share)
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes
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No
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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
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No
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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.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes
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No
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As of June 30, 2006, the aggregate market value of the registrant’s voting shares held by
non-affiliates of the registrant was approximately $63.0 billion based on the closing sale price as
reported on the New York Stock Exchange.
As of February 22, 2007, there were 1,192,339,538 common shares of the registrant outstanding.
Documents Incorporated By Reference
Parts I, II and IV: Portions of Registrant’s 2006 Annual Report to Shareholders.
Part III: Portions of Registrant’s Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of Shareholders to be held on April 23,
2007.
TABLE OF CONTENTS
Form 10-K
Item Number
PART I
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ITEM 1. BUSINESS
INTRODUCTION
Overview
American Express Company, together with its consolidated subsidiaries (“American Express,” the
“Company,” “we,” “us” or “our”), is a leading global payments, network and travel company that
offers its products and services throughout the world. We were founded in 1850 as a joint stock
association. We were incorporated in 1965 as a New York corporation.
Our headquarters are located in New York, New York in lower Manhattan. We also have offices
in other locations in North America, as well as throughout the world.
We have three reportable operating segments: Global Network & Merchant Services, U.S. Card
Services and International Card & Global Commercial Services,
and a Corporate & Other section,
which we describe below.
Securities Exchange Act Reports and Additional Information
We maintain an Investor Relations Web site on the Internet at http://ir.americanexpress.com.
We make available free of charge, on or through this Web site, our annual, quarterly and current
reports and any amendments to those reports as soon as reasonably practicable following the time
they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).
To access these, just click on the “SEC Filings” link under the caption “Financial Information &
Filings” found on our Investor Relations homepage.
You can also access our Investor Relations Web site through our main Web site at
www.americanexpress.com by clicking on the “About American Express” link, which is located at the
bottom of our homepage. Information contained on our Investor Relations Web site and our main Web
site is not incorporated by reference into this report or any other report filed with or furnished
to the SEC.
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Some of the statements in this report
constitute forward-looking statements. You can identify forward-looking
statements by words such as “believe,” “expect,” “anticipate,” “optimistic,”
“intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,”
“estimate,” “predict,” “potential,” “continue” or other similar expressions.
We discuss certain factors that affect our business and operations and factors
that may cause our actual results to differ materially from these
forward-looking statements under “Item 1A. Risk Factors” below.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they are made. We
undertake no obligation to update publicly or revise any forward-looking
statements.
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2006 Highlights
During 2006, American Express continued its strong performance of recent years. Compared with
2005, we delivered:
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net revenues of $27.1 billion, up 13% from $24.1 billion;
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income from continuing operations of $3.7 billion, up 16% from $3.2 billion;
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net income of $3.7 billion, which was essentially level with year-ago
results (reflects the inclusion of nine months of earnings of Ameriprise Financial,
Inc., which we spun-off to shareholders on September 30, 2005);
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diluted earnings per share based on income from continuing operations of
$3.01, up 18% from $2.56;
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diluted earnings per share based on net income of $2.99, up 1% from $2.97; and
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return on average equity of 34.7%, compared with 25.4%.
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These results met or exceeded our on-average and over-time financial targets of earnings per
share growth of 12% to 15%, revenue growth of at least 8% and return on equity of 33% to 36%.
For a complete discussion of our 2006 financial results, including financial information
regarding each of our reportable operating segments, see pages 30-111 of the Company’s 2006 Annual
Report to Shareholders, which are incorporated herein by reference. For a summary of the Company
and our reportable operating segments, and a discussion of our principal sources of revenue, see
pages 30-32 and pages 74-76, respectively, of the 2006 Annual Report to Shareholders.
Products and Services
We provide a variety of products and services worldwide, including, among others:
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global card network services;
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merchant acquisition and merchant processing for our network partners and
proprietary payments businesses;
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charge cards and credit cards for consumers and businesses worldwide;
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consumer and small business lending products;
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American Express
®
Travelers Cheques and Gift Cards;
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travel and business expense management products and services;
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business travel and travel management services;
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consumer travel services;
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point-of-sale and back-office products and services and marketing programs for
merchants;
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international banking products; and
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magazine publishing.
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In certain countries we have granted licenses to partially-owned affiliates and unaffiliated
entities to offer some of these products and services.
The Company’s various products and services are sold globally to diverse customer groups,
including consumers, small businesses, mid-market companies, large corporations, and
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banking institutions. These products and services are sold through various channels including
direct mail, online, targeted sales forces and direct response advertising.
Our
general purpose card network, card issuing and merchant acquiring and processing
businesses are global in scope. We are a world leader in providing charge and credit cards to
consumers, small businesses and corporations. These cards, which include cards issued by American
Express as well as cards issued by third-party banks and other institutions that are accepted on
the American Express network (collectively, “Cards”), are currently issued in over 40 currencies.
Our Cards permit Cardmembers to charge purchases of goods and services in most countries around
the world at the millions of merchants that accept cards bearing our logo. We added a net total of
7.0 million Cards in 2006, bringing total worldwide Cards-in-force to 78.0 million (including Cards
issued by third parties). In 2006, our worldwide billed business (spending on American
Express
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Cards, including Cards issued by third parties) was $561.5 billion.
Spend-Centric Model is Competitive Advantage
We believe that our “spend-centric” business model (which focuses on generating revenues
primarily by driving spending on our Cards and secondarily by finance charges and fees) has
significant competitive advantages. Average spending per Cardmember, which is substantially higher
than for our competitors, represents greater value to merchants in the form of loyal customers and
higher sales. This gives us the ability to earn a premium discount rate and invest in greater
value-added services for merchants and Cardmembers. As a result of the higher revenues generated
from higher spending, we have the flexibility to offer more attractive rewards and other incentives
to Cardmembers, which in turn create an incentive for them to spend more on their Cards. This
business model, along with our closed loop network, in which we are both the card issuer and the
merchant acquirer, gives us a competitive advantage that we seek to leverage to provide more value
to Cardmembers, merchants and Card issuing partners.
Our business as a whole has not experienced significant seasonal fluctuations, although travel
sales tend to be highest in the second quarter; 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.
The American Express Brand
Our brand and its attributes – trust, security, integrity, quality and customer service – are
key assets of the Company. We continue to focus on our brand by educating employees about these
attributes and by incorporating them into our programs, products and services. Our brand has been
rated one of the most valuable brands in the world in various surveys, and we believe it provides
us with a significant competitive advantage. We believe our brand and its attributes are critical
to our success, and we invest heavily in managing, marketing and promoting it. (We account for our
expenses in managing our brand advertising and related campaigns in the Global Network & Merchant
Services segment discussed below.) In addition, we place significant
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importance on trademarks, servicemarks and patents, and diligently protect our intellectual
property rights around the world.
GLOBAL NETWORK & MERCHANT SERVICES
Global Network Services
We operate a global general purpose charge and credit card network through our Global Network
Services (“GNS”) business. 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 merchants
globally.
Since May 1996, we have been pursuing a strategy of inviting U.S. banks and other institutions
to issue Cards on the American Express network, building on a business strategy we have implemented
successfully in a number of countries outside the United States, where we have many banks and other
financial institutions issuing Cards on the American Express network. By leveraging our global
infrastructure and the appeal of the American Express brand, we aim to broaden our Cardmember and
merchant base for our network worldwide. Our GNS business has established more than 105 card
issuing or merchant acquiring arrangements with banks and other institutions in 120 countries.
A key asset of our network is the American Express brand, which is one of the world’s most
highly recognized and respected brands.
Cards bearing our logo are issued by our principal operating subsidiary, American Express
Travel Related Services Company, Inc. (“TRS”), and certain of its subsidiaries and also by
third-party institutions, and are accepted at all merchant locations worldwide that accept American
Express-branded Cards. In addition, depending on the product, Cards bearing our logo are generally
accepted at ATM locations worldwide that accept Cards. TRS and its subsidiaries issue the vast
majority of Cards on our network.
GNS focuses on partnering with qualified third-party banks and other financial institutions
that choose to issue Cards accepted on our global network. Although we customize our network
arrangements to the particular market and our partner’s requirements, as well as to our strategic
plans in that marketplace, all GNS arrangements are designed to help issuers develop products for
their highest-spending and most affluent customers and to support the value of American Express
Card acceptance to merchants. We choose to partner with institutions who share a core set of
attributes such as commitment to high quality standards, strong marketing expertise and
compatibility with the American Express brand, and we require adherence to our product, brand and
service standards.
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Our GNS arrangements fall into three main categories.
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The use of the term
“partner” or “partnering” does not mean or imply a
formal legal partnership.
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The first type of GNS arrangement is known as an independent operator (“IO”) arrangement. As
of the end of 2006, we had 55 of these arrangements around the world. We pursue these arrangements
to expand the presence of the American Express network throughout the world, in markets in which we
do not offer a proprietary local currency card. Under this type of arrangement, the partner’s
local presence and relationships help us enhance the impact of our brand in the market, reach
merchant coverage goals more quickly, and operate at economic scale and cost levels that would be
difficult for us to achieve on our own. We license our bank partner to issue local currency Cards
in their market, including the classic Green, Gold and Platinum American Express Cards. In
addition, the majority of these partners serve as the merchant acquirer and processor for local
merchants. American Express retains the relationship with multi-national merchants. Our IO
partner owns the customer relationships and credit risk for the Cards it issues, and makes the
decisions about which customers will be issued Cards. GNS generates revenues in IO arrangements
from fees paid by the IO partner derived from the number of Cards it issues, the level of
Cardmember spending on those Cards, royalties and the total charge volume at merchants with which
the IO partner has an agreement to accept Cards. Our IO partner is responsible for transaction
authorization, billing and pricing, Cardmember servicing and funding Card receivables for its
Cards.
Examples of countries where we have entered into IO arrangements include Ecuador, Greece,
South Korea, Pakistan, Croatia, Peru, Portugal and Vietnam. In 2006, we sold our proprietary card
issuing and related businesses in Brazil, Malaysia and Indonesia to Global Network Services IO
partners Banco Bradesco S.A., Maybank and Bank Danamon, respectively. Through our partnerships
with these leading financial institutions, we believe we can accelerate growth in Cardmember
spending, Cards-in-force and merchant acceptance in these countries.
The second type of GNS arrangement is known as a network card license (“NCL”) (which we
formerly referred to as a non-proprietary license). At the end of 2006, we had 48 of these
arrangements in place. We pursue these arrangements to increase our brand presence and gain market
share in markets in which we have a proprietary Card issuing business, and in a few cases those in
which we also have IO partners. In an NCL arrangement, we grant the third-party financial
institution a license to issue American Express-branded Cards. The NCL issuer owns the customer
relationships for all Cards it issues, provides customer service to its Cardmembers, transaction
authorization, billing and credit management, and is responsible for the marketing of the Cards, and designs the Card product features
(including rewards and other incentives for Card holders), subject to
meeting certain standards. We operate the merchant network, route
and process Card transactions from the merchant’s point-of-sale through submission to the issuer,
and settle with issuers. The NCL is the type of arrangement that we have implemented
with banks in the United States.
Examples of NCL arrangements include our relationships with Citibank (South Dakota), N.A. and
Bank of America in the United States, Lloyds TSB Bank in the United Kingdom and Westpac Banking
Corporation in Australia.
GNS’ revenues in NCL arrangements are related to a variety of factors, including the level of
Cardmember spending, royalties and fees charged to the Card issuer based on charge volume, and our
provision of value-added services such as Cardmember insurance products and
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other Card features and benefits for the issuer’s Cards. As indicated above, the NCL issuer
bears the credit risk for the issued Cards, as well as the Card marketing and acquisition costs,
Cardmember fraud risks and costs of rewards and other loyalty initiatives. We bear the risk
arising from the GNS partner’s potential failure to meet its settlement obligations to us. We
mitigate this risk by partnering with issuers that we believe are financially sound and will meet
their obligations, and by monitoring their financial health, their compliance with the terms of
their relationship with us and the political and economic environment in which they operate. In
addition, we generally require NCL issuers to post a letter of credit, bank guarantee or other
collateral to reduce this risk.
The third type of GNS arrangement is a joint venture. We have utilized this type of
arrangement in Switzerland, Belgium and several other countries. In these markets, TRS joins with
a third party to establish a separate business in which TRS has a significant ownership stake. The
joint venture typically signs new merchants to the American Express network and issues local
currency Cards that carry our logo. In a joint venture arrangement, the joint venture assumes the
Cardmember credit risk and bears the operating and marketing costs. The economics of the joint
venture are similar to our proprietary Card issuing business, which we discuss below under “U.S.
Card Services,” and we receive a portion of the joint venture’s income depending on the level of
our ownership interest.
Gross revenues we receive per dollar spent on a Card issued by a GNS partner are lower than
those from our proprietary card issuing business. However, because the GNS partner is responsible
for most of the operating costs and risk of its card issuing business, our expenses are lower than
those in our proprietary card issuing business. The GNS business model generates an attractive
earnings stream and risk profile that requires a lower level of capital support. The return on
equity in our GNS business can thus be significantly higher than that of our proprietary card
issuing business. Because the majority of GNS costs are fixed, the GNS business is highly
scalable. GNS partners benefit from their association with the American Express brand and their
ability to gain attractive revenue streams and expand and differentiate their product offerings
with innovative marketing programs.
In 2006, GNS signed 11 new partners to issue Cards on the American Express network. GNS
partners launched over 125 new products during 2006, bringing the total number of American
Express-branded GNS partner products to approximately 550. Outside the United States, we have
signed a number of agreements over the past year in markets such as Brazil, Indonesia, Malaysia and
Turkey.
Some of the highlights of our GNS business outside the United States in 2006 include:
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Launch of the Virgin Atlantic American Express Credit Card in conjunction
with Virgin Atlantic and MBNA Europe Bank;
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Launch of the dual currency ICBC Corporate American Express Card and the
ICBC China Petrol American Express Card with Industrial and Commercial Bank of China
and PetroChina Company Limited;
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Launch of the SAA Voyager Credit Card in partnership with Nedbank and South
African Airways; and
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Launch of the Korean Air American Express Card, the first American
Express-branded airline cobrand card in Korea, in conjunction with Samsung Card and
Korean Air.
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In contrast to the situation outside the United States, where banks and other qualified
institutions have issued Cards on our network for many years, until 2004 no major U.S. banks had
issued Cards in the United States on the American Express global network. This situation was the
result of rules and policies of Visa U.S.A. and Visa International Service Association (together,
“VISA”) and MasterCard, Incorporated and MasterCard International, Inc. (together, “MasterCard”) in
the United States, which mandated expulsion of members that issued American Express-branded Cards.
No bank was willing to risk forfeiting membership in VISA and/or MasterCard (collectively, the
“bankcard associations”) to issue cards on our network.
However, as a consequence of the decision in a lawsuit filed in October 1998 by the U.S.
Department of Justice against VISA and MasterCard in which such rules and policies were found to
violate the U.S. antitrust laws, these rules and policies were finally repealed in late 2004 after
the U.S. Supreme Court declined to hear VISA’s and MasterCard’s appeal of the lower courts’ rulings
against them. The Supreme Court’s decision not to hear the appeals marked the end of VISA’s and
MasterCard’s rules that prevented their member banks from issuing cards on competitive networks and
cleared the way for implementation of the trial court’s order requiring the repeal of the illegal
rules. We view this decision as a major victory for U.S. consumers as well as U.S. banks because
it opened the door to more vigorous network competition and more innovative card products and
services.
For American Express, the conclusion of the litigation brought by the Justice Department meant
that we were now able to open our network to other card issuers in the United States, just as we
have done internationally. Building a network business in the United States that operates in
addition to our proprietary card business provides us with new and substantial opportunities for
growth. We have acted on this decision by entering into several GNS arrangements with financial
institutions in the United States, which have all launched products in the marketplace. These
companies include MBNA, Bank of America, Citibank (South Dakota), N.A., HSBC Bank Nevada N.A.,
Barclays, which issues Cards to U.S. wealth management clients of UBS Financial Services Inc., and
USAA Federal Savings Bank. In addition, we have a GNS arrangement with GE Money under which GE Money Bank issues Cards
accepted on our network, the first of which is the Dillard’s American Express Card.
In November 2004, we filed a lawsuit against VISA, MasterCard and certain of their member
banks seeking monetary damages resulting from the illegal rules that were struck down in the U.S.
Department of Justice lawsuit discussed above. (You can read more about this lawsuit in the “Legal
Proceedings” section of this report below.)
With approximately 550 different Card products launched on our network so far by our bank
partners, GNS is an increasingly important business that is strengthening our brand visibility
around the world, driving more transaction volume onto our merchant network and increasing the
number of merchants accepting the American Express Card. GNS enables us to expand our global
presence without having to invest large amounts of resources, as our GNS
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partners already have established attractive customer bases they can target with American
Express-branded products. Since 1999, Cards-in-force issued by GNS partners have grown at a
compound annual growth rate of 27%, and totaled 15 million Cards at the end of 2006. Outside the
United States, approximately 50% of new Cards issued in 2006 were Cards issued by one of our GNS
partners. Spending on these Cards has grown at a compound annual rate
of 25% since 1999, and
totaled $35.4 billion in 2006.
With the increase in electronic transmission of credit card transaction data over merchants’
point-of-sale systems, the necessity for merchants and merchant processors to secure this data
against accidental or intentional compromise using a standard protocol that applies to all card
types became clear to American Express and the other major card networks. In 2006, in order to
strengthen the security practices of merchants and payment processing firms and to secure payment
account data in a globally consistent manner, we and Discover Financial Services, JCB, MasterCard
Worldwide and Visa International formed PCI Security Standards Council, LLC (“PCI Co.”), an
independent standards-setting organization to manage the ongoing evolution of the Payment Card
Industry (PCI) Data Security Standard, which focuses on improving payment card account security
throughout the transaction process. By establishing PCI Co. to manage the PCI Data Security
Standard, we and the other founders have developed a common standard that is more accessible and
efficient for participants in the payment card industry. All merchants and service providers that
store, process and transmit payment card data are required to comply with the PCI Data Security
Standard. PCI Co. is dedicated to driving greater education, awareness and adoption of the PCI
Data Security Standard to ensure that all stakeholders involved in the payment process conduct
their business responsibly.
Regulation
Local regulations governing the issuance of charge and credit cards have not been a
significant factor impacting our 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 general purpose cards. Accordingly, our GNS partners have generally not
had difficulty in obtaining appropriate government authorization in the markets in which we have
chosen to enter into GNS arrangements. As a network service provider to regulated U.S. banks, our
GNS business is subject to review by certain federal bank regulators, including the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift
Supervision. As the operator of a general purpose card network, we are also subject to the USA
PATRIOT Act of 2001 (the “Patriot Act”), which requires us to conduct due diligence on our GNS
partners to ensure that they maintain sufficient anti-money laundering and “know your customer”
programs to prevent our network from being used for money laundering or terrorist financing.
Global Merchant Services
We operate a global merchant services business, which includes signing merchants to accept
Cards, and accepting and processing Card transactions and paying merchants that accept Cards for
purchases made by Cardmembers with Cards (“Charges”). We also provide point-of-
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sale and back-office products and services and marketing programs to merchants, leveraging the
capabilities provided by our closed loop structure.
Our
objective is for Cardmembers to be able to use the Card wherever and however they desire,
as well as to increase merchant coverage in key geographic areas and in selected new industries
that have not traditionally accepted general purpose credit and charge cards as a means of payment.
We add new merchants to our network through a number of sales channels: a proprietary sales force,
third-party sales agents, strategic alliances with banks, the Internet, telemarketing and inbound
“Want to Honor” calls (i.e., merchants desiring to accept the Card contacting us directly).
Since the early 1990s, we have significantly expanded the number of merchants that accept our
Card products as well as the kinds of businesses that accept the Card. In recent years, we have
focused our efforts on increasing the use of our Cards for everyday spending. In 1990, 64% of our
U.S. billings came from the travel and entertainment sectors and 36% came from retail and other
sectors. That proportion has now been more than reversed. In 2006, U.S. non-travel and
entertainment billings represented over 65% of the U.S. billed business on American Express Cards.
This shift resulted from the growth, over time, in the types of merchants that began to accept
charge and credit cards in response to consumers’ increased desire to use these cards for more of
their purchases, and our focus on expanding Card acceptance to meet Cardmembers’ needs.
During 2006, we continued our efforts to encourage consumers to use the Card for everyday
spending. We increased the number and types of merchants in retail and everyday spending
categories that accept the Card, such as quick-serve restaurants, mass transit, healthcare and
recurring billing merchants.
In addition, we also continued our drive of bringing Card acceptance to industries where cash
or checks are the predominant form of payment. For example, in the area of real estate, we signed
an agreement with The Moinian Group to allow down-payments for luxury condominiums to be charged on
the American Express Card. Card acceptance for private jets and residence/destination clubs, as
well as business-to-business purchases, are other examples of new industries in which the Card is
now accepted, and which have the potential to increase our average Cardmember spending.
Globally, acceptance of general purpose charge and credit cards continues to increase,
including among merchants in industries that have not traditionally accepted charge and credit
cards. As in prior years, during 2006, we continued to grow merchant acceptance of Cards around
the world and to refine our approach to calculating merchant coverage in accordance with changes in
the marketplace. Management estimates that, as of the end of 2006, our merchant network in the
United States accommodated more than 90% of Cardmembers’ general purpose charge and credit card
spending, and our international merchant network as a whole accommodated approximately 80% of our
Cardmembers’ general purpose charge and credit card spending. These percentages are based on
comparing our Cardmembers’ spending on our network currently with our estimate of what our
Cardmembers would spend on our network if all merchants that accept general purpose credit and
charge cards accepted American Express Cards.
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We earn “discount” revenue from fees charged to merchants for accepting Cards as payment for
goods or services sold. The merchant discount is the fee charged to the merchant for accepting
Cards and is generally expressed as a percentage of the amount charged on a Card. The merchant
discount is generally deducted from the amount of the payment that the “merchant acquirer” (in most
cases, TRS or one of its subsidiaries) pays to a merchant for Charges submitted. A merchant
acquirer is the entity that contracts for Card acceptance with the merchant, accepts transactions
from the merchant, pays the merchant for these transactions and submits the transactions through
the American Express network to the appropriate Card issuer for billing to the Cardmember. When a
Cardmember presents the Card for payment, the merchant creates a record of charge for the
transaction and submits it to the merchant acquirer for payment. To the extent that TRS or one of
its subsidiaries is the merchant acquirer, the merchant discount is recorded by us as discount
revenue at the point-of-sale.
Where we act as the merchant acquirer and the Card presented at a merchant is issued by a
third-party bank or financial institution, such as in the case of our GNS partners, we will make
financial settlement to the merchant and receive the discount revenue. In our role as the operator
of the Card network, we will also receive financial settlement from the Card issuer, who retains an
issuer rate (i.e., the individually negotiated amount that Card issuers receive for transactions
charged on our network with Cards that they issue, which is usually expressed as a percentage of
the charged amount). The difference between the discount revenue (received by us in the form of
the merchant discount) and the issuer rate received by the Card issuer generates a return to us.
Where we are the Card issuer and the merchant acquirer is a third-party bank or financial
institution (which can be the case in a country in which the IO is the local merchant acquirer), we
receive an issuer rate in our settlement with the merchant acquirer, which is recorded by us as
discount revenue.
The following diagrams depict the relationships among the parties in a point-of-sale
transaction effected on the American Express network where we act as both the Card issuer and
merchant acquirer (the “3-Party Model”) and under an NCL arrangement where third-party financial
institutions in the United States act as Card issuers (the “NCL Model”):
The merchant discount rate that we charge is principally determined by the value we deliver to
the merchant and generally represents a premium over other networks.
We deliver greater value to the
merchant through higher spending Cardmembers relative to cards issued on
10
competing card networks, the overall higher volume of spending by all Cardmembers, marketing
expertise, and Cardmembers’ insistence on using their Cards when enrolled in rewards or other Card
loyalty programs, including those as part of our Corporate Card program.
The merchant discount rate varies with the industry in which the merchant does business, the
Charge volume, the timing and method of payment to the merchant, the method of submission of
Charges and, in certain instances, the geographic scope of the Card acceptance agreement signed
with us (local or global) and the Charge amount. In 2006, as in prior
years, we experienced some reduction in our global weighted average merchant discount rate,
principally reflecting the impact of selective repricing initiatives, continued changes in the mix
of business and volume-related pricing adjustments. We expect that the effect of these factors will
likely continue to result in some erosion over time of the weighted average merchant discount rate,
particularly outside the United States.
While most merchants understand our merchant discount rate pricing in relation to the value
provided, we do encounter a relatively small number of merchants that accept our Cards, but tell
their customers that they prefer to accept another type of payment and, consequently, suppress use
of the Card. We respond to this issue aggressively to ensure that our Cardmembers are able to use
their Card where and when they want to. We have made progress by: concentrating on acquiring
merchants where Cardmembers want to use the Card; continuing to enhance the value we provide by
programs such as American Express Selects
®
and My WishList, which enable
merchants to gain valuable exposure and additional sales by providing exclusive offers and
experiences to American Express Cardmembers; providing better and earlier communication of our
value proposition; and, when necessary, cancelling merchants who suppress the use of our Card
products.
In the case of My WishList, a seasonal Web site we developed in conjunction with merchant
partners, we are able to greatly enhance our merchant value. Through the site, we provide
Cardmembers with opportunities to buy a limited number of sought-after items, such as automobiles,
trips, electronics and jewelry, at a fraction of their retail prices, as well as access to numerous
offers from top brands. Through American Express Selects, we make available to our Cardmembers
high quality shopping, dining and travel values from merchants all over the world, and these
merchants have an opportunity to reach out to our Cardmembers.
Merchant satisfaction is a key goal of our Global Merchant Services business. We focus on
understanding and addressing factors that influence merchant satisfaction, including developing and
executing innovative programs that increase Card usage at merchants, using technology resources,
our closed loop and deep marketing expertise and strengthening our relationships with merchants
through an expanding roster of services that help them meet their business goals. We offer a full
range of point-of-sale solutions, including integrated point-of-sale terminals and direct links
that allow merchants to accept American Express Cards, as well as bankcards, debit cards and
checks, and contactless point-of-sale terminals that enable merchants to accept contactless payment
products including our ExpressPay from American Express
®
products. Virtually all proprietary point-of-sale solutions
support direct processing (i.e., direct connectivity) to American Express, which lowers a
merchant’s cost of Card acceptance and avoids payment delays caused by a third party.
11
ExpressPay,
a contactless payment feature, is designed to be a fast, easy-to-use
alternative for making everyday purchases at merchants where speed
and convenience is important. ExpressPay is now accepted at over 30,000 places in the United States,
including top quick-service restaurant, movie theater, drug store and convenience store chains.
ExpressPay, powered by radio-frequency technology, is available both in a key-fob form and has been
introduced within several Card products. In 2006, we expanded merchant coverage of ExpressPay by
partnering with organizations like the Utah Transit Authority, Jack in the Box, and Arby’s
Restaurant Group, Inc. at participating locations.
We continue to focus our efforts on the fast-growing recurring billing industry through
Automatic Bill Payment, a service that allows merchants to bill Cardmembers on a regular basis for
recurring charges such as insurance premiums, newspaper subscriptions, health club memberships,
commutation costs and cable television service. We have also made modifications to our host authorization
system to approve more transactions and reduce Cardmember inconvenience at the point-of-sale
without a corresponding increase in fraud or credit losses.
Wherever we manage both the acquiring relationship with merchants and the Card issuing side of
the business, there is a “closed loop,” which distinguishes our network from the bankcard networks
in that there is access to information at both ends of the Card transaction. We maintain a direct
relationship with both our Cardmembers and our merchants, and we handle all key aspects of those
relationships. Our relationships allow us to analyze information on Cardmembers’ spend. This
enables us to provide targeted marketing for merchants and special offers to Cardmembers through a
variety of channels, subject to compliance with our privacy policy and legal requirements. We
protect the confidentiality of this data, and comply with strict privacy, firewall and applicable
legal requirements. We work closely with our Card issuing bank partners to maintain key elements of this closed
loop, which permits them to customize marketing efforts, deliver greater value to their Cardmembers
and help us to direct increased business to merchants who accept the Card.
As the merchant acquirer, we have certain contingent liabilities that arise if a billing
dispute between a Cardmember and a merchant is settled in favor of the Cardmember. Drivers of this
liability are returns in the normal course of business, disputes over fraudulent charges, the
quality or non-delivery of goods and services and billing errors. Typically, we offset the amount
due to the Cardmember against payments for the merchant’s current or future Charge submissions. We
can realize losses when offsetting submissions cease, such as when the merchant commences a
bankruptcy proceeding or goes out of business. We actively monitor our merchant base to assess the
risk of this exposure. When appropriate, we will take action to reduce the net exposure to a given
merchant by requiring a parent company guarantee or letter of credit, holding cash reserves funded
through Charge payable holdbacks from a merchant, lengthening the time between when the merchant
submits a Charge for payment and when we pay the merchant or implementing other appropriate risk
management tools. We also establish reserves on our balance sheet for these contingencies.
12
In some markets outside the United States, particularly in the United Kingdom, third-party
processors and some bankcard acquirers have begun to offer merchants the capability of converting
credit card transactions from the local currency to the currency of the cardholder’s residence
(i.e., the cardholder’s billing currency) at the point-of-sale, and submitting the transaction in
the cardholder’s billing currency, thus bypassing the traditional foreign currency conversion
process of the card network. This practice is known as “dynamic currency conversion.” If a
merchant utilizes a dynamic currency conversion process, the merchant and processor share any fee
assessed or spread earned for converting the transaction at the point of sale, thus reducing or
eliminating revenue for card issuers and card networks relating to the conversion of foreign
charges to the cardholder’s billing currency. This practice is not widespread, and it is uncertain
to what extent consumers will prefer to have foreign currency transactions converted by merchants
in this way. Our policy generally requires merchants to submit Charges and be paid in the currency
of the country in which the transaction occurs, and we convert the transaction to the Cardmember’s
billing currency.
Competition
Our network competes with other charge and credit card networks, including, among others,
VISA, MasterCard, Diners Club (which, in the United States and Canada, has been folded into the
network operated by MasterCard), Discover, a business unit of Morgan Stanley (primarily in the
United States), and JCB Co., Ltd. (primarily in Asia). We are the third largest general purpose
charge and credit card network based on charge volume, behind VISA and MasterCard, which are larger
than we are in most markets.
The principal competitive factors that affect the network and merchant service business
include:
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the number of Cards-in-force and amount of spending on these Cards;
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the quantity and quality of the establishments where the Cards can be used;
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the economic attractiveness to card issuers and merchant acquirers of
participating in the network;
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the success of marketing and promotional campaigns;
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reputation and brand recognition;
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innovation in systems, technology and product offerings;
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the quality of customer service;
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the security of Cardmember and merchant information; and
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cost of Card acceptance relative to the value provided.
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Another aspect of network competition is the recent emergence and rapid growth of alternative
payment mechanisms and systems, which include aggregators (such as PayPal), wireless payment
technologies (including using mobile telephone networks to carry out transactions), pre-paid
systems and systems linked to credit cards, and bank transfer models. In the United States, a
“credit push” payment mechanism is being developed to re-direct online customers to payment
systems based on ACH (automated clearing house, i.e., inter-bank
13
transfer), and existing debit networks are making efforts to develop online PIN functionality,
which could potentially reduce the relative use of charge and credit cards online.
Some of our competitors have attempted to replicate our closed loop structure, such as VISA’s
Visa Incentive Network. Although it remains to be seen how effective VISA will be, efforts by VISA
and other card networks and payment providers to replicate the closed loop speak both to its
continued value, as well as the intense competitive environment in which we operate.
Regulation
In recent years, regulators in several countries have focused on the fees involved in the
operation of card networks, including the fees merchants are charged to accept cards. Regulators
in the United Kingdom, Poland, Germany, Spain, the European Union, Australia, Mexico and
Switzerland, among others, have conducted, and are continuing to conduct, investigations into the
way bankcard network members collectively set the “interchange,” which is the fee paid by the
bankcard merchant acquirer to the card issuing bank. The interchange fee is generally the largest
component of the merchant discount rate charged to merchants by the merchant acquirer for bankcard
debit and credit charges. Although the regulators’ focus has primarily been on VISA and MasterCard
as the dominant card networks, antitrust actions and government regulation of the bankcard
associations’ pricing could ultimately affect all networks. Downward movement of interchange and
merchant discount fees may affect the relative economic attractiveness to card issuers and merchant
acquirers of participation in a particular network. Lower interchange and/or merchant discount
revenue may lead card issuers to look for other sources of revenue such as annual card fees, as
well as to reduce costs by scaling back or eliminating rewards programs. In certain countries
where antitrust actions or regulations have forced our competitors to lower their fees, we have
made adjustments to our own fee arrangements with merchants to reflect local competitive trends.
For example, reductions in bankcard interchange mandated by the Reserve Bank of Australia reforms
in 2003 have resulted in lower merchant discount rates for VISA and MasterCard. As a result of
changes in the marketplace, we have reduced our own merchant discount rates in Australia although
we have nevertheless been able to increase billed business and the number of merchants accepting
our Cards. In addition, under legislation enacted in Argentina, a merchant acquirer is required to
charge the same merchant discount rate to all merchants in the same industry category, and merchant
discount rates cannot exceed 3%.
In its Final Report on the retail banking sector issued in January 2007, which included review
of the payment cards industry, including interchange fees, the European Commission appears to favor
competition law enforcement tools, rather than regulating price levels, as the preferred means to
address perceived issues of insufficient competition in the European payment cards industry. The conclusions
of the European Commission as expressed in its Final Report do not have the force of law, but may
be used as the basis for future legislation or regulation in the European Union countries. In
2007, as an example, the competition regulator in Poland found insufficient basis for VISA and
MasterCard interchange fees and ordered the associations to stop their current interchange setting
practices, and the banks are appealing that decision.
14
In the United States, the Board of Governors of the Federal Reserve System and various Federal
Reserve Banks have been following developments on interchange and have held several conferences
focused on credit card interchange rates. While the Federal Reserve has expressed interest in
monitoring this issue, it has not indicated the need to regulate interchange rates in the United
States. In Congress, there have been several hearings on Visa/MasterCard interchange over the last
year. During 2006, there were also a number of bills proposed in individual state legislatures
seeking to impose caps on credit card interchange or to prohibit card companies from charging
merchant discount on the state tax portion of credit card purchases. None of those bills was
enacted. It is expected that Congressional hearings and similar proposed state legislation will
continue during 2007. In the event that governmental or regulatory activity to limit interchange
continues or increases, our revenues and profitability could be adversely affected.
Regulators, including most recently the European Commission, have considered the industry
practice of prohibiting merchants from passing the cost of merchant discount fees along to
consumers through surcharges on card purchases. Although some countries, such as the United
Kingdom, have for a number of years permitted merchants to levy a surcharge on credit card
purchases, provided that surcharges were clearly disclosed, there has to date been a relatively low
overall incidence of surcharging, as merchants do not want to risk offending customers or losing
them to competitors that do not assess surcharges for credit card purchases. In its Final Report,
the European Commission indicated that prohibiting surcharging appeared to restrict inter-network
competition and may constitute a barrier to entry for alternative, non-cash payment instruments.
In Australia, we have seen selective merchant surcharging in certain industries such as
telecommunications and, in some cases, on a basis that is greater than applied to the bankcard
networks.
The European Commission will likely be enacting a new legislative directive that will put in
place a licensing and supervision framework for all electronic payment methods in the European
Union over the course of the next several years. The objective is to create a single, internal
payments market throughout the European Union. The directive will likely be finalized in 2007 and
adopted as legislation in the member states of the European Union through to the end of 2008. By
2010, licensing will be required and supervision will commence for American Express’ card operations
in the European Union. One provision of this draft directive gives merchants the right to
surcharge, subject to disclosure requirements. At the same time, new technical standards are being
adopted by the industry. All of the foregoing will entail costs to implement and maintain.
U.S. CARD SERVICES
As a significant part of its proprietary Card issuing business, TRS and its U.S. banking
subsidiaries issue a wide range of Card products and services to consumers and small businesses in
the United States. Our consumer travel business, which provides travel services to Cardmembers and
other consumers, complements our core Card business, as does our travelers check and prepaid
services business. The proprietary Card business offers a broad set of card products to attract
our target customer base. Core elements of our strategy are:
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focusing on acquiring and retaining high-spending, creditworthy
Cardmembers across multiple groups;
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designing Card products with features that appeal to specific customer
segments;
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the use of strong incentives to drive spending on our various Card
products, including our Membership Rewards
®
program and other
rewards features;
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the use of loyalty programs such as Delta SkyMiles
®
,
sponsored by our cobrand and other partners to drive spending;
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the development and nurturing of wide-ranging relationships with cobrand
and other partners;
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a multi-card strategy (having multiple Card products in customers’ wallets); and
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high-quality customer service.
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Consumer and Small Business Services
We and our licensees offer individual consumer charge Cards such as the American Express Card,
the American Express One
®
Card, the American Express
®
Gold Card, the Platinum
Card
®
, and the ultra-premium Centurion
®
Card; revolving credit Cards such as
Blue from American Express
®
, Blue Cash
®
Card from American Express and Blue
Sky from American Express, a travel rewards Card launched in 2005; and a variety of Cards sponsored
by and cobranded with other corporations and institutions, such as the Delta SkyMiles
®
Credit Card from American Express, True Earnings
SM
Card exclusively for Costco Members,
Starwood Preferred Guest
®
Credit Card and JetBlue Card from American Express.
Charge Cards
Our charge Cards, which 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 current spending patterns, payment history,
credit record, and financial resources. Cardmembers generally must pay the full amount billed each
month, and no finance charges are assessed on the balance. 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 cancelled. The no preset-spending limit and pay-in-full nature of these products attract
high-spending Cardmembers who want to use a charge Card to facilitate larger payments.
The charge Cards also offer enrollment services to Cardmembers. The Sign &
Travel
®
program gives qualified U.S. Cardmembers the option of extended
payments for airline, cruise and certain travel charges that are purchased with our charge Cards.
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.
Revolving Credit Cards
We offer a variety of revolving credit Cards. These Cards have a range of different payment
terms, grace periods and rate and fee structures. Since late 1994, our lending balance growth has been among the
16
top tier of card issuers. Much of this growth has been due to the breadth of our lending
products, such as Blue from American Express, Blue Cash from 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 our “lending on charge” options (such as the Sign & Travel
and Extended Payment Option programs described above).
Cobrand Cards
We issue Cards under cobrand agreements with selected commercial firms in the United States.
The competition among card issuers and networks for attractive cobrand card partnerships is quite
intense because they can generate high-spending loyal cardholders. The duration of our cobrand
arrangements generally ranges from five to ten years. Cardmembers earn rewards provided by the
partners’ respective loyalty programs based upon their spending on the cobrand Cards, such as
frequent flyer miles, hotel loyalty points and cash back. We make payments to our cobrand
partners, which can be significant, based primarily 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. We expense amounts due under cobrand arrangements in the month
earned. Payment terms vary by arrangement, but are monthly or quarterly. Generally, once we make
payment to the cobrand partner, the partner is solely liable for providing
rewards to the Cardmember under the cobrand partner’s own loyalty program. As the issuer of the
cobrand card, we retain all the credit risk with the Cardmember and bear the receivables funding
and operating expenses for such cards. The cobrand partner retains the risk associated with the
miles, points or other currency earned by the Cardmember under the partner’s loyalty program.
Cobrand Partnerships with Financial Services Institutions
We also issue Cards that are marketed under cobrand partnership arrangements with financial
services partners. Such partnerships involve the offering of a standard product (issued by TRS or
one of its subsidiaries) to customers of the financial services partner, generally cobranded with
the partner’s name on the Card. Under these arrangements, we make payments to the financial
services 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 duration of such
arrangements generally ranges from three to seven years.
For example, during 2005 we established an alliance with Guaranty Bank to distribute cobranded
cards to Guaranty’s small business customers throughout its branch network in Texas and California.
In 2006, we expanded this partnership to include a cobranded American Express Preferred Rewards
Gold Card, to be offered to Guaranty Bank’s consumer customers at its various locations. This past
year, we also announced a strategic bank partnership between OPEN from American Express and
Sovereign Bank, under which Sovereign will offer American Express Business Cards to small business
customers in the Northeast.
American Express Centurion Bank and American Express Bank, FSB as Issuers of Certain Cards
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Our revolving credit Cards in the United States are issued by American Express Centurion Bank
(“Centurion Bank”), which markets primarily through direct mail and other remote marketing
channels, and American Express Bank, FSB (“AEBFSB”), which markets primarily through in-person
selling and third-party cobrand partners. Both banks are wholly owned subsidiaries of TRS.
Centurion Bank is a Utah-chartered industrial bank regulated, supervised and regularly
examined by the Utah Department of Financial Institutions and the Federal Deposit Insurance
Corporation (“FDIC”). Centurion Bank is an FDIC-insured depository institution. AEBFSB is a
federal savings bank regulated, supervised and regularly examined by the Office of Thrift
Supervision (“OTS”), a bureau of the U.S. Department of the Treasury. AEBFSB is an FDIC-insured
depository institution. The activities of Centurion Bank and AEBFSB are subject to examination by
their respective regulators. Both banks take steps to maintain compliance programs to
address the various safety and soundness, internal control and compliance requirements, including anti-money laundering
requirements, that apply to them. You can find a further discussion of the anti-money laundering
initiatives affecting us under “Corporate and Other” below.
Centurion Bank is subject to the risk-based capital adequacy requirements promulgated by the
FDIC. Under these regulations, a bank is deemed to be well-capitalized if it maintains a tier one
risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a
leverage ratio of at least 5%. Based on Centurion Bank’s tier one risk-based capital, total
risk-based capital and leverage ratios, Centurion Bank was considered
to be well-capitalized at
December 31, 2006.
AEBFSB is subject to the risk-based capital adequacy requirements promulgated by the OTS.
Under these regulations, a federal savings bank is deemed to be well-capitalized if it maintains a
tier one risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10%,
and a tier one core capital ratio of at least 5%. Based on AEBFSB’s tier one risk-based capital,
total risk-based capital and tier one core capital ratios, AEBFSB was considered to be
well-capitalized at December 31, 2006.
Card Pricing and Account Management
Certain of our Cards, particularly charge Cards, charge an annual fee that varies based on the
type of Card and the number of Cards for each account. We also offer many revolving credit Cards
with no annual fee but on which we assess finance charges for revolving balances. Depending on the
product, we also charge Cardmember fees to participate in rewards programs, for account performance
(e.g., late fees) or for certain services (e.g., additional copies of account statements). We
apply standards and criteria for creditworthiness to each Cardmember through a variety of means
both at the time of initial solicitation or application and on an ongoing basis during the Card
relationship. We use sophisticated credit models and techniques in our risk management operations
and believe that our strong risk management capabilities provide us with a competitive advantage.
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Membership Rewards
®
Program
The Membership Rewards program from American Express has over 1,300 redemption partners
worldwide and is offered in 98 markets. The program allows Cardmembers to earn one point for
virtually every dollar charged on eligible, enrolled American Express
®
Cards,
and then redeem their points for a wide array of rewards, including travel, retail merchandise,
dining and entertainment, financial services and even donating their points to benefit tens of
thousands of charities. Points have no expiration date, and there is no limit on the number of
points one can earn.
In
2006, we introduced innovative features such as
First
Collection
SM
portfolio, a luxury rewards tier
exclusively for Platinum
Card
®
and Centurion
®
Card members. Redemption partners include some of the world’s
finest retail establishments and service providers, such as Tiffany & Co., Lamborghini and Oberoi
Hotels & Resorts. We also introduced
Bonus Points
Mall
SM
program, an online gateway to more than 100
retailers, where Cardmembers can earn double Membership Rewards points for their purchases. We
also redesigned our Web site to deliver enhanced capabilities. In 2007, we plan to introduce a
tiered structure that will include tailored rewards offerings and
services for our premium Cards.
When a Cardmember enrolled in the Membership Rewards program uses the Card, we establish
reserves to cover the cost of estimated future reward redemptions for points earned to date. When
a Membership Rewards program enrollee redeems a reward using Membership Rewards points, we make a
payment to the Membership Rewards program partner providing the reward pursuant to contractual
arrangements. Because of higher charge volumes and increased customer participation in Membership
Rewards, the expense of the program has increased both in the United States and internationally
over the past several years and continues to grow.
Despite the increasing costs of the Membership Rewards program as penetration and usage
expand, it plays a vital role in our profitability. The program continues to be an important
driver of Cardmember spending and loyalty. We believe, based on historical experience, that
Cardmembers enrolled in rewards programs yield higher spend, stronger credit performance and
greater profit for us. For the three-year period through the end of 2006, total spending by U.S.
Membership Rewards participants increased by 66%. By offering a broader range of redemption
choices, we have given our Cardmembers more flexibility in the use of their rewards points and
favorably affected our average cost per point. We continually seek to optimize the overall
economics of the program and make changes to enhance its value to Cardmembers. Our program is also
valuable to merchants that become redemption partners as we bring them high-spending Cardmembers
and new marketing channels to reach these Cardmembers.
Cardmember Special Services and Programs
Throughout the world, our Cardmembers have access to a variety of fee-free and fee-based
special services and programs, depending on the type of Cards they have and their country of
residence. Examples of these special services and programs include:
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the Membership Rewards program;
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Global Assist
SM
Hotline;
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Emergency Check Cashing Privileges;
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Buyer’s Assurance Plan;
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Automatic Flight Insurance;
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Car Rental Loss and Damage Insurance;
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Premium Baggage Protection;
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Purchase Protection
Plan;
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Assured Reservations;
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Emergency Card Replacement;
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Online Fraud Protection Guarantee;
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Return Protection;
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Credit Card Registry;
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Manage Your Card Account Online;
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Credit Bureau Monitoring and Reporting;
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Online Year End Summary;
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Identity Theft Assistance; and
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Roadside Assistance – Anywhere;
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Event Ticket Protection Plan.
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Automatic Bill Pay;
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During 2006, we began “Membership Changes Everything
SM
,” a five-week series of free activities
in the New York City area for Cardmembers who carry American Express-issued Cards, which was
designed to exhibit the benefits and services that accompany Card membership.
We offer the Platinum Card, a charge Card that provides access to additional and enhanced
travel, protection, personal assistance and other services. In addition, we offer the
Centurion
®
Card, an ultra-premium charge card providing highly personalized
customer service and an array of travel, lifestyle and financial benefits.
OPEN
from American Express
®
In addition to our U.S. Consumer Card business, through AEBFSB we are also a leading
provider of financial services to small businesses (firms that generally have less than 100
employees and/or sales of $10 million or less), a key growth area in the United States. OPEN from
American Express (“OPEN”) offers small business owners a wide range of
tools, services and savings designed to meet their evolving needs, including:
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charge and credit Cards;
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access to lines of credit up to $100,000;
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discounts at select suppliers of business services and products, including
airline tickets, car rentals, hotel stays, package shipping, computer and software
equipment, telecommunications, printing and photocopying services and other business
services;
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expense management reporting;
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enhanced online account management capabilities;
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retail and travel protections such as baggage insurance; and
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travel services.
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During
2006, we continued to expand the breadth of products and services
offered by
OPEN
®
by,
among other things, introducing several new Cards:
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the JetBlue Business Card from American Express, which offers small
business owners an automatic OPEN
Savings
®
discount of 5% on JetBlue flights, plus one
award dollar on virtually every purchase and double awards dollars on select small
business purchases, including JetBlue travel, gasoline, office supplies, wireless phone
charges and car rentals
;
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the American Express
SimplyCash
SM
Business Card, offering
automatic cash back
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rewards for small business owners through monthly rebates within the Cardmembers’
statements. Cardmembers receive 5% cash back each month on gas, office supplies and
wireless charges, and 1% cash back on virtually all other purchases; and
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The Starwood Preferred Guest
®
Business Credit Card,
which incorporates programs and services tailored specifically to the
small business owner and
gives Starpoints for all their business spending that can be redeemed for hotel stays
or airline flights. At the same time, we enhanced and relaunched the Starwood
Preferred Guest Credit Card for consumers, enabling Cardmembers to take advantage of
greater benefits and richer rewards.
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These programs are in addition to OPEN Savings, which is a program that
offers savings for OPEN customers on travel and other major business expenses simply by using their
American Express
®
Business Card at participating companies. These savings may be combined with any
existing discounts or offers. During 2006, we expanded OPEN Savings by signing new partners and
expanding relationships with existing ones in various categories, including:
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the launch of airline partners Delta Airlines and JetBlue Airways. Small
business owners using any American Express Business Card receive an automatic 3%
discount on the total cost of Delta and JetBlue flights. In addition, Cardmembers who
purchase flights on these airlines, using their respective Delta SkyMiles, SkyPoints
Delta Business Card or JetBlue Business Card, will receive an additional 2% discount
off the total cost of the flights; and
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the inclusion of two new technology partners, Gateway and Symantec.
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Competition – Card Issuing Business
Our proprietary Card business encounters substantial and intense competition. As a card
issuer, we compete in the United States with financial institutions (such as Citibank, Bank of
America, JPMorgan Chase, and Capital One Financial) that issue general purpose credit cards,
primarily under revolving credit plans, and the Morgan Stanley affiliate that issues the Discover
Card on the Discover Business Services network. We also encounter 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 our
Cards because of their limited acceptance. Because of continuing 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, in
several cases by acquiring card portfolios and also by cross-selling through their retail branch
networks.
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, cash rebates and other reward or rebate programs, services for small business
owners, “teaser” promotional interest rates for both credit card acquisition and balance transfers,
and cobranded arrangements with partners that offer benefits to cardholders. In recent years we
have encountered increasingly intense competition in the small business sector, as competitors
21
have targeted OPEN’s customer base as a result of our leadership position in providing
financial services to small businesses.
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 most financial institutions have replaced ATM cards with general purpose debit cards bearing
either the VISA or MasterCard logo. As a result, the volume of transactions made with debit cards
in the United States has continued to increase significantly and, in the United States, has grown
more rapidly than credit and charge card transactions. Debit cards are marketed as replacements
for cash and checks, and transactions made with debit cards are typically for small dollar amounts.
The ability to substitute debit cards for credit and charge cards is limited because the consumer
must have sufficient funds in his or her demand deposit account to cover the transaction in
question. For example, larger purchases or delayed purchases may not be appropriate for debit
cards. We do not currently issue point-of-sale debit cards for use on the American Express
network.
The principal competitive factors that affect the card-issuing business are:
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the features and the quality of the services, including rewards programs,
provided to Cardmembers;
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the number, spending characteristics and credit performance of Cardmembers;
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the quantity and quality of the establishments that accept
Cards;
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the cost of Cards to Cardmembers;
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pricing, payment and other Card account terms and conditions;
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the number and quality of other payment instruments available to Cardmembers;
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the nature and quality of expense management data capture and reporting
capability;
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the success of targeted marketing and promotional campaigns;
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reputation and brand recognition;
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the ability of issuers to manage credit and interest rate risk throughout
the economic cycle;
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the ability of issuers to implement operational and cost efficiencies; and
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the quality of customer service.
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As the payment industry continues to evolve, we are also beginning to face competition from
non-traditional players, such as online networks and telecom providers, that leverage new
technology to create payment solutions.
Financing Activities
American Express Credit Corporation, a wholly owned subsidiary of TRS, along with its
subsidiaries (“Credco”), purchases the majority of charge Card receivables arising from the use of
Cards issued in the United States and in certain 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 and AEBFSB finance their revolving credit
receivables, in part, through the sale of short- and medium-term notes and certificates of deposit
in the United States. TRS, Centurion Bank and AEBFSB also fund receivables through
22
asset securitization programs. The cost of funding Cardmember receivables and loans is a
major expense of Card operations. (You can find a discussion of TRS’ and Centurion Bank’s
securitization and other financing activities on page 32,
page 35, pages
43 - 48 and pages 55 - 56 under the caption “Financial Review,” and Note
5 on pages 87 - 89 of the Company’s 2006 Annual Report
to Shareholders, which portions we incorporate herein by reference.)
Regulation – Card Issuing Business
The charge card and consumer lending businesses are subject to extensive regulation. In the
United States, the business is subject to a number of federal laws and regulations, including:
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the Equal Credit Opportunity Act (which generally prohibits discrimination
in the granting and handling of credit);
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the Fair Credit Reporting Act (“FCRA”), as amended by the Fair and
Accurate Credit Transactions Act (“FACT 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);
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the Truth in Lending Act (“TILA”) (which, among other things, requires
extensive disclosure of the terms upon which credit is granted), including the
amendments to TILA that were adopted through the enactment of the Fair Credit and
Charge Card Disclosure Act (which mandates certain disclosures on credit and charge
card applications);
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the Fair Credit Billing Act (which, among other things, regulates the
manner that billing inquiries are handled and specifies certain billing requirements);
and
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the Electronic Funds Transfer Act (which regulates disclosures and
settlement of transactions for electronic funds transfers including those at ATMs).
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Certain federal privacy-related laws and regulations govern the collection and use of customer
information by financial institutions (see “Corporate and Other” below). Federal legislation also
regulates abusive debt collection practices. In addition, a number of states, the European Union,
and many foreign countries in which we operate have significant
consumer credit protection and disclosure and privacy-related laws (in certain cases more stringent than the laws in the United
States). The application of bankruptcy and debtor relief laws affect us 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, in the United States, the Patriot Act. (For a discussion of this legislation and its
effect on our business, see “Regulation” in the “Global Network Services” section above and see
“Corporate and Other” below.)
Centurion Bank, AEBFSB and our other bank entities are subject to a variety of laws and
regulations applicable to financial institutions. Changes in such laws and regulations or in the
regulatory application or judicial interpretation thereof could impact the manner in which we
conduct our business and the costs of compliance. The regulatory environment in which our Card and
lending businesses operate has become increasingly complex and robust. More recently, the U.S.
Congress, as well as regulators and various consumer advocacy groups, have begun increasing focus
and attention on the types and levels of fees charged by card issuers for,
23
among other things, late payments, returned checks, payments by telephone, copies of
statements and the like. We regularly review and, as appropriate, refine our business practices in
light of existing and anticipated developments in laws, regulations and industry trends so we can
continue to manage our 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 U.S. federal entities that regulate banks and other
financial institutions, issued new guidance to the industry 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 identification by bank regulators in their examinations of other credit card lenders’ practices
deemed by them to be inappropriate, particularly, but not exclusively, with regard to subprime
lending programs. At present, we do not have any lending programs
that target the subprime market. Centurion Bank and
AEBFSB evaluate and discuss the Guidance with their respective regulators on an ongoing basis as
part of their regulatory examination processes, and, as a result, may refine their practices from
time to time based on regulatory input. The Guidance has not had, nor
do we expect it to have, any material
impact on our businesses or practices.
Global Travelers Cheques and Prepaid Services (“TCPS”)
We have been in the business of issuing and selling travelers checks since 1891. In addition
to travelers checks, we also offer a variety of other prepaid products, including reloadable and
non-reloadable prepaid cards and, through American Express Incentive Services L.L.C., a joint
venture with Maritz Inc., we offer various incentive prepaid products, including the Corporate Gift
Cheque, the Incentive Funds Card and several points-based incentive cards.
We sell the American Express
®
Travelers Cheque (“Travelers Cheque” or
“Cheque”) as a safe and convenient alternative to cash. Travelers Cheques are available in eight
currencies, including Euros. We also issue and sell other forms of paper travelers checks:
American Express
®
Gift Cheques, which are available in U.S. and Canadian
dollars, and the American Express Cheque-Secure Funds, which are available in dollars and Euros,
and are offered in certain countries as a safe way to keep cash at home. Sales of Travelers
Cheques declined slightly in 2006, reflecting the migration of the prepaid business toward plastic.
TCPS offers prepaid gift cards in the United States: the American Express
®
Gift Card (“Gift
Card”), which can be used in the United States at businesses that accept American Express Cards,
subject to certain usage limitations, and mall-branded gift cards, which are specifically designed
for use solely at merchants that accept the American Express Card and that are located within a
specific shopping mall. Our Gift Cards are now sold through tens of thousands of
24
locations throughout the United States, and we added many new ones during the year, including
gas stations, retail bank branches and grocery stores. Sales of Gift Cards continued to rise,
reflecting the growing popularity of these products and our efforts to increase buying convenience
for customers.
We also continued to offer the Travelers Cheque Card (“TCC”), a reloadable, prepaid card
marketed as a plastic form of our Travelers Cheque. During 2006, the TCC was sold in the United
States, the United Kingdom and Germany, in U.S. dollars, British pounds sterling and Euros,
respectively, for use worldwide, for both online and in-person purchases and at ATMs (ATM fees
apply) that accept the American Express Card. TCC holders have access to the same customer service
and security provided to holders of Travelers Cheques, including card replacement or refund if the
TCC is lost or stolen (usually within 24 hours).
We sell American Express paper and plastic prepaid products through a variety of channels. We
sell these products directly to consumers via phone and the Internet. Travelers Cheques and Gift
Cheques are sold primarily through a broad network of selling outlets worldwide, including American
Express travel offices, independent travel agents, financial institutions, and many other
financial, travel and commercial businesses. Many of the same sellers also sell our prepaid cards.
We sometimes compensate selling outlets for their sales.
In 2006, we continued to expand our Gift Card retail distribution network significantly to
include Walgreens and Office Depot, as well as more than 2,500 locations in the grocery category,
malls and large national retail chains. These sellers use prepaid card merchandise racks to market
and sell our Gift Cards.
Competition – Travelers Checks and Prepaid Cards
Travelers Cheques compete with a wide variety of financial payment products, including cash,
foreign currency, checks, other brands of travelers checks, and, increasingly, debit and ATM cards,
as well as credit and charge cards (even though travelers checks and prepaid cards are not
substitutes for charge and credit cards) and, to a limited extent, competing prepaid cards. The
principal competitive factors affecting the travelers check and prepaid card industry are:
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the number and location of merchants willing to accept the form of payment;
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the availability to the consumer of other forms of payment;
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the amount of fees charged to the consumer;
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the compensation paid to, and frequency of settlement by, selling outlets;
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the accessibility of sales and refunds for the products;
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the success of marketing and promotional campaigns; and
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the ability to service the customer satisfactorily, including for lost or
stolen instruments.
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Our prepaid cards (“open-system” cards that can be used at multiple unaffiliated sellers of
goods or services) compete with the same payment methods described
above; however, gift cards compete
primarily with cash, checks and other open-system and store-specific gift cards.
25
Regulation – Travelers Cheques and Prepaid Cards
As an issuer of travelers checks, we are regulated in the United States under the “money
transmitter” or “sale of check” laws in effect in most states. These laws require travelers check
(and, where applicable, prepaid card) 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. We invest the proceeds from sales of our Travelers Cheques and
prepaid cards issued by TRS in accordance with applicable law,
predominantly in highly-rated debt
securities consisting primarily of intermediate- and long-term federal, state and municipal
obligations. In 2006, a few states (e.g., Hawaii and New Hampshire) passed money transmitter laws
for the first time, and we have applied for or secured licenses in each of these jurisdictions.
Many states examine licensees annually. In addition, travelers check issuers are required by the
laws of many states to comply with state unclaimed and abandoned property laws under which such
issuers must pay to states the face amount of any travelers check that is uncashed or unredeemed
after 15 years. A few states have amended their abandoned property laws to apply to prepaid cards.
In the past few years, some states have enacted laws pertaining to the issuance and the sale
of gift cards. We continue to monitor state legislative activity restricting the fees that
consumers can be charged or the expiration dates that can apply to gift cards. In certain states
where regulation has made it impossible for us to offer gift cards profitably, we have limited or
withdrawn from selling these cards. Federal anti-money laundering regulations require, among other
things, the registration of traveler check issuers as “Money Service Businesses” and compliance
with anti-money laundering recordkeeping and reporting requirements by issuers and selling outlets.
At this time, stored value issuers and redeemers, while considered to be “Money Service
Businesses,” are not required to register under these regulations. Outside the United States, there are varying licensing
and anti-money laundering requirements, including some that are similar to those in the United
States.
American Express Consumer Travel Network – USA
The American Express Consumer Travel Network – USA provides travel, financial and Cardmember
services to consumers through American Express-owned travel service offices, call centers,
participating American Express Representatives (independently-owned travel agency locations that
operate under the American Express brand) and the Consumer Travel Web site. U.S. Consumer Travel
has distinguished itself in the luxury marketplace through its Platinum Travel Services and
Centurion Travel Services, which provide programs such as the International Airline Program, which
offers two-for-one fares on certain international first and business class tickets, and the Fine
Hotels & Resorts program, a luxury hotel program offering room upgrades and value-added amenities.
Other premium programs developed by Consumer Travel for Centurion and
Platinum Card members include
Centurion Cruise
Privileges
®
, Centurion
Destinations
®
and Platinum Destinations
®
Vacations, the Private Jets Program, Private
Villas and Yachts. Consumer Travel also provides Membership Rewards programs designed for unique
Cardmember segments such as Membership Rewards Land & Sea packages and Gold Destinations.
26
In addition, the Consumer Travel business operates a wholesale travel business in the United
States through our Travel Impressions subsidiary. (A wholesaler purchases inventory, such as hotel
rooms, from suppliers and then resells the services to the customer at retail prices that the
wholesaler determines.) Our wholesale travel business packages American Express Vacations and
distributes travel packages through other retail travel agents and private label brands for third
parties in the United States.
Our Consumer Travel Web site, americanexpress.com/travel, offers a full range of travel rates
and discounts on airfares, hotels, car rentals, last-minute deals, cruises and full vacation
packages. The Web site offers unique American Express Cardmember benefits such as an American
Express Travel Office locator, Travel Specialist finder tools, double Membership Rewards points,
and travel planning resources and destination content through the “Local Color” portion of the Web
site. In addition, Cardmembers are able to redeem Membership Rewards points for some categories of
travel through both our Web site and our call centers and Travel Offices.
In 2006, Consumer Travel attracted eight new members with 43 locations to our Representative
Network, including The Travel Team, CI Travel and Passageways Travel.
TRS’ worldwide travel network of more than 2,200 retail travel locations is important in
supporting the American Express brand and providing Cardmember servicing throughout the world,
including a range of Traveler Cheques, Gift Cheques, Gift Cards and foreign exchange services.
Competition – Consumer Travel Network – USA
American Express Consumer Travel competes with a variety of different competitors including
traditional “brick and mortar” travel agents, credit card companies with significant travel
benefits, online travel agents and travel suppliers that distribute their products to consumers
directly via the Internet or telephone-based customer service centers. In recent years we have
experienced an increasing presence of “niche” players that are seeking to capitalize on the growth
in the luxury travel segment by combining luxury travel offers with concierge-type services.
INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
International Proprietary Consumer Card
We
issue our charge and credit Cards in numerous countries around the globe. Although
our geographic scope is widespread, we generally do not have significant share in the markets in
which we operate. We focus primarily on those markets that we believe offer us the greatest
financial opportunity.
The Company continued to bolster its international proprietary Card business through the
launch of numerous new or enhanced Card products during 2006. These are Cards that we issue,
either on our own or, as further described below, as cobrands with partnering institutions. This
past year, among other new proprietary products, we announced or launched:
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the American Express RED Card
®
in the United Kingdom, in partnership
with Project RED, pursuant to which a portion of the money spent by Cardmembers is
donated to the Global Fund for HIV/Aids programs in Africa;
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cobranded consumer credit Cards with Qantas airlines in Australia and Thai
Airways International in Thailand, designed to appeal to the airlines’ most frequent travelers;
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the American Express small business platinum charge Card in Italy, and a
small business gold charge Card in France;
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new Platinum credit Cards in India and Argentina; and
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distribution agreements with Commerzbank to distribute consumer Cards in
Germany; with ABN-AMRO to distribute consumer Cards in the Netherlands; and with
Mitsubishi UFJ Financial Group to distribute consumer Cards in Japan.
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We offer many of the same programs in our international proprietary Card issuing business as
we do in our U.S. proprietary issuing business. For example, as in the United States, we offer
various flexible payment options similar to our Sign & Travel program and our Extended Payment
Option to Cardmembers in several international markets.
Also, as in the United States, we issue Cards internationally under distribution agreements
with banks. Another example of our distribution partnerships is affinity cards with fraternal,
professional, educational and other organizations. For instance, we have been successful in
penetrating the affinity card segment in Australia, where we issue Cards with the majority of the
largest professional associations in that country. In Australia, affinity cards are a substantial
part of our total revolving portfolio and contribute to our proprietary consumer lending
activities.
As in the United States, rewards programs are a strong driver of Cardmember spending in the
international consumer business. We have more than 1,300 redemption partners across our
international business, with an average of 75 partners in each country; less than 23% of these
partners are in the travel industry. Cardmembers can redeem their points with more than 35
airlines and over 200 hotels. Our redemption options include travel, retail merchandise,
entertainment, shopping and recreation gift certificates, experiences, financial services and
charity rewards. In 2006, we continued to enhance our rewards programs in several markets,
offering more flexible choices that enable Cardmembers to redeem points more quickly.
Significantly, in selected markets we launched TravelKey, which allows Cardmembers to book flights
and vacations with virtually any airline to any destination without restrictions, and enhanced the
Membership Rewards Web site to offer easier online redemption. In Australia, we introduced
Membership Rewards Concierge Service to help Cardmembers create customized rewards packages.
Membership Travel Services International provides premium travel and lifestyle, as well as
concierge services, a benefit that exemplifies the customer experience provided to our Platinum
Card and Centurion Card customers, through 25 exclusively dedicated international call centers in
25 countries. Additionally, Membership Travel Services operates 25 proprietary Travel Service
Offices in Mexico, Argentina and Italy to provide Cardmembers with travel and foreign exchange
assistance. Across all markets, we are enhancing our capabilities to sell exclusively negotiated
benefits and luxury travel packages with preferred suppliers through American Express’s
International Airline Program, the Fine Hotel & Resorts Program and American Express
®
Vacations to
create exceptional experiences for our Cardmembers.
27
Competition – International Proprietary Consumer Card
As compared to the United States, consumers outside the United States use cards for a smaller
percentage of their total payments, with some large emerging market countries just beginning to
transition to card usage in any meaningful way. Currently, we have a small share of consumer card
spending outside the United States. Internationally, our proprietary Card issuing business is
subject to competition from multinational banks, such as Citibank, HSBC and Banco Santander, as
well as many local banks and financial institutions. Globally, we view Citibank and HSBC as our
strongest competitors, as they offer card products in a large number of markets.
Global Commercial Services
Through our Global Commercial Services (“GCS”) group, we provide expense management services
to more than 100,000 firms worldwide through our Corporate Card program, Corporate Purchasing
Solutions, electronic invoicing and payment services
(Source-to-Settle
(“S2S”
SM
)) and Global Business Travel Services. American
Express is a
leading global issuer of commercial cards and is also a leading
global travel management company for corporations and businesses. During 2006, we added or retained several
major Corporate Card clients in the United States and internationally, including Accenture, Costco
Wholesale Corporation, Merrill Lynch, Phillips and Siemens
Corporation. We also were awarded the corporate travel business of
several new clients including Astra Zeneca PLC, Medtronic Inc.,
Nortel Networks Corporation, BearingPoint Inc. and Lear Corporation. GCS offers four primary
products and services:
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Corporate Card, issued to individuals through a corporate account
established by their employer and designed primarily for travel and entertainment
spending;
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Corporate Purchasing Solutions, an account established by a company to pay
for everyday business expenses such as office and computer supplies;
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S2S, a suite of electronic solutions
for companies looking to automate their source-to-settle processes and gain savings and
control by integrating steps in their entire procurement cycle; and
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Business Travel, which helps businesses manage their travel expenses
through a variety of travel-related products and services.
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28
Corporate
Card, Corporate Purchasing Solutions, and S2S
The American Express
®
Corporate Card is a charge card that individuals
may obtain through a corporate account established by their employer for business purposes.
Through the Corporate Card program, companies can manage their travel, entertainment and purchasing
expenses and improve negotiating leverage with suppliers, among other benefits. We use our direct
relationships with merchants to offer Corporate Card clients superior data about company spending,
as well as streamlined dispute resolution. We issue local currency
Corporate Cards in over 35
countries, which we distribute through proprietary operations and partner banks, and international
dollar Corporate Cards in over 100 countries.
Corporate Purchasing Solutions (“CPS”) helps global, large and middle market companies manage
their everyday spending. CPS is used by corporations to buy everyday goods and services, such as
office supplies and industrial supplies and equipment, in 24 markets around the world. This type
of spending by corporations is less susceptible to economic downturns than traditional travel and
entertainment spending and helps to diversify the spending mix on our Cards.
S2S
SM
solutions are designed to help companies improve
the efficiency of their supply chain, reduce processing costs and increase control and compliance
along all steps in the purchasing process. The S2S product set
significantly
expands the American Express suite of commercial card products and
services and responds to clients’
needs as they transform their purchasing process, from sourcing and ordering through invoice and
payment. To support the development and roll-out of the S2S
electronic invoice and payment suite of solutions, at the end of 2006, the Company acquired Harbor
Payments, Inc., an Atlanta-based technology company with an established network of corporate
clients and business-to-business suppliers.
In addition to providing expense management services to large and global corporations, our GCS
business markets Corporate Card programs to middle market companies (defined in the United States
as firms with annual revenues of $10 million to $1 billion) worldwide. GCS is focused on
continuing to expand its business with midsize companies, which represent significant growth opportunities. Businesses of this size often do not have corporate card
programs. However, once enrolled in the program, midsize companies, which usually do not have
well-defined purchasing programs, will typically put a significant portion of their business
spending (both travel and entertainment and non-T&E, such as office supplies) on the Card because
they can gain control, savings and employee benefits. In 2005, our GCS business invested in a wide
range of marketing programs and product enhancements, and added sales staff to build our business
within the midsize segment. In support of this strategy, GCS offers the Savings at
Work
SM
program in the United States, as well as similar programs globally,
which provide companies with cash back and/or discounted pricing on everyday business products and
services, such as car rentals, hotels, restaurants and courier services.
29
With the increased focus on cost containment by firms, we have experienced significant growth
over the past few years in the Corporate Meeting Card, which helps U.S.-based and international
companies control company meeting expenses. The Corporate Meeting Card is available in 19 global
markets and provides clients with a tool to capture such spending and provides company meeting
planners with a tool to simplify the meetings payment process and access to data to negotiate with
suppliers. GCS also offers the Corporate Defined Expense Program. This product allows companies
to set a maximum amount to be charged on a Card before expiration and permits them to segregate
spending data for specific purposes on projects. It is designed for companies that want to
allocate funds for a specific purpose, such as employee relocations or training.
During
2006, we also partnered with a group of major hotel companies in North America and
Europe to offer our corporate clients secure Web-based access to enhanced data regarding their
employees’ lodging spend. This enhanced data is available for integration with expense reporting
providers to allow for pre-itemization of lodging transactions, thereby reducing the amount of time
required for employees to process their T&E expenses.
GCS also offers American Express@Work
®
, a secure, web-based suite of
online tools that enables clients to manage their global Corporate Card, Corporate Purchasing
Solutions and Corporate Meeting Card programs on a 24/7 basis through a single user interface. @
Work provides authorized client representatives online access to global management information to
help them gain visibility into their spending patterns, as well as the ability make changes to
their program or Card accounts through an easy to use online interface. @ Work also includes
automated expense reporting and reconciliation tools that enable clients to enforce program
compliance and effectively integrate spend information with their internal accounting systems.
This suite of online tools is intended to assist companies in managing expenses more efficiently
than offline alternatives, thereby decreasing both the direct and indirect costs associated with
maintaining accounts and ensuring program compliance.
Competition – Global Commercial Card Business
The
commercial payments industry is dynamic and highly competitive, with
competition increasingly intense at both the card network and card
issuer levels. At the network level, we have experienced increasing
competition in the commercial card marketplace, including aggressive expansion into new and emerging markets,
efforts to transition business-to-business spend from cash and check to cards and electronic
invoicing and payment vehicles and expanding marketing and advertising budgets for commercial
services.
In addition, both VISA and MasterCard have increased efforts to support card issuers such as
U.S. Bank, JPMorgan Chase, GE Capital Financial Inc. and Citibank (in the United States and
globally), who are willing to build and support data collection and reporting necessary to satisfy
customer requirements.
Card issuers have increasingly acquired niche technology offerings to enhance data capture
capabilities and reporting functionality. These efforts are built on the solid progress of the
bankcard associations to offer more global, robust solutions. As such, global servicing, data
quality, technological functionality and simplicity, and customer experience are among the key
competitive factors in the commercial card business.
Global Travel Services
GCS Global Travel Services consists of American Express Business Travel and
Global Foreign Exchange Services.
30
American Express Business Travel provides globally integrated solutions, both online and
offline, to help organizations optimize their travel investments and service their traveling
employees. These solutions include travel reservation advice and booking transaction processing;
travel expense management policy consultation; supplier negotiation and consultation; management
information reporting, data analysis and benchmarking; and group and incentive travel services.
Business Travel services customers directly in 34 key markets worldwide, of which 28 are
proprietary operations and six are managed through joint ventures. In addition, Business Travel
also serves customers in other relevant markets through franchise partnerships. In 2006, Business
Travel sold and franchised operations in Brazil and New Zealand. American Express processed $21.8
billion of travel spend globally in 2006.
Business Travel continues to update its economic model and invest in new innovative products,
services and technologies to enhance the value that we deliver to our customers and address ongoing
travel industry challenges and opportunities. For example, we have substantially reduced our
reliance on commission revenues from suppliers (such as airlines or hotels), and now generate
revenues primarily from customers who pay for the services that we provide. We have comprehensive
cost-saving travel management offerings for our clients, including webfare guarantees for the
small- and mid-sized segments in the United States, a travel management loyalty program with double
Membership Rewards points for individual travelers and automatic ticket refunds in the United
States and select international markets. We also offer customers savings and benefits through the
Preferred Extra supplier value programs and advisory services, which provide consulting solutions
in all areas of travel and entertainment expense management. Business Travel also offers the
TravelBahn
®
Distribution Solution, a proprietary distribution solution that
provides access to airline inventory and fares for American Express Business Travel customers with
a number of carriers, in North America and in select international markets. Business Travel offers
a range of other solutions to our customers that provide them with savings, control, services and
traveler care.
Among other developments during 2006, we also worked with Rearden Commerce to launch American
Express Intelligent Online Marketplace (AXIOM
SM
), an online marketplace of more than 135,000
suppliers that lets clients find, purchase and manage both traditional travel and related services,
such as airport parking, dining and package shipping. This site passes on negotiated savings from
our merchant partners to clients, and makes it easier for business travelers to book with approved
suppliers.
During 2006, Business Travel also formed Global Advisory Services, providing clients with
end-to-end solutions to help them optimize their investments in air, hotel, car rental and meetings
spending. Business Travel also introduced Security Suite, a global traveler security
31
solution to support our clients in locating and caring for their traveling executives in times
of unexpected events and crises.
Business Travel continued numerous reengineering initiatives in 2006, including the
rationalization of our network, standardization of platforms and processes and implementation of
new technology solutions to increase the flexibility of our business model, increase productivity,
reduce costs and enhance the quality of customer service globally. Business Travel has also moved
many of its business processes and customer servicing online. In the United States, 43% of all of
GCS’ business travel transactions were processed online, and while lower than in the United States,
online penetration rates in other markets, including the United Kingdom, Canada, Mexico and
Australia have been increasing in recent years, ranging from 7% to 27%.
Global Foreign Exchange Services (“FES”) consists of retail and wholesale foreign exchange
services and International Payments. In 2006, we completed the divestiture of most of our retail
travel and FES standalone city locations, with the exceptions of Australia, Mexico and Italy. We
are concentrating the retail foreign exchange business in key international airports, including
London’s Heathrow, the Aeroports de Paris and Changi Airport in Singapore. For corporate clients,
our International Payments online payment product allows companies and banks to make cross-border
payments in major foreign currencies at competitive exchange rates. Wholesale banknote services
are also provided to select financial institutions and travel-related companies.
Competition – Global Travel Services
Business Travel continues to face intense competition in the United States and internationally
from numerous traditional and online travel management companies, as well as from direct sales by
airlines and other travel suppliers. Competition among travel management companies is mainly based
on price, service, value creation, convenience, global capabilities and proximity to the customer.
In addition, competition comes from corporate customers themselves, as some companies have become
accredited as in-house corporate travel agents.
In 2006, significant changes were announced to the ownership and network structure of four of
the major traditional travel management companies – Business Travel International, TQ3, Carlson
Wagonlit and Navigant International, Inc. – consolidating and realigning the shape of the industry.
Similarly, changes to the ownership structures of numerous other travel industry companies were
announced in 2006, including, but not limited to, Qantas Airways Ltd., Sabre Holdings Corporation,
Travelport Ltd. and Worldspan LP. In addition, the recently-withdrawn offer by US Airways to
acquire Delta Air Lines has increased speculation that the U.S. airline industry may be entering a
period of consolidation. More change in the industry is expected to follow. Each of these changes
to the competitive environment in the industry may result in additional challenges to travel
management companies, which could have a competitive impact.
For
many years, travel management companies have faced pressure on
revenues from airlines, as most
carriers have stopped paying “base” commissions to travel agents for tickets sold. Carriers have
also increased the number of transactions they book directly through their Web sites and
32
other means. These trends have reduced the revenue opportunities for travel agents because they do
not receive distribution revenue from directly booked transactions.
Overall, intense competition among travel management companies, the ongoing trends of airline
direct sales, rise of low-cost carriers and ongoing reductions in or elimination of airline
commissions and fees continue to put pressure on revenue for travel agents. We believe that the
restructuring of our business model over the last few years by charging customers for the services
we provide and the value we create, restructuring our expense base through the rationalization of
our call center locations, transitioning many of our services online, and our global presence have
helped us to balance these revenue pressures.
American Express Bank
American Express Bank (“AEB”) serves affluent and high net worth individuals and financial
institutions through over 75 locations in 47 countries and regions worldwide. AEB’s operations are
conducted primarily through our indirect wholly owned subsidiary, American Express Bank Ltd., and
its subsidiaries. AEB serves financial institutions worldwide and individual clients outside the
United States. AEB does not directly or indirectly do business in the United States except as may
be incidental to its activities outside the United States. The following discussion relating to
AEB generally does not distinguish between U.S.- and non-U.S.-based activities.
AEB’s two primary business lines are Global Wealth Management (“GWM”), which incorporates The
Private Bank and Financial Advisory Services, and the Financial Institutions Group (“FIG”). The
Private Bank focuses on delivering an extensive range of investment management, trust and estate
planning and banking services, including secured lending and investment certificates, to high net
worth individuals. Financial Advisory Services provides a wide variety of local, domestic saving
and investment products to affluent individuals in Hong Kong, Singapore, India, Mexico, Indonesia,
the Philippines and Germany.
FIG provides financial institution clients with a wide range of correspondent banking
products, including international payments processing (wire transfers and checks), trade-related
payments and financing, cash management, loans, extensions of credit and investment products. AEB
also distributes mutual funds through its financial institutions clients. In addition, AEB
provides treasury and capital market products and services to its customers, including foreign
exchange, foreign exchange options and other derivatives and interest rate risk management
products.
AEB continues to work with other parts of American Express to cross-sell a range of payment,
lending and financial service products and build deeper relationships with consumer and small
business customers in key international markets. AEB markets its Private Bank services to a highly
selective group of Cardmembers outside the United States. AEB offers credit products such as
installment loans and revolving lines of credit to both Cardmembers and non-Cardmembers in Germany,
Hong Kong, India and Singapore. AEB also issues deposit certificates denominated in U.S. dollars,
euros, pounds sterling and Australian dollars through American Express International Deposit
Company in the Cayman Islands.
33
AEB’s worldwide headquarters is located in New York City. It maintains an international
banking agency in New York City and Miami, Florida, and facility offices in San Francisco, San
Diego and Los Angeles, California, as well as a representative office in Atlanta, Georgia. Its
wholly owned Edge Act subsidiary, American Express Bank International (“AEBI”), is headquartered in
Miami, Florida, and has branches in New York City and Miami.
Risks – Banking Services
The global nature of AEB’s business activities is such that concentrations of credit to
geographic regions are not unusual. AEB continually monitors and actively manages its credit
concentrations to reduce the associated risk. The Private Bank’s loans are generally secured by
liquid, marketable collateral. FIG controls its exposures by limiting its relationships to select
banks and limiting its exposures to such banks to quantitative limits (by obligor, by country and
by exposure type) that are periodically re-evaluated; such exposures also typically carry a
short-term tenure and are trade-related, which generally has a lower risk profile. At December 31,
2006, AEB had significant investments in certain on- and off-balance sheet financial instruments,
which were primarily represented by deposits with banks, securities, loans, forward contracts,
contractual amounts of letters of credit (standby and commercial) and guarantees. The
counterparties to these financial instruments were primarily unrelated to AEB, and principally
consisted of consumers to whom AEB has extended loans, banks and other financial institutions and
foreign government agencies operating geographically within the Asia/Pacific region, Europe, North
America, Latin America, the Indian Subcontinent and Middle East/Africa.
AEB’s earnings are sensitive to interest rates because the repricing of its liabilities does
not, generally, match the repricing of its assets. AEB invests deposits in excess of loans and the
proceeds of investment certificates in highly-rated investment securities. It maintains mandatory
investment portfolios in a number of countries as required by central banks. AEB monitors and
controls its assets-liability mismatches both on a country and global level through a rigorous
Earnings at Risk process and manages the mismatch of assets and liabilities by adjusting the
repricing frequency of its investments or by using derivatives.
AEB sells foreign exchange, interest rate and equity products to its customer base and may
decide to take short-term proprietary trading positions as a result of this business. The foreign
exchange, interest rate and equity risk is managed at the branch and global level through a
comprehensive Value at Risk process. AEB manages counterparty credit exposure on foreign exchange
and interest rate derivatives through a dynamic mark-to-market and potential future exposure
process, in which the current fair value and potential future exposure are calculated and managed
against counterparty loan equivalent limits. You can find more information on AEB’s management of
its foreign exchange risk and use of derivative financial instruments
under the caption “Risk Management – Market Risk Management
Process” and in Note 10 to the Company’s
Consolidated Financial Statements on pages
51-52 and pages
93-95, respectively, of our 2006 Annual
Report to Shareholders, which portions of such reports are incorporated herein by reference.
34
Because AEB conducts significant business in emerging market countries and in countries that
are less politically and economically stable than the United States or those in Western Europe, its
Private Banking, Financial Advisory Services and FIG activities may be subject to greater credit
and compliance risks than are found in more well-developed jurisdictions. AEB continually monitors
its exposures in such jurisdictions, and regularly evaluates its client base to identify potential
legal risks as a result of clients’ use of AEB’s banking services.
Competition – Banking Services
The banking services of AEB are subject to vigorous competition everywhere AEB operates.
Competitors include local and international banks whose assets often exceed those of AEB, other
financial institutions and, in certain cases, governmental agencies.
Regulation – Banking Services
American Express Banking Corp. (“AEBC”) is a New York investment company organized under
Article XII of the New York Banking Law and is a wholly owned direct subsidiary of American
Express. American Express Bank Ltd. (“AEBL”) is a wholly owned direct subsidiary of AEBC. AEBC,
AEBL and AEBL’s global network of offices and subsidiaries are subject to continuous supervision
and examination by the New York State Banking Department (“NYSBD”) pursuant to the New York Banking
Law. AEBC does not directly engage in banking activities. AEBL’s branches, representative offices
and subsidiaries are licensed and regulated in the jurisdictions in which they do business and are
subject to the same local requirements as other competitors that have the same license.
Since AEBC and AEBL do not do business in the United States, except as may be incidental to
their activities outside the United States, our affiliation with AEBC and AEBL does not require us
to register as a bank holding company under Regulation Y promulgated by the Board of Governors of
the Federal Reserve System (“Federal Reserve Board”). AEBC and AEBL are not members of the Federal
Reserve System, are not subject to supervision by the FDIC, and are not subject to any of the
restrictions imposed by the Competitive Equality Banking Act of 1987
other than anti-tying rules
with respect to transactions involving products and services of certain of its affiliates. AEBC
and AEBL are not financial holding companies under the Gramm-Leach-Bliley Act.
The NYSBD requires AEBC, on a consolidated basis, to monitor its financial condition and
maintain risk-based and leverage capital in accordance with minimum thresholds established by the
NYSBD. At year-end 2006, AEB had Tier One, Total and Leverage capital (as those terms are defined
under the Federal Reserve Board’s risk-based capital guidelines) that exceeded the minimum
standards established by the NYSBD. Additionally, AEB is not required to comply on a consolidated
basis with the Advanced Internal Ratings Based Approach incorporated in the Basel II Capital Accord
Framework published in June, 2004. AEB monitors developments with respect to the implementation of
the Basel II Capital Accord in jurisdictions where its branch and subsidiary network is located.
35
In recent years, U.S. and foreign regulatory authorities, together with international
organizations, have raised increasing concerns over the ability of criminal organizations and
corrupt persons to use global financial intermediaries to facilitate money laundering. In the
United States, the Secretary of the Treasury has issued regulations pursuant to the Patriot Act
that specifically impact certain money laundering prevention activities of entities involved, as
AEBL is, in correspondent and private banking activities. Compliance efforts to combat money
laundering remain a high priority for AEBL, and it has increased its efforts to address evolving
regulatory and supervisory standards and requirements in jurisdictions in which it does business.
CORPORATE & OTHER
Corporate and Other includes American Express Publishing. We also discuss information
relevant to the Company as a whole in this section.
American Express Publishing
Through American Express Publishing, we publish luxury lifestyle magazines such as
Travel+Leisure
®
, T+L Family, a supplement to Travel+Leisure, T+L
Golf
®
, Food & Wine
®
and Departures
®
;
travel resources such as SkyGuide
®
; business resources such as the American
Express Appointment Book and SkyGuide Executive Travel, a business traveler supplement; a variety
of general interest, cooking, travel, wine, financial and time management books; branded membership
services; a growing roster of international magazine editions; as well as directly sold and
licensed products. American Express Publishing also has a custom publishing group and is expanding
its service-driven Web sites such as: travelandleisure.com, foodandwine.com, departures.com,
tlgolf.com, tlfamily.com and eskyguide.com. We have an agreement with Time Inc. under which it
manages our publishing business, and we share profits relating to this business.
Service and Technology Infrastructure
We continue to make significant investments, both in the United States and internationally, in
our Card systems and infrastructure to allow faster introduction and greater customization of
products. We also are using technology to develop and improve our service capabilities to continue
to deliver a high quality customer experience. For example, we maintain a service delivery
platform that our 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 resolving customer satisfaction issues. In international
markets, we are building flexibility and enhancing our global platforms and capabilities, such as
in revolving credit.
We continue to leverage the Internet to lower costs, improve service quality and enhance our
business model. During 2006, we broadened our focus to include opportunities to use the Internet
to drive revenue and build our brand, while continuing to focus on migrating transaction volumes at
lower costs. We now have more online interactions with U.S. customers than we do by telephone or
in person.
36
At year-end, customers had enrolled approximately 21 million Cards globally in our “Manage
Your Card Account Service.” This service enables Cardmembers to review and pay their American
Express bills electronically, view and service their Membership Rewards program accounts and
conduct various other functions quickly and securely online. We now have an online presence in 62
markets around the world, including GNS markets.
We continue to devote substantial resources to our technology platform to ensure the highest
level of data integrity, security and privacy. Also, in 2006, we and several other card networks
formed PCI Security Standards Council, LLC, an independent standards-setting organization that will
manage the evolution of the Payment Card Industry (PCI) Data Security Standard. (For a discussion
of this organization, see the “Global Network Services” section above.)
In 2002, we outsourced most of our technology operations work to IBM. This arrangement, which
has a seven-year term with options to extend, enables us to benefit from IBM’s expertise while
lowering our information technology costs. IBM is responsible for managing most of our day-to-day
technology operations functions, including mainframe, midrange and desktop systems; web hosting;
database administration; help desk services and data center operations. Our internal IT
organization continues to retain the Company’s technology competencies, including information
technology strategy, information security, managing strategic relationships with technologies’
partners, developing and maintaining applications and databases and managing the technology
portfolios of our businesses.
Regulation – General
Most aspects of our business are subject to rigorous regulation by U.S. Federal and state
regulatory agencies and securities exchanges and by non-U.S. government agencies or regulatory
bodies and securities exchanges. Certain of our public disclosure, internal control environment
and corporate governance principles are subject to the Sarbanes-Oxley Act of 2002 and related
regulations and rules of the SEC and the New York Stock Exchange, Inc. New laws or regulations or
changes to existing laws and regulations (including changes in interpretation or enforcement) could
materially adversely affect our financial condition or results of operations. As a global
financial institution, to the extent that different regulatory systems impose overlapping or
inconsistent requirements on the conduct of our business, we face complexity and additional costs
in our compliance efforts.
We use information about our customers to develop and make available relevant, personalized
products and services. Our customers are given choices about how we use and disclose their
information, and we give them notice regarding the measures we take to safeguard this information.
Regulatory activity in the areas of privacy and data protection continues to increase worldwide,
spurred by advancements in technology and related concerns about the rapid and widespread
dissemination and use of information. As noted above, as part of our efforts to enhance payment
account data security, in 2006, we and Discover Financial Services, JCB, MasterCard Worldwide and
Visa International formed the PCI Security Standards Council, an open global forum for the ongoing
development, enhancement, storage, dissemination and
37
implementation of security standards for account data protection throughout the transaction
process.
The Gramm-Leach-Bliley Act (“GLBA”) became effective on July 1, 2001. GLBA provides for
disclosure of a financial institution’s privacy policies and practices and affords customers the
right to “opt out” of the institution’s disclosure of their personal financial information to
unaffiliated third parties (with limited exceptions). This legislation does not preempt state laws
that afford greater privacy protections to consumers, and several states have adopted such
legislation. For example, in 2003 California enacted that state’s Financial Information Privacy
Act. We continue our efforts to safeguard the data entrusted to us in accordance with
applicable law and our internal data protection policies, including taking steps to reduce the
potential for identity theft, while seeking to collect and use data properly to achieve our
business objectives.
The Fair Credit Reporting Act of 1970 regulates the disclosure of consumer credit reports by
consumer reporting agencies and the use of consumer credit report information by banks and other
companies. FCRA was significantly amended by the enactment in December 2003 of the Fair and
Accurate Credit Transactions Act (the “FACT Act”). The FACT Act requires any company that receives
information concerning a consumer from an affiliate to permit the consumer to opt out from having
that information used to market the company’s products to the consumer. The FACT Act further
amends the FCRA by adding several new provisions designed to prevent or decrease identity theft and
to improve the accuracy of consumer credit information. New duties are imposed on both consumer
reporting agencies and on businesses that furnish or use information contained in consumer credit
reports. For example, a furnisher of information is required to implement procedures to prevent
the reporting of any information that it learns is the result of identity theft. Also, if a
consumer disputes the accuracy of information provided to a consumer reporting agency, the
furnisher of that information must conduct an investigation and respond to the consumer in a timely
fashion. The FACT Act also requires grantors of credit that use consumer credit report information
in making a determination to offer a borrower credit on terms that are “materially less favorable”
than the terms offered to most of the lender’s other customers to notify the borrower that the
terms are based on a consumer credit report. In such a case the borrower is entitled to receive a
free copy of the report from the consumer reporting agency. Grantors of credit using pre-screened
consumer credit report information in credit solicitations are also required to include an enhanced
notice to consumers that they have the right to opt out from receiving further pre-screened offers
of credit. The enactment and implementation of the FACT Act has not had a significant impact on
our business or practices.
The federal fiscal year 2007 Defense Authorization Act includes a provision (often referred to
as the “Talent Amendment”) aimed at preventing abuses of payday lending programs marketed to
members of the U.S. military services. This provision is broadly worded and could be interpreted
to impose a number of new regulatory requirements on lending products that may be marketed to
members of the armed forces. The Department of Defense has primary authority for making the rules
under which this provision would be implemented. The Company is working with industry groups to
urge the Department of Defense to craft these rules in a manner that will carry out the provision’s
purpose of curbing abuses in payday lending without imposing undue regulation on lending products.
38
In the United States, the Patriot Act was enacted in October 2001 in the wake of the September
11, 2001 terrorist attacks. The Patriot Act substantially
broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the
United States. The Patriot Act contains a wide variety of provisions
aimed at fighting terrorism and money laundering,
including provisions aimed at impeding terrorists’ ability to access and move funds used in support
of terrorist activities. Among other things, the Patriot Act requires federal regulators, led by
the Secretary of the Treasury, to regulate or take other steps to require financial institutions to
establish anti-money laundering programs that meet certain standards, including expanded reporting
and enhanced information gathering and recordkeeping requirements. While American Express has long
maintained anti-money laundering programs in our businesses, the Secretary of the Treasury has
issued regulations under the Patriot Act applicable to certain of our business activities conducted
within AEB, TRS and their affiliates, prescribing minimum standards for such anti-money laundering
programs, and we have enhanced existing programs and developed and implemented new ones in response
to these new regulations. For example, in April 2002, the U.S. Secretary of the Treasury issued
regulations applicable to operators of credit card networks (such as VISA, MasterCard, Diners
Club, Discover and American Express) that would require credit card networks to have risk-based
programs to screen institutions that are licensed to issue cards or acquire merchants on their
networks. As a result, we developed and implemented a program for our GNS business. We have also
developed and implemented a Customer Identification Program applicable to many of our businesses,
and we have enhanced our Know Your Customer and Enhanced Due Diligence programs in others. We
intend to take steps to comply with any additional regulations that are adopted. In addition, we
will take steps to comply with anti-money laundering initiatives adopted in other jurisdictions in
which we conduct business.
We have significant operations in the European Union, including a number of regulated
businesses. We monitor developments in EU legislation, as well as in the other markets in which we
operate, to ensure that we are in a position to comply with all applicable legal requirements,
including European Union directives applicable to credit institutions, insurance intermediaries and
other financial institutions.
FOREIGN OPERATIONS
We derive a significant portion of our revenues from the use of our Card products, Travelers
Cheques, travel and other financial products and services in countries outside the United States
and continue to broaden the use of these products and services outside the United States. (For a
discussion of our revenue by geographic region, see Note
19 to our Consolidated Financial
Statements, which you can find on pages
106-109 of our 2006 Annual Report to Shareholders and which
is incorporated herein by reference.) Our revenues can be affected by political and economic
conditions in these countries (including the availability of foreign exchange for the payment by
the local Card issuer of obligations arising out of local Cardmembers’ spending outside such
country, for the payment of Card bills by Cardmembers who are billed in other than their local
currency, and for the remittance of the proceeds of Travelers Cheque sales).
39
Substantial and sudden devaluation of local Cardmembers’
currency can also affect their ability to make payments to the local
issuer of the Card in
connection with spending outside the local country. The majority of AEB’s revenues are derived
from business conducted in countries outside the United States. Some of the risks attendant to
those operations include currency fluctuations and changes in political, economic and legal
environments in each such country.
As a result of our foreign operations, we are exposed to the possibility that, because of
foreign exchange rate fluctuations, assets and liabilities denominated in currencies other than the
U.S. dollar may be realized in amounts greater or less than the U.S. dollar amounts at which they
are currently recorded in our Consolidated Financial Statements. Examples of transactions in which
this may occur include the purchase by Cardmembers of goods and services in a currency other than
the currency in which they are billed; the sale in one currency of a Travelers Cheque denominated
in a second currency; foreign exchange positions held by AEB as a consequence of its client-related
foreign exchange trading operations; and, in most instances, investments in foreign operations.
These risks, unless properly monitored and managed, could have an adverse effect on our operations.
For more information on how we manage risk relating to foreign exchange, see “Risk Management –
Market Risk Management Process” on pages
51-52 of our 2006 Annual Report to Shareholders, which
information is incorporated herein by reference.
SEGMENT INFORMATION AND CLASSES OF SIMILAR SERVICES
You can find information regarding the Company’s reportable operating segments, geographic
operations and classes of similar services in Note 19 to the Consolidated Financial Statements of
the Company, which appears on pages 106-108 of the Company’s 2006 Annual Report to Shareholders,
which Note is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is a list of all our executive officers as of March 1, 2007. None of our
executive officers has any family relationship with any other executive officer, and none of our
executive officers became an officer pursuant to any arrangement or understanding with any other
person. Each executive officer has been elected to serve until the next annual election of
officers or until his or her successor is elected and qualified. Each officer’s age is indicated
by the number in parentheses next to his or her name.
|
|
|
|
|
KENNETH I. CHENAULT -
|
|
Chairman and Chief Executive Officer;
Chairman and Chief Executive Officer, American
Express Travel Related Services Company, Inc.
|
Mr. Chenault (55) has been Chairman since April 2001 and Chief Executive Officer since January
2001. Prior thereto he had been President and Chief Operating Officer of the Company since
February 1997. He has also been Chairman of TRS since April 2001 and Chief Executive Officer of
TRS since February 1997.
40
|
|
|
|
|
L. KEVIN COX -
|
|
Executive Vice President, Human Resources
|
Mr. Cox (43) has been Executive Vice President, Human Resources of the Company since April
2005. Prior thereto he had been Executive Vice President of The Pepsi Bottling Group since
September 2004. Prior thereto, he had been Senior Vice President, Human Resources of such company
since March 1999.
|
|
|
|
|
EDWARD P. GILLIGAN -
|
|
Group President, American Express International & Global Corporate Services
|
Mr. Gilligan (47) has been Group President, American Express International & Global Corporate
Services since July 2005. Prior thereto, he had been Group President, Global Corporate Services
since June 2000 and Group President, Global Corporate Services & International Payments, since July
2003.
|
|
|
|
|
JOHN D. HAYES -
|
|
Executive Vice President, Global Advertising and Brand Management and Chief Marketing Officer
|
Mr. Hayes (52) has been Executive Vice President, Global Advertising and Brand Management
since May 1995 and Chief Marketing Officer of the Company since August 2003.
|
|
|
|
|
DANIEL
T. HENRY -
|
|
Executive Vice President and acting Chief Financial Officer
|
Mr. Henry
(57) has been Executive Vice President and acting Chief
Financial Officer of the Company since February 2007. Prior thereto,
he had been Executive Vice President and Chief Financial Officer,
U.S. Consumer, Small Business and Merchant Services since October
2005 and Executive Vice President and Chief Financial Officer, U.S.
Consumer and Small Business Services since August 2000.
|
|
|
|
|
ALFRED F. KELLY, JR. -
|
|
Group President, Consumer, Small Business and Merchant Services
|
Mr. Kelly (48) has been Group President, Consumer, Small Business and Merchant Services since
October 2005. Prior thereto, he had been Group President, U.S. Consumer and Small Business
Services since June 2000.
|
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LOUISE M. PARENT -
|
|
Executive Vice President and General Counsel
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Ms. Parent (56) has been Executive Vice President and General Counsel since May 1993.
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THOMAS SCHICK -
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Executive Vice President, Corporate Affairs and Communications
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Mr. Schick (60) has been Executive Vice President, Corporate Affairs and Communications since
March 1993.
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STEPHEN SQUERI -
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Executive Vice President and Chief Information Officer
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Mr. Squeri (47) has been Executive Vice President and Chief Information Officer since May
2005. Prior thereto, he had been President, Global Commercial Card – Global Corporate Services
since January 2002 and President, Establishment Services – United States and Canada, from July 2000
through December 2001.
EMPLOYEES
We had approximately 65,400 employees on December 31, 2006.
ITEM 1A. RISK FACTORS
This section highlights specific risks that could affect our Company and its businesses. You
should carefully consider each of the following risks and all of the other information set forth in
this Annual Report on Form 10-K. Based on the information currently known to us, we believe that
the following information identifies the most significant risk factors affecting our Company.
However, the risks and uncertainties our Company faces are not limited to those described below.
Additional risks and uncertainties not presently known to us or that we currently believe to be
immaterial may also adversely affect our business.
If any of the following risks and uncertainties develops into actual events or the
circumstances described in the risks and uncertainties occur, these events or circumstances could
have a material adverse effect on our business, financial condition or results of operations.
These events could also have a negative effect on the trading price of our securities.
We face increasingly intense competitive pressure which may impact the prices we charge
merchants who accept our cards for payment for goods and services.
Unlike our competitors in the payments industry that rely on high revolving credit balances to
drive profits, our business model is focused on Cardmember spending. Discount revenue, which
represents fees charged to merchants when Cardmembers use their Cards to purchase goods and
services on our network, is primarily driven by billed business volumes and is our largest single
revenue source. In recent years, we have been under market pressure to reduce merchant discount
rates and undertake other repricing initiatives. This pressure arises, in part, due to the
regulatory pressure on our competitors outside the United States, which has been increasing. If we
continue to experience a decline in the average merchant discount rate we charge merchants or are
unable to sustain premium merchant discount rates on our Cards without experiencing overall volume
growth or an increase in merchant coverage, our revenues and profitability could be materially and
adversely affected.
We may not be able to increase consumer and business spending and borrowing on our payment
services products or manage the costs of our Cardmember benefits intended to stimulate such use.
Our business is characterized by the high level of spending by our Cardmembers. Increasing
consumer and business spending and borrowing on our payment services products, particularly credit
and charge Cards and Travelers Cheques and other prepaid products, and growth in Card lending
balances, depend in part on our ability to develop and issue new or
42
enhanced Card and prepaid products and increase revenues from such products. It also depends
on our ability to attract new Cardmembers, reduce Cardmember attrition, increase merchant coverage,
and capture a greater share of customers’ total spending on Cards issued on our network, both in
the United States and in our international operations. One of the ways in which we attract new
Cardmembers is through our Membership Rewards program, as well as other Cardmember benefits. We
may not be able to cost effectively manage and expand Cardmember benefits, including containing the
growth of marketing, promotion and rewards expenses and Cardmember services expenses. If we are
not successful in increasing consumer and business spending or in managing the costs of our
Cardmember benefits, our revenues and profitability could be negatively affected.
Our brand and reputation are key assets of our Company and our business may be affected by how
we are perceived in the marketplace.
Our brand and its attributes are key assets of the Company. Our ability to attract and retain
consumer Cardmembers and corporate clients is highly dependent upon the external perceptions of our
level of service, business practices and financial condition. Negative perceptions or publicity
regarding these matters could damage our reputation among existing and potential Cardmembers and
corporate clients, which could make it difficult for us to attract new Cardmembers and maintain
existing ones. Adverse developments with respect to our industry may also, by association,
negatively impact our reputation, or result in greater regulatory or legislative scrutiny.
Although we monitor developments for areas of potential risk to our reputation and brand, negative
perceptions or publicity could materially and adversely affect our revenues and profitability.
An increase in account data breaches and fraudulent activity using our Cards could lead to
reputational damage to our brand and could reduce the use and acceptance of our charge and credit
Cards.
We and other third parties store Cardmember account information in connection with our charge
and credit Cards. Criminals are using increasingly sophisticated methods to capture various types
of information relating to Cardmembers’ accounts, including Membership Rewards accounts, to engage
in illegal activities such as fraud and identity theft. As outsourcing and specialization become a
more acceptable way of doing business in the payments industry, there are more third parties
involved in processing transactions using our Cards. If data breaches or fraud levels involving
our Cards were to rise, it could lead to regulatory intervention (such as mandatory card
reissuance) and reputational and financial damage to our brand, which could reduce the use and
acceptance of our Cards, and have a material adverse impact on our business.
Our reengineering and other cost control initiatives may not prove successful and we may not
realize all or a significant portion of the benefits that we intended.
We have regularly undertaken, and are currently considering undertaking, a variety of efforts
to reengineer our business operations in order to achieve cost savings and other benefits
(including the reinvestment of such savings in key areas such as marketing, promotion and rewards),
enhance revenue-generating opportunities and improve our operating expense to
43
revenue ratio both in the short-term and over time. These efforts include cost management,
structural and strategic measures such as vendor, process, facilities and operations consolidation,
outsourcing functions (including, among others, technologies operations), relocating certain
functions to lower cost overseas locations, moving internal and external functions to the Internet
to save costs and planned staff reductions relating to certain of these reengineering actions. If
we do not successfully achieve these efforts in a timely manner or if we are not able to capitalize
on these efforts, we may not realize all or a significant portion of the benefits that we intended.
Failure to achieve these benefits could have a negative effect on our financial condition and
results of operations.
We have agreements with business partners in a variety of industries, including the airline
industry, that represent a significant portion of our billed business. We are exposed to the risk
of downturns in these industries, including bankruptcies of our partners, and the possible
obligation to make payments to our partners.
In the ordinary course of our business we enter into different types of contractual
arrangements with business partners in a variety of industries. For example, we have partnered
with Costco to offer cobranded cards for consumers and small businesses, and through our Membership
Rewards program we have partnered with businesses in many industries, most notably the airline
industry, to offer benefits to Cardmember participants. The airline industry represents a
significant portion of our billed business and in recent years has undergone bankruptcies,
restructurings and other similar events. In particular, we are exposed to risk under our
agreements with Delta Air Lines, which were restructured in connection with Delta’s filing for
protection under Chapter 11 of the Bankruptcy Code. For additional information relating to the
agreements with Delta, see “Financial Review – Airline
Industry Matters” on page 60 of our 2006
Annual Report to Shareholders. In addition, under some types of these contractual arrangements,
upon the occurrence of certain triggering events, we may be obligated to make payments to certain
cobrand partners, merchants, vendors and customers. If we are not able to effectively manage the
triggering events, we could unexpectedly have to make payments to these partners, which could have
a negative effect on our financial condition and results of operations. We are also exposed to
risk if we are not able to effectively manage bankruptcies, restructurings, consolidations and
other similar events that may occur in the airline industry or any other industry representing a
significant portion of our billed business, including any potential negative effects on particular
card products and services (and billed business generally) that could result from the actual or
perceived weakness of key business partners in such industries.
Our risk management policies and procedures may not be effective.
We must effectively manage credit risk related to consumer debt, business loans, merchant
bankruptcies and other credit trends and the rate of bankruptcies, which can affect spending on
card products, debt payments by individual and corporate customers and businesses that accept our
card products. Credit risk is the risk of loss from obligor or counterparty default. We are
exposed to both consumer credit risk, principally from Cardmember receivables, and our other
consumer lending activities and institutional credit risk from merchants and GNS partners. While
consumer credit risk is more closely linked to general economic conditions rather than
borrower-specific events like institutional credit risk, both expose us to a risk of loss. Third
44
parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational
failure or other reasons. Country, regional and political risks are components of credit risk.
Rising delinquencies and rising rates of bankruptcy are often precursors of future write-offs and
may require us to increase our reserve for loan losses. Higher write-off rates and an increase in
our reserve for loan losses may adversely affect our profitability and the performance of our
securitizations, and may increase our cost of funds.
Although we make estimates to provide for credit losses in our outstanding portfolio of loans
and receivables, these estimates may not be accurate. In addition, the information that we use in
managing our credit risk may be inaccurate or incomplete. Although we regularly review our credit
exposure to specific clients and counterparties and to specific industries, countries and regions
that we believe may present credit concerns, default risk may arise from events or circumstances
that are difficult to foresee or detect, such as fraud. We may also fail to receive full
information with respect to the credit risks of our customers.
We must also effectively manage market risk to which we are exposed. Market risk represents
the loss in value of portfolios and financial instruments due to adverse changes in market
variables. We are exposed to market risk from interest rates in our Card business. Changes in the
interest rates at which we borrow and lend money affect the value of our assets and liabilities.
If the rate of interest we pay on our borrowings increases more than the rate of interest we earn
on our loans, our net finance charge revenue, and consequently our net income, could fall.
We must also accurately estimate the fair value of the assets in our investment portfolio and,
in particular, those investments that are not readily marketable, including the valuation of the
interest-only strip (commonly referred to as the I/O strip) arising from our securitization of
charge and credit Card receivables.
Finally, we must also manage the operational risks to which we are exposed. We consider
operational risk to be the risk of not achieving our business objectives due to failed processes,
people or information systems, or from the external environment, such as natural disasters.
Operational risks include the risk that we may not accurately estimate the expense provision for
the cost of our Membership Rewards program, as well as the risk that we are unable to manage a
downturn in our businesses and/or negative changes in our and our subsidiaries’ credit ratings,
which could result in contingent payments under contracts, decreased liquidity and higher borrowing
costs.
Although we have devoted significant resources to develop our risk management policies and
procedures and expect to continue to do so in the future, our hedging strategies and other risk
management techniques may not be fully effective. See “Financial Review – Risk Management” on
pages 49-53 of our 2006 Annual Report to Shareholders for a discussion of the policies and
procedures we use to identify, monitor and manage the risks we assume in conducting our businesses.
Management of credit, market and operational risk requires, among other things, policies and
procedures to record properly and verify a large number of transactions and events, and these
policies and procedures may not be fully effective.
45
Adverse currency fluctuations and foreign exchange controls could decrease revenue we receive
from our international operations.
During 2006, over 30% of our revenue was generated from activities outside the United States.
We are exposed to foreign exchange risk from our international operations, and some of the revenue
we generate outside the United States is subject to unpredictable and indeterminate fluctuations if
the values of other currencies change relative to the U.S. dollar. Resulting exchange gains and
losses are included in our net income. Furthermore, we may become subject to exchange control
regulations that might restrict or prohibit the conversion of our other revenue currencies into
U.S. dollars. The occurrence of any of these events or circumstances could decrease the revenues
we receive from our international operations and have a material adverse effect on our business.
Our access to financing, including securitizations, may be limited.
In general, the amount, type and cost of our funding, including financing from other financial
institutions and the capital markets, directly impacts our expense in operating our business and
growing our assets and therefore, can positively or negatively affect our financial results.
A number of factors could make such financing more difficult, more expensive or unavailable on
any terms both domestically and internationally (where funding transactions may be on terms more or
less favorable than in the United States), including, but not limited to, financial results and
losses, changes within our organization, specific events that adversely impact our reputation,
changes in the activities of our business partners, disruptions in the capital markets, specific
events that adversely impact the financial services industry, counter-party availability, changes
affecting our assets, our corporate and regulatory structure, interest rate fluctuations, ratings
agencies’ actions, general economic conditions and the legal, regulatory, accounting and tax
environments governing our funding transactions. In addition, our ability to raise funds is
strongly affected by the general state of the United States and world economies, and may become
increasingly difficult due to economic and other factors. Also, we compete for funding with other
financial institutions, some of which are publicly traded. Competition from these institutions may
increase our cost of funds.
In
addition, we periodically securitize Cardmember receivables and loans arising from our Card
business. Securitization involves the legal sale of beneficial interests in Cardmember receivables
and loan balances to a trust, which in turn issues securities to third-party investors
collateralized by the transferred receivables and loans, and our receipt of the proceeds from the
issuance of such securities. Although the markets for securitized credit and charge card
receivables and loans is large and well-established, if these markets experience difficulties, we
may be unable to securitize our receivables or to do so at favorable pricing levels. If we were
unable to continue to securitize our loan receivables at desired levels, we would use alternative
funding sources to meet our liquidity needs. If we were unable to find cost-effective and stable
alternatives, it could negatively impact our liquidity and potentially subject us to certain risks.
These risks would include an increase in our cost of funds, an increase in the allowance for loan
46
losses and the provision for possible credit losses as more loans would remain on our
consolidated balance sheet, and lower loan growth.
In addition, the occurrence of certain events may cause the securitization transactions to
amortize earlier than scheduled, which would accelerate the need for an alternate source of
funding.
For a further discussion of our liquidity and funding needs, see “Financial Review – Funding
Strategy” on pages 43-48 in the 2006 Annual Report to Shareholders.
If we are not able to invest successfully in, and compete at the leading edge of,
technological developments across all our businesses, our revenue and profitability could be
negatively affected.
Our industry is subject to rapid and significant technological changes. In order to compete
in our industry, we need to continue to invest in technologies across all areas of our business,
including in transaction processing, data management, customer interactions and communications,
travel reservations systems, prepaid products, alternative payment mechanisms and risk management
and compliance systems. We rely in part on third parties, including some of our competitors and
potential competitors, for the development of and access to new technologies. We expect that new
services and technologies applicable to the payments industry will continue to emerge, and these
new services and technologies may be superior to, or render obsolete, the technologies we currently
use in our Cards and networks. In addition, our ability to adopt new services and technologies
that we develop may be inhibited by a need for industry-wide standards or by resistance from
Cardmembers or merchants to such changes in addition to patent rights held by competitors or
others. Our future success will depend, in part, on our ability to develop or adapt to
technological changes and evolving industry standards.
Our operating results may suffer because of substantial and increasingly intense competition
worldwide in the payments industry.
The payments industry is highly competitive and includes, in addition to credit card networks,
evolving alternative payment mechanisms and systems. Some of our competitors have developed, or
may develop, substantially greater financial and other resources than we have, may offer a wider
range of programs and services than we offer or may use more effective advertising and marketing
strategies to achieve broader brand recognition or merchant acceptance than we have. We may not
continue to be able to compete effectively against these threats. In addition, our competitors may
be more efficient in introducing innovative products, programs and services than we are. As a
result, our revenue or profitability may decline.
Banks, card issuers and card network operators generally are the subject of increasing global
regulatory focus, which may impose costly new compliance burdens on our company and lead to
decreased transaction volumes through our network.
We are subject to regulations that affect banks and the payments industry in the many
countries in which our charge and credit Cards are used and where we conduct banking
47
activities. In particular, we are subject to numerous regulations applicable to financial
institutions in the United States and abroad. We are also subject to regulations as a provider of
services to financial institutions. Regulation of the payments industry has increased
significantly in recent years. For example, we are subject to the regulatory requirements of the
Patriot Act, which substantially broadened existing anti-money laundering legislation and the
extraterritorial jurisdiction of the United States. The Patriot Act requires us to create and
implement comprehensive anti-money laundering programs that meet certain standards, including
expanded reporting and enhanced information gathering and record-keeping requirements, as well as
to perform due diligence on the third party institutions that issue Cards and/or acquire merchants
on our network. Increased regulatory focus in this area could result in additional obligations or
restrictions with respect to the types of products and services that we may offer to consumers, the
countries in which our charge and credit Cards may be used and where we provide private and
correspondent banking services, and the types of cardholders and merchants who can obtain or accept
our charge and credit Cards.
The U.S. Congress is also presently considering legislative initiatives in the areas of
Internet gambling, Internet prescription drug purchases and copyright and trademark infringement,
among others, that could impose additional compliance burdens on our Company
,
for example, imposing
requirements aimed at preventing the use of payment cards to unlawfully purchase prescription drugs
over the Internet. Many states are also considering a variety of similar legislation. Federal and
state law enforcement authorities have also contacted payment companies concerning these issues.
If implemented, these initiatives may require us to monitor, filter, restrict, or otherwise oversee
various categories of charge and credit card transactions, thereby increasing our costs or
decreasing our transaction volumes. Various regulatory agencies are also considering regulations
covering identity theft, account management guidelines, disclosure rules, security, and marketing
that would impact us directly, in part due to increased scrutiny of our underwriting standards.
These new requirements may restrict our ability to issue charge and credit cards or partner with
other financial institutions, which could decrease our transaction volumes. In some circumstances,
new regulations could have the effect of limiting our ability to offer new types of charge or
credit cards or restricting our ability to offer existing Cards, such as stored value cards, which
could materially and adversely reduce our revenues and revenue growth.
In the United States, the Board of Governors of the Federal Reserve System and various Federal
Reserve Banks have been following developments on interchange and have held several conferences
focused on credit card interchange rates. While the Federal Reserve has expressed interest in
monitoring this issue, it has not indicated the need to regulate interchange rates in the United
States. In Congress, there have been several hearings on VISA and MasterCard interchange over the
last year. During 2006, there were also a number of bills proposed in individual state
legislatures seeking to impose caps on credit card interchange or to prohibit card companies from
charging merchant discount on the state tax portion of credit card purchases. None of those bills
were enacted. It is expected that Congressional hearings and similar proposed state legislation
will continue during 2007.
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Regulators and Congress have also increased their scrutiny of our industry’s fees to its
customers. Any legislative or regulatory restrictions on our ability to price our services freely
could materially and adversely affect our transaction volume and revenues.
Increased regulatory focus on our Company, such as in connection with the matters discussed
above, may increase our compliance costs or result in a reduction of transactions processed on our
networks, which could materially and adversely impact our financial performance.
Existing and proposed regulation in the areas of consumer privacy and data use and security
could decrease the number of charge and credit cards issued and could increase our costs.
We are also subject to regulations related to privacy and data use and security in the
jurisdictions in which we do business, and we could be negatively impacted by these regulations.
For example, in the United States, we are subject to the Federal Trade Commission’s information
safeguards rule under the Gramm-Leach-Bliley Act. The rule requires that each financial
institution develop, implement and maintain a written, comprehensive information security program
containing safeguards that are appropriate to the financial institution’s size and complexity, the
nature and scope of the financial institution’s activities, and the sensitivity of any customer
information at issue. The heightened legislative and regulatory focus on data security, including
requiring consumer notification in the event of a data breach, continues. In the United States,
there are a number of bills pending in Congress and there have been several Congressional hearings
to address these issues. Congress will likely consider data security/data breach legislation in
2007 that, if implemented, could affect our Company.
In addition, approximately 34 states, Puerto Rico and the District of Columbia have enacted
security breach legislation, requiring varying levels of consumer notification in the event of a
security breach, and several other states are considering similar legislation. In 1995, the
European Parliament and Council passed European Directive 95/46/EC on the protection of individuals
with regard to the processing of personal data and on the free movement of such data (commonly
referred to as the Data Protection Directive), which obligates the controller of an individual’s
personal data to take the necessary technical and organizational measures to protect personal data.
The Data Protection Directive has been implemented through local laws regulating data protection
in European Union member states. Any additional regulations in these areas may also increase our
costs to comply with such regulations, which could materially and adversely affect our
profitability.
Global economic, political and other conditions may adversely affect trends in consumer
spending and in travel
.
Our business depends heavily upon the overall level of spending using our credit and charge
Cards, and we are not insulated from the effects of economic cycles. A sustained deterioration in
general economic conditions, particularly in the United States or Europe, or increases in interest
rates in key countries in which we operate, may adversely affect our financial performance by
reducing the number or average purchase amount of transactions involving our charge and credit
Cards and result in increasing delinquencies and credit losses.
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Political or economic instability in certain regions or countries could also affect our
commercial or other lending activities, among other businesses, or result in restrictions on
convertibility of certain currencies. In addition, our travel network may be adversely affected by
world geopolitical and other conditions. Travel expenditures are sensitive to business and
personal discretionary spending levels and tend to decline during general economic downturns.
Terrorist attacks, natural disasters or other catastrophic events may have a negative effect
on our business. Because of our proximity to the World Trade Center, our headquarters were damaged
as a result of the terrorist attacks of September 11, 2001. Similar events or other disasters or
catastrophic events in the future could have a negative effect on our businesses and
infrastructure, including our information technology systems. Because we derive a portion of our
revenues from travel-related spending, our business will be sensitive to safety concerns, and thus
may decline during periods in which travelers become concerned about safety issues or when travel
might involve health-related risks.
If our global network systems are disrupted or we are unable to process transactions
efficiently or at all, our revenue or profitability would be materially reduced.
Our transaction authorization, clearing and settlement systems may experience service
interruptions as a result of fire, natural disasters, power loss, disruptions in long distance or
local telecommunications access, fraud, terrorism or accident. A natural disaster or other problem
at our facilities could interrupt our services. Additionally, we rely on third-party service
providers for the timely transmission of information across our global network. If a service
provider fails to provide the communications capacity or services we require, as a result of
natural disaster, operational disruption, terrorism or any other reason, the failure could
interrupt our services, adversely affect the perception of our brands’ reliability and materially
reduce our revenue or profitability.
We rely on third-party providers of various computer systems and other services integral to
the operations of our businesses. These third parties may act in ways that could harm our
business.
We outsource to third-party providers many of our computer systems and other services that are
integral to the operations of our businesses. We are subject to the risk that certain decisions
are subject to the control of our third-party service providers and that these decisions may
adversely affect our activities. We cannot be certain that our third-party vendors will perform
their obligations as expected.
Resolution of our unresolved SEC staff comment may result in a change in the presentation of
our reportable operating segments in our financial statements.
Our business is comprised of three reportable operating segments, U.S. Card Services,
International Card & Global Commercial Services and Global Network & Merchant Services. In
connection with a review of our Annual Report on Form 10-K for the year ended December 31, 2005,
the SEC requested certain information regarding the aggregation of our operating segments into the
reportable segments identified above. The Company and the SEC are
50
continuing to discuss the Company’s segment reporting. If, as a result of these discussions,
it is concluded that a different reportable operating segment presentation (including the
disaggregation of certain operating segments) is appropriate, we would report our segments
differently in our filings with the SEC (although consolidated results would not be impacted). The
SEC may also require that we restate segment information that appears in the notes to our
consolidated financial statements included in this Annual Report on Form 10-K and file an amendment
to this Form 10-K to reflect any such changes to the reportable operating segment presentation.
Special Note About Forward-Looking Statements
We have made various statements in this report that may constitute “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements may also be made in our other reports filed with the SEC, in our press
releases and in other documents. In addition, from time to time, we, through our management, may
make oral forward-looking statements. Forward-looking statements are subject to risks and
uncertainties, including those identified above, which could cause actual results to differ
materially from such statements. The words “believe,” “expect,” “anticipate,” “optimistic,”
“intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely” and similar
expressions are intended to identify forward-looking statements. We caution you that the risk
factors described above are not exclusive. There may also be other risks that we are unable to
predict at this time that may cause actual results to differ materially from those in
forward-looking statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are made. We undertake
no obligation to update publicly or revise any forward-looking statements.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We received comments from the SEC in a letter, dated June 30, 2006, with respect to our Form
10-K for the year ended December 31, 2005. All comments have been resolved with the exception of
how we aggregate segment data in our consolidated financial statements under Statement of Financial
Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related
Information.” As discussed in “Risk Factors” above, the Company and the SEC are continuing to
discuss the Company’s segment reporting.
ITEM 2. PROPERTIES
Our principal executive offices are in a 51-story, 2.2 million square foot building located in
lower Manhattan. This building, which is on land leased from the Battery Park City Authority for a
term expiring in 2069, is one of four office buildings in a complex known as the World Financial
Center. We have a 49% ownership interest in the building. Brookfield Financial Properties owns
the remaining 51% interest in the building. We also lease space in the building from Brookfield.
Other owned or leased principal locations include: the American Express Service Centers in
Fort Lauderdale, Florida; Phoenix, Arizona; Greensboro, North Carolina; and Salt Lake City,
51
Utah; the American Express Data Centers in Phoenix, Arizona and in Minneapolis, Minnesota; the
American Express Finance Center in Phoenix, Arizona; and the Amex Canada Inc. headquarters in
Markham, Ontario, Canada; and service centers located in Mexico City, Mexico; Sydney, Australia;
Gurgaon, India and Brighton, United Kingdom.
In recent years we have engaged in several sale-leaseback transactions pursuant to which we
sold various owned properties to third parties and leased back the properties under long-term net
leases whereby each American Express entity that leases back the property is responsible for all
costs and expenses relating to the property (including maintenance, repair, utilities, operating
expenses and insurance costs) in addition to annual rent. The sale leaseback transactions have not
materially impacted our financial results in any year. Gains resulting from completed sale and
leaseback transactions are amortized over the initial ten-year lease periods. We continue to
consider whether sale-leaseback transactions are appropriate for other properties that we currently
own.
In February 2000, we entered into a ten-year agreement with CBRE Real Estate Services, Inc.,
formerly known as Trammell Crow Corporate Services, Inc., for facilities, project and transaction
management and other related services. The agreement covers North and South America and parts of
Europe and Asia.
Generally, we and our subsidiaries lease the premises we occupy in other locations. We
believe that the facilities we own or occupy suit our needs and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in a number of legal and arbitration
proceedings, including class actions, concerning matters arising in connection with the conduct of
their respective business activities. The Company believes it has meritorious defenses to each of
these actions and intends to defend them vigorously. In the course of its business, the Company
and its subsidiaries are also subject to and governmental examinations, information
gathering requests, subpoenas, inquiries and investigations. The Company believes that it is not a
party to, nor are any of its properties the subject of, any pending
legal, arbitration, regulatory, tax or investigative proceedings that would have a material adverse effect on the Company’s
consolidated financial condition, results of operations or liquidity. However, it is possible that
the outcome of any such proceeding could have a material impact on results of operations in any
particular reporting period as the proceedings are resolved. Certain legal proceedings involving
the Company are described below.
Corporate Matters
Beginning in mid-July 2002, 12 putative class action lawsuits were filed in the United States
District Court for the Southern District of New York. In October 2002, these cases were
consolidated under the caption
In re American Express Company Securities Litigation
. These
lawsuits allege violations of the federal securities laws and the common law in connection with
alleged misstatements regarding certain investments in high-yield bonds and write-downs in the
2000-2001 timeframe. The purported class covers the period from July 18, 1999 to July 17,
52
2001. The actions seek unspecified compensatory damages as well as disgorgement, punitive
damages, attorneys’ fees and costs, and interest. On March 31, 2004, the Court granted the
Company’s motion to dismiss the lawsuit. Plaintiffs appealed the dismissal to the United States
Court of Appeals for the Second Circuit. In August 2006, the Court of Appeals, without expressing
any views whatsoever on the merits of the cases, vacated the District Court’s judgment and remanded
all claims to the District Court for further proceedings. More particularly, the Court of Appeals
reversed the District Court’s ruling that two of the plaintiff’s claims in an amended complaint did
not “relate back” to the original complaint and were thus time-barred under the statute of
limitations period. As a result, the Court of Appeals decided that it was prudent to remand all
claims back to the District Court so that plaintiffs could file a new amended complaint.
Plaintiffs filed their amended complaint on January 8, 2007. The Company wrote to the Court on
February 5, 2007, telling the Court that it intended to file a motion to strike the amended
complaint. The Company continues to believe that it has meritorious defenses to the action.
In December 2003, American Express Travel Related Services Company, Inc. was named as a
defendant in a shareholder derivative action purportedly filed on behalf of InfoSpace Inc. The
action, captioned
Dreiling v. American Express Travel Related Services Company, Inc.
, was
filed in the U.S. District Court for the District of Washington. The complaint alleges that the
Company violated the “short swing” liability provisions of Section 16(a) of the Securities Exchange
Act of 1934, as amended, in connection with its sale of InfoSpace common stock. The plaintiff
seeks disgorgement of profits from the sale of the InfoSpace shares, as well as fees and expenses.
In June 2004, the Court granted American Express’ motion to dismiss the complaint without American
Express’ ever having answered the complaint. In August 2006, the U.S. Court of Appeals for the
Ninth Circuit reinstated the action because of certain unresolved factual disputes. The Company
continues to believe that it has meritorious defenses to this action and intends to defend it
vigorously.
In January 2006, a purported class action captioned
Paula Kritzman, individually and on
behalf of all others similarly situated v. American Express Retirement Plan et al.
was filed in
the U.S. District Court for the Southern District of New York. The plaintiff alleges that when the
American Express Retirement Plan (the “AXP Plan”) was amended effective July 1, 1995, to convert
from a final average pay formula to a “cash balance” formula for the calculation of benefits, the
terms of the amended AXP Plan violated the Employee Retirement Income Security Act, as amended
(“ERISA”), in at least the following ways: (i) the AXP Plan violated ERISA’s prohibition on
reducing rates of benefit accrual due to the increasing age of a plan participant; (ii) the AXP
Plan violated ERISA’s prohibition on forfeiture of accrued benefits; and (iii) the AXP Plan
violated ERISA’s present value calculation rules. The plaintiff seeks, among other remedies,
injunctive relief entitling the plaintiff and the purported class to benefits that are the greater
of (x) the benefits to which the members of the class would have been entitled without regard to
the conversion of the benefit payout formula of the AXP Plan to a cash balance formula and (y) the
benefits under the AXP Plan with regard to the cash balance formula. The plaintiff also seeks pre-
and post-judgment interest and attorneys fees and expenses. The Company has filed a motion with
the Court seeking to dismiss the complaint.
In November 2004, the Company filed a lawsuit captioned
American Express Travel Related
Services Company, Inc. v. VISA USA Inc., MasterCard International, Inc. et al.
in the U.S.
District Court for the Southern District of New York. The lawsuit seeks unspecified monetary
damages against VISA, MasterCard and eight major banks that are or were members of the two card
associations for the business lost as a result of the illegal, anticompetitive practices of the
card associations that effectively locked the Company out of the bank-issued card business in the
United States. The lawsuit follows the U.S. Supreme Court’s October 2004 decision not to hear an
appeal from VISA and MasterCard that sought to overturn a lower court ruling that found the two
card associations in violation of U.S. antitrust laws. Since filing the action, TRS has
voluntarily dismissed its claims against the following bank defendants: Bank of America, N.A., Bank
of America Corporation (including its subsidiaries Fleet Bank (RI), N.A. and Fleet National Bank),
Household Bank, N.A., Household International, Inc. and USAA Federal Savings Bank.
53
U.S. Card Services and Global Merchant Services Matters
The Company has been named in a number of purported class actions in which the plaintiffs
allege an unlawful antitrust tying arrangement between the Company’s charge cards, credit cards and
debit cards in violation of various state and federal laws, including the following: (i)
Cohen
Rese Gallery et al. v. American Express Company et al.
, U.S. District Court for the Northern
District of California (filed July 2003); (ii)
Italian Colors Restaurant v. American Express
Company et al.
, U.S. District Court for the Northern District of California (filed August
2003); (iii)
DRF Jeweler Corp. v. American Express Company et al.
, U.S. District Court for
the Southern District of New York (filed December 2003); (iv)
Hayama Inc. v. American Express
Company et al.
, Superior Court of California, Los Angeles County (filed December 2003); (v)
Chez Noelle Restaurant v. American Express Company et al.
, U.S. District Court for the
Southern District of New York (filed January 2004); (vi)
Mascari Enterprises d/b/a Sound
Stations v. American Express Company et al.
, U.S. District Court for the Southern District of
New York (filed January 2004); (vii)
Mims Restaurant v. American Express Company et al
.,
U.S. District Court for the Southern District of New York (filed February 2004); and (viii)
The
Marcus Corporation v. American Express Company et al.
, U.S. District Court for the Southern
District of New York (filed July 2004). The plaintiffs in these actions seek injunctive relief and
an unspecified amount of damages. Upon motion to the Court by the Company, the venue of the Cohen
Rese and Italian Colors actions was moved to the U.S. District Court for the Southern District of
New York (“SDNY”) in December 2003. Each of the above-listed actions (except for Hayama) is now
pending in the SDNY, consolidated as “In re American Express Merchants’ Litigation”. On April 30,
2004, the Company filed a motion to dismiss all the actions filed prior to such date that were
pending in the SDNY, and on March 15, 2006, such motion was granted, with the Court finding the
claims of the plaintiffs to be subject to arbitration. Plaintiffs asked the Court to reconsider
its dismissal. That request was denied. The plaintiffs have appealed the Court’s arbitration
ruling. In addition, during the pendency of the motion in the SDNY, the Company had asked the
California Superior Court hearing the Hayama action referenced above to stay that action pending
resolution of such motion. The Company also filed a motion to dismiss the action filed by the
Marcus Corporation, which was denied in July 2005. Nonetheless, the Company continues to believe
that it has meritorious defenses and will continue to vigorously defend against the Marcus action.
54
In December 2004, a purported class action captioned
National Supermarkets Association,
Inc., Mascari Enterprises, Inc. d/b/a Sound Stations, and Bunda Starr Corp. d/b/a Brite Wines and
Spirits v. MBNA America Bank, N.A., MBNA Corp., Citibank (South Dakota) N.A. and Citigroup,
Incorporated
, was filed in the SDNY. The action is a lawsuit related to the antitrust tying
actions described in the preceding paragraph. Although the Company is not named as a defendant,
the plaintiffs in this action are also plaintiffs in the direct actions against American Express
described in the preceding paragraph. This lawsuit alleges that, by agreeing to issue American
Express-branded cards, MBNA and Citibank have conspired with the Company in the alleged wrongful
tying arrangement described in the preceding paragraph. The Company believes this lawsuit is
without merit and is contrary to the Department of Justice’s successful efforts to render
unenforceable Visa’s and MasterCard’s rules that prevented
banks from issuing American Express-branded cards in the United States. The Company also believes that this lawsuit is susceptible to
the same defenses available to the Company in the direct actions filed against it, which are
described in the preceding paragraph. In the March 15, 2006 decision described in the preceding
paragraph, the SDNY denied the Company’s request to intervene in this action and denied the motion
of MBNA and Citibank to dismiss the action. The Court did, however, stay the action against MBNA
and Citibank pending the arbitration of the claims made against the Company in the actions
described in the preceding paragraph.
In August 2005, a purported class action captioned
Performance Labs Inc. v. American
Express Travel Related Services Company, Inc. (“TRS”), MasterCard International Incorporated, Visa
USA, Inc. et al.
was filed in the U. S. District Court for the District of New Jersey. The
action was then transferred to the U.S. District Court for the Eastern District of New York. The
complaint alleged that the Company’s policy prohibiting merchants from imposing restrictions on the
use of American Express cards that are not imposed equally on other forms of payment violates U.S.
antitrust laws. The suit sought injunctive relief. TRS moved to dismiss the complaint. In addition,
the Company learned that two additional purported class actions that made allegations similar to
those made in the Performance Labs action had also been filed:
518 Restaurant Corp. v. American
Express Travel Related Services Company, Inc., MasterCard International Incorporated, Visa USA,
Inc. et al.
(filed in August 2005 in the United States District Court for the Eastern District
of Pennsylvania) and
Lepkowski v. American Express Travel Related Services Company, Inc.,
MasterCard International Incorporated, Visa USA, Inc. et al.
(filed in October 2005 in the U.S.
District Court for the Eastern District of New York). The plaintiffs in these actions sought
injunctive relief. The 518 Restaurant Corp. action was voluntarily withdrawn without TRS ever
having been served with the complaint. The complaint in the Lepkowski action was also never served.
The Lepkowski and Performance Labs cases were consolidated in the U.S. District Court for the
Eastern District of New York for pre-trial purposes in a larger multi-district litigation involving
other named defendants not affiliated with the Company, and all proceedings in the consolidated
action were stayed pending the filing of a consolidated amended complaint. Such consolidated
amended complaint was filed on April 24, 2006, but the Company was not named in that action. Other
defendants, not affiliated with the Company, were named. However, on April 18, 2006, Performance
Labs, Inc., Joseph Lepkowski, DDS d/b/a Oak Park Dental Studio, and Jasa Inc. filed an action in
the SDNY against American Express Company and American Express Travel Related Services Company,
Inc. This complaint challenges the Company’s “Anti-Steering” rules as unlawful under the antitrust
laws. As alleged by plaintiffs, these rules prevent merchants from offering consumers
55
incentives to use alternative forms of payments when consumers wish to use an American
Express-branded card. Originally plaintiffs sought only injunctive relief but have since amended
their complaint to also seek unspecified damages. These plaintiffs have agreed that a stay would be
imposed with regard to their respective actions pending the appeal of the Court’s arbitration
ruling discussed above.
The Company has been named in several purported class actions in various state courts alleging
that the Company violated the respective state’s laws by wrongfully collecting amounts assessed on
converting transactions made in foreign currencies to U.S. dollars and/or failing to properly
disclose the existence of such amounts in its Cardmember agreements and billing statements. The
plaintiffs in the actions seek, among other remedies, injunctive relief, money damages and/or
attorneys’ fees on their own behalf and on behalf of the putative class of persons similarly
situated. In December 2005, the U.S. District Court for the Southern District of Florida granted
final approval of a nationwide class action settlement to resolve all lawsuits and allegations with
respect to the Company’s collection and disclosure of fees assessed on transactions made in foreign
currencies in the case captioned
Lipuma v. American Express Bank, American Express Travel
Related Services Company, Inc. and American Express Centurion Bank
(filed in August 2003). The
settlement approved by the Court calls for the Company to (a) deposit $75 million into a fund that
will be used to reimburse class members with valid claims, make certain contributions to charitable
organizations to be identified later and pay attorneys’ fees and (b) make certain changes to the
disclosures in its Cardmember agreements and billing statements regarding its foreign currency
conversion practices (which it has already done). The Company had previously established reserves
to cover the payment that will be made to reimburse class members and pay attorneys’ fees. The
Court’s approval order enjoins all other proceedings that make related allegations pending a final
approval hearing including, but not limited to the following cases: (i)
Environmental Law
Foundation, et al. v. American Express Company, et al.
, Superior Court of Alameda County,
California (filed March 2003); (ii)
Rubin v. American Express Company and American Express
Travel Related Services Company, Inc.
, Circuit Court of Madison County, Illinois (filed April
2003); (iii)
Angie Arambula, et al. v. American Express Company, et al.
, District Court of
Cameron County, Texas, 103rd Judicial District (filed May 2003); (iv)
Fuentes v. American
Express Travel Related Services Company, Inc. and American Express Company
, District Court of
Hidalgo County, Texas (filed May 2003); (v)
Wick v. American Express Company, et al.
,
Circuit Court of Cook County, Illinois (filed May 2003); (vi)
Bernd Bildstein v. American
Express Company, et al.
, Supreme Court of Queens County, New York (filed June 2003); (vii)
Janowitz v. American Express Company, et al.
, Circuit Court of Cook County, Illinois (filed
September 2003); (viii)
Paul v. American Express Company, et al.
, Superior Court of Orange
County, California (filed January 2004); and (ix)
Ball v. American Express, et al.
,
Superior Court of San Joaquin, California (filed August 2004). The Court’s approval of the
settlement has been appealed by several attorneys purporting to represent the interests of
objectors to the settlement to the U.S. Court of Appeals for the Eleventh Circuit.
In July 2004, a purported class action captioned
Ross, et al. v. American Express Company,
American Express Travel Related Services and American Express Centurion Bank
was filed in the
United States District Court for the Southern District of New York. The complaint alleges that
AMEX conspired with Visa, MasterCard and Diners Club in the setting of
56
foreign conversion rates and in the inclusion of arbitration clauses in certain of their cardmember
agreements. The suit seeks injunctive relief and unspecified damages. The class is defined as
“all Visa, MasterCard and Diners Club general purpose cardholders who used cards issued by any of
the MDL Defendant Banks....” American Express cardholders are not part of the class. In September
2005, the Court denied the Company’s motion to dismiss the action and preliminarily certified an
injunction class of Visa and MasterCard cardholders to determine the validity of Visa’s and
MasterCard’s cardmember arbitration clauses. American Express filed a motion for reconsideration
with the Court, which motion was denied in September 2006. The Company has filed an appeal from
the District Court’s order denying its motion to compel arbitration. On February 14, 2007, the
United States Court of Appeals for the Second Circuit denied plaintiffs motion to dismiss that
appeal. The Company had also asked the appellate court to entertain an interlocutory appeal of the
District court’s certification of an injunction class. On December 19, 2006, that appellate court
denied that request.
In January 2006, in a matter captioned
Hoffman, et al. v. American Express Travel Related
Services Company, Inc.,
No. 2001-02281, Superior Court of the State of California, County of
Alameda, the Court certified a class action against TRS. Two classes were certified: (1) all
persons who held American Express charge cards with billing addresses in California who purchased
American Express’ fee-based travel-related insurance plans from September 6, 1995, through a date
to be determined; and (2) all persons who held American Express charge cards with billing addresses
in states other than California and who purchased American Express fee-based travel-related
insurance plans from September 6, 1995, through a date to be determined. Plaintiffs allege that
American Express violated California and New York law by allegedly billing customers for flight and
baggage insurance that they did not receive. American Express denies the allegations and filed an
interlocutory appeal (known as a petition for a writ of mandate) of the class certification order.
In June 2006, the appellate court denied jurisdiction over that interlocutory appeal. American
Express also appealed the denial of its motion to compel individual arbitration of all
non-California class members. The appellate court has jurisdiction over that appeal and the appeal
is pending. In the U.S. District Court for the Eastern District of New York a matter making related
allegations to those raised in Hoffman is pending. That matter, captioned
Environment Law
Enforcement Systems v. American Express et al.
, had effectively been stayed pending the
proceedings in the Hoffman action. In October 2006, the Court in the Environment Law action entered
an order scheduling a pre-motion conference on American Express’ anticipated motion to compel
arbitration for January 31, 2007. That date has since been extended to March 5, 2007.
In June 2006, a putative class action captioned
Homa v. American Express Company et
al
. was filed in the U.S. District Court for the District of New Jersey. The case alleges,
generally, misleading and fraudulent advertising of the “tiered” “up to 5%” cash rebates with the
Blue Cash card. The complaint initially sought certification of a nationwide class consisting of
“all persons who applied for and received an American Express Blue Cash card during the period from
September 30, 2003 to the present and who did not get the rebate or rebates provided for in the
offer.” On December 1, 2006, however, plaintiff filed a First Amended Complaint dropping the
nationwide class claims and asserting claims only on behalf of New Jersey residents who “while so
residing in New Jersey, applied for and received an American Express Blue Cash card
57
during the period from September 30, 2003 to the present.” The plaintiff seeks unspecified damages
and other unspecified relief that the Court deems appropriate.
International Matters
As described elsewhere in this report, in recent years, U.S. and foreign regulatory
authorities, together with international organizations, have raised increasing concerns over the
ability of criminal organizations and corrupt persons to use global financial intermediaries to
facilitate money laundering. In the United States, the Secretary of the Treasury has issued
regulations pursuant to the U.S. Patriot Act that specifically impact certain money laundering
prevention activities of entities involved, as AEBL is, in correspondent and private banking
activities. Compliance efforts to combat money laundering remain a high priority for AEBL and it
has increased these efforts to address evolving regulatory and supervisory standards and
requirements in jurisdictions in which AEBL does business. The
regulatory authorities are exercising heightened scrutiny of the
anti-money laundering programs of financial institutions and have
taken action against financial institutions for deficiencies in such
programs. In early 2004, AEBI, a subsidiary of
AEBL headquartered in Miami, received subpoenas from the Department of Justice (“DOJ”) relating to
certain customer accounts and anti-money laundering (“AML”) compliance programs. In September 2006,
the DOJ informed AEBI of concerns relating to AML compliance programs that could result in an
action. AEBI has been cooperating with the DOJ.
In May 2006, in a matter captioned
Marcotte v. Bank of Montreal et al.
, filed in the
Superior Court of Quebec, District of Montreal (originally filed in April 2003) the Court
authorized a class action against Amex Bank of Canada, Bank of Montreal, Toronto-Dominion Bank,
Royal Bank of Canada, Canadian Imperial Bank of Commerce, Scotiabank, National Bank of Canada,
Laurentian Bank of Canada and Citibank Canada. The action alleges that conversion commissions made
on foreign currency transactions are credit charges under the Quebec Consumer Protection Act (the
“QCPA”) and cannot be charged prior to the 21-day grace period under the QCPA. The class includes
all persons holding a credit card issued by one of the defendants to whom fees were charged since
April 17, 2000, for transactions made in foreign currency before expiration of the period of 21
days following the statement of account. The class claims reimbursement of all foreign currency
conversions, CDN $400 per class member for trouble, inconvenience and punitive damages, interest
and fees and costs.
In March 2006, a motion to authorize a class action captioned
Jasmin v. Amex Bank of
Canada
, was filed in the Superior Court of Quebec, District of Montreal. The motion purports
to claim, on behalf of a Canada-wide class of persons who were holders of an American Express
Credit Card who paid their credit card account at the counter or at an automatic banking machine of
an authorized financial institution, and who obtained a grace period that was less than that
appearing on their statement of account and/or who were charged interest under a three- to five-
day processing delay contrary to their contracts, the law respecting banks and the Civil Code of
Quebec. A claim is also being made of an alleged violation of the Charter of Human Rights and
Freedoms for depriving the class members of their use of property. The class claims reimbursement
per class member of finance charges in the amount of CDN $75, CDN $100 in punitive damages and CDN
$25 for having to pay their account early and being deprived of the use of their money, interest,
fees and costs.
58
In March 2006, in a matter captioned
Ptack v. Amex Bank of Canada
, filed in the
Superior Court of Quebec, District of Montreal (originally filed in March 2004), the Court
authorized a class action against Amex Bank of Canada. The class includes all persons who were
holders of an American Express Credit Card who paid their credit card account via Internet,
telephone and/or automatic banking machine, on or before the due date and incurred a finance charge
as a result of the alleged payment processing policy of Amex Bank. The class claims reimbursement
per class member of finance charges, CDN $100 in punitive damages and CDN $100 for waste of time,
interest and fees and costs. Amex Bank believes it has meritorious defenses and will defend
against this action.
In November 2006, in a matter captioned
Option Consommateurs and Benoit Fortin v. Amex
Bank of Canada et al.
filed in the Superior Court of Quebec, District of Montreal (originally
filed in July 2003), the Court authorized a class action against Amex Bank of Canada, Citibank
Canada, MBNA Canada, Diners Club International, Capital One and Royal Bank of Canada. The
plaintiff alleges that the defendants have violated the Quebec Consumer Protection Act (“QCPA”) by
imposing finance charges on credit card transactions prior to 21 days following the receipt of the
statement containing the charge. It is alleged that the QCPA provisions which require a 21-day
grace period prior to imposing finance charges applies to credit cards issued by Amex Bank of
Canada in Quebec and that finance charges imposed prior to this grace period violate the Act. The
class seeks reimbursement of all finance charges imposed in violation of the Act, CDN$200 in
punitive damages per class member, interest and fees and costs.
In November 2006, in a matter captioned
Sylvan Adams v. Amex Bank of Canada
filed in
the Superior Court of Quebec, District of Montreal (originally filed in November 2004), the Court
authorized a class action against Amex Bank of Canada. The plaintiff alleges that prior to
December 2003, Amex Bank of Canada charged a foreign currency conversion commission on transactions
to purchase goods and services in currencies other than Canadian dollars and failed to disclose the
commissions in monthly billing statements or solicitations directed to prospective cardmembers.
The class, consisting of all Cardmembers in Quebec that purchased goods or services in a foreign
currency prior to December 2003, claims reimbursement of all foreign currency conversion
commissions, CDN$1,000 in punitive damages per class member, interest and fees and costs.
In May 2005, Amex Bank of Canada was added as a defendant to a motion to authorize a class
action captioned
Option Consommateurs and Joel-Christian St-Pierre v. Bank of Montreal et
al.
filed in the Superior Court of Quebec, District of Quebec. The motion, which also names as
defendants Royal Bank of Canada, Toronto-Dominion Bank, HSBC Bank of Canada, among others, alleges
that the defendants violated QCPA by imposing finance charges on credit card transactions prior to
21 days following the receipt of the statement containing the charge. It is alleged that the QCPA
provisions, which require a 21-day grace period prior to imposing finance charges, applies to
credit cards issued by Amex Bank of Canada in Quebec and that finance charges imposed prior to this
grace period violate the QCPA. The proposed class seeks reimbursement of all finance charges
imposed in violation of the QCPA, CDN$100 in punitive damages per class member, interest and fees
and costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during the last quarter of our
fiscal year ended December 31, 2006.
59
PART II
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ITEM 5.
|
|
MARKET FOR COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
|
(a) Our common stock trades principally on The New York Stock Exchange under the trading
symbol AXP. As of December 31, 2006, we had 51,644 common shareholders of record. You can find
quarterly price and dividend information concerning our common stock
in Note 20 to the Consolidated Financial
Statements, which can be found on page 109 of our 2006 Annual Report to Shareholders, which Note is
incorporated herein by reference. You can find information on securities authorized for issuance
under our equity compensation plans under the captions “Executive Compensation – Share Plans”,
and “Executive Compensation – Equity Compensation Plan Information” to be contained in the Company’s
definitive 2007 proxy statement for our Annual Meeting of
Shareholders, which is scheduled to be held
on April 23, 2007. The information to be found under such captions is incorporated herein by
reference. In addition, you can find information regarding our 2007 Incentive Compensation Plan,
which will be voted on by our Shareholders at the Annual Meeting, under the caption “Item 3 –
Proposal to Adopt the American Express Company 2007 Incentive Compensation Plan” to be contained
in our definitive 2007 Proxy Statement. Our proxy statement for the Annual Meeting is expected to
be filed with the SEC in March 2007 (and, in any event, not later than 120 days of the close of our
most recently completed fiscal year).
On December 31, 2006, we acquired Harbor Payments, Inc. (“Harbor”), a privately held company,
pursuant to a merger agreement under which fifteen former Harbor shareholders received an aggregate
of 2,424,660 unregistered American Express common shares in a private placement transaction, in
consideration of all of the outstanding shares of Harbor, and Harbor became a wholly-owned
subsidiary of ours. The merger documents contained certain representations and warranties of the former
Harbor shareholders that we relied upon in making this private
placement pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended.
(b) Not applicable.
(c) The table below sets forth the information with respect to purchases of our common stock
made by or on behalf of the Company during the quarter ended December 31, 2006.
60
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|
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|
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|
Total Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly
|
|
that May Yet Be
|
|
|
|
Total Number
|
|
|
|
|
|
Announced
|
|
Purchased Under
|
|
|
|
of Shares
|
|
Average Price
|
|
Plans or
|
|
the Plans or
|
|
Period
|
|
Purchased
|
|
Paid Per Share
|
|
Programs (3)
|
|
Programs
|
|
October 1-31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase program (1)
|
|
|
2,300,000
|
|
|
$
|
57.14
|
|
|
|
2,300,000
|
|
|
|
181,118,123
|
|
|
Employee transactions
(2)
|
|
|
8,194
|
|
|
$
|
54.19
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1-30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase program (1)
|
|
|
5,313,700
|
|
|
$
|
58.85
|
|
|
|
5,313,700
|
|
|
|
175,804,423
|
|
|
Employee transactions
(2)
|
|
|
371,854
|
|
|
$
|
59.20
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1-31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase program (1)
|
|
|
10,995,100
|
|
|
$
|
59.85
|
|
|
|
10,995,100
|
|
|
|
164,809,323
|
|
|
Employee transactions
(2)
|
|
|
44,550
|
|
|
$
|
59.83
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase program (1)
|
|
|
18,608,800
|
|
|
$
|
59.23
|
|
|
|
|
|
|
|
|
|
|
Employee transactions
(2)
|
|
|
424,598
|
|
|
$
|
59.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Our Board of Directors authorized the repurchase of an additional 200 million shares of
common stock in May 2006. At present, there are approximately 164.8 million shares remaining
under such authorization. Such authorization does not have an expiration date, and at
present, there is no intention to modify or otherwise rescind such authorization. Since
September 1994, we have acquired 605.2 million shares of our common stock under various Board
authorizations to repurchase up to an aggregate of 770 million shares, including purchases
made under agreements with third parties.
|
|
|
|
(2)
|
|
Includes: (a) shares delivered by or deducted from holders of employee stock options who
exercised options (granted under our incentive compensation plans) in satisfaction of the
exercise price and/or tax withholding obligation of such holders and (b) restricted shares
withheld (under the terms of grants under our incentive compensation plans) to offset tax
withholding obligations that occur upon vesting and release of restricted shares. Our
incentive compensation plans provide that the value of the shares delivered or attested to, or
withheld, shall be the average of the high and low price of the Company’s common stock on the
date the relevant transaction occurs.
|
|
|
|
(3)
|
|
Share purchases under publicly announced programs are made pursuant to open market purchases
or privately negotiated transactions (including with employee benefit plans) as market
conditions warrant and at prices we deem appropriate.
|
ITEM 6. SELECTED FINANCIAL DATA
The
“Consolidated Five-Year Summary of Selected Financial Data”
appearing on page 111 of the
Company’s 2006 Annual Report to Shareholders is incorporated herein by reference.
61
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The
information set forth under the heading “Financial Review”
appearing on pages 30-63 of the
Company’s 2006 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
information set forth under the heading “Risk Management”
appearing on pages 49-53 and
in Note 10 to the Consolidated Financial Statements on
pages 93-95 of the Company’s 2006 Annual Report
to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The “Report of Independent Registered Public Accounting Firm” (PricewaterhouseCoopers LLP),
the “Report of Independent Registered Public Accounting Firm” (Ernst & Young LLP), the
“Consolidated Financial Statements” and the “Notes to Consolidated Financial Statements” appearing
on pages 66-110 of the Company’s 2006 Annual Report to Shareholders are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and
acting Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.
Based on such evaluation, our Chief Executive Officer and acting Chief Financial Officer have concluded
that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
There have not been any changes in the Company’s internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s
fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
“Management’s Report on Internal Control over Financial Reporting,” which sets forth
management’s evaluation of internal control over financial reporting, and the “Reports of
Independent Registered Public Accounting Firms,” appearing on
pages 65-68 of the Company’s 2006
Annual Report to Shareholders, are incorporated herein by reference.
62
ITEM
9B. OTHER INFORMATION
Not applicable.
PART III
|
|
|
|
|
ITEMS 10, 11, 12 and 13.
|
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE; EXECUTIVE
COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS; CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
We expect to file with the SEC, in March 2007 (and, in any event, not later than 120 days
after the close of our last fiscal year), a definitive proxy statement, pursuant to Regulation 14A
of the SEC in connection with our Annual Meeting of Shareholders to be held April 23, 2007, which
involves the election of directors. The following information to be included in such proxy
statement is incorporated herein by reference:
|
|
•
|
|
information included under the caption “Corporate Governance
– Summary of the Corporate Governance
Principles – Independence of Directors;”
|
|
|
|
|
•
|
|
information included in the table under the caption “Corporate Governance
– Membership on Board Committees;”
|
|
|
|
|
•
|
|
information under the captions “Corporate Governance – Compensation and
Benefits Committee – Compensation Committee Interlocks and
Insider Participation” and “Report of Compensation and
Benefits Committee;”
|
|
|
|
|
•
|
|
information included under the caption “Corporate Governance – Audit
Committee;”
|
|
|
|
|
•
|
|
information included under the caption “Compensation of Directors;”
|
|
|
|
|
•
|
|
information included under the caption “Ownership of Our Common Shares;”
|
|
|
|
|
•
|
|
information included under the caption “Items to be Voted on by
Shareholders – Item 1 – Election of Directors;”
|
|
|
|
|
•
|
|
information included under the caption “Executive
Compensation;”
|
|
|
|
|
•
|
|
information under the caption “Certain Relationships and Transactions;” and
|
|
|
|
|
•
|
|
information under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance.”
|
In addition, the information regarding executive officers called for by Item 401(b) of
Regulation S-K may be found under the caption “Executive Officers of the Company” in this report.
63
We have adopted a set of Corporate Governance Principles, which together with the charters of
the five standing committees of the Board of Directors (Audit; Compensation and Benefits;
Executive; Nominating and Governance; and Public Responsibility), our Code of Conduct (which
constitutes the Company’s code of ethics), and the Code of
Business Conduct for the Members of the Board of Directors provide the framework for the governance of the Company. A complete copy of
our Corporate Governance Principles, the charters of each of the Board committees, the Code of
Conduct (which applies not only to our Chief Executive Officer, Chief Financial Officer and
Comptroller, but also to all other employees of the Company) and the Code of Business Conduct for
the Members of the Board of Directors may be found by clicking on the “Corporate Governance” link
found on our Investor Relations Web site at http://ir.americanexpress.com. You may also access our
Investor Relations Web site through the Company’s main Web site at www.americanexpress.com by
clicking on the “About American Express” link, which is located at the bottom of the Company’s
homepage. (Information from such sites is not incorporated by reference into this report.) You
may also obtain free copies of these materials by writing to our Secretary at the Company’s
headquarters.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth under the heading “Item 2 – Selection of Independent Registered
Public Accountants – Audit Fees;” “ – Audit-Related Fees;” “ – Tax Fees;” “ – All Other Fees;” and “ – Policy on Pre-Approval of Services Provided by
Independent Registered Public Accountants,” which will appear in the Company’s definitive proxy
statement in connection with our Annual Meeting of Shareholders to be held April 23, 2007, is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.
Financial Statements
:
The financial statements filed as a part of this report are listed on page F-1 hereof under
“Index to Financial Statements Covered by Reports of Independent Registered Public Accounting
Firms,” which is incorporated herein by reference.
2.
Financial Statement Schedules
:
The financial statement schedules required to be filed in this report are listed on page F-1
hereof under “Index to Financial Statements Covered by Reports of Independent Registered Public
Accounting Firms,” which is incorporated herein by reference.
3.
Exhibits
:
The list of exhibits required to be filed as exhibits to this report are listed on pages E-1
through E-6 hereof under “Exhibit Index,” which is incorporated herein by reference.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
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|
|
|
|
|
|
AMERICAN EXPRESS COMPANY
|
|
|
|
|
|
|
February 28, 2007
|
/s/
Daniel T. Henry
|
|
|
|
Daniel T. Henry
|
|
|
|
Executive Vice President and
acting Chief Financial Officer
|
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the capacities and on the
date indicated.
|
|
|
|
|
/s/ Kenneth I. Chenault
|
|
/s/ Vernon E. Jordan, Jr.
|
|
|
|
|
|
Kenneth I. Chenault
|
|
Vernon E. Jordan, Jr.
|
|
Chairman, Chief Executive Officer and Director
|
|
Director
|
|
|
|
|
|
/s/
Daniel T. Henry
|
|
/s/ Jan Leschly
|
|
|
|
|
|
Daniel T. Henry
|
|
Jan Leschly
|
|
Executive
Vice President and acting Chief Financial Officer
|
|
Director
|
|
|
|
|
|
/s/ Joan C. Amble
|
|
/s/ Richard C. Levin
|
|
|
|
|
|
Joan C. Amble
|
|
Richard C. Levin
|
|
Executive Vice President and Comptroller
|
|
Director
|
|
|
|
|
|
/s/ Daniel F. Akerson
|
|
/s/ Richard A. McGinn
|
|
|
|
|
|
Daniel F. Akerson
|
|
Richard A. McGinn
|
|
Director
|
|
Director
|
|
|
|
|
|
/s/ Charlene Barshefsky
|
|
/s/ Edward D. Miller
|
|
|
|
|
|
Charlene Barshefsky
|
|
Edward D. Miller
|
|
Director
|
|
Director
|
|
|
|
|
|
/s/ Ursula M. Burns
|
|
/s/ Frank P. Popoff
|
|
|
|
|
|
Ursula M. Burns
|
|
Frank P. Popoff
|
|
Director
|
|
Director
|
|
|
|
|
|
/s/ Peter Chernin
|
|
/s/ Robert D. Walter
|
|
|
|
|
|
Peter Chernin
|
|
Robert D. Walter
|
|
Director
|
|
Director
|
|
|
|
|
|
|
|
/s/ Ronald A. Williams
|
|
|
|
|
|
|
|
Ronald A. Williams
|
|
|
|
Director
|
February 28, 2007
65
AMERICAN EXPRESS COMPANY
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORTS OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRMS
(Items 15(a)(1) and 15(a)(2) of Form 10-K)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
|
|
|
|
to Shareholders
|
|
|
|
|
Form 10-K
|
|
|
(Page)
|
|
|
American Express Company and Subsidiaries:
|
|
|
|
|
|
|
|
|
|
Data incorporated by reference from 2006 Annual Report to
Shareholders:
|
|
|
|
|
|
|
|
|
|
Management’s report on internal control over financial
reporting
|
|
|
|
|
|
|
65
|
|
|
Report of independent registered public accounting firm
(PricewaterhouseCoopers LLP)
|
|
|
|
|
|
|
66-67
|
|
|
Report of independent registered public accounting firm
(Ernst & Young LLP)
|
|
|
|
|
|
|
68
|
|
|
Consolidated statements of income for each of the three
years in the period ended December 31, 2006
|
|
|
|
|
|
|
70
|
|
|
Consolidated balance sheets at December 31, 2006
and 2005
|
|
|
|
|
|
|
71
|
|
|
Consolidated statements of cash flows for each of the
three years in the period ended December 31, 2006
|
|
|
|
|
|
|
72
|
|
|
Consolidated statements of shareholders’ equity for each of
the three years in the period ended December 31, 2006
|
|
|
|
|
|
|
73
|
|
|
Notes to consolidated financial statements
|
|
|
|
|
|
|
74-110
|
|
|
Consent of independent registered public accounting firm
|
|
|
F-2
|
|
|
|
|
|
|
Consent of independent registered public accounting firm
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedules:
|
|
|
|
|
|
|
|
|
|
Report of independent registered public accounting firm on
financial statement schedules
|
|
|
F-4
|
|
|
|
|
|
|
I – Condensed financial information of the Company
|
|
|
F-5 – F-9
|
|
|
|
|
|
|
II – Valuation and qualifying accounts for each of the
three years in the period ended December 31, 2006
|
|
|
F-10
|
|
|
|
|
|
All other schedules for American Express Company and subsidiaries have been omitted since the
required information is not present or not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the respective financial
statements or notes thereto.
* * *
The Consolidated Financial Statements of American Express Company (including the reports of
independent registered public accounting firms) listed in the above index, which are included in
the Annual Report to Shareholders for the year ended December 31, 2006, are hereby incorporated by
reference. With the exception of the pages listed in the above index, unless otherwise
incorporated by reference elsewhere in this Annual Report on Form 10-K, the 2006 Annual Report to
Shareholders is not to be deemed filed as part of this report.
F-1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements (Form S-8
No. 2-46918, No. 2-59230, No. 2-64285, No. 2-73954, No. 2-89680, No. 33-01771, No. 33-02980, No.
33-28721, No. 33-33552, No. 33-36442, No. 33-48629, No. 33-62124, No. 33-65008, No. 33-53801, No.
333-12683, No. 333-41779, No. 333-52699, No. 333-73111, No. 333-38238, and No. 333-98479; Form S-3
No. 2-89469, No. 33-43268, No. 33-50997, No. 333-32525, No. 333-45445, No. 333-47085, No.
333-55761, No. 333-51828, No. 333-113768, No. 333-117835 and No. 333-138032) of American Express
Company of our report dated February 26, 2007, relating to the consolidated financial statements,
management’s assessment of the effectiveness of internal control over financial reporting and the
effectiveness of internal control over financial reporting, which appears in the Annual Report to
Shareholders, which is incorporated by reference in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report dated
February 26, 2007, relating to the
financial statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 2007
F-2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Annual Report on Form 10-K of American
Express Company of our report dated February 18, 2005, except for notes 2 and 19, as to which the
date is February 27, 2006, with respect to the consolidated financial statements of American
Express Company, included in the 2006 Annual Report to Shareholders of American Express Company
(the “Company”).
Our
audit also included the financial statement schedules of American Express Company listed in
Item 15(a). These schedules are the responsibility of the Company’s management. Our responsibility
is to express an opinion based on our audit. In our opinion the
financial statement schedules
referred to above, when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements (Form S-8 No.
2-46918, No. 2-59230, No. 2-64285, No. 2-73954, No. 2-89680, No. 33-01771, No. 33-02980, No.
33-28721, No. 33-33552, No. 33-36442, No. 33-48629, No. 33-62124, No. 33-65008, No. 33-53801, No.
333-12683, No. 333-41779, No. 333-52699, No. 333-73111, No. 333-38238, and No. 333-98479; Form S-3
No. 2-89469, No. 33-43268, No. 33-50997, No. 333-32525, No. 333-45445, No. 333-47085, No.
333-55761, No. 333-51828, No. 333-113768, No. 333-117835 and No. 333-138032) and in the related
Prospectuses of our report dated February 18, 2005, except for notes 2 and 19, as to which the date
is February 27, 2006, with respect to the consolidated financial statements of American Express
Company incorporated herein by reference, and our report in the preceding paragraph with respect to
the financial statement schedules of American Express Company included in this Annual Report on
Form 10-K of American Express Company.
/s/ Ernst & Young LLP
New York, New York
February 26, 2007
F-3
Report of Independent Registered Public Accounting Firm
on
Financial Statement Schedules
To the Board of Directors and Shareholders
of American Express Company:
Our audits of the consolidated financial statements, of management’s assessment of the
effectiveness of internal control over financial reporting and of the effectiveness of internal
control over financial reporting referred to in our report dated February 26, 2007 appearing in the
2006 Annual Report to Shareholders of American Express Company (which report, consolidated
financial statements and assessment are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedules as of and for the years ended
December 31, 2006 and December 31, 2005, listed in Item 15(a)(2) of this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 26, 2007
F-4
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I
—
CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED STATEMENTS OF INCOME
(Parent Company Only)
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
$
|
196
|
|
|
$
|
183
|
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
243
|
|
|
|
336
|
|
|
|
427
|
|
|
Human resources
|
|
|
136
|
|
|
|
145
|
|
|
|
105
|
|
|
Other
|
|
|
173
|
|
|
|
198
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
552
|
|
|
|
679
|
|
|
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
|
(356
|
)
|
|
|
(496
|
)
|
|
|
(498
|
)
|
|
Income tax benefit
|
|
|
(187
|
)
|
|
|
(195
|
)
|
|
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before equity in net income of
subsidiaries and affiliates
|
|
|
(169
|
)
|
|
|
(301
|
)
|
|
|
(293
|
)
|
|
Equity in net income of subsidiaries and
affiliates
|
|
|
3,898
|
|
|
|
3,522
|
|
|
|
2,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
3,729
|
|
|
|
3,221
|
|
|
|
2,686
|
|
|
(Loss) Income from discontinued operations,
net of tax
|
|
|
(22
|
)
|
|
|
513
|
|
|
|
830
|
|
|
Cumulative effect of accounting change
related to discontinued operations,
net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,707
|
|
|
$
|
3,734
|
|
|
$
|
3,445
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Information of the Parent Company on page F-8.
F-5
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I
—
CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED BALANCE SHEETS
(Parent Company Only)
(millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Investments
|
|
|
50
|
|
|
|
30
|
|
|
Equity in net assets of subsidiaries and affiliates
of continuing operations
|
|
|
11,017
|
|
|
|
10,955
|
|
|
Accounts receivable and accrued interest, less
reserves
|
|
|
20
|
|
|
|
45
|
|
|
Land, buildings and equipment — at cost, less
accumulated depreciation: 2006, $22; 2005, $32
|
|
|
33
|
|
|
|
29
|
|
|
Due from subsidiaries
|
|
|
5,067
|
|
|
|
4,853
|
|
|
Other assets
|
|
|
388
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,578
|
|
|
$
|
16,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
’
EQUITY
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
$
|
73
|
|
|
$
|
309
|
|
|
Long-term debt
|
|
|
5,994
|
|
|
|
5,242
|
|
|
Due to subsidiaries
|
|
|
—
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,067
|
|
|
|
5,570
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Common shares, $.20 par value, authorized 3.6
billion shares; issued and outstanding 1,199
million shares in 2006 and 1,241 million shares in
2005
|
|
|
240
|
|
|
|
248
|
|
|
Additional paid-in capital
|
|
|
9,638
|
|
|
|
8,652
|
|
|
Retained earnings
|
|
|
1,153
|
|
|
|
1,788
|
|
|
Accumulated other comprehensive (loss) income,
net of tax:
|
|
|
|
|
|
|
|
|
|
Net unrealized securities gains
|
|
|
92
|
|
|
|
137
|
|
|
Net unrealized derivatives gains
|
|
|
27
|
|
|
|
143
|
|
|
Foreign currency translation adjustments
|
|
|
(222
|
)
|
|
|
(400
|
)
|
|
Net unrealized pension and other postretirement
benefit costs
|
|
|
(417
|
)
|
|
|
—
|
|
|
Minimum pension liability
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
|
(520
|
)
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
10,511
|
|
|
|
10,549
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
16,578
|
|
|
$
|
16,119
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Information of the Parent Company on page F-8.
F-6
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I
—
CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Parent Company Only)
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,707
|
|
|
$
|
3,734
|
|
|
$
|
3,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
net (income) loss of subsidiaries and affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– continuing operations
|
|
|
(3,898
|
)
|
|
|
(3,522
|
)
|
|
|
(2,979
|
)
|
|
– discontinued operations
|
|
|
22
|
|
|
|
(513
|
)
|
|
|
(830
|
)
|
|
Cumulative effect of accounting change related to
discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
71
|
|
|
Dividends received from subsidiaries and affiliates
|
|
|
3,479
|
|
|
|
2,474
|
|
|
|
2,110
|
|
|
Dividends received from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
1,325
|
|
|
Other operating activities, primarily with subsidiaries
|
|
|
(279
|
)
|
|
|
(316
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,031
|
|
|
|
1,857
|
|
|
|
3,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(20
|
)
|
|
|
(30
|
)
|
|
|
—
|
|
|
Purchase of land, buildings and equipment
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
(10
|
)
|
|
Acquisition
|
|
|
(200
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(230
|
)
|
|
|
(38
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of debt
|
|
|
1,750
|
|
|
|
—
|
|
|
|
1
|
|
|
Principal payment of debt
|
|
|
(1,000
|
)
|
|
|
(498
|
)
|
|
|
—
|
|
|
Issuance of
American Express common shares and other
|
|
|
1,203
|
|
|
|
1,129
|
|
|
|
1,055
|
|
|
Repurchase of American Express common shares
|
|
|
(4,093
|
)
|
|
|
(1,853
|
)
|
|
|
(3,578
|
)
|
|
Dividends paid
|
|
|
(661
|
)
|
|
|
(597
|
)
|
|
|
(535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,801
|
)
|
|
|
(1,819
|
)
|
|
|
(3,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
:
Cash paid for interest (net of amounts capitalized) in 2006, 2005 and 2004 was $190 million, $246
million and $174 million, respectively. Net cash received for income taxes in 2006, 2005 and 2004
was $216 million, $160 million and $384 million, respectively.
See Notes to Condensed Financial Information of the Parent Company on page F-8.
F-7
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I
—
CONDENSED FINANCIAL INFORMATION OF THE COMPANY
NOTES TO CONDENSED FINANCIAL INFORMATION OF THE COMPANY
(Parent Company Only)
|
1.
|
|
Principles of Consolidation
|
|
|
|
|
|
The accompanying condensed financial statements include the accounts of American Express Company
(the “Parent Company”) and, on an equity basis, its subsidiaries and affiliates. Parent Company
revenues and expenses, other than human resources expenses and interest expense on long-term
debt, are primarily related to intercompany transactions with subsidiaries and affiliates.
These financial statements should be read in conjunction with the consolidated financial
statements and the accompanying notes thereto of American Express Company and its subsidiaries
(the “Company”). Certain reclassifications of prior period amounts have been made to conform to
the current presentation.
|
|
|
|
|
|
On September 30, 2005, the Company completed the spin-off of Ameriprise Financial, Inc.
(Ameriprise), formerly known as American Express Financial Corporation, the Company’s financial
planning and financial services business. In addition, during the third quarter of 2005, the
Company completed certain dispositions including the sale of its tax, accounting and consulting
business, American Express Tax and Business Services, Inc. (“TBS”). The operating results and
cash flows related to Ameriprise and certain dispositions (including TBS) have been reflected as
discontinued operations in the condensed financial information.
|
F-8
2. Long-term debt consists of (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
1.85% Convertible Debentures due December 1, 2033(a)
|
|
$
|
—
|
|
|
$
|
2,000
|
|
|
3.75% Senior Notes due November 20, 2007
|
|
|
749
|
|
|
|
748
|
|
|
4.75% Senior Notes due June 17, 2009
|
|
|
500
|
|
|
|
499
|
|
|
4.875% Senior Notes due July 15, 2013
|
|
|
995
|
|
|
|
995
|
|
|
5.25% Senior Notes due September 12, 2011
|
|
|
400
|
|
|
|
—
|
|
|
5.48% Senior Notes due December 1, 2033(a)
|
|
|
2,000
|
|
|
|
—
|
|
|
5.50 % Senior Notes due September 12, 2006
|
|
|
—
|
|
|
|
1,000
|
|
|
5.50 % Senior Notes due September 12, 2016
|
|
|
600
|
|
|
|
—
|
|
|
Subordinated Debentures due 2036
|
|
|
750
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,994
|
|
|
$
|
5,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
At December 1, 2006, the Parent Company remarketed the $2 billion Convertible Debentures
outstanding at December 31, 2005, into unsecured 5.48 percent floating rate senior notes due 2033.
|
Aggregate annual maturities of long-term debt for the five years ending December 31, 2011 are
as follows (millions): 2007, $749; 2008, $0; 2009, $500; 2010, $0; 2011, $400 and thereafter,
$4,345.
F-9
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II —VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2006
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for credit losses,
loans, and
|
|
|
Reserve for doubtful
|
|
|
|
|
discounts
|
|
|
accounts receivable
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance at beginning of period
|
|
|
1,097
|
|
|
$
|
1,084
|
|
|
$
|
1,121
|
|
|
$
|
1,008
|
|
|
$
|
863
|
|
|
$
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges to income
|
|
|
1,699
|
|
|
|
1,381
|
|
|
|
1,188
|
|
|
|
1,296
|
|
|
|
1,563
|
(a)
|
|
|
1,213
|
(a)
|
|
Recoveries of amounts
previously written off
|
|
|
212
|
|
|
|
148
|
|
|
|
94
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges for which reserves
were provided
|
|
|
(1,739
|
)
|
|
|
(1,516
|
)
|
|
|
(1,319
|
)
|
|
|
(1,281
|
)
|
|
|
(1,418
|
)
|
|
|
(1,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,269
|
|
|
$
|
1,097
|
|
|
$
|
1,084
|
|
|
$
|
1,023
|
|
|
$
|
1,008
|
|
|
$
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Before recoveries on accounts previously written off, which are credited to income
(millions): 2006 — $210; 2005 — $202 and 2004 — $196.
|
F-10
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report. The exhibit numbers preceded by
an asterisk (*) indicate exhibits electronically filed herewith. All other exhibit numbers
indicate exhibits previously filed and are hereby incorporated herein by reference. Exhibits
numbered 10.1 through 10.26, 10.28 through 10.39 and 10.42 through
10.44 are management contracts
or compensatory plans or arrangements.
|
3.1
|
|
Company’s Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 of
the Company’s Registration Statement on Form S-3, dated July 31, 1997 (Commission File No.
333-32525)).
|
|
|
|
3.2
|
|
Company’s Certificate of Amendment of the Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q (Commission File No.
1-7657) for the quarter ended March 31, 2000).
|
|
|
|
3.3
|
|
Company’s By-Laws, as amended through September 27, 2006 (incorporated by reference to
Exhibit 3.1 of the Company’s Current Report on Form 8-K
(Commission File No. 1-7657), dated
September 27, 2006 (filed September 29, 2006)).
|
|
|
|
4.
|
|
The instruments defining the rights of holders of long-term debt securities of the Company
and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation
S-K. The Company hereby agrees to furnish copies of these instruments to the SEC upon
request.
|
|
|
|
10.1
|
|
American Express Company 1989 Long-Term Incentive Plan, as amended and restated (incorporated
by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (Commission File
No. 1-7657) for the quarter ended March 31, 1996).
|
|
|
|
10.2
|
|
American Express Company 1989 Long-Term Incentive Compensation Plan Master Agreement, dated
February 27, 1995 (incorporated by reference to Exhibit 10.4 of the Company’s Current Report
on Form 8-K (Commission File No. 1-7657), dated November 22, 2004 (filed January 28, 2005)).
|
|
|
|
10.3
|
|
Amendment dated February 28, 2000 of American Express Company 1989 Long-Term Incentive
Compensation Plan Master Agreement dated February 27, 1995 (incorporated by reference to
Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for
the quarter ended March 31, 2000).
|
|
|
|
10.4
|
|
American Express Company 1998 Incentive Compensation Plan, as amended through July 25, 2005
(incorporated by reference to Exhibit 10.4 of the Company’s
Annual Report on Form 10-K (Commission
File No. 1-7657) for the year ended December 31, 2005).
|
|
|
|
10.5
|
|
American Express Company 1998 Incentive Compensation Plan Master Agreement, dated April 27,
1998 (for awards made prior to January 22, 2007) (incorporated by
|
E-1
|
|
|
reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (Commission File
No. 1-7657) for the quarter ended September 30, 2004).
|
|
|
|
10.6
|
|
Amendment of American Express Company 1998 Incentive Compensation Plan Master Agreement,
dated April 27, 1998 (for awards made prior to January 22, 2007) (incorporated by reference to
Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for
the quarter ended March 31, 2000).
|
|
|
|
*10.7
|
|
American Express Company 1998 Incentive Compensation Plan Master Agreement, dated
January 22, 2007 (for awards made on or after such date).
|
|
|
|
*10.8
|
|
Form of award agreement for executive officers in connection with Performance Grant awards
(a/k/a Incentive Award) under the American Express Company 1998 Incentive Compensation Plan,
as amended.
|
|
|
|
10.9
|
|
Form of award agreement for executive officers in connection with Portfolio Grants under the
American Express Company 1998 Incentive Compensation Plan, as amended (for awards made prior
to January 22, 2007) (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report
on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2005).
|
|
|
|
10.10
|
|
Form of award agreement for executive officers in connection with Portfolio Grants under the
American Express Company 1998 Incentive Compensation Plan, as amended (for awards made after
January 22, 2007) (incorporated by reference to Exhibit 10.1 to the Company’s current Report
on Form 8-K (Commission File No. 1-7657) dated January 22, 2007 (filed January 26, 2007)).
|
|
|
|
10.11
|
|
Description of Compensation Payable to Non-Management Directors (incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657),
dated November 21, 2005 (filed January 13, 2006)).
|
|
|
|
10.12
|
|
American Express Company Deferred Compensation Plan for Directors, as amended through July
28, 2003 (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form
8-K (Commission File No. 1-7657), dated November 22, 2004 (filed January 28, 2005)).
|
|
|
|
*10.13
|
|
Description of amendments to 1994 – 2006 Pay-for-Performance Deferral Programs.
|
|
|
|
10.14
|
|
Description of American Express Company Pay-for-Performance Deferral Program (incorporated
by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (Commission File No.
l-7657), dated November 22, 2004 (filed January 28, 2005)).
|
|
|
|
10.15
|
|
American Express Company 2006 Pay-for-Performance Deferral Program Guide (incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (Commission File No.
1-7657), dated November 21, 2005 (filed November 23, 2005)).
|
E-2
|
10.16
|
|
American Express Company 2005 Pay-for-Performance Deferral Program Guide (incorporated by
reference to Exhibit 10.10 of the Company’s Annual Report on Form 10-K (Commission File No.
1-7657) for the fiscal year ended December 31, 2004).
|
|
|
|
10.17
|
|
American Express Company 2007 Pay-for-Performance Deferral Program Document (incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (Commission File No.
1-7657), dated November 20, 2006 (filed November 22, 2006)).
|
|
|
|
10.18
|
|
American Express Company Retirement Plan for Non-Employee Directors, as amended
(incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31, 1988).
|
|
|
|
10.19
|
|
Certificate of Amendment of the American Express Company Retirement Plan for Non-Employee
Directors dated March 21, 1996 (incorporated by reference to Exhibit 10.11 of the Company’s
Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31,
1995).
|
|
|
|
10.20
|
|
American Express Key Executive Life Insurance Plan, as amended (incorporated by reference to
Exhibit 10.12 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the
fiscal year ended December 31, 1991).
|
|
|
|
10.21
|
|
Amendment to American Express Company Key Executive Life Insurance Plan (incorporated by
reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q (Commission File No.
1-7657) for the quarter ended September 30, 1994).
|
|
|
|
*10.22
|
|
Amendment to American Express Company Key Executive Life
Insurance Plan, effective as of January 22, 2007.
|
|
|
|
10.23
|
|
American Express Key Employee Charitable Award Program for Education (incorporated by
reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K (Commission File No.
1-7657) for the fiscal year ended December 31, 1990).
|
|
|
|
10.24
|
|
American Express Directors’ Charitable Award Program (incorporated by reference to Exhibit
10.14 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal
year ended December 31, 1990).
|
|
|
|
10.25
|
|
American Express Company Salary/Bonus Deferral Plan (incorporated by reference to Exhibit
10.20 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal
year ended December 31, 1988).
|
|
|
|
10.26
|
|
Amendment to American Express Company Salary/Bonus Deferral Plan (incorporated by reference
to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657)
for the quarter ended September 30, 1994).
|
E-3
|
10.27
|
|
Tax Allocation Agreement, dated May 27, 1994, between Lehman Brothers Holdings Inc. and the
Company (incorporated by reference to Exhibit 10.2 of Lehman Brothers Holdings Inc.’s
Transition Report on Form 10-K (Commission File No. 1-9466) for the transition period from
January 1, 1994 to November 30, 1994).
|
|
|
|
10.28
|
|
American Express Company 1993 Directors’ Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.11 of the Company’s Quarterly Report on Form 10-Q (Commission File No.
1-7657) for the quarter ended March 31, 2000).
|
|
|
|
10.29
|
|
American Express Senior Executive Severance Plan Effective January 1, 1994 (as amended and
restated through May 1, 2000) (incorporated by reference to Exhibit 10.10 of the Company’s
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31,
2000).
|
|
|
|
10.30
|
|
Amendments to the American Express Senior Executive Severance Plan, effective November 26,
2001 (incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10-K
(Commission File No. 1-7657) for the year ended December 31, 2001).
|
|
|
|
*10.31
|
|
Amendment to the American Express Senior Executive Severance Plan, effective January 22,
2007.
|
|
|
|
10.32
|
|
Amendment of Long-Term Incentive Awards under the American Express Company 1979 and 1989
Long-Term Incentive Plans (incorporated by reference to Exhibit 10.6 of the Company’s
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended September 30,
1994).
|
|
|
|
10.33
|
|
Amendments of (i) Long-Term Incentive Awards under the American Express Company 1979 and
1989 Long-Term Incentive Plans, (ii) the American Express Senior Executive Severance Plan,
(iii) the American Express Supplemental Retirement Plan, (iv) the American Express
Salary/Bonus Deferral Plan, (v) the American Express Key Executive Life Insurance Plan and
(vi) the IDS Current Service Deferred Compensation Plan (incorporated by reference to Exhibit
10.37 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal
year ended December 31, 1997).
|
|
|
|
10.34
|
|
American Express Supplemental Retirement Plan Amended and Restated Effective March 1, 1995
(incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q
(Commission File No. 1-7657) for the quarter ended September 30, 1999).
|
|
|
|
10.35
|
|
American Express Supplemental Retirement Plan (as amended and restated effective July 1,
2007) (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on
|
E-4
|
|
|
Form 8-K (Commission File No. 1-7657), dated January 22, 2007 (filed January 26, 2007)).
|
|
|
|
10.36
|
|
American Express Directors’ Stock Plan (incorporated by reference to Exhibit 4.4 of the
Company’s Registration Statement on Form S-8, dated December 9, 1997 (Commission File No.
333-41779)).
|
|
|
|
10.37
|
|
American Express Annual Incentive Award Plan (incorporated by reference to Exhibit 10.6 of
the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
March 31, 2000).
|
|
|
|
*10.38
|
|
Amendment to American Express Annual Incentive Award Plan,
effective January 22, 2007.
|
|
|
|
10.39
|
|
Agreement dated February 27, 1995 between the Company and Berkshire Hathaway Inc.
(incorporated by reference to Exhibit 10.43 of the Company’s Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31, 1994).
|
|
|
|
10.40
|
|
Agreement dated July 20, 1995 between the Company and Berkshire Hathaway Inc. and its
subsidiaries (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on
Form 10-Q (Commission File No. 1-7657) for the quarter ended September 30, 1995).
|
|
|
|
10.41
|
|
Amendment dated September 8, 2000 to the agreement dated February 27, 1995 between the
Company and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 99.3 of the
Company’s Current Report on Form 8-K (Commission File No. 1-7657) dated January 22, 2001).
|
|
|
|
10.42
|
|
Description of a special grant of a stock option and restricted stock award to Kenneth I.
Chenault, the Company’s President and Chief Operating Officer (incorporated by reference to
Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for
the quarter ended June 30, 1999).
|
|
|
|
10.43
|
|
American Express Company 2003 Share Equivalent Unit Plan for Directors, as adopted and
effective April 28, 2003 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly
Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31, 2003).
|
|
|
|
*10.44
|
|
Description of 2007 Base Salaries of Named Executive Officers.
|
|
|
|
10.45
|
|
Separation and Distribution Agreement between American Express Company and Ameriprise
Financial, Inc., dated August 24, 2005 (incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated August 24, 2005
(filed August 30, 2005)).
|
|
|
|
10.46
|
|
Employee Benefits Agreement, dated as of September 30, 2005, by and between American Express
Company and Ameriprise Financial, Inc. (incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated October 6, 2005).
|
E-5
|
10.47
|
|
Tax Allocation Agreement, dated as of September 30, 2005, by and between American Express
Company and Ameriprise Financial, Inc. (incorporated by reference to Exhibit 10.2 of the
Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated October 6, 2005).
|
|
|
|
*12
|
|
Computation in Support of Ratio of Earnings to Fixed Charges.
|
|
|
|
*13
|
|
Portions of the Company’s 2006 Annual Report to Shareholders that
are incorporated herein by reference.
|
|
|
|
*21
|
|
Subsidiaries of the Company.
|
|
|
|
*23.1
|
|
Consent of PricewaterhouseCoopers LLP (contained on page F-2 of this
Annual Report on Form 10-K).
|
|
|
|
*23.2
|
|
Consent of Ernst & Young LLP (contained on page F-3 of this Annual
Report on Form 10-K).
|
|
|
|
*31.1
|
|
Certification of Kenneth I. Chenault, Chief Executive Officer,
pursuant to Rule 13a-14(a) promulgated under the Securities Exchange
Act of 1934, as amended.
|
|
|
|
*31.2
|
|
Certification of Daniel T. Henry, acting Chief Financial Officer,
pursuant to Rule 13a-14(a) promulgated under the Securities Exchange
Act of 1934, as amended.
|
|
|
|
*32.1
|
|
Certification of Kenneth I. Chenault, Chief Executive Officer, and
Daniel T. Henry, acting Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
E-6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006 Commission File No. 1-7657
American Express Company
(Exact name of Company as specified in charter)
EXHIBITS
EXHIBIT 10.7
[LOGO OF AMERICAN EXPRESS COMPANY]
AMERICAN EXPRESS COMPANY
1998 INCENTIVE COMPENSATION PLAN
MASTER AGREEMENT
DATED JANUARY 22, 2007
(for awards made on or after January 22, 2007)
Nonqualified Stock Options, Restricted Stock Awards, UK Stock Options
and Letter of Intent Awards ("Awards") are issued pursuant to the 1998 Incentive
Compensation Plan, as amended (the "Plan") of American Express Company (the
"Company") at the discretion and subject to the administration of the
Compensation and Benefits Committee, or its successor (the "Committee") of the
Board of Directors of the Company (the "Board"). Awards issued on or after
January 22, 2007 shall contain the general terms set forth in the applicable
provisions of this Master Agreement. The specific terms of individual Awards
will be contained in the Award Schedule(s) delivered to participants in the Plan
(the "Participants"). All Awards shall be subject to the Plan, the Plan being
incorporated into this Master Agreement by reference and made a part hereof. As
used herein, the term "shares" refers to the common shares of the Company having
a par value of $.60 per share, or the shares of any other stock of any other
class into which such shares may thereafter be changed.
SECTION I
MASTER AGREEMENT PROVISIONS RELATING TO
A GRANT OF NONQUALIFIED STOCK OPTION
1. Sections I and V of this Master Agreement, together with an Award
Schedule referring to Section I of this Master Agreement, shall contain the
terms of a specific Nonqualified Stock Option ("Option") issued to a
Participant. Each Award Schedule shall specify the number of shares subject to
the Option, the Option Date of Grant, the Option Exercise Date(s), the Option
Exercise Price and any additional terms applicable to the Option. Such
additional terms may address any matter deemed appropriate by the Committee or
its delegate and may include terms not contained in this Master Agreement and/or
may delete terms contained in this Master Agreement. A stock appreciation right
is included herein only if specifically approved by the Committee and reflected
in an Award Schedule.
2. Unless otherwise determined by the Committee and subject to the
provisions of this Master Agreement and the applicable provisions of the Plan, a
Participant may exercise this Option as follows:
(a) No part of this Option may be exercised before the first
Option Exercise Date listed in the Award Schedule or after the
expiration of ten years from the Date of Grant set forth in the Award
Schedule;
(b) At any time or times on or after the first Option Exercise
Date listed in the Award Schedule, a Participant may exercise this
Option as to any number of shares which, when added to the number of
shares as to which a Participant has theretofore exercised this Option,
if any, will not exceed 25% of the total number of shares covered
hereby;
(c) At any time or times on or after the second Option
Exercise Date listed in the Award Schedule, a Participant may exercise
this Option as to any number of shares which, when added to the number
of shares as to which a Participant has theretofore exercised this
Option, if any, will not exceed 50% of the total number of shares
covered hereby;
(d) At any time or times on or after the third Option Exercise
Date listed in the Award Schedule, a Participant may exercise this
Option as to any number of shares which, when added to the number of
shares as to which a Participant has theretofore exercised this Option,
if any, will not exceed 75% of the total number of shares covered
hereby; and
(e) At any time or times on or after the fourth Option
Exercise Date listed in the Award Schedule and thereafter through the
expiration date of this Option, a Participant may exercise this Option
as to any number of shares which, when added to the number of shares as
to which the Participant has theretofore exercised this Option, if any,
will not exceed the total number of shares covered hereby.
This Option may not be exercised for a fraction of a share.
3. A Participant may not exercise this Option and, if applicable, any
stock appreciation right included herein, unless all of the following conditions
are met:
(a) Legal counsel for the Company must be satisfied at the
time of exercise that the issuance of shares upon exercise will be in
compliance with the Securities Act of 1933, as amended, and applicable
United States federal, state, local and foreign laws;
(b) The Participant must pay at the time of exercise the full
purchase price for the shares being acquired hereunder, by (i) paying
in cash in United States dollars (which may be in the form of a check),
(ii) tendering shares owned by the Participant which have a fair market
value equal to the full purchase price for the shares being acquired,
such fair market value to be determined in such reasonable manner as
may be provided from time to time by the Committee or as may be
required in order to comply with the requirements of any applicable
laws or regulations, or (iii) if permitted by the Committee, by
authorizing a third party to sell, on behalf of the Participant, the
appropriate number of shares otherwise issuable to the Participant upon
the exercise of this Option and to remit to the Company a sufficient
portion of the sale proceeds to pay the entire exercise price and any
tax withholding resulting from such exercise, or (iv) tendering a
combination of the forms of payment provided for in this Subparagraph
3(b); and
(c) The Participant must, at all times during the period
beginning with the Date of Grant of this Option and ending on the date
of such exercise, have been employed by the Company or an
-2-
Affiliate (as defined in the Plan) or have been engaged in a period of
Related Employment (as defined in the Plan). However, if the
Participant ceases to be so employed or terminates a period of Related
Employment by reason of the Participant's disability or retirement (as
such terms are defined in the Plan and interpreted and administered by
the Committee) while holding this Option which has not expired and has
not been fully exercised, the Participant may, at any time within five
years of the date of the onset of such disability (but in no event
after the expiration of this Option under Paragraph 2(a) above with
respect to ten years from the Date of Grant) or in the case of
retirement until the expiration of the Option under Paragraph 2(a)
above, exercise this Option with respect to the number of shares, after
giving full effect to the gradual vesting provisions of Paragraph 2
above, as to which the Participant could have exercised this Option on
the date of the onset of such disability or retirement, or with respect
to such greater number of shares as determined by the Committee in its
sole discretion, and any remaining portion of this Option shall be
canceled by the Company. In the event the Participant's employment by
the Company and its Affiliates or Related Employment terminates for
reasons other than disability or retirement as described in this
Subparagraph 3(c) or death as described in Paragraph 4 below, this
Option shall be canceled by the Company; provided, however, if within
two years following a Change in Control (as defined in Section V of
this Master Agreement), a Participant is terminated under circumstances
that would entitle the Participant to severance under an applicable
U.S. severance plan (other than Constructive Termination, as defined in
the applicable plan), the Participant may, at any time within 90 days
following such termination (but in no event after the expiration of
this Option under Paragraph 2(a) above with respect to ten years from
the Date of Grant), exercise this Option with respect to the number of
shares as to which the Participant could have exercised this Option on
the date of such termination. For any other Participant not covered by
a U.S. severance plan, the 90-day extension period shall apply if the
Participant is terminated within two years following a Change in
Control and the Participant would have been entitled to severance under
the applicable U.S. severance plan had the Participant been a U.S.
employee.
4. Except as otherwise determined by the Committee, a Participant may
not assign, transfer, pledge, hypothecate or otherwise dispose of this Option
(and any stock appreciation right included herein), except by will or the laws
of descent and distribution, and this Option is exercisable during the
Participant's lifetime only by the Participant. If the Participant or anyone
claiming under or through the Participant attempts to violate this Paragraph 4,
such attempted violation shall be null and void and without effect, and the
Company's obligation to make any further payments (stock or cash) hereunder
shall terminate. If at the time of the Participant's death this Option has not
been fully exercised, the Participant's estate or any person who acquires the
right to exercise this Option by bequest or inheritance or by reason of the
Participant's death may, at any time within five years after the date of the
Participant's death (but in no event after the expiration of this Option under
Paragraph 2(a) above with respect to ten years from the Date of Grant or the
time period described in Paragraph 3(c) above with respect to disability),
exercise this Option with respect to the number of shares, after giving full
effect to the gradual vesting provisions of Paragraph 2 above, as to which the
Participant could have exercised this Option at the time of the Participant's
death, or with respect to such greater number of shares as determined by the
Committee in its sole discretion. The Committee may, in its discretion,
-3-
provide the Participant's estate, or any person acquiring the right to exercise
this Option upon the Participant's death, a minimum of six months to exercise
this Option without regard to the expiration of this Option under Paragraph 2(a)
above. The applicable requirements of Paragraph 3 above must be satisfied at the
time of such exercise.
5. In the event of any change in the outstanding shares of the Company
by reason of any stock split, stock dividend, split-up, split-off, spin-off,
recapitalization, merger, consolidation, rights offering, reorganization,
combination, subdivision or exchange of shares, sale by the Company of all or
part of its assets, distribution to shareholders other than a normal cash
dividend, or other extraordinary or unusual event occurring after the Date of
Grant specified in the Award Schedule and prior to its exercise in full, the
Committee shall make such adjustment in the number and kind of shares for which
this Option may then be exercised and the Option Exercise Price per share as may
be determined to be appropriate by the Committee, in its sole discretion, so as
to reflect such change, and such adjustments shall be final, conclusive and
binding for all purposes of the Plan, this Master Agreement and any Award
Schedule. In the event that the Company or any of its Affiliates is a
participant in a corporate merger, consolidation or other similar transaction,
neither the Company nor such Affiliate shall be obligated to cause any other
participant in such transaction to assume this Option or to substitute a new
option for this Option.
6. (a) If approved by the Committee and subject to the conditions
specified in Paragraph 6(b) below, within such time or times as this Option
shall be exercisable in whole or in part and to the extent that it shall then be
exercisable in accordance with Paragraph 2 above, the Participant (or any person
acting under Paragraph 4 above) may surrender unexercised this Option or any
portion thereof which is then exercisable to the Company and receive from the
Company in exchange therefor that number of shares having an aggregate value
equal to 100% of the excess of the value of one share over the Option Exercise
Price per share heretofore specified times the lesser of (i) the number of
shares as to which this Option then is exercisable or (ii) the number of shares
as to which this Option is surrendered to the Company. This right to surrender
unexercised this Option or any portion thereof which is then exercisable is
referred to herein as a "stock appreciation right." No fractional shares shall
be delivered, but in lieu thereof a cash adjustment shall be made.
(b) If granted by the Committee, the stock appreciation right may be
exercised only if, and to the extent that,
(A) this Option is at the time exercisable, and
(B) on the date of exercise (1) this Option will, in
accordance with Paragraph 2(a) above, expire within 30 days,
or (2) the Participant has ceased to be an employee of the
Company or an Affiliate thereof or terminated a period of
Related Employment by reason of the Participant's disability
or retirement (as defined in the Plan), or (3) the Participant
has died.
Notwithstanding Paragraph 6(b)(ii) above, but subject to the conditions
of Paragraph 6(b)(i) above, (1) the ability to exercise a stock
appreciation right may be further limited to the extent determined by
the Committee as necessary or desirable to comply with applicable
provisions of United States federal, state, local or foreign law or
regulation, and (2) if the Participant is on the date
-4-
of exercise an executive officer of the Company as that term is defined
in the Securities Exchange Act of 1934, as amended, and the rules
thereunder (an "Insider"), the stock appreciation right may be
exercised only with respect to a maximum of 50% of the shares subject
to this Option granted hereunder, unless otherwise determined by the
Committee.
(c) The Committee may elect from time to time in its sole discretion
to settle the obligation arising out of the exercise of the stock
appreciation right, by the payment of cash equal to the aggregate value
of the shares it otherwise would be obligated to deliver or partly by
the payment of cash and partly by the delivery of shares.
(d) For all purposes under this Paragraph 6, the value of a share
shall be the fair market value thereof, as determined by the Committee,
on the last business day preceding the date of the election to exercise
the stock appreciation right, provided that if notice of such election
is received by the Committee more than three business days after the
date of such election (as such date of election is stated in the notice
of election), the Committee may, but need not, determine the value of a
share as of the day preceding the date on which the notice of election
is received.
7. It shall be a condition to the obligation of the Company to furnish
shares upon exercise of this Option or settlement of a stock appreciation right
by delivery of shares and/or cash (a) that the Participant (or any person acting
under Paragraph 4 above) pay to the Company or its designee, upon its demand, in
accordance with Paragraph 18(f) of the Plan, such amount as may be demanded for
the purpose of satisfying its obligation or the obligation of any of its
Affiliates or other person to withhold United States federal, state, local or
foreign income, employment or other taxes incurred by reason of the exercise of
this Option or the settlement of the stock appreciation right or the transfer of
shares thereupon, (b) whether the settlement of the stock appreciation right is
to be made by delivery of shares or by the payment of cash, that the Participant
(or any person acting under Paragraph 4 above) execute such forms as the
Committee shall prescribe for the purpose of evidencing the surrender of this
Option in whole or in part, as the case may be, and (c) that the Participant (or
any person acting under Paragraph 4 above) provide the Company with any forms,
documents or other information reasonably required by the Company in connection
with the grant. The Company shall have the right to deduct or cause to be
deducted from any payment made in settlement of a stock appreciation right any
United States federal, state, local or foreign income, employment or other taxes
that it determines are required by law to be withheld with respect to such
payment. If the amount requested for the purpose of satisfying the withholding
obligation is not paid, the Company may refuse to furnish shares upon exercise
of this Option or shares and/or cash upon settlement of the stock appreciation
right.
SECTION II
MASTER AGREEMENT PROVISIONS RELATING TO
AWARDS OF RESTRICTED STOCK
1. Sections II and V of this Master Agreement, together with an Award
Schedule referring to Section II of this Master Agreement, shall contain the
terms of a specific Restricted Stock Award ("RSA") issued to a Participant. Each
Award Schedule shall specify the number of shares awarded, the Award Date, the
Expiration Date and any additional terms applicable to the Award. Such
additional terms may address any matter deemed appropriate by the
-5-
Committee or its delegate and may include terms not contained in this Master
Agreement and/or may delete terms contained in this Master Agreement.
2. An RSA consists of the number of shares specified in an Award
Schedule and is subject to the provisions of the Plan. In addition, the
following terms, conditions and restrictions apply to RSAs issued under the
Plan:
(a) Except as otherwise determined by the Committee, such
shares cannot be sold, assigned, transferred, pledged, hypothecated or
otherwise disposed of (except that Participants may designate a
beneficiary as provided herein) on or before the Expiration Date and
prior to the subsequent issuance to a Participant (or, in the event of
a Participant's death, the Participant's designated beneficiary) of a
certificate for such shares free of any legend or other transfer
restriction relating to the terms, conditions and restrictions provided
for in the Award Schedule or this Master Agreement. If a Participant or
anyone claiming under or through such Participant attempts to violate
this Subparagraph 2(a), such attempted violation shall be null and void
and without effect, and the Company's obligation to make any further
payments or deliveries (in stock or cash) hereunder shall terminate.
(b) An RSA shall be evidenced by a share certificate or an
uncertificated book entry memo position maintained by the Company's
transfer agent and registrar.
(c) If (i) a Participant's continuous employment with the
Company and its Affiliates (as defined in the Plan) shall terminate for
any reason on or before the Expiration Date, except for a period of
Related Employment (as defined in the Plan), and except as provided in
Paragraph 2(d) below or (ii) within the period following the Expiration
Date as determined by the Committee, a Participant (or such
Participant's designated beneficiary) has not paid to the Company or
such Affiliate or other person an amount equal to any United States
federal, state, local or foreign income, employment or other taxes
which the Company determines is required to be withheld in respect of
such shares, or fails to provide such information as is described in
Paragraph 4 below, then, unless the Committee determines otherwise, the
Participant's RSA or portion thereof shall be automatically terminated,
cancelled, and rendered null and void as of the Expiration Date without
any action on the part of the Company, and the Company shall be deemed
to have exercised its repurchase option without the requirement of any
payment, and shall be entitled to the return from such Participant (or
the Participant's designated beneficiary or the Secretary of the
Company) of any share certificate(s) issued in respect of the Award or
the cancellation of any book entry memo position maintained by the
Company's transfer agent and registrar with respect to a Participant's
RSA.
(d) On or before the Expiration Date, the Committee shall have
the authority, in its sole discretion, to determine whether and to what
extent, the termination provisions of Paragraph 2(c) shall cease to be
effective with respect to a Participant's Award in the following
situations:
(i) a Participant shall die or have a termination of
employment or Related Employment by reason of disability or
retirement (as such terms are defined in the Plan and
interpreted and administered by the Committee); or
-6-
(ii) in such circumstances as the Committee, in its
sole discretion, shall deem appropriate if, since the Award
Date, a Participant has been in the continuous employment of
the Company or an Affiliate or has undertaken Related
Employment.
(e) The share certificate, if any, issued in respect of a RSA
shall be held in escrow by the Secretary of the Company during the
period up to and including the date determined by the Committee
pursuant to Paragraph 2(c) above, unless otherwise determined by the
Committee.
3. In the event of any change in the outstanding shares of the Company
by reason of any stock split, stock dividend, split-up, split-off, spin-off,
recapitalization, merger, consolidation, rights offering, reorganization,
combination, subdivision or exchange of shares, sale by the Company of all or
part of its assets, distribution to shareholders other than a normal cash
dividend, or other extraordinary or unusual event, or in the event a Participant
(or the Participant's designated beneficiary) receives any shares, securities or
other property in respect of the shares which have been awarded to a Participant
(including, but not limited to, by way of a dividend or other distribution on
such shares), any such shares, securities or other property received by a
Participant (or a Participant's designated beneficiary) in respect of the shares
awarded to such Participant shall, other than upon a Change In Control as
defined in Article V, be subject to the Company's right to receive or cancel
such shares, securities or other property from such Participant (or such
Participant's designated beneficiary) as provided in Paragraph 2(c) above and
the other terms, conditions and restrictions specified herein to the extent
that, and in such manner as, the Committee shall determine, and if the Committee
shall determine, in its sole discretion, that such a change equitably requires
an adjustment in the terms of this Award, such adjustment may be made by the
Committee. Any such determination by the Committee under this Paragraph 3 shall
be final, binding and conclusive.
4. If the Company, in its sole discretion, shall determine that the
Company or an Affiliate or other person has incurred or will incur any
obligation to withhold any United States federal, state, local or foreign
income, employment or other taxes by reason of making of the Award to a
Participant, the transfer of shares to a Participant (or the Participant's
designated beneficiary) pursuant thereto or the lapse or release of the
termination provisions contained in Paragraph 2(c) above with respect to a
Participant's Award or any other restrictions upon such shares, such Participant
(or such Participant's designated beneficiary) will, promptly upon demand
therefor by the Company, pay to the Company or such Affiliate or other person
any amount demanded by it for the purpose of satisfying such liability. If the
amount so demanded is not promptly paid or if such Participant (or such
Participant's designated beneficiary) shall fail to promptly provide the Company
with any and all forms, documents or other information reasonably required by
the Company in connection with the Award, the Company or its designee may refuse
to permit the transfer of such shares and may, without further consent by or
notice to such Participant (or such Participant's designated beneficiary),
cancel the Award and the shares otherwise issuable under the Award.
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SECTION III
MASTER AGREEMENT PROVISIONS RELATING TO
A GRANT OF A STOCK OPTION UNDER
THE 1989 UK STOCK OPTION SCHEME
(AND NOT QUALIFYING AS AN INCENTIVE STOCK UK OPTION)
1. Sections III and V of this Master Agreement, together with an Award
Schedule referring to Section III of this Master Agreement, and applicable
provisions of the 1989 UK Stock Option Scheme (the "Scheme"), shall contain all
the terms of a specific UK Stock Option ("UK Option(s)") issued to a
Participant. Each Award Schedule shall specify the number of shares subject to
the UK Option, the UK Option Date of Grant, the UK Option Exercise Date(s), the
UK Option Exercise Price and any additional terms applicable to the UK Option.
Such additional terms may address any matter deemed appropriate by the Committee
or its delegate and may include terms not contained in this Master Agreement
and/or may delete terms contained in this Master Agreement.
2. Subject to the provisions of this Master Agreement and the
applicable provisions of the Plan, a Participant may exercise this UK Option as
follows:
(a) Unless otherwise determined by the Committee no part of
this UK Option may be exercised before the first option Exercise Date
listed in the Award Schedule or after the expiration of ten years from
the Date of Grant set forth in the Award Schedule;
(b) At any time or times on or after the first option Exercise
Date listed in the Award Schedule, a Participant may exercise this UK
Option as to any number of shares which, when added to the number of
shares as to which a Participant has theretofore exercised this UK
Option, if any, will not exceed 25% of the total number of shares
covered hereby;
(c) At any time or times on or after the second Option
Exercise Date listed above, a Participant may exercise this UK Option
as to any number of shares which, when added to the number of shares as
to which a Participant has theretofore exercised this UK Option, if
any, will not exceed 50% of the total number of shares covered hereby;
(d) At any time or times on or after the third Option Exercise
Date listed above, a Participant may exercise this UK Option as to any
number of shares which, when added to the number of shares as to which
a Participant has theretofore exercised this UK Option, if any, will
not exceed 75% of the total number of shares covered hereby; and
(e) At any time or times after the fourth Option Exercise Date
listed above and thereafter through the tenth year after the Date of
Grant hereof, a Participant may exercise this UK Option as to any
number of shares which, when added to the number of shares as to which
a Participant has theretofore exercised this UK Option, if any, will
not exceed the total number of shares covered hereby.
-8-
This UK Option may not be exercised for a fraction of a share.
3. This UK Option may not be exercised by a Participant unless all of
the following conditions are met:
(a) Legal counsel for the Company must be satisfied at the
time of exercise that the issuance of shares upon exercise will be in
compliance with the Securities Act of 1933, as amended, and applicable
United States federal, state, local and foreign laws;
(b) The Participant must pay at the time of exercise the full
subscription price for the shares being acquired hereunder, by (i)
paying in cash in United States dollars (which may be in the form of a
check); (ii) tendering shares owned by the Participant which have a
fair market value equal to the full subscription price for the shares
being acquired, such fair market value to be determined in such
reasonable manner as may be provided from time to time by the Committee
or as may be required in order to comply with the requirements of any
applicable laws or regulations; (iii) if permitted by the Committee, by
authorizing a third party to sell, on behalf of the Participant, the
appropriate number of shares otherwise issuable to the Participant upon
the exercise of the UK Option and to remit to the Company a sufficient
portion of the sale proceeds to pay the entire exercise price and any
tax withholding resulting from such exercise; or (iv) tendering a
combination of the forms of payment provided for in this Subparagraph;
and
(c) The Participant must, at all times during the period
beginning with the Date of Grant and ending on the date of such
exercise, have been employed by the Company or an Affiliate (as defined
in the Scheme) or have been engaged in a period of Related Employment
(as defined in the Scheme). However, if a Participant ceases to be so
employed or terminates a period of Related Employment by reason of a
Participant's disability or retirement (as such terms are defined in
the Scheme and interpreted and administered by the Committee) while
holding this UK Option which has not expired and has not been fully
exercised, a Participant may, at any time within five years of the date
of the onset of such disability (but in no event after the expiration
of this UK Option under Paragraph 2(a) above with respect to ten years
from the Date of Grant), or in the case of retirement until the
expiration of this UK Option under Paragraph 2(a), exercise this UK
Option with respect to the number of shares, after giving full effect
to the gradual vesting provisions of Paragraph 2 above, as to which a
Participant could have exercised the UK Option on the date of the onset
of such disability or retirement, or with respect to such number of
shares adjusted pursuant to Clause 8 of the Scheme, and any remaining
portion of this UK Option shall be canceled by the Company. In the
event a Participant's employment by the Company and its Affiliates or a
Participant's Related Employment terminates for reasons other than
disability or retirement as described in this Subparagraph 3(c) or
death as described in Paragraph 4 below, this UK Option shall be
canceled by the Company.
4. Except as otherwise determined by the Committee, a Participant may
not sell, assign, transfer, pledge, hypothecate or otherwise dispose of this UK
Option, except by will or the laws of descent and distribution and is
exercisable during the Participant's lifetime only by a Participant. If a
Participant or anyone claiming under or through a Participant attempts to
violate this Paragraph 4, such attempted violation shall be null and void and
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without effect, and the Company's obligation to make any further payments
hereunder shall terminate. If at the time of the Participant's death this UK
Option has not been fully exercised, the Participant's estate or any person who
acquires the right to exercise this UK Option by bequest or inheritance or by
reason of the Participant's death may, at any time within five years after the
date of the Participant's death (but in no event after the expiration of this UK
Option under Paragraph 2(a) above with respect to ten years from the Date of
Grant or expiration under the time periods described in Paragraph 3(c) above
with respect to disability or retirement), exercise this UK Option with respect
to the number of shares, after giving full effect to the gradual vesting
provisions of Paragraph 2 above, as to which a Participant could have exercised
this UK Option at the time of the Participant's death, or such number of shares
adjusted pursuant to Clause 8 of the Scheme, and any remaining portion of this
UK Option shall be canceled by the Company. The Committee may, in its
discretion, provide the Participant's estate, or any person acquiring the right
to exercise this Option upon the Participant's death, a minimum of six months to
exercise this Option without regard to the expiration of this Option under
Paragraph 3(a) above. The applicable requirements of Paragraph 3 above must be
satisfied at the time of such exercise.
5. In the event of any change in the outstanding shares of the Company
by reason of any stock split, stock dividend, split-up, recapitalization,
merger, consolidation, rights offering, reorganization, combination, subdivision
or exchange of shares, sale by the Company of all or part of its assets,
distribution to shareholders other than a normal cash dividend or other
extraordinary or unusual event occurring after the Date of Grant specified above
and prior to its exercise in full, the Committee shall make such adjustment in
the number and kind of shares for which this UK Option may then be exercised and
the subscription price per share as may be determined to be appropriate by the
Committee, in its sole discretion, subject to the prior approval of the Inland
Revenue in writing, so as to reflect such change, and such adjustments shall be
final, conclusive and binding for all purposes of the Plan, this Master
Agreement and any Award Schedule. In the event that the Company or any of its
Affiliates is a participant in a corporate merger, consolidation or other
similar transaction, neither the Company nor such Affiliate shall be obligated
to cause any other participant in such transaction to assume this UK Option or
to substitute a new option for this UK Option.
6. It shall be a condition to the obligation of the Company to furnish
shares upon exercise of this UK Option (a) that a Participant (or any person
acting under Paragraph 4 above) pay to the Company or its designee, upon its
demand, in accordance with Clause 5(b) of the Scheme, such amount as may be
demanded for the purpose of satisfying its obligation or the obligation of any
of its Affiliates or other person to withhold United Kingdom taxes, United
States federal, state, local or foreign income, employment or other taxes
incurred by reason of the exercise of this UK Option or the transfer of shares
thereupon and (b) that a Participant (or any person acting under Paragraph 4
above) provide the Company with any forms, documents or other information
reasonably required by the Company in connection with the grant. If the amount
requested for the purpose of satisfying the withholding obligation is not paid,
the Company may refuse to furnish shares upon exercise of this UK Option.
7. It is hereby certified that this instrument falls within category L
in the Schedule to the Stamp Duty (Exempt Instruments) Regulations 1987.
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8. The terms of this UK Option are subject to the terms of the Scheme,
which provides that the Committee may at any time alter or add to the terms of
any UK Option granted under the Scheme, and if such an alteration or amendment
is made at a time when the Scheme is approved by the Inland Revenue under
Schedule 9 to the Taxes Act 1988, the approval will not thereafter have effect
unless the Inland Revenue has approved the alteration or addition; provided that
no alteration or addition to the terms of any UK Option granted under the Scheme
(other than one which causes the Scheme to cease to hold Inland Revenue approval
under Schedule 9) shall adversely affect in a material manner any right of a
Participant with respect to any UK Option granted hereunder without a
Participant's written consent, unless the Committee determines in its sole
discretion that there have occurred or are about to occur significant changes in
a Participant's position, duties or responsibilities, or significant changes in
economic, legislative, regulatory, tax, accounting or cost/benefit conditions
which are determined by the Committee in its sole discretion to have or to be
expected to have a substantial effect on the performance of the Company, or any
subsidiary, Affiliate, division or department thereof, on the Plan, the Scheme
or on this UK Option. The Committee reserves the right to make amendments which
will result in the Inland Revenue approval not having effect if it in its sole
discretion considers that this is in the interests of the Company or any of its
Affiliates.
SECTION IV
MASTER AGREEMENT PROVISIONS RELATING TO
AWARDS OF A LETTER OF INTENT
1. Sections IV and V of this Master Agreement, together with an Award
Schedule referring to Section IV of this Master Agreement, shall contain the
terms of a specific Letter of Intent ("LOI") issued to a Participant. Each Award
Schedule shall specify the number of shares to be awarded, the LOI Date, the
Expiration Date and any additional terms applicable to the Award. Such
additional terms may address any matter deemed appropriate by the Committee or
its delegate and may include terms not contained in this Master Agreement and/or
may delete terms contained in this Master Agreement.
2. Subject to the provisions of the Plan and the following terms,
conditions and restrictions herein set forth, the Company will issue to a
Participant a certificate for the number of shares specified in an Award
Schedule as promptly as practicable after the last day of a period of four years
from the LOI Date (the "Restricted Period"):
(a) Except as otherwise determined by the Committee, rights
under this LOI may not be sold, assigned, transferred, pledged,
hypothecated or otherwise disposed of, except by will or the laws of
descent and distribution, on or before the last day of the Restricted
Period and prior to the subsequent issuance to a Participant (or, in
the event of a Participant's death, the Participant's designated
beneficiary) of a certificate for such shares free of any legend or
other transfer restriction relating to the terms, conditions and
restrictions provided for in this Master Agreement. If a Participant or
anyone claiming under or through a Participant attempts to violate this
Subparagraph 2(a), such attempted violation shall be null and void and
without effect, and the Company's obligations hereunder shall
terminate.
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(b) If (i) a Participant's continuous employment with the
Company and its Affiliates (as defined in the Plan) shall terminate for
any reason on or before the last day of the Restricted Period, except
for a period of Related Employment (as defined in the Plan), and except
as provided in Paragraph 2(c) below, or (ii) within the period
following the last day of the Restricted Period as determined by the
Committee, a Participant (or such Participant's designated beneficiary)
has not paid to the Company or such Affiliate or other person an amount
equal to any United States federal, state, local or foreign income,
employment or other taxes which the Company determines is required to
be withheld in respect of such shares, or fails to provide such
information as is described in Paragraph 4 below, then, unless the
Committee determines otherwise, this LOI or portion thereof shall be
automatically terminated, cancelled, and rendered null and void as of
the last day of the Restricted Period without any action on the part of
the Company.
(c) If a Participant shall, on or before the last day of the
Restricted Period, die or have a termination of employment or Related
Employment by reason of disability or retirement (as such terms are
defined in the Plan and interpreted and administered by the Committee),
or by reason of such other circumstances as the Committee, in its sole
discretion, shall deem appropriate, after a Participant have been,
since the LOI Date, in the continuous employment of the Company or an
Affiliate or have undertaken Related Employment, the Committee, in its
sole discretion, shall determine whether and to what extent, if any,
the Company's right as specified in Paragraph 2(b) above (and in any
and all other terms, conditions and restrictions imposed hereby) shall
lapse and cease to be effective. The Company's right specified in
Paragraph 2(b) above shall be exercisable at such time as to the
remaining shares, if any.
(d) From time to time during the Restricted Period, the
Company shall pay to a Participant an amount of cash equal to the
regular quarterly cash dividend paid by the Company on a number of
shares equal to the number of shares remaining to be issued to a
Participant hereunder less any applicable United States federal, state,
local or foreign income, employment or other taxes that the Company
determines are required to be withheld therefrom. The Company's
obligation to make such payment shall cease with respect to any shares
at such time as the Company's right becomes exercisable with respect
thereto pursuant to Paragraph 2(b) or 2(c) above.
2. In the event of any change in the outstanding shares of the Company
by reason of any stock split, stock dividend, split-up, split-off, spin-off,
recapitalization, merger, consolidation, rights offering, reorganization,
combination, subdivision or exchange of shares, sale by the Company of all or
part of its assets, distribution to shareholders other than a normal cash
dividend, or other extraordinary or unusual event occurring after the LOI Date
and on or before the last day of the Restricted Period and prior to the issuance
of a share certificate to a Participant, the Committee shall make such
adjustment in the number and kind of shares to be awarded as may be determined
to be appropriate by the Committee, in its sole discretion, so as to reflect
such change, and such adjustments shall be final, conclusive and binding for all
purposes of the Plan, this Master Agreement and any Award Schedule.
3. If the Company, in its sole discretion, shall determine that the
Company or an Affiliate or other person has incurred or will incur any
obligation to withhold any United States federal, state, local or foreign
income, employment or other taxes by reason of the issuance or operation of
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this LOI, a Participant (or, in the event of a Participant's death, the legal
representatives of a Participant's estate) will, promptly upon demand therefor
by the Company, pay to the Company or such Affiliate or other person, in
accordance with Subparagraph 18(f) of the Plan, any amount demanded by it for
the purpose of satisfying such obligation. If the amount so demanded is not
promptly paid or if a Participant (or, in the event of a Participant's death,
the legal representatives of a Participant's estate) shall fail to promptly
provide the Company with any and all forms, documents or other information
reasonably required by the Company in connection with this LOI, the Company or
its designee may refuse to permit the transfer of any shares and the
distribution of any proceeds and may, without further consent by or notice to a
Participant (or, in the event of a Participant's death, the legal
representatives of a Participant's estate) cancel its agreement to issue to a
Participant any shares and cancel any shares otherwise issuable hereunder.
SECTION V
MASTER AGREEMENT COMMON PROVISIONS RELATING TO
MORE THAN ONE FORM OF AWARD
1. Notwithstanding anything in this Master Agreement to the contrary
(but subject to those provisions in Paragraph 3 or 4 below which could reduce
payments hereunder as a result of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code")), upon a Change in Control (as applicable to a
particular award), the awardholder shall immediately be:
(a) with respect to any Option or UK Option issued pursuant to
the Option or UK Option provisions of this Master Agreement, 100%
vested in the total number of shares covered thereby such that they
shall be fully exercisable;
(b) with respect to any RSA issued pursuant to the RSA
provisions of this Master Agreement, 100% vested in the total number of
shares covered thereby such that they shall no longer be subject to any
transfer restrictions imposed by this Master Agreement; and
(c) with respect to any LOI issued pursuant to the LOI
provisions of this Master Agreement, entitled to receive the total
number of shares covered thereby such that they shall no longer be
subject to any restrictions on issuance imposed by this Master
Agreement.
The Committee may not amend or delete this Section V of this Master Agreement in
a manner that is detrimental to the awardholder, without his written consent.
2. A "Change in Control" means the happening of any of the following:
(a) Any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") becomes the beneficial owner
(within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 25% or more of either (i) the then outstanding common shares of the
Company (the "Outstanding Company Common Shares") or (ii) the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that such
beneficial ownership shall not constitute a Change in Control if it
occurs as a result of any of the following acquisitions of securities:
(A) any acquisition directly
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from the Company; (B) any acquisition by the Company or any
corporation, partnership, trust or other entity controlled by the
Company (a "Subsidiary"); (C) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
Subsidiary; (D) any acquisition by an underwriter temporarily holding
Company securities pursuant to an offering of such securities; (E) any
acquisition by an individual, entity or group that is permitted to, and
actually does, report its beneficial ownership on Schedule 13-G (or any
successor schedule), provided that, if any such individual, entity or
group subsequently becomes required to or does report its beneficial
ownership on Schedule 13D (or any successor schedule), then, for
purposes of this subsection, such individual, entity or group shall be
deemed to have first acquired, on the first date on which such
individual, entity or group becomes required to or does so report,
beneficial ownership of all of the Outstanding Company Common Stock and
Outstanding Company Voting Securities beneficially owned by it on such
date; or (F) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation if, following such
reorganization, merger or consolidation, the conditions described in
clauses (i), (ii) and (iii) of Paragraph 2(c) are satisfied.
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") became the
beneficial owner of 25% or more of the Outstanding Company Common
Shares or Outstanding Company Voting Securities as a result of the
acquisition of Outstanding Company Common Shares or Outstanding Company
Voting Securities by the Company which, by reducing the number of
Outstanding Company Common Shares or Outstanding Company Voting
Securities, increases the proportional number of shares beneficially
owned by the Subject Person; provided, that if a Change in Control
would be deemed to have occurred (but for the operation of this
sentence) as a result of the acquisition of Outstanding Company Common
Shares or Outstanding Company Voting Securities by the Company, and
after such share acquisition by the Company, the Subject Person becomes
the beneficial owner of any additional Outstanding Company Common
Shares or Outstanding Company Voting Securities which increases the
percentage of the Outstanding Company Common Shares or Outstanding
Company Voting Securities beneficially owned by the Subject Person,
then a Change in Control shall then be deemed to have occurred; or
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of either an actual or threatened election contest or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board, including by reason of agreement intended
to avoid or settle any such actual or threatened contest or
solicitation; or
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(c) The consummation of a reorganization, merger, statutory
share exchange, consolidation, or similar corporate transaction
involving the Company or any of its direct or indirect Subsidiaries
(each a "Business Combination"), in each case, unless, following such
Business Combination, (i) the Outstanding Company Common Shares and the
Outstanding Company Voting Securities immediately prior to such
Business Combination, continue to represent (either by remaining
outstanding or being converted into voting securities of the resulting
or surviving entity or any parent thereof) more than 50% of the
then-outstanding shares of common stock and the combined voting power
of the then-outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation
resulting from Business Combination (including, without limitation, a
corporation that, as a result of such transaction, owns the Company or
all or substantially all of the Company's assets either directly or
through one or more subsidiaries), (ii) no Person (excluding the
Company, any employee benefit plan (or related trust) of the Company, a
Subsidiary or such corporation resulting from such Business Combination
or any parent or subsidiary thereof, and any Person beneficially
owning, immediately prior to such Business Combination, directly or
indirectly, 25% or more of the Outstanding Company Common Shares or
Outstanding Company Voting Securities, as the case may be) beneficially
owns, directly or indirectly, 25% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from
such Business Combination (or any parent thereof) or the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and
(iii) at least a majority of the members of the board of directors of
the corporation resulting from such Business Combination (or any parent
thereof) were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board providing for
such Business Combination; or
(d) The consummation of the sale, lease, exchange or other
disposition of all or substantially all of the assets of the Company,
unless such assets have been sold, leased, exchanged or disposed of to
a corporation with respect to which following such sale, lease,
exchange or other disposition (i) more than 50% of, respectively, the
then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of such
corporation (or any parent thereof) entitled to vote generally in the
election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding
Company Common Shares and Outstanding Company Voting Securities
immediately prior to such sale, lease, exchange or other disposition in
substantially the same proportions as their ownership immediately prior
to such sale, lease, exchange or other disposition of such Outstanding
Company Common Shares and Outstanding Company Voting Shares, as the
case may be, (ii) no Person (excluding the Company and any employee
benefit plan (or related trust)) of the Company or a Subsidiary or of
such corporation or a subsidiary thereof and any Person beneficially
owning, immediately prior to such sale, lease, exchange or other
disposition, directly or indirectly, 25% or more of the Outstanding
Company Common Shares or Outstanding Company Voting Securities, as the
case may be) beneficially owns, directly or indirectly, 25% or more of
respectively, the then outstanding shares of common stock of such
corporation (or any parent thereof) and the combined voting power of
the then outstanding voting securities of such corporation (or any
parent thereof) entitled to vote generally in the election of directors
and (iii) at least a
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majority of the members of the board of directors of such corporation
(or any parent thereof) were members of the Incumbent Board at the time
of the execution of the initial agreement or action of the Board
providing for such sale, lease, exchange or other disposition of assets
of the Company; or
(e) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
3. This Paragraph 3 shall apply in the event of a Change in Control.
(a) In the event that any payment or benefit received or to be
received by a Participant hereunder in connection with a Change in
Control or termination of such Participant's employment (such payments
and benefits, excluding Gross-Up Payment (as hereinafter defined),
being hereinafter referred to collectively as the "Payments"), will be
subject to the excise tax referred to in Section 4999 of the Code (the
"Excise Tax"), then (i) in the case of a Participant who is classified
in Band 70 (or its equivalent) or above immediately prior to such
Change in Control (a "Tier 1 Employee"), the Company shall pay to such
Tier 1 Employee, within five days after receipt by such Tier 1 Employee
of the written statement referred to in paragraph (e) below, an
additional amount (the "Gross Up Payment") such that the net amount
retained by such Tier 1 Employee, after deduction of any Excise Tax on
the Payments and any federal, state and local income and employment
taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the
Payments and (ii) in the case of a Participant other than a Tier 1
Employee, the Payments shall be reduced to the extent necessary so that
no portion of the Payments is subject to the Excise Tax but only if (A)
the net amount of all Total Payments (as hereinafter defined), as so
reduced (and after subtracting the net amount of federal, state and
local income and employment taxes on such reduced Total Payments), is
greater than or equal to (B) the net amount of such Total Payments
without any such reduction (but after subtracting the net amount of
federal, state and local income and employment taxes on such Total
Payments and the amount of Excise Tax to which the Participant would be
subject in respect of such unreduced Total Payments); provided,
however, that the Participant may elect in writing to have other
components of his or her Total Payments reduced prior to any reduction
in the Payments hereunder.
(b) For purposes of determining whether the Payments will be
subject to the Excise Tax, the amount of such Excise Tax and whether
any Payments are to be reduced hereunder: (i) all payments and benefits
received or to be received by the Participant in connection with such
Change in Control or the termination of such Participant's employment,
whether pursuant to the terms of this Master Agreement or any other
plan, arrangement or agreement with the Company, any Person (as such
term is defined in Paragraph 2(a) above) whose actions result in such
Change in Control or any Person affiliated with the Company or such
Person (all such payments and benefits, excluding the Gross-Up Payment
and any similar gross-up payment to which a Tier 1 Employee may be
entitled under any such other plan, arrangement or agreement, being
hereinafter referred to as the "Total Payments"), shall be treated as
"parachute payments" (within the meaning of Section 280G(b)(2) of the
Code) unless, in the opinion of the Firm, such payments or benefits (in
whole or in part) do not constitute parachute payments, including by
reason of Section 280G(b)(2)(A) or Section 280G(b)(4)(A) of the Code;
(ii) no portion of the Total Payments the receipt or enjoyment of which
the Participant shall have waived at such time and in such manner as
not to constitute a "payment" within the meaning of Section 280G(b) of
the Code shall be
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taken into account; (iii) all "excess parachute payments" within the
meaning of Section 280G(b)(l) of the Code shall be treated as subject
to the Excise Tax unless, in the opinion of the Firm, such excess
parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered (within the meaning of
Section 280G(b)(4)(B) of the Code) in excess of the Base Amount (within
the meaning of Section 280G(b)(3) of the Code) allocable to such
reasonable compensation, or are otherwise not subject to the Excise
Tax; and (iv) the value of any noncash benefits or any deferred payment
or benefit shall be determined by the Firm in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code and regulations
or other guidance thereunder. For purposes of determining the amount of
the Gross Up Payment in respect of a Tier 1 Employee and whether any
Payments in respect of a Participant (other than a Tier 1 Employee)
shall be reduced, a Participant shall be deemed to pay federal income
tax at the highest marginal rate of federal income taxation (and state
and local income taxes at the highest marginal rate of taxation in the
state and locality of such Participant's residence, net of the maximum
reduction in federal income taxes which could be obtained from
deduction of such state and local taxes) in the calendar year in which
the Gross Up Payment is to be made (in the case of a Tier 1 Employee)
or in which the Payments are made (in the case of a Participant other
than a Tier 1 Employee). The Firm will be paid reasonable compensation
by the Company for its services.
(c) In the event that the Excise Tax is finally determined to
be less than the amount taken into account hereunder in calculating the
Gross-Up Payment, then an amount equal to the amount of the excess of
the earlier payment over the redetermined amount (the "Excess Amount")
will be deemed for all purposes to be a loan to the Tier 1 Employee
made on the date of the Tier 1 Employee's receipt of such Excess
Amount, which the Tier 1 Employee will have an obligation to repay to
the Company on the fifth business day after demand, together with
interest on such amount at the lowest applicable Federal rate (as
defined in Section 1274(d) of the Code or any successor provision
thereto), compounded semi-annually (the "Section 1274 Rate") from the
date of the Tier 1 Employee's receipt of such Excess Amount until the
date of such repayment (or such lesser rate (including zero) as may be
designated by the Firm such that the Excess Amount and such interest
will not be treated as a parachute payment as previously defined). In
the event that the Excise Tax is finally determined to exceed the
amount taken into account hereunder in calculating the Gross-Up Payment
(including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross Up Payment), within five
business days of such determination, the Company will pay to the Tier 1
Employee an additional amount, together with interest thereon from the
date such additional amount should have been paid to the date of such
payment, at the Section 1274 Rate (or such lesser rate (including zero)
as may be designated by the Firm such that the amount of such
deficiency and such interest will not be treated as a
-17-
parachute payment as previously defined). The Tier 1 Employee and the
Company shall each reasonably cooperate with the other in connection
with any administrative or judicial proceedings concerning the amount
of any Gross-Up Payment.
(d) As soon as practicable following a Change in Control, the
Company shall provide to each Tier 1 Employee and to each other
Participant with respect to whom it is proposed that Payments be
reduced, a written statement setting forth the manner in which the
Total Payments in respect of such Tier 1 Employee or other Participant
were calculated and the basis for such calculations, including, without
limitation, any opinions or other advice the Company has received from
the Firm or other advisors or consultants (and any such opinions or
advice which are in writing shall be attached to the statement).
4. The terms of any RSA, Option or LOI (including terms under this
Master Agreement or any Award Schedule) may be amended from time to time by the
Committee in its sole discretion in any manner that it deems appropriate
(including, but not limited to, acceleration of the date of payments
thereunder); provided, however, that no such amendment shall adversely affect in
a material manner any right of a Participant under such RSA, Option or LOI
without the written consent of such Participant, unless the Committee determines
in its sole discretion that there have occurred or are about to occur
significant changes in such Participant's position, duties or responsibilities,
or significant changes in economic, legislative, regulatory, tax, accounting or
cost/benefit conditions which are determined by the Committee in its sole
discretion to have or to be expected to have a substantial effect on the
performance of the Company, or any subsidiary, affiliate, division, or
department thereof, on the Plan or on a RSA, Option or LOI under the Plan;
provided, further, however, that the Committee shall not have the authority to
amend any Option held by any executive officer of the Company as defined in Rule
3(b)(7) under the Securities Exchange Act of 1934, as amended, so that the
amount of compensation an executive officer could receive is not based solely on
an increase in the value of shares, or to otherwise amend any Award issued to
such executive officer if the amendment would cause compensation payable
thereunder to be nondeductible under Section 162(m) of the Code (or any
successor provision) or regulations thereunder assuming such executive officer
is a covered employee for purposes of such Section.
5. Subject to the provisions of the Plan, a Participant may, by
completing a form acceptable to the Company and returning it to the Corporate
Secretary's Office in New York City, name a beneficiary or beneficiaries to
receive any payment or exercise any rights to which such Participant may become
entitled under an Award in the event of such Participant's death. A Participant
may change his or her designated beneficiary or beneficiaries from time to time
by submitting a new form to the Corporate Secretary's Office in New York City,
to the extent permitted by law (for example, unless such Participant has made a
prior irrevocable designation). If a Participant does not designate a
beneficiary, or if no designated beneficiary is living on the date any amount
becomes payable under an Award, such payment will be made to the legal
representatives of such Participant's estate, which will be deemed to be the
Participant's designated beneficiary under the Award.
6. If the Company, in its sole discretion, shall determine that the
listing upon any securities exchange or registration or qualification under any
United States federal, state, local or foreign law of any shares to be delivered
pursuant to an Award is necessary or desirable, delivery of such shares shall
not be made in shares until such listing, registration or
-18-
qualification shall have been completed. Until a certificate for some or all of
the shares subject to an LOI is issued to a Participant, a Participant shall
have no rights as a shareholder of the Company and, in particular, shall not be
entitled to vote such shares or to receive any dividend or other distribution
paid in respect thereof.
7. Notwithstanding anything to the contrary contained herein, the
Committee, in its sole discretion, may approve and the Company may issue RSAs,
Options, UK Options, or LOIs that are not governed by the provisions contained
in this Master Agreement.
8. Any action taken or decision made by the Company, the Board, or the
Committee or its delegates arising out of or in connection with the
construction, administration, interpretation or effect of any provision of the
Plan, the Scheme or this Master Agreement shall lie within its sole and absolute
discretion, as the case may be, and shall be final, conclusive and binding on
the Participant and all persons claiming under or through the Participant. By
receipt of such Awards or other benefit under the Plan, the Participant and each
person claiming under or through the Participant shall be conclusively deemed to
have indicated acceptance and ratification of, and consent to, any action taken
under the Plan or the Scheme, by the Company, the Board or the Committee or its
delegates.
9. The validity, construction, interpretation, administration and
effect of the Plan or the Scheme and of its rules and regulations, and rights
relating to the Plan or the Scheme, and to any Award issued under this Master
Agreement, shall be governed by the substantive laws, but not the choice of law
rules, of the State of New York, in the United States of America.
10. The Committee may rescind, without further notice to the
Participant, any Award issued to the Participant under the Plan in duplicate, or
in error, as determined in the sole discretion of the Committee.
11. Any Award issued under this Master Agreement is subject to the
terms of the Detrimental Conduct Provisions established by the Committee, and as
from time to time amended.
-19-
EXHIBIT 13
PORTIONS OF 2006 ANNUAL REPORT TO SHAREHOLDERS
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[ 30 ]
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FINANCIAL REVIEW
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[ 65 ]
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
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[ 66 ]
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|
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
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[ 70 ]
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|
CONSOLIDATED STATEMENTS OF INCOME
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[ 71 ]
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|
CONSOLIDATED BALANCE SHEETS
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[ 72 ]
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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[ 73 ]
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
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[ 74 ]
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|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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[ 111 ]
|
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CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
|
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
FINANCIAL REVIEW
The financial section of American Express Company’s (the Company) Annual Report consists of
this Financial Review, the Consolidated Financial Statements and the related notes that follow. The
following discussion is designed to provide perspective and understanding to the Company’s
consolidated financial condition and results of operations. Certain key terms are defined in the
Glossary of Selected Terminology, which begins on page 60.
EXECUTIVE OVERVIEW
American Express Company is a leading global payments, network, and travel company. The Company
offers a broad range of products and services including charge and credit cards; stored value
products such as Travelers Cheques and gift cards; travel agency services; travel and business
expense management products and services; network services and merchant acquisition and merchant
processing for the Company’s network partners and proprietary payments businesses; lending
products; point-of-sale and back-office products and services for merchants; magazine publishing;
and international banking products. The Company’s various products and services are sold globally
to diverse customer groups, including consumers, small businesses, mid-market companies, large
corporations, and banking institutions. These products and services are sold through various
channels including direct mail, on-line applications, targeted sales forces, and direct response
advertising.
The Company generates revenue from a variety of sources including payment
products, such as charge and credit cards, travel services, and stored value products, including
Travelers Cheques. Charge and credit cards generate four types of revenue for the Company:
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•
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|
Discount revenue, which is the Company’s largest revenue source, represents fees
charged to merchants when cardmembers use their cards to purchase goods
and services on the Company’s network;
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•
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|
Finance charge revenue, which is earned on outstanding balances related to
the cardmember lending portfolio;
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•
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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; and
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•
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|
Securitization income, net which reflects the net earnings related to
cardmember loans financed through securitization activities. Refer to the
Glossary for further information.
|
In addition to funding and operating costs associated with these activities, other major expense
categories are related to marketing and reward programs that add new cardmembers and promote
cardmember loyalty and spending, and provisions for anticipated cardmember credit and fraud losses.
The Company believes that its “spend-centric” business model (which focuses on
generating revenues primarily by driving spending on its cards and secondarily by finance charges
and fees) has significant competitive advantages. Average spending per cardmember, which is
substantially higher than for the Company’s competitors, represents greater value to merchants in
the form of loyal customers and higher sales. This gives the Company the ability to earn a premium
discount rate and invest in greater value-added services for merchants and cardmembers. As a result
of the higher revenues generated from higher
spending, the Company has the flexibility to offer more attractive rewards and other incentives to
cardmembers, which in turn create an incentive to spend more on their cards.
The Company creates shareholder value by focusing on the following elements:
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•
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Driving growth principally through organic opportunities and related business
strategies, as well as joint ventures and selected acquisitions;
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•
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Delivering returns well in excess of the Company’s cost of capital; and
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•
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Distributing excess capital to shareholders through dividends and stock repurchases.
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Overall, it is management’s priority to increase shareholder value over the moderate to long term
by achieving the following long-term financial targets, on average and over time:
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•
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Earnings per share growth of 12 to 15 percent;
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•
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Revenue growth of at least 8 percent; and
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•
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Return on average equity (ROE) of 33 to 36 percent.
|
After the completion of the spin-off of Ameriprise Financial, Inc. (Ameriprise) in 2005, the
Company raised its ROE target to 28 to 30 percent from its previous target of 18 to 20 percent.
Based on the Company’s recent financial performance and expectations regarding future performance,
the Company’s on average and over time targeted ROE was increased again in late 2006 to 33 to 36
percent. The new ROE target reflects the success of the Company’s spend-centric business model and
its effectiveness in capturing high spending consumer, small business, and corporate cardmembers.
[ 30 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
For 2006 and 2005, the Company met or exceeded management’s targets for
earnings per share, revenue, and ROE, illustrating the success of investments made over the past
few years. Reported ROE for 2006 was 35 percent. Reported ROE for 2005, including discontinued
operations (prior to disposal), was 25 percent, which exceeded the Company’s target prior to the
spin-off.
ACQUISITIONS AND DIVESTITURES
Effective December 31, 2006, the Company acquired Harbor Payments, Inc. (Harbor Payments) for
approximately $150 million, which was paid primarily in the Company’s common stock. Harbor Payments
is a technology provider that specializes in electronic invoice and payment capabilities. The
acquisition is reflected in the International Card & Global Commercial Services segment.
During the third quarter of 2006, the Company completed the sale of its card
and merchant-related activities in Malaysia to Maybank, and its card and merchant-related
activities in Indonesia to Bank Danamon, for combined proceeds of $94 million. The
transactions generated a gain of $33 million ($24 million after-tax), and are reported as a
reduction to other expenses in the Company’s continuing operations. The gain is reported
within the International Card & Global Commercial Services segment.
On June 30, 2006, the Company completed the sale of its card and
merchant-related activities, and international banking activities in Brazil to Banco Bradesco S.A.
(Bradesco), for approximately $470 million. The transaction generated a net after-tax gain of $109
million. $144 million ($131 million after-tax) of the gain relates to the card and merchant-related
activities sold and is reported as a reduction to other operating expenses in the Company’s
continuing operations ($119 million in the International Card & Global Commercial Services segment
and $25 million in the Global Network & Merchant Services segment). A $22 million
after-tax loss related to the sale of the Company’s international banking activities to Bradesco is
reported in discontinued operations. These banking activities previously were reflected in the
International Card & Global Commercial Services segment. Financial results for these operations,
prior to the second quarter of 2006, were not reclassified as discontinued operations because such
results are not material.
The Company will continue to maintain its presence in the card and
merchant-related businesses within Malaysia, Indonesia, and Brazil through its Global Network
Services arrangements with acquirers.
On September 30, 2005, the Company completed the spin-off of Ameriprise,
formerly known as American Express Financial Corporation, the Company’s financial planning and
financial services business. In addition, during the third quarter of 2005, the Company completed
certain dispositions including the sale of its tax, accounting, and consulting business, American
Express Tax and Business Services, Inc. (TBS). The operating results and cash flows related to
Ameriprise and certain dispositions (including TBS) have been reflected as discontinued operations
in the Consolidated Financial Statements.
SEGMENT REPORTING
The Company is a leading global payments, network, and travel company that is principally engaged
in businesses comprising three reportable operating segments: U.S. Card Services, International
Card & Global Commercial Services, and Global Network & Merchant Services. The Company considers a
combination of factors when evaluating the composition of its reportable operating segments and the
aggregation of operating segments with similar attributes (in all material respects), including
economic characteristics, products and services offered, classes of customers, product distribution
channels, geographic considerations (primarily U.S. versus international), and regulatory
environment considerations.
U.S. Card Services issues a wide range of card products and services to
consumers and small businesses in the U.S., provides consumer travel services to cardmembers and
other consumers, and also issues Travelers Cheques and other prepaid products on a global basis.
International Card & Global Commercial Services issues proprietary consumer and
small business cards outside the U.S., offers global corporate payment and travel-related products
and services, and provides international banking services through American Express Bank Ltd.
Global Network & Merchant Services operates a global merchant services
business, which includes signing merchants to accept cards as well as processing and settling card
transactions for those merchants. This segment also offers merchants point-of-sale and back-office
products, services, and marketing programs and also manages a global general-purpose charge and
credit card network, which includes both proprietary cards and cards issued under network
partnership agreements.
[ 31 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Corporate & Other consists of corporate functions and auxiliary businesses,
including the Company’s publishing business, and for 2004, the leasing product line of the
Company’s small business financing unit, which was sold in 2004.
FINANCIAL SUMMARY
A summary of the Company’s recent financial performance follows:
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Years Ended December 31,
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Percent
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(Millions, except per share
|
|
|
|
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|
Increase
|
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|
amounts and ratio data)
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Net revenues
|
|
$
|
27,136
|
|
|
$
|
24,068
|
|
|
|
13
|
%
|
|
Expenses
|
|
$
|
21,808
|
|
|
$
|
19,820
|
|
|
|
10
|
|
|
Income from continuing operations
|
|
$
|
3,729
|
|
|
$
|
3,221
|
|
|
|
16
|
|
|
Net income
|
|
$
|
3,707
|
|
|
$
|
3,734
|
|
|
|
(1
|
)
|
|
Earnings per common share from continuing operations — diluted
|
|
$
|
3.01
|
|
|
$
|
2.56
|
|
|
|
18
|
|
|
Earnings per common share — diluted
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|
$
|
2.99
|
|
|
$
|
2.97
|
|
|
|
1
|
|
|
Return on average equity
(a)
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|
|
34.7
|
%
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|
25.4
|
%
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(a)
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|
Calculated based on $3.7 billion of net
income in both years, and $10.7 billion and $14.7
billion of average shareholders’ equity for the
trailing twelve months ending December 31, 2006 and
2005, respectively.
|
See Consolidated Results of Operations, beginning on page 36 for discussion of the Company’s
results.
The Company follows U.S. generally accepted accounting principles (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,
in the Consolidated Selected Statistical Information and U.S. Card Services segment, there have
been no cardmember lending securitization transactions, and certain tax-exempt investment income
had been earned on a taxable basis. These managed basis adjustments, and management’s rationale for
such presentation, are discussed further in the U.S. Card Services section below under “Differences
between GAAP and Managed Basis Presentation.”
Certain reclassifications of prior period amounts have been made to conform to
the current presentation throughout this Annual Report, including revenue and expense
reclassifications contained in the current report on Form 8-K dated April 5, 2006. In addition,
beginning prospectively as of July 1, 2006, certain card acquisition-related costs were
reclassified from other expense to a reduction in net card fees. Certain of the statements in this
Annual Report are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. See Forward-Looking Statements at the end of this discussion.
[ 32 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
CRITICAL ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial
Statements. The following chart provides information about three critical accounting policies that
are important to the Consolidated Financial Statements and that require significant management
assumptions and judgments.
RESERVES FOR CARDMEMBER LOSSES
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Effect if Actual Results Differ
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Description
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Assumptions/Approach Used
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from Assumptions
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Reserves for
losses relating to
cardmember loans and
receivables represent
management’s estimate
of the losses
inherent in the
Company’s outstanding
portfolio of loans
and receivables.
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Reserves for these losses are
primarily based upon models that
analyze specific portfolio
statistics, including average
write-off rates for various stages
of receivable aging (i.e., current,
30 days, 60 days, 90 days) over a
24-month period and average
bankruptcy and recovery rates.
Cardmember loans and receivables
are generally written off when they
are past due 180 and 360 days,
respectively. Also, to a lesser
extent, these reserves reflect
management’s judgment regarding
overall reserve adequacy.
Management considers whether to
adjust reserves that are calculated
by the analytic models based on
other factors, such as the level of
coverage of past-due accounts, as
well as leading economic and market
indicators, such as the
unemployment rate, the consumer
confidence index, the purchasing
manager’s index, bankruptcy filings
and the legal and regulatory
environment.
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To the extent historical credit
experience is not indicative of future
performance, actual loss experience could
differ significantly from management’s
judgments and expectations, resulting in
either higher or lower future provisions
for losses, as applicable.
As of December 31, 2006,
an increase in write-offs equivalent to
20 basis points of cardmember loan and
receivable balances at such date would
increase the provision for losses by
approximately $160 million.
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[ 33 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
RESERVE FOR MEMBERSHIP REWARDS COSTS
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Effect if Actual Results Differ
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Description
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|
Assumptions/Approach Used
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|
from Assumptions
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|
The Membership
Rewards program is
the largest
card-based rewards
program in the
industry. Eligible
cardmembers can
earn points for
purchases charged
and many cards
offer the ability
to earn bonus
points for certain
types of purchases.
Membership Rewards
points are
redeemable for a
broad variety of
rewards, including
travel,
entertainment,
retail certificates
and merchandise.
Points have no
expiration date and
there is no limit
on the number of
points a cardmember
may earn. A
majority of
spending by
cardmembers earns
points under this
program. While
cardmember spend,
redemption rates,
and the related
expense have been
increasing, the
Company benefits
through higher
revenues, lower
cardmember
attrition and
credit losses and
more timely
payments.
The Company
establishes
balance sheet
reserves to
cover the cost
of future
reward
redemptions
for points
earned to
date. The
provision for
the cost of
Membership
Rewards is
included in
marketing,
promotion,
rewards and
cardmember
services.
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The reserve for Membership
Rewards is estimated using models
that analyze historical redemption
statistics and reflect, to a lesser
extent, management’s judgment
regarding overall adequacy. The
provision for the cost of
Membership Rewards is based upon
points earned that are expected to
ultimately be redeemed by
cardmembers and the current
weighted-average cost per point of
redemption. The estimated points to
be redeemed are based on many
factors, including past redemption
behavior of cardmembers who have
left the program in the past five
years, card product type, year of
program enrollment, and card spend
level. The weighted-average cost
per point is affected by the mix of
rewards redeemed.
The Company
continually evaluates its reserve
methodology and assumptions based
on developments in redemption
patterns, cost per point redeemed,
and other factors.
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The balance sheet reserve for
unredeemed points is impacted over
time by enrollment levels, the
number of points earned and
redeemed, the weighted-average cost
per point, redemption choices made
by cardmembers, reward offerings by
partners and other Membership
Rewards program changes. The
calculation is most sensitive to
changes in the estimated ultimate
redemption rate. This rate is based
on the expectation that a large
majority of all points earned will
eventually be redeemed.
As of December 31,
2006, if the global ultimate
redemption rate changed by 100 basis
points, the balance sheet reserve
would change by approximately $175
million.
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[ 34 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
ASSET SECURITIZATIONS
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Effect if Actual Results Differ
|
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Description
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Assumptions/Approach Used
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from Assumptions
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When the Company
securitizes
cardmember loans,
certain estimates and
assumptions are
required to determine
the fair value of the
Company’s
subordinated retained
interests, including
an interest-only
strip, and gains or
losses recorded at
the time of sale.
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Estimates and assumptions are
generally based on projections of
finance charges and fees paid
related to the securitized assets,
expected credit losses, average
loan life (i.e., monthly payment
rate), the contractual fee to
service the securitized assets, and
a discount rate applied to the cash
flows from the subordinated
retained interests which is
commensurate with the inherent
risk.
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Changes in the estimates and
assumptions used may have an
impact on the Company’s gain
or loss calculation and the
valuation of its subordinated
retained interests. Management
believes that the fair value
of the subordinated interest
is most sensitive to changes
in the monthly payment rate,
expected credit losses, and
cash flow discount rate.
As of December 31, 2006, the
total fair value of all
subordinated retained
interests was $266 million.
The three key economic
assumptions and the
sensitivity of the current
year’s fair value of the
interest-only strip to
immediate 10 percent and 20
percent adverse changes in
these assumptions are as
follows:
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|
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(Millions,
except
rates per
annum)
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|
Monthly
Payment
Rate
|
|
Expected
Credit
Losses
|
|
Cash
Flows
from
Interest-
only
Strips
Discounted
at
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Assumption
|
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25.6%
|
|
2.6%
|
|
12.0%
|
|
|
|
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10% adverse change
|
|
$(17)
|
|
$(12)
|
|
$(0.5)
|
|
|
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|
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20% adverse change
|
|
$(33)
|
|
$(24)
|
|
$(1.0)
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These sensitivities are
hypothetical. Management
cannot extrapolate changes in
fair value based on a 10
percent or 20 percent change
in all key assumptions
simultaneously in part because
the relationship of the change
in one assumption on the fair
value of the retained interest
is calculated independent from
any change in another
assumption. Changes in one
factor may cause changes in
another, which could magnify
or offset the sensitivities.
|
[ 35 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
AMERICAN EXPRESS COMPANY
CONSOLIDATED RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUMMARY OF THE COMPANY'S FINANCIAL PERFORMANCE
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
(
Millions, except per share amounts and ratio data)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues
|
|
$
|
27,136
|
|
|
$
|
24,068
|
|
|
$
|
21,897
|
|
|
Expenses
|
|
$
|
21,808
|
|
|
$
|
19,820
|
|
|
$
|
18,066
|
|
|
Income from continuing operations
|
|
$
|
3,729
|
|
|
$
|
3,221
|
|
|
$
|
2,686
|
|
|
Net income
|
|
$
|
3,707
|
|
|
$
|
3,734
|
|
|
$
|
3,445
|
|
|
Earnings per common share from continuing operations — diluted
|
|
$
|
3.01
|
|
|
$
|
2.56
|
|
|
$
|
2.09
|
|
|
Earnings per common share — diluted
|
|
$
|
2.99
|
|
|
$
|
2.97
|
|
|
$
|
2.68
|
|
|
Return on average equity
(a)
|
|
|
34.7
|
%
|
|
|
25.4
|
%
|
|
|
22.0
|
%
|
|
|
|
|
|
|
|
(a)
|
|
Calculated based on $3.7 billion, $3.7
billion, and $3.4 billion of net income, and $10.7
billion, $14.7 billion, and $15.7 billion of
average shareholders’ equity for the trailing
twelve months ending December 31, 2006, 2005, and
2004, respectively.
|
SELECTED STATISTICAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
(Billions, except percentages and where indicated)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Card billed business
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
406.8
|
|
|
$
|
354.6
|
|
|
$
|
304.8
|
|
|
Outside the United States
|
|
|
154.7
|
|
|
|
129.8
|
|
|
|
111.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
561.5
|
|
|
$
|
484.4
|
|
|
$
|
416.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cards-in-force (millions)
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
48.1
|
|
|
|
43.0
|
|
|
|
39.9
|
|
|
Outside the United States
|
|
|
29.9
|
|
|
|
28.0
|
|
|
|
25.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
78.0
|
|
|
|
71.0
|
|
|
|
65.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic cards-in-force (millions)
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
37.1
|
|
|
|
32.8
|
|
|
|
30.3
|
|
|
Outside the United States
|
|
|
25.4
|
|
|
|
23.2
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
62.5
|
|
|
|
56.0
|
|
|
|
51.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average discount rate
(b)
|
|
|
2.57
|
%
|
|
|
2.58
|
%
|
|
|
2.61
|
%
|
|
Average basic cardmember spending (dollars)
(a)
|
|
$
|
11,201
|
|
|
$
|
10,445
|
|
|
$
|
9,460
|
|
|
Average fee per card (dollars)
(a)(c)
|
|
$
|
35
|
|
|
$
|
35
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
(a)
|
|
Card billed business includes activities (including cash advances) related to proprietary cards, cards issued
under network partnership agreements, and certain insurance fees charged on proprietary cards. Cards-in-force include
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.
|
|
|
|
(b)
|
|
Computed as follows: Discount Revenue from all card spending (proprietary and Global Network Services) at merchants
divided by all billed business (proprietary and Global Network Services) generating discount revenue at such merchants.
Only merchants acquired by the Company are included in the computation.
|
|
|
|
(c)
|
|
Average fee per card is computed based on net card fees excluding the amortization of deferred direct acquisition costs.
|
[ 36 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
AMERICAN EXPRESS COMPANY
SELECTED STATISTICAL INFORMATION (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
(Billions, except percentages and where indicated)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Worldwide cardmember receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
37.4
|
|
|
$
|
34.2
|
|
|
$
|
31.1
|
|
|
90 days past due as a % of total
|
|
|
1.8
|
%
|
|
|
1.6
|
%
|
|
|
1.8
|
%
|
|
Loss reserves (millions):
|
|
$
|
981
|
|
|
$
|
942
|
|
|
$
|
806
|
|
|
% of receivables
|
|
|
2.6
|
%
|
|
|
2.8
|
%
|
|
|
2.6
|
%
|
|
% of 90 days past due
|
|
|
147
|
%
|
|
|
177
|
%
|
|
|
146
|
%
|
|
Net loss ratio as a % of charge volume
|
|
|
0.24
|
%
|
|
|
0.26
|
%
|
|
|
0.26
|
%
|
|
Worldwide cardmember lending — owned basis
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
43.3
|
|
|
$
|
33.1
|
|
|
$
|
26.9
|
|
|
30 days past due as a % of total
|
|
|
2.7
|
%
|
|
|
2.5
|
%
|
|
|
2.4
|
%
|
|
Loss reserves (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
996
|
|
|
$
|
972
|
|
|
$
|
998
|
|
|
Provision
|
|
|
1,507
|
|
|
|
1,227
|
|
|
|
1,016
|
|
|
Net write offs
|
|
|
(1,359
|
)
|
|
|
(1,155
|
)
|
|
|
(1,040
|
)
|
|
Other
|
|
|
27
|
|
|
|
(48
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,171
|
|
|
$
|
996
|
|
|
$
|
972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of loans
|
|
|
2.7
|
%
|
|
|
3.0
|
%
|
|
|
3.6
|
%
|
|
% of past due
|
|
|
98
|
%
|
|
|
122
|
%
|
|
|
151
|
%
|
|
Average loans
|
|
$
|
36.5
|
|
|
$
|
28.3
|
|
|
$
|
25.9
|
|
|
Net write-off rate
|
|
|
3.7
|
%
|
|
|
4.1
|
%
|
|
|
4.0
|
%
|
|
Net finance charge revenue/average loans
|
|
|
9.5
|
%
|
|
|
9.1
|
%
|
|
|
8.6
|
%
|
|
Worldwide cardmember lending — managed basis
(b)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
63.5
|
|
|
$
|
54.3
|
|
|
$
|
47.2
|
|
|
30 days past due as a % of total
|
|
|
2.6
|
%
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
|
Loss reserves (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,469
|
|
|
$
|
1,475
|
|
|
$
|
1,541
|
|
|
Provision
|
|
|
1,991
|
|
|
|
2,097
|
|
|
|
1,931
|
|
|
Net write offs
|
|
|
(1,933
|
)
|
|
|
(2,055
|
)
|
|
|
(1,957
|
)
|
|
Other
|
|
|
95
|
|
|
|
(48
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,622
|
|
|
$
|
1,469
|
|
|
$
|
1,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of loans
|
|
|
2.6
|
%
|
|
|
2.7
|
%
|
|
|
3.1
|
%
|
|
% of past due
|
|
|
97
|
%
|
|
|
114
|
%
|
|
|
129
|
%
|
|
Average loans
|
|
$
|
56.9
|
|
|
$
|
48.9
|
|
|
$
|
45.4
|
|
|
Net write-off rate
|
|
|
3.4
|
%
|
|
|
4.2
|
%
|
|
|
4.3
|
%
|
|
Net finance charge revenue/average loans
|
|
|
9.4
|
%
|
|
|
9.3
|
%
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
(a)
|
|
“Owned,” a GAAP basis measurement, reflects only cardmember loans included in the Company’s Consolidated Balance Sheets.
|
|
|
|
(b)
|
|
Includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. The difference between the
“owned basis” (GAAP) information and “managed basis” information is attributable to the effects of securitization activities.
See the U.S. Card Services segment for additional information on managed basis presentation.
|
* * *
The following discussions regarding Consolidated Results of Operations and Consolidated Liquidity
and Capital Resources are presented on a basis consistent with GAAP unless otherwise noted.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2006
The Company’s 2006 consolidated income from continuing operations rose 16 percent to $3.7 billion
and diluted earnings per share (EPS) from continuing operations rose 18 percent to $3.01.
Consolidated income from continuing operations for 2005 increased 20 percent from 2004 and diluted
EPS from continuing operations for 2005 increased 22 percent from 2004.
The Company’s 2006 consolidated net income was $3.7 billion, which was level
with 2005, and diluted EPS increased 1 percent to $2.99. Consolidated net income for 2005 increased
8 percent from 2004. Net income for 2006 included a loss of $22 million from discontinued
operations compared to $513 million and $830 million of income from discontinued operations in 2005
and 2004, respectively.
Net income and EPS in 2004 reflected the $71 million ($109 million pretax) or
$0.06 per diluted share impact of the Company’s adoption of 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). The
adoption of SOP 03-1 related to discontinued operations.
The Company’s revenues and expenses are both affected by changes in the
relative values of non-U.S. currencies to the U.S. dollar. The currency rate changes had minimal
impact on both revenue and expense growth in each of 2006 and 2005.
Results from continuing operations for 2006 included:
|
|
•
|
|
$177 million ($155 million after-tax) of gains related to the sales of the
Company’s card and merchant-related activities in Brazil, Malaysia, and Indonesia;
|
|
|
|
|
•
|
|
$88 million ($40 million after-tax) of gains from the sale of an investment
in Egyptian American Bank (EAB);
|
|
|
|
|
•
|
|
$68 million ($42 million after-tax) of gains related to a rebalancing
program in the fourth quarter of 2006 to better align the maturity profile of the
Travelers Cheque and Gift Card investment portfolio with its business
liquidity needs;
|
|
|
|
|
•
|
|
$174 million ($113 million after-tax) of charges associated with certain
adjustments made to the Membership Rewards reserve models in the U.S. and
outside the U.S.;
|
[ 37 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
|
|
•
|
|
$154 million ($100 million after-tax) of reengineering costs; and
|
|
|
|
|
•
|
|
a $72 million ($47 million after-tax) reduction in cardmember lending
finance charge revenues, net of interest, and securitization income, net
related to higher than anticipated cardmember completion of consumer debt
repayment programs and certain associated payment waivers.
|
In addition, 2006 results included a favorable impact from lower early credit write-offs, primarily
related to bankruptcy legislation enacted in October 2005 and lower than expected costs associated
with Hurricane Katrina that were provided for in 2005, partially offset by a higher provision for
losses in Taiwan due primarily to the impact of industry-wide credit issues.
Results from continuing operations for 2005 included:
|
|
•
|
|
tax benefits of $239 million resulting from the resolution of previous years’ tax
items and the finalization of state tax returns;
|
|
|
|
|
•
|
|
a $113 million ($73 million after-tax) benefit from the recovery of
September 11, 2001-related insurance claims;
|
|
|
|
|
•
|
|
$286 million ($186 million after-tax) of reengineering costs; and
|
|
|
|
|
•
|
|
a $49 million ($32 million after-tax) provision to reflect the estimated
costs related to Hurricane Katrina.
|
In addition, 2005 results included an increase in the provision for losses related to increased
bankruptcy filings resulting from the change in bankruptcy legislation.
Results from continuing operations for 2004 included:
|
|
•
|
|
a $115 million ($75 million after-tax) charge reflecting a reconciliation of
securitization-related cardmember loans for balances accumulated over the
prior five-year period as a result of a computational error;
|
|
|
|
|
•
|
|
$99 million ($64 million after-tax) of restructuring charges;
|
|
|
|
|
•
|
|
a $117 million ($76 million after-tax) net gain on the sale of the equipment leasing product line; and
|
|
|
|
|
•
|
|
a $60 million ($39 million after-tax) benefit for a reduction in merchant-related reserves.
|
Net Revenues
Consolidated net revenues for 2006 and 2005 were $27.1 billion and $24.1 billion, respectively, up
13 percent and 10 percent from 2005 and 2004, respectively. Net revenues increased primarily due to
higher discount revenue, increased cardmember lending finance charge revenue, net of interest,
greater securitization income, net, and also, higher other revenues in 2006. Consolidated net
revenues in 2006 included a $72 million reduction in cardmember lending finance charge revenue, net
of interest and
securitization income, net related to higher than anticipated cardmember completion of consumer
debt repayment programs and certain associated payment waivers as well as a reclassification of
certain card acquisition-related costs, beginning prospectively July 1, 2006, from other expenses
to a reduction in net card fees.
Discount revenue for 2006 rose 13 percent as compared to 2005 to $13.0 billion
as a result of a 16 percent increase in worldwide billed business, partially offset by a lower
average discount rate, relatively faster growth in billed business related to Global Network
Services (GNS), and higher cash-back rewards costs. Selective repricing initiatives,
continued changes in the mix of business and volume-related pricing discounts will likely continue
to result in some erosion of the average discount rate over time. The 16 percent increase in
worldwide billed business in 2006 reflected increases in average spending per proprietary basic
card, growth in basic cards-in-force, and a 48 percent increase in billed business related to GNS
from 2005.
U.S. billed business and billed business outside the U.S. were up 15 percent
and 19 percent, respectively, in 2006, due to increases in average spending per proprietary basic
card and growth in basic cards-in-force. The growth in the billed business both within the U.S. and
outside the U.S. reflected increases within the Company’s consumer card business, small business
spending and Corporate Services volumes.
[ 38 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
The table below summarizes selected statistics for which increases in 2006 have
resulted in discount revenue growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
Assuming
|
|
|
|
|
|
|
|
|
No Changes
|
|
|
|
|
|
|
|
|
in Foreign
|
|
|
|
|
Percentage
|
|
|
Exchange
|
|
|
|
|
Increase
|
|
|
Rates
|
|
|
Worldwide
(a)
|
|
|
|
|
|
|
|
|
|
Billed business
|
|
|
16
|
%
|
|
|
15
|
%
|
|
Average spending per proprietary basic card
|
|
|
7
|
|
|
|
7
|
|
|
Basic cards-in-force
|
|
|
12
|
|
|
|
|
|
|
U.S.
(a)
|
|
|
|
|
|
|
|
|
|
Billed business
|
|
|
15
|
|
|
|
|
|
|
Average spending per proprietary basic card
|
|
|
6
|
|
|
|
|
|
|
Basic cards-in-force
|
|
|
13
|
|
|
|
|
|
|
Proprietary consumer card billed business
(b)
|
|
|
13
|
|
|
|
|
|
|
Proprietary small business billed business
(b)
|
|
|
16
|
|
|
|
|
|
|
Proprietary Corporate Services billed business
(c)
|
|
|
14
|
|
|
|
|
|
|
Outside the U.S.
(a)
|
|
|
|
|
|
|
|
|
|
Billed business
|
|
|
19
|
|
|
|
17
|
|
|
Average spending per proprietary basic card
|
|
|
11
|
|
|
|
9
|
|
|
Basic cards-in-force
|
|
|
9
|
|
|
|
|
|
|
Proprietary consumer and small business billed business
(c)
|
|
|
13
|
|
|
|
11
|
|
|
Proprietary Corporate Services billed business
(c)
|
|
|
19
|
|
|
|
17
|
|
|
|
|
|
|
|
|
(a)
|
|
Captions not designated as “proprietary” include both proprietary and GNS data.
|
|
|
|
(b)
|
|
Included in the U.S. Card Services segment.
|
|
|
|
(c)
|
|
Included in the International Card & Global Commercial Services segment.
|
Total billed business outside the U.S. reflected double-digit proprietary growth in all
regions except for Latin America. Excluding the impact of the sale in Brazil, described in the
Acquisition and Divestitures section, Latin America also exhibited double-digit proprietary growth.
The increase in overall cards-in-force within both proprietary and Global
Network Services reflected continued robust increases in the number of new cards added to the
Company’s franchise as well as continued solid average customer retention levels in 2006. In the
U.S. and non-U.S. businesses, 5.1 million and 1.9 million cards were added in 2006, respectively.
During 2005, discount revenue rose 13 percent to
$11.5 billion compared to 2004 as a result of increases in worldwide billed business,
average spending per proprietary basic card and growth in cards-in-force, offset in part by a lower
average discount rate.
Cardmember lending finance charge revenue, net of interest, rose 34 percent to
$3.5 billion in 2006, resulting from a 36 percent increase in lending finance charge revenue which
was partially offset by a 41 percent increase in lending finance charge interest as compared to
2005. The net increase is attributable to a 29 percent growth in average worldwide cardmember
lending balances, and a higher portfolio yield, partially offset by the impact of higher than
anticipated cardmember completion of consumer debt repayment programs and certain associated
payment waivers and higher funding costs. During 2005, cardmember lending finance charge revenue,
net of interest, increased 16 percent to $2.6 billion, reflecting growth in average worldwide
lending balances and a higher portfolio yield.
Securitization income, net increased 18 percent to $1.5 billion in 2006 as a
higher trust portfolio yield and a decrease in trust portfolio write-offs were partially offset by
greater interest expense due to a higher coupon rate paid to certificate holders, a lower average
securitization balance, and the impact of higher than anticipated cardmember completion of consumer
debt repayment programs and certain associated payment waivers. Securitization income, net
increased 11 percent to $1.3 billion in 2005 up from $1.1 billion in 2004 on a greater average
balance of securitized loans, a higher trust portfolio yield and a decrease in the trust portfolio
write-offs, partially offset by greater interest expense due to a higher coupon rate paid to
certificate holders, and an increase in the payment speed of trust assets.
Other revenues increased 21 percent to $1.8 billion in 2006 primarily due to
$68 million of gains related to the rebalancing of the Company’s Travelers Cheque and Gift Card
investment portfolio as discussed previously, fees associated with transition services agreements
with Ameriprise as well as higher network partner-related fees. Other revenues of $1.5 billion in
2005 were consistent with 2004.
Expenses
Consolidated expenses for 2006 were $21.8 billion, up 10 percent from $19.8 billion in 2005. The
increase in 2006 was primarily driven by increased marketing, promotion, rewards and cardmember
services expenses, greater professional services expenses, increased interest costs, higher
provisions for losses and benefits, and greater human resources expenses, partially offset by lower
other expenses. Consolidated expenses in 2006 and 2005 also included $154 million and $286 million,
[ 39 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
respectively, of reengineering costs. The charges reflect expenses in connection with several
initiatives relating principally to the restructuring of the Company’s business travel, operations,
finance, and technology areas. Reengineering costs in 2006 included $111 million of severance, of
which $89 million was restructuring-related, and is included within human resources, and $43
million of non-severance exit costs, of which $11 million was restructuring-related, and is
included within other expenses.
Reengineering costs for 2005 included $203 million of severance, of which $164
million was restructuring-related, and is included within human resources, and $83 million of
non-severance exit costs, of which $29 million was restructuring-related, and is included within
other expenses. Consolidated expenses for 2005 were $19.8 billion, up 10 percent from $18.1 billion
in 2004. The increase in 2005 was primarily driven by higher marketing, promotion, rewards and
cardmember services expenses, greater provisions for losses and benefits, and increased expenses
for human resources, partially offset by lower other expenses.
Marketing, promotion, rewards and cardmember services expenses increased 12
percent to $6.5 billion for 2006, reflecting greater rewards costs, and higher marketing and
promotion expenses. The higher rewards costs continued to reflect volume growth, a higher estimated
ultimate redemption rate, and strong cardmember loyalty program participation. Rewards costs in
2006 included a $112 million charge related to certain adjustments made to the Membership Rewards
reserve model in the U.S. and a $62 million charge related to certain adjustments made to the
Membership Rewards reserve model outside the U.S. These adjustments to the Membership Rewards
reserve models related to a higher ultimate redemption rate assumption to reflect redemption
statistics for cardmembers who left the program over the past five years, as management believes
this is a better indicator of future redemption behavior than the redemption statistics for
cardmembers who left the program since inception used previously. Marketing expenses continued to
reflect relatively high levels of spending related to various business-building initiatives, but
lower costs versus last year related to the Company’s ongoing global “MyLife,
MyCard
(SM)
” advertising campaign, which was in a more active phase during 2005.
Marketing, promotion, rewards and cardmember services expenses increased 18
percent to $5.8 billion in 2005 reflecting higher marketing and promotion expenses and greater
rewards costs. The increase in marketing and promotion expenses was primarily driven by
the Company’s ongoing global brand advertising campaign and continued focus on business-building
initiatives. The growth in rewards costs is attributed to volume growth, a higher redemption rate
and strong cardmember loyalty program participation.
Human resources expenses increased 5 percent to $5.1 billion for 2006 due to
merit increases and larger benefit-related costs, partially offset by a relatively flat level of
employees and lower severance-related costs compared to 2005. Human resources expenses in 2005
increased 6 percent to $4.8 billion compared to 2004 due to severance-related costs resulting from
the restructuring initiatives, higher management incentives, including an additional year of
stock-based compensation expenses, merit increases, and increased employee benefit expenses, which
were partially offset by reengineering benefits.
Total provisions for losses and benefits in 2006 increased 11 percent over last
year to $3.1 billion as the lending and investment certificate and other provisions growth of 20
percent and 37 percent, respectively, was partially offset by a 10 percent decline in the charge
card provision. The increase in the lending provision was driven by increased loan volumes globally
and higher loss rates outside the U.S., primarily in Taiwan, partially offset by the
favorable impact of lower bankruptcy-related charge offs and strong credit quality in the U.S., and
lower than expected costs related to Hurricane Katrina losses that were provided for in 2005. The
investment certificate and other provision rose due to higher interest rates on larger
investment certificate balances and increased merchant-related reserves. Compared to 2005, the
charge provision reflected the lower loss rate, lower than expected costs for Hurricane Katrina
losses that were provided for last year, and improved results from collection activities.
Total provisions for losses and benefits in 2005 increased 22 percent over 2004
to $2.8 billion due to increases in charge card, lending and other provisions. These
increases were primarily due to increased charge card and lending volumes and higher provision
rates, which were mostly due to substantially higher write-offs within the lending business due to
the change in the bankruptcy legislation during the fourth quarter of 2005, as well as a provision
to reflect the estimated costs related to Hurricane Katrina.
Professional services expenses in 2006 and 2005 increased 17 percent and 8
percent to $2.7 billion and $2.3 billion, respectively, due to higher technology service fees,
greater business and service-related volumes, and in 2006, increased credit and collection costs.
[ 40 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Interest expense in 2006 and 2005 increased 34 percent and 13 percent to $1.2
billion and $920 million, respectively, reflecting a higher effective cost of funds and increased
debt funding levels in support of growth in receivables.
Other expenses in 2006 decreased 1 percent to $1.3 billion compared to 2005 due
to the reclassification of certain card acquisition-related costs, beginning prospectively July 1,
2006, from other expenses to a reduction in net card fees, and the 2006 gains on the sales of the
Company’s card and merchant-related activities in Brazil, Malaysia, and Indonesia as well as the
investment in EAB. The decrease was partially offset by the September 11, 2001-related insurance
settlement in 2005 and higher volume and technology-related costs in 2006.
The effective tax rate was 30 percent in 2006 compared to 24 percent in 2005
and 30 percent in 2004. The effective tax rate in 2006 as compared to 2005 reflected higher tax
expense related to uncertainty regarding the Company’s ability to obtain tax benefits for certain
expenses attributable to foreign subsidiaries, a relatively high effective tax rate due to the
impact of foreign exchange translation on the gain on the sale of the Company’s investment in EAB,
and a relatively low effective tax rate benefit on the credit losses in Taiwan. These items were
offset by the favorable impacts of a relatively low effective rate on the sale of the Company’s
card and merchant-related activities in Brazil resulting principally from the difference between
the applicable Brazil tax rate and the higher U.S. statutory rate, a net interest receivable from
the IRS, finalization of the 2005 U.S. federal tax return, and an adjustment of 2006 estimated
state taxes. The effective tax rate was lower in 2005 as compared to 2004 as the 2005 rate
reflected benefits of $239 million resulting from the resolution of previous years’ tax items and
the finalization of state tax returns.
(Loss) income from discontinued operations, net of tax, was $(22) million, $513
million, and $830 million in 2006, 2005, and 2004, respectively. Included in 2006 is a $22 million
after-tax loss related to the sale of the Company’s international banking activities in Brazil.
Income from discontinued operations, net of tax, decreased 38 percent in 2005 from 2004 due to
spin-off related costs of $127 million after-tax, partially offset by a $63 million net after-tax
gain on certain dispositions, primarily TBS. Additionally, 2005 results from discontinued
operations are included through September 30, 2005, the date on which the spin-off of Ameriprise
and certain dispositions (primarily TBS) occurred, whereas 2004 included a full year of
results from these discontinued operations. The discontinued operations generated revenues of $9
million, $5.8 billion, and $7.2 billion for 2006, 2005, and 2004, respectively.
Going forward, the Company recognizes the need to respond to increased
competitive pressures within the marketplace and challenges within the economic environment. In
particular, as compared to 2005, the Company economically hedged a smaller percentage of its
expected interest rate exposure in 2006, and is substantially less economically hedged for 2007 and
beyond. This decrease along with higher interest rates and higher volume-related borrowings
resulted in higher funding costs in 2006 as compared with 2005. The Company expects higher funding
costs to continue in 2007, due to an expected increase in higher-cost floating rate borrowings
relative to fixed-rate funding that matured in 2006. In addition, the Company expects that results
in 2007 will not reflect the same benefit to its write-off rate that resulted from the change in
U.S. bankruptcy laws in 2005, and that favorably impacted results in 2006. The Company is focused
on meeting these and other challenges in 2007 and beyond by investing in growth opportunities, by
focusing on reengineering activities to control operating expense growth, by efficiently allocating
capital, and by controlling discretionary expenses, including lower levels of marketing and
promotion expenses.
CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY
CAPITAL STRATEGY
The Company generates equity capital primarily through net income to fund current needs and future
business growth and to maintain a targeted debt rating. Equity capital generated in excess of these
needs is returned to shareholders through dividends and the share repurchase program. The
maintenance of a solid equity capital base provides the Company with a strong and stable debt
rating and uninterrupted access to diversified sources of financing to fund asset growth. In
addition, the Company has a contingency funding plan to help ensure adequate sources of financing
in difficult economic or market environments and, in certain circumstances, for other adverse
events affecting the Company.
The Company believes allocating capital to growing businesses with a return on
risk-adjusted equity in excess of its cost of capital will generate shareholder value. The Company
retains sufficient earnings and other capital generated to satisfy growth objectives and, to the
extent capital exceeds business needs, returns excess capital to shareholders. The Company was able
during 2006 to
[ 41 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
return to shareholders a high percentage of its earnings and capital generated due in part to
its balance sheet management activities that seek to optimize the level of shareholders’ equity
required to support its growth. Assuming the Company achieves its financial objectives of 12 to 15
percent EPS growth, 33 to 36 percent ROE and at least 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.
As described above, during 2006 the Company raised its ROE target from a range
of 28 to 30 percent to a range of 33 to 36 percent. Important factors relating to ROE include the
Company’s margins, the amount and type of receivables and other assets needed to generate revenue,
the level of capital required to support its assets, and the mix between shareholders’ equity and
other forms of financial capital that it holds as a result of its financing activities. In
addition, in keeping with the Company’s objectives regarding the return of excess capital to
shareholders, the Board of Directors of the Company approved a 25 percent increase in the quarterly
dividend on the Company’s common stock from $0.12 to $0.15 per share for the dividend paid to
shareholders on August 10, 2006 and future dividends. During 2006, through dividends and share
repurchases, the Company returned approximately 93 percent of total capital generated to
shareholders in the form of $692 million in dividends and $4.1 billion of share repurchases.
The Company maintains flexibility to shift capital among business units as
appropriate. For example, the Company may infuse additional capital into subsidiaries to maintain
capital at targeted levels, considering debt ratings and regulatory requirements. These infused
amounts can affect both the capital and liquidity levels for American Express’ Parent Company
(Parent Company). The Company maintains discretion to manage these effects, by issuing public debt
and reducing projected common share buybacks. Additionally, the Company may transfer short-term
funds within the Company to meet liquidity needs, subject to and in compliance with various
contractual and regulatory constraints.
SHARE REPURCHASES
The Company has a share repurchase program to return equity capital in excess of business needs to
shareholders. These share repurchases both offset the issuance of new shares as part of employee
compensation plans and reduce shares outstanding. The Company repurchases its common shares
primarily by open market purchases.
Approximately 69 percent of capital generated has been returned to shareholders
since inception of the share repurchase program in 1994. In May 2006, the Company’s Board of
Directors authorized the repurchase of an additional 200 million shares of the Company’s common
stock. During 2006, the Company purchased 75 million common shares at an average price of $54.50.
The Company repurchased a higher level of shares in 2006 after activity was reduced in 2005 due to
the capital implications of the September 30, 2005 spin-off of Ameriprise. At December 31, 2006,
there were approximately 165 million shares remaining under authorizations to repurchase shares
approved by the Company’s Board of Directors.
CASH FLOWS
Cash Flows from Operating Activities
For the year ended December 31, 2006, net cash provided by operating activities was $9.0 billion.
In 2005 and 2006, net cash provided by operating activities exceeded net income, primarily due to
provisions for losses and benefits, which are 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 (including the
Membership Rewards liability). These accounts vary significantly in the normal course of business
due to the amount and timing of various payments.
Net cash provided by operating activities was lower in 2005 than 2004 due to a
decrease in net cash provided by operating activities attributable to discontinued operations.
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 cardmember loans and receivables and
the Company’s available-for-sale investment portfolio.
For the year ended December 31, 2006, net cash of $15.2 billion was used in
investing activities primarily due to net increases in cardmember receivables and loans.
For the year ended December 31, 2005, net cash used in investing activities
increased from 2004. The increase reflects net increases in cardmember receivables and loans and
cash retained by Ameriprise after the spin-off.
[ 42 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Cash Flows from Financing Activities
The Company’s financing activities primarily include issuing debt and taking customer deposits in
addition to the sale of investment certificates. The Company also regularly repurchases its common
shares.
In 2006, net cash provided by financing activities of $6.8 billion was
primarily due to a net increase in debt partially offset by an increase in share repurchase
activity.
In 2005, financing activities provided net cash greater than in 2004 primarily
due to a net increase in customers’ deposits.
FINANCING ACTIVITIES
The Company is committed to maintaining cost-effective, well-diversified funding programs to
support current and future asset growth in its global businesses. The Company’s funding plan is
structured to meet expected and changing business needs to fund asset balances efficiently and
cost-effectively. The Company relies on diverse sources, to help ensure the availability of
financing in unexpected periods of stress and to manage interest rate exposures. In addition to the
funding plan described below, the Company has a contingent funding strategy to allow for the
continued funding of business operations through difficult economic, financial market and business
conditions when access to regular funding sources could become diminished or interrupted.
The Company’s card businesses are the primary asset-generating businesses, with
significant assets in both domestic and international cardmember receivable and lending activities.
Accordingly, the Company’s most significant borrowing and liquidity needs are associated with the
card businesses. The Company generally pays merchants for card transactions prior to reimbursement
by cardmembers. The Company funds merchant payments during the period cardmember loans and
receivables are outstanding. The Company also has borrowing needs associated with general corporate
purposes.
The following discussion includes information on both a GAAP and managed basis.
The managed basis presentation includes debt issued in connection with the Company’s lending
securitization activities, which are off-balance sheet. For a discussion of managed basis and
management’s rationale for such presentation, refer to the U.S. Card Services discussion below.
FUNDING STRATEGY
The Company’s funding needs are met primarily through the following sources:
|
|
•
|
|
Commercial paper,
|
|
|
|
|
•
|
|
Bank notes, customers’ deposits, institutional CDs and Fed Funds,
|
|
|
|
|
•
|
|
Medium-term notes and senior unsecured debentures,
|
|
|
|
|
•
|
|
Asset securitizations, and
|
|
|
|
|
•
|
|
Long-term committed bank borrowing facilities in selected non-U.S. markets.
|
General corporate purpose funding is primarily through the Parent Company and American Express
Travel Related Services Company, Inc. (TRS). The Company funds its cardmember receivables and loans
primarily through five entities. American Express Credit Corporation (Credco) finances the vast
majority of worldwide cardmember receivables, while American Express Centurion Bank (Centurion
Bank) and American Express Bank, FSB (FSB) principally fund cardmember loans originated from the
Company’s U.S. lending activities. Two trusts are used by the Company in connection with the
securitization and sale of U.S. receivables and loans generated in the ordinary course of the
Company’s card businesses. In 2006 and 2005, the Company had uninterrupted access to the money and
capital markets to fund its business operations.
The Company’s debt offerings are placed either directly to investors, as in the
case of its commercial paper program through Credco, or through securities brokers or underwriters.
In certain international markets, bank borrowings are used to partially fund cardmember receivables
and loans.
Diversity of funding sources by type of debt instrument, by maturity and by
investor base provides additional insulation from unforeseen events in the short-term debt market.
The Company had the following consolidated debt, on both a GAAP and managed basis, and customer
deposits outstanding at December 31:
|
|
|
|
|
|
|
|
|
|
|
(Billions)
|
|
2006
|
|
|
2005
|
|
|
Short-term debt
|
|
$
|
15.2
|
|
|
$
|
15.6
|
|
|
Long-term debt
|
|
|
42.7
|
|
|
|
30.8
|
|
|
|
|
|
|
|
|
|
|
Total debt (GAAP basis)
|
|
|
57.9
|
|
|
|
46.4
|
|
|
Off-balance sheet securitizations
|
|
|
20.2
|
|
|
|
21.2
|
|
|
|
|
|
|
|
|
|
|
Total debt (managed basis)
|
|
|
78.1
|
|
|
|
67.6
|
|
|
Customers’ deposits
|
|
|
24.7
|
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
Total debt (managed) and customers’ deposits
|
|
$
|
102.8
|
|
|
$
|
92.2
|
|
|
|
[ 43 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Short-term debt is defined as any debt with an original maturity of 12 months or less.
Credco’s commercial paper is a widely recognized name among short-term investors and is a principal
source of short-term debt for the Company. At December 31, 2006, Credco had $5.8 billion of
commercial paper outstanding. The outstanding amount decreased $1.9 billion or 25 percent from a
year ago. Average commercial paper outstanding was $7.8 billion and $8.1 billion in 2006 and 2005,
respectively. Credco currently manages the level of short-term debt outstanding such that its
back-up liquidity, including available bank credit facilities and term liquidity portfolio
investment securities, is not less than 100 percent of net short-term debt. Net short-term debt,
which consists of commercial paper and certain other short-term borrowings less cash and cash
equivalents, was $5.1 billion at December 31, 2006. Based on the maximum available borrowings under
bank credit facilities and term liquidity portfolio investment securities, Credco’s total back-up
liquidity coverage of net short-term debt was 212 percent at December 31, 2006.
Centurion Bank and FSB raise short-term debt through various instruments. Bank
notes issued and Fed Funds purchased by Centurion Bank and FSB totaled approximately $7.8 billion
as of December 31, 2006. Centurion Bank and FSB also raise customer deposits through the issuance
of certificates of deposit to retail and institutional customers. As of December 31, 2006,
Centurion Bank and FSB held $11.6 billion in customer deposits. Centurion Bank and FSB each
maintain $400 million of committed bank credit lines as a backup to short-term funding programs.
Long-term funding needs are met principally through the sale of cardmember loans in securitization
transactions.
The Asset/Liability Committees of Centurion Bank and FSB provide management
oversight with respect to formulating and ratifying funding strategy and to ensuring that all
funding policies and requirements are met.
The Company had short-term debt as a percentage of total debt at December 31 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Short-term debt percentage of total debt (GAAP basis)
|
|
|
26.2
|
%
|
|
|
33.7
|
%
|
|
|
The percentage of short-term debt at December 31, 2006 is lower than at December 31, 2005 in part
due to the temporary decline in the amount of commercial paper outstanding at Credco.
Medium- and long-term debt is raised through the offering of debt securities in
the United States and international capital markets. Medium-term debt is generally defined as any
debt with an original maturity greater than 12 months but less than 36 months. Long-term
debt is generally defined as any debt with an original maturity greater than 36 months.
In 2006, medium- and long-term debt with maturities primarily ranging from 2 to
10 years was issued. The Company’s 2006 term offerings, which include those made by the Parent
Company, TRS, Credco, Centurion Bank, FSB, and the American Express Credit Account Master Trust
(the Lending Trust) are presented in the following table on both a GAAP and managed basis:
|
|
|
|
|
|
|
(Billions)
|
|
Amount
|
|
|
American Express Company (Parent Company only)
(a)
:
|
|
|
|
|
|
Subordinated Debentures
|
|
$
|
0.8
|
|
|
Fixed Rate Senior Notes
|
|
|
1.0
|
|
|
American Express Travel Related Services Company, Inc.:
|
|
|
|
|
|
Fixed and Floating Rate Medium-Term Notes
|
|
|
1.5
|
|
|
American Express Credit Corporation:
|
|
|
|
|
|
Floating Rate Senior Notes
|
|
|
6.5
|
|
|
Fixed and Floating Rate Medium-Term Notes
|
|
|
1.9
|
|
|
American Express Centurion Bank:
|
|
|
|
|
|
Floating Rate Medium-Term Notes
|
|
|
3.7
|
|
|
American Express Bank, FSB:
|
|
|
|
|
|
Floating Rate Medium-Term Notes
|
|
|
3.2
|
|
|
|
|
|
|
|
GAAP Basis
|
|
|
18.6
|
|
|
American Express Credit Account Master Trust:
|
|
|
|
|
|
Trust Investor Certificates (off-balance sheet)
|
|
|
3.5
|
|
|
|
|
|
|
|
Managed Basis
|
|
$
|
22.1
|
|
|
|
|
|
|
|
|
(a)
|
|
The table above excludes the remarketing of the Convertible Senior Debentures to Senior Notes described below.
|
The Company continues to issue long-term debt with a wide range of maturities to reduce and
spread out the refinancing requirement in future periods. The Company expects that its planned
funding during 2007 will be met through a combination of sources similar to those on which it
currently relies. However, the Company continues to assess its needs and investor demand and may
change its funding mix. The Company’s funding plan is subject to various risks and uncertainties,
such as disruption of financial markets, market capacity and demand for securities offered by the
Company, regulatory changes, ability to sell receivables and the performance of receivables
previously sold in securitization transactions. Many of these risks and uncertainties are beyond
the Company’s control.
At December 31, 2006, the Parent Company had an unspecified amount of debt or
equity securities and Credco had an unspecified amount of debt available for issuance under shelf
registrations filed with the Securities and Exchange Commission (SEC). In addition, TRS,
[ 44 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Centurion Bank, Credco, American Express Overseas Credit Corporation Limited, a wholly-owned
subsidiary of Credco, and American Express Bank Ltd. have established a program 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 cannot exceed $10 billion.
The Company’s funding strategy is designed to maintain high and stable debt
ratings from the major credit rating agencies, Moody’s, Standard & Poor’s and Fitch Ratings.
Maintenance of high and stable debt ratings is critical to ensuring the Company has continuous
access to the capital and credit markets. It also enables the Company to reduce its overall
borrowing costs. At December 31, 2006, the Parent Company debt ratings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard
|
|
Fitch
|
|
|
|
Moody's
|
|
& Poor's
|
|
Ratings
|
|
Short-term
|
|
P-1
|
|
A-1
|
|
F1
|
|
Senior unsecured
|
|
A1
|
|
A+
|
|
A+
|
|
|
The Company actively manages the risk of liquidity and cost of funds resulting from the
Company’s financing activities. Management believes a decline in the Company’s long-term credit
rating by two levels could result in the Company having to significantly reduce its commercial
paper and other short-term borrowings. Remaining borrowing requirements would be addressed through
other means such as the issuance of long-term debt, additional securitizations, increased deposit
taking, and the sale of investment securities or drawing on existing credit lines. This would
result in higher interest expense on the Company’s commercial paper and other debt, as well as
higher fees related to unused lines of credit. The Company believes a two level downgrade is highly
unlikely due to its capital position and growth prospects.
Parent Company Funding
Total Parent Company long-term debt outstanding was $6.0 billion and $5.2 billion at December 31,
2006 and 2005, respectively. During 2006, the Parent Company issued $750 million of fixed-rate
Subordinated Debentures due 2036. These Subordinated Debentures are automatically extendable until
2066 unless certain events occur prior to that date. The Subordinated Debentures will accrue
interest at an annual rate of 6.80 percent until September 1, 2016 and at an annual rate of
three-month LIBOR plus 2.23 percent thereafter. The Parent Company also issued $400 million of 5.25
percent and $600 million of 5.50 percent fixed-rate Senior Global Notes due 2011 and 2016,
respectively.
As of December 31, 2005, the Parent Company had $2 billion principal
outstanding of 1.85 percent Convertible Senior Debentures due 2033 (the Senior Debentures), which
were unsecured obligations of the Company. On December 1, 2006, the Senior Debentures were
remarketed into unsecured, floating rate Senior Notes due 2033 (the Senior Notes). The Senior Notes
may be put to the Company at par on June 5, 2008 and accrue interest at an annual rate of
three-month LIBOR plus 11.453 basis points. Contingent interest payments up to 4 percent are
required if the Senior Notes are not rated at certain levels by the rating agencies.
The Parent Company is authorized to issue commercial paper. This program is
supported by a $1.2 billion multi-purpose committed bank credit facility that expires in 2010.
There was no Parent Company commercial paper outstanding during 2006 and 2005, and no borrowings
have been made under its bank credit facility.
Asset Securitizations
The Company periodically securitizes cardmember receivables and loans arising from its card
business. The securitization market provides the Company with cost-effective funding.
Securitization of cardmember receivables and loans is accomplished through the transfer of those
assets to a trust, which in turn issues certificates or notes (securities) to third-party investors
collateralized by the transferred assets. The proceeds from issuance are distributed to the
Company, through its wholly-owned subsidiaries, as consideration for the transferred assets.
Securitization transactions are accounted for as either a sale or secured borrowing, based upon the
structure of the transaction.
Securitization of cardmember receivables generated under designated consumer
charge card and small business charge card accounts is accomplished through the transfer of
cardmember receivables to the American Express Issuance Trust (Charge Trust). Securitizations of
these receivables are accounted for as secured borrowings because the Charge Trust is not a
qualifying special purpose entity (QSPE). Accordingly, the related assets being securitized are not
accounted for as sold and continue to be reported as owned assets on the Company’s Consolidated
Balance Sheets. The related securities issued to third-party investors are reported as long-term
debt on the Company’s Consolidated Balance Sheets. As of December 31, 2006 and 2005, the
[ 45 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Charge Trust held total assets of $9.6 billion and $9.9 billion, respectively, with $1.2
billion of long-term debt outstanding at December 31, 2006 and 2005.
Securitization of the Company’s cardmember loans generated under designated
consumer lending accounts is accomplished through the transfer of cardmember loans to a QSPE, the
American Express Credit Account Master Trust (Lending Trust). In a securitization structure like
the Lending Trust (a revolving master trust), credit card accounts are selected and the rights to
the current cardmember loans, as well as future cash flows related to the corresponding accounts,
are transferred to the trust for the life of the accounts. In consideration for the transfer of
these rights, the Company, through its wholly-owned subsidiaries, receives an undivided, pro rata
interest in the trust referred to as the “seller’s interest”, which is reflected on balance sheet
as a component of cardmember loans. The seller’s interest is required to be maintained at a minimum
level of 7 percent of the outstanding securities in the Lending Trust. As of December 31, 2006, the
amount of seller’s interest was approximately 67 percent of outstanding securities, above the
minimum requirement. When the Lending Trust issues a security to a third party, a new investor
interest is created. The Company removes the corresponding cardmember loans from its Consolidated
Balance Sheets, recognizes a gain on sale and records an interest-only strip. From time to time,
the Company may record other retained interests as well. The total investors’ interest outstanding
will change through new issuances or maturities. The seller’s interest will change as a result of
new trust issuances or maturities as well as new account additions, new charges on securitized
accounts, and collections. As seller’s interest changes each period, the related allowance for loss
will change as well. When a security matures, the trust uses a portion of the collections to repay
the security, and as a result the investors’ interest decreases. In the monthly period which
contains a maturity, new charges on securitized accounts have historically been greater than the
portion of the collections required to repay the maturing security, and therefore, seller’s
interest has increased in an amount greater than or equal to the decrease in investors’ interest.
The Company’s continued involvement with the securitized cardmember loans
includes the process of managing and servicing the securitized loans through its subsidiary, TRS,
for which it earns a fee. Any billed finance charges related to the transferred cardmember loans
are reported as other receivables on the Company’s Consolidated Balance Sheets. As of December 31,
2006 and 2005, the Lending Trust held total assets of $34.6 billion and $28.9 billion,
respectively, of which $20.2 billion and $21.2 billion, respectively, had been sold and $14.4
billion and $7.7 billion, respectively, had been classified as seller’s interest. The fair value of
the interest-only strip and other retained interests was $266 million and $279 million at December
31, 2006 and 2005, respectively.
Under the respective terms of the Lending Trust and the Charge Trust
agreements, the occurrence of certain events could result in either trust being required to paydown
the investor certificates and notes before their expected payment dates over an early amortization
period. An example of such an event is, for either trust, the failure of the securitized assets to
generate specified yields over a defined period of time.
No such events have occurred during 2006 and 2005, and the Company does not
expect an early amortization trigger event to occur prospectively. In the event of a paydown of the
Lending Trust, $20.2 billion of assets would revert to the balance sheet and an alternate source of
funding of a commensurate amount would have to be obtained. Had a total paydown of the Lending
Trust hypothetically occurred at a single point in time at December 31, 2006, the cumulative
negative effect on results of operations would have been approximately $639 million pretax to
re-establish reserves and to derecognize the retained interests related to these securitizations
that would have resulted when the securitized loans reverted back onto the balance sheet.
Virtually no financial statement impact would occur from a paydown of the
Charge Trust, but an alternate source of funding for the $1.2 billion of securities outstanding at
December 31, 2006 would have to be obtained.
With respect to both the Lending Trust and the Charge Trust, a decline in the
actual or implied short-term credit rating of TRS below A-1/P-1 will trigger a requirement that
TRS, as servicer, transfer collections on the securitized assets to investors on a daily, rather
than a monthly, basis or make alternative arrangements with the rating agencies to allow TRS to
continue to transfer collections on a monthly basis. Such alternative arrangements include
obtaining appropriate guarantees for the performance of the payment and deposit obligations of TRS,
as servicer.
No officer, director, or employee holds any equity interest in the trusts or
receives any direct or indirect compensation from the trusts. The trusts in the Company’s
securitization programs do not own stock of the Company or the stock of any affiliate. Investors in
the securities issued by the trusts have no recourse
[ 46 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
against the Company if cash flows generated from the securitized assets are inadequate to
service the obligations of the trusts.
Liquidity
The Company balances the trade-offs between having too much liquidity, which can be costly and
limit financial flexibility, with having inadequate liquidity, which may result in financial
distress during a liquidity event. The Company considers various factors in determining its
liquidity needs, such as economic and financial market conditions, seasonality in business
operations, growth in business segments, cost and availability of alternative liquidity sources,
and credit rating agency considerations.
The Company has developed a contingent funding plan that enables it to meet its
daily funding obligations when access to unsecured funds in the debt capital markets is impaired or
unavailable. This plan is designed to ensure that the Company and all of its main operating
entities could continuously maintain normal business operations for a twelve-month period in which
its access to unsecured funds is interrupted. In addition, the Company maintains substantial
flexibility to reduce its operating cash uses, such as through its share repurchase program, and
the delay or deferral of certain operating expenses.
The funding sources that would be relied upon depend on the exact nature of
such a hypothetical liquidity crisis; nonetheless, the Company’s liquidity sources are designed
with the goal of ensuring there is sufficient cash on hand to fund business operations over a
twelve-month period regardless of whether the liquidity crisis was caused by an external, industry,
or Company specific event. The contingent funding plan also addresses operating flexibilities in
quickly making these funding sources available to meet all financial obligations. The simulated
liquidity crisis is defined as a sudden and unexpected event that temporarily impairs access to or
makes unavailable funding in the unsecured debt markets.
The contingent funding plan includes access to diverse sources of alternative
funding. Such sources include but are not limited to its liquidity investment portfolio, committed
bank lines, intercompany borrowings, sale of consumer, commercial card, and small business loans
and cardmember receivables through its existing securitization programs and sale of other eligible
receivables. The Company estimates that, under a worst case liquidity crisis scenario, it has
identified up to $37.5 billion in alternate funding sources available to cover cash needs over the
first 60 days after a liquidity crisis has occurred.
Liquidity Investment Portfolio
During the normal course of business, funding activities may raise more proceeds than are necessary
for immediate funding needs. These amounts are invested principally in short-term overnight, highly
liquid instruments. In addition, the Company has developed a liquidity portfolio in which proceeds
raised from such borrowings are invested in longer term, highly liquid instruments, such as U.S.
Treasury securities and federal agency debt. At December 31, 2006, the Company held $5.1 billion of
such securities under this program. In addition, Credco entered into securities lending agreements
in June 2006 with other financial institutions to enhance investment income. At December 31, 2006,
the liquidity investment portfolio included approximately $716 million of investment securities
loaned under these agreements.
The invested amounts of the liquidity portfolio provide back-up liquidity,
primarily for the commercial paper program at Credco, and also flexibility for other short-term
funding programs at Centurion Bank and FSB. Instruments held within this portfolio will be of the
highest credit quality and most liquid of investment instruments available. The Company can easily
sell these securities or enter into sale/repurchase agreements to immediately raise cash proceeds
to meet liquidity needs.
Committed Bank Credit Facilities
The Company maintained committed bank credit facilities with 38 financial institutions totaling
$11.6 billion, of which $2.7 billion was outstanding. During 2006, the Company renewed and extended
a total of $3.3 billion and increased approximately $785 million of these facilities. Credco has
the right to borrow a maximum amount of $10.8 billion (including amounts outstanding) under these
facilities, with a commensurate maximum $1.2 billion reduction in the amount available to the
Parent Company. The Company’s facilities expire as follows (billions): 2009, $3.3; 2010, $5.0; and
2011, $3.3.
The availability of the credit lines is subject to the Company’s compliance
with certain financial covenants, including the maintenance by the Company of consolidated tangible
net worth of at least $4.1 billion, the maintenance by Credco of a 1.25 ratio of combined earnings
and fixed charges to fixed charges, and the compliance by Centurion Bank and FSB with applicable
regulatory capital adequacy guidelines. At December 31, 2006, the Company’s consolidated tangible
net worth was approximately $9.0 billion, Credco’s ratio of combined earnings and fixed charges to
fixed charges was 1.44 and Centurion Bank and FSB each exceeded their regulatory capital adequacy
guidelines.
[ 47 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Committed bank credit facilities do not contain material adverse change
clauses, which may preclude borrowing under the credit facilities. The facilities may not be
terminated should there be a change in the Company’s credit rating.
Contingent Securitization Capacity
A key source in the Company’s contingent funding plan is asset securitization. Management expects
that $20.6 billion of additional consumer loans, commercial card loans, small business loans and
cardmember receivables could be sold to investors through the existing securitization trust over
the first 60 days after a liquidity crisis has occurred. The Company has added, through the
establishment of the Charge Trust, the capabilities to sell a wider variety of cardmember
receivable portfolios to further enhance the Company’s flexibility in accessing diverse funding
sources on a contingency basis.
The Company believes that the securitized financing would be available even
through adverse conditions due to the structure, size, and relative stability of the securitization
market. Proceeds from secured financings completed during a liquidity crisis could be used to meet
current obligations, to reduce or retire other contingent funding sources such as bank credit
lines, or a combination of the two. However, other factors affect the Company’s ability to
securitize loans and receivables, such as credit quality of the assets and the legal, accounting,
regulatory, and tax environment for securitization transactions. Material changes in any
of these factors may potentially limit the Company’s ability to securitize its loans and
receivables and could introduce certain risks to the Company’s ability to meet its financial
obligations. In such a case, the use of investment securities, asset dispositions, asset
monetization strategies, and flexibility to reduce operating cash needs could be utilized to meet
its liquidity needs.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company has identified both on- and off-balance sheet transactions, arrangements, obligations,
and other relationships that may have a material current or future effect on its financial
condition, changes in financial condition, results of operations, or liquidity and capital
resources.
CONTRACTUAL OBLIGATIONS
The table below identifies on- and off-balance sheet transactions that represent material expected
or contractually committed future obligations of the Company. Purchase obligations include
agreements to purchase goods and services that are enforceable and legally binding on the Company
and that specify significant terms, including: fixed or minimum quantities to be purchased; fixed,
minimum, or variable price provisions; and the approximate timing of the transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 and
|
|
|
(Millions)
|
|
Total
|
|
|
2007
|
|
|
2008-2009
|
|
|
2010-2011
|
|
|
thereafter
|
|
|
On-Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
42,747
|
|
|
$
|
8,754
|
|
|
$
|
22,876
|
|
|
$
|
5,682
|
|
|
$
|
5,435
|
|
|
Other long-term liabilities
(a)
|
|
|
4,258
|
|
|
|
1,185
|
|
|
|
1,295
|
|
|
|
752
|
|
|
|
1,026
|
|
|
Off-Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease obligations
|
|
|
2,435
|
|
|
|
227
|
|
|
|
404
|
|
|
|
313
|
|
|
|
1,491
|
|
|
Purchase obligations
(b)
|
|
|
2,386
|
|
|
|
943
|
|
|
|
1,399
|
|
|
|
40
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51,826
|
|
|
$
|
11,109
|
|
|
$
|
25,974
|
|
|
$
|
6,787
|
|
|
$
|
7,956
|
|
|
|
|
|
|
|
|
(a)
|
|
At December 31, 2006, there were no minimum
required contributions, and no contributions are
currently planned for the U.S. American Express
Retirement Plan. For the U.S. and non-U.S. defined
benefit pension and postretirement benefit plans,
contributions in 2007 are anticipated to be
approximately $68 million and this amount has been
included within other long-term liabilities.
Remaining obligations under defined benefit
pension and postretirement benefit plans
aggregating $588 million have not been included in
the table above as the timing of such obligations
is not determinable.
|
|
|
|
(b)
|
|
The purchase obligation amounts include expected
spending by period under contracts that were in
effect at December 31, 2006. Minimum contractual
payments associated with purchase obligations,
including termination payments, were $211 million.
|
[ 48 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
The Company also has certain contingent obligations to make payments under contractual
agreements entered into as part of the ongoing operation of the Company’s business, primarily with
co-brand partners. The contingent obligations under such arrangements were $3 billion as of
December 31, 2006.
In addition to the off-balance sheet contractual obligations noted above, the
Company has off-balance sheet arrangements that include guarantees, retained interests in
structured investments, unconsolidated variable interest entities and other off-balance sheet
arrangements as more fully described below.
GUARANTEES
The Company’s principal guarantees are associated with cardmember services to enhance the value of
owning an American Express card. At December 31, 2006, the Company had guarantees totaling
approximately $75 billion related to cardmember protection plans, as well as other guarantees in
the ordinary course of business that are within the scope of Financial Accounting Standards Board
(FASB) Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others” (FIN 45). Expenses relating to actual
claims under these guarantees were approximately $15 million for both 2006 and 2005.
The Company had approximately $1 billion of bank standby letters of credit and
bank guarantees and other letters of credit within the scope of FIN 45 which had supporting
collateral with an approximate value of $940 million. Additionally, at December 31, 2006, the
Company had $447 million of loan commitments and other lines of credit, as well as $756 million of
bank standby letters of credit, bank guarantees, and bank commercial and other bank letters of
credit that were outside the scope of FIN 45. At December 31, 2006, the Company held collateral
supporting these bank, commercial, and other letters and lines of credit with an approximate value
of $490 million.
See Note 11 to the Consolidated Financial Statements for further discussion
regarding the Company’s guarantees.
RETAINED INTERESTS IN ASSETS TRANSFERRED TO UNCONSOLIDATED ENTITIES
The Company held, as an investment, $266 million of an interest-only strip in the cardmember loan
securitization trust at December 31, 2006. See the Consolidated Liquidity and Capital Resources
section and Note 5 to the Consolidated Financial Statements for details regarding the Company’s
securitization trusts.
CERTAIN OTHER OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2006, the Company had approximately $264 billion of unused credit available to
cardmembers as part of established lending product agreements. Total unused credit available to
cardmembers does not represent potential future cash requirements, as a significant portion of this
unused credit will likely not be drawn. The Company’s charge card products have no pre-set limit
and, therefore, are not reflected in unused credit available to cardmembers. As discussed in the
Consolidated Liquidity and Capital Resources section, the Company’s securitizations of cardmember
loans are also off-balance sheet. The Company’s cardmember receivables securitizations remain on
the Consolidated Balance Sheets.
See Note 11 to the Consolidated Financial Statements for discussion regarding
the Company’s other off-balance sheet arrangements.
RISK MANAGEMENT
INTRODUCTION
The key objective of risk management at American Express is to drive profitable growth and
exceptional customer experiences, while limiting the exposure to adverse financial impacts. By
building analytical and technological capabilities, creating transparent limits on risk exposures,
optimizing investment decision-making, and identifying unacceptable risks, risk management
contributes to the Company’s efforts to create shareholder and customer value.
In addition to business risk, the Company recognizes three fundamental sources of risk:
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•
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Credit Risk,
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|
|
|
|
•
|
|
Market Risk, and
|
|
|
|
|
•
|
|
Operational Risk.
|
These risk types, which are described below, are interrelated and span the Company’s business units
and geographic locations. Because of their nature and scope, the Company believes in managing and
monitoring these risks centrally at the enterprise level and/or at the business unit level, as
appropriate. Further, management has adopted well-defined risk-taking principles to guide the
Company’s business strategy, achieve long-term shareholder objectives and deliver outstanding
customer experience.
[ 49 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
PRINCIPLES
The Company’s risk management is based on the following three principles:
|
|
•
|
|
Independence of risk management oversight;
|
|
|
|
|
•
|
|
Management of risk exposures through Board-approved risk limits; and
|
|
|
|
|
•
|
|
Ultimate business ownership for risk-return decision making.
|
The Company’s risk management leaders partner with business unit managers in making risk-return
decisions using standardized risk metrics with predictable outcomes. The measurement and reporting
of these risks are performed independently by risk management leaders. Both risk and business unit
managers remain jointly accountable for the outcome of risk-return decisions within these
established limits.
GOVERNANCE
The Company’s risk management governance begins with the Board oversight of risk management
parameters. The Audit Committee approves the Company’s risk management objectives, risk limits and
policies. The Global Leadership Team (GLT) and the Enterprise-wide Risk Management Committee (ERMC)
support the Board in their oversight function. In addition to risk-return decision-making, the GLT
works with the ERMC to invest in core risk capabilities and increase Company-wide awareness of
risk-return tradeoffs. The ERMC leads the Company’s overall risk management activities by measuring
and monitoring enterprise-wide risk and establishing policies and practices.
Daily risk management occurs at the business unit level where the processes and
infrastructure necessary to measure and manage risk are integrated into business unit goals.
Business unit managers, in partnership with independent risk management leaders, make decisions on
how to optimize risk-return tradeoffs and contain risk within established limits.
The Company has also developed a process that provides increased scrutiny
throughout the risk management governance structure and requires higher levels of approval for
exposures above defined risk thresholds. The escalation process is designed to ensure that the
large majority of transactions and initiatives can proceed within existing business unit risk
management processes, while risks that are either large or with enterprise-wide implications
receive enhanced scrutiny.
ROLES AND RESPONSIBILITIES
The ERMC is chaired by the Company’s Chief Risk Officer. Given the key role of credit risk in the
Company business model, the Chief Risk Officer supervises officers responsible for (i) credit risk
management, (ii) the centralized functional task of worldwide card fraud and information
management, and (iii) banking services. In addition, as the Chair of the ERMC, the Chief Risk
Officer is responsible for monitoring and escalating overall credit, market, and operational risk
exposures throughout the Company.
In addition to the Chief Risk Officer, the ERMC is composed of:
|
|
•
|
|
The senior risk leaders responsible for enterprise-wide market and operational risk;
|
|
|
|
|
•
|
|
The enterprise-wide leaders of compliance, controllership, and information security; and
|
|
|
|
|
•
|
|
The senior risk leaders representing all three operating segments of the Company.
|
As the most senior risk management entity, the ERMC draws on its significant expertise to analyze
risk comprehensively and determine acceptable risk thresholds across the Company.
In order to enhance its enterprise-wide risk assessment, the ERMC continues to
upgrade risk management capabilities that help the Company make better business and investment
decisions as well as strengthen measuring, managing and transparent reporting of risk. The ERMC
also launches focused risk management initiatives to assess the sources of significant exposures.
Under the ERMC leadership, committees governing each risk type are established.
These committees are responsible for translating the ERMC guidance and enterprise-wide risk
policies into policies and procedures for their corresponding risk types, managing and monitoring
those risks, and strengthening risk capabilities.
CREDIT RISK MANAGEMENT PROCESS
Credit risk is defined as the risk of loss from obligor or counterparty default. Leadership for
overall credit risk management at the Company rests with the Chief Risk Officer. Credit risks in
the Company can be divided into two broad categories, each with distinct risk management tools and
metrics: consumer credit risk and institutional credit risk.
[ 50 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
CONSUMER CREDIT RISK
Consumer credit risk arises principally from the Company’s portfolio of consumer and small business
charge cards, credit cards, lines of credit, and loans. Since such portfolio consists of millions
of borrowers across multiple geographies, occupations, and social segments, its risk is
substantially reduced through diversification. In addition, the Company benefits from the fact that
the credit profile of its cardmembers is better than that of its many competitors, which is a
combined result of the brand positioning, underwriting, and customer management policies, premium
customer servicing, and product reward features. The level of consumer credit risk losses is more
driven by general economic and legal conditions than by borrower-specific events.
Consumer credit risk is managed within a highly organized structure of policies
covering all facets of credit extension, including prospecting, approvals, authorizations, line
management, collections, and fraud prevention. The policies ensure consistent application of credit
management principles and standardized reporting of asset quality and loss recognition. Moreover,
consumer credit risk management is supported by sophisticated proprietary scoring and
decision-making models.
Credit underwriting decisions are made based on sophisticated evaluation of
product economics and customer behavior predictions. The Company has developed unique decision
logic for each customer interaction, including prospect targeting, new accounts, line assignment,
balance transfer, cross sell, and account management. Each decision has benefited from
sophisticated modeling capability that uses the most up-to-date proprietary information on
customers, including payment history, purchase data, as well as insights from data feeds from
credit bureaus.
In addition to the impact of improved risk management processes, the Company’s
overall consumer credit performance has also benefited from the shifting mix of the portfolio
towards products that reward the customer for spending. Rewards attract higher spending from
premium customers, which in turn leads to lower credit loss rates.
While consumer credit risk indicators have continued to show steady progress,
the Company’s objective of driving profitable growth may be accomplished by the launch of new
products or of existing products in new markets, which may exhibit higher loss rates.
INSTITUTIONAL CREDIT RISK
Institutional credit risk arises principally within the Company’s corporate card, establishment
services, network services, and international banking businesses. Unlike consumer credit risk,
institutional credit risk is characterized by a lower loss frequency but higher severity. It is
affected both by general economic conditions and by borrower-specific events. The Company’s senior
risk officers recognize that the absence of large losses in any given year or over several years is
not necessarily representative of the risk of institutional portfolios, given the infrequency of
loss events in such portfolios.
Under the governance of the Institutional Risk Management Committee (IRMC), the
credit officers of each business unit make investment decisions in core risk capabilities, ensure
proper implementation of the underwriting standards and contractual rights of risk mitigation,
monitor risk exposures, and determine risk mitigation actions. The IRMC formally reviews large
institutional exposures to ensure compliance with ERMC guidelines and procedures. At the same time,
the IRMC provides continuous guidance to business unit risk teams to optimize risk-adjusted returns
on capital. A company-wide risk rating utility and a specialized airline risk group provide
independent risk assessment of institutional obligors.
MARKET RISK MANAGEMENT PROCESS
Market risk is the risk to earnings or value resulting from movements in market prices. The
Company’s non-trading related market risk consists of:
|
|
•
|
|
Interest rate risk in its card, insurance, and certificate businesses; and
|
|
|
|
|
•
|
|
Foreign exchange risk in its international operations.
|
Market risk is centrally managed by the corporate treasurer, who also acts as the Vice Chairman of
the ERMC. Within each business, market risk exposures are monitored and managed by various
asset/liability committees, guided by Board-approved policies covering derivative financial
instruments, funding and investments. Derivative financial instruments derive their value from an
underlying variable or multiple variables, including commodity, equity, foreign exchange, and
interest rate indices or prices. These instruments enable end users to increase, reduce or alter
exposure to various market risks and, for that reason, are an integral component of the Company’s
market risk and related asset/liability management strategy and processes. Use of derivative
financial instruments is incorporated into the discussion below as well as Note 10 to the
Consolidated Financial Statements.
Market exposure is a byproduct of the delivery of products and services to
cardmembers. Interest rate risk is generated by funding cardmember charges and fixed-rate loans
with variable rate borrowings. These
[ 51 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
assets and liabilities generally do not create naturally offsetting positions with respect to
basis, re-pricing, or maturity characteristics.
For the Company’s charge card and fixed-rate lending products, interest rate
exposure is managed by shifting the mix of funding toward fixed-rate debt and by using derivative
instruments, with an emphasis on interest rate swaps, which effectively fix interest expense for
the length of the swap. The Company endeavors to lengthen the maturity of interest rate hedges in
periods of low or falling interest rates and to shorten their maturity in periods of high or rising
interest rates. For the majority of its cardmember loans, which are linked to a floating rate base
and generally reprice each month, the Company uses floating rate funding. The Company regularly
reviews its strategy and may modify it. Non-trading interest rate derivative financial instruments,
primarily interest rate swaps, with notional amounts of approximately $10 billion and $22 billion
were outstanding at December 31, 2006 and 2005, respectively. These derivatives generally qualify
for hedge accounting. A portion of these derivatives outstanding as of December 31, 2006, extend to
2015.
The detrimental effect on the Company’s pretax earnings of a hypothetical 100
basis point increase in interest rates would be approximately $263 million ($250 million related to
the U.S. dollar), based on the 2006 year-end positions. This effect, which is calculated using a
static asset liability gapping model, is primarily determined by the volume of variable rate
funding of charge card and fixed-rate lending products for which the interest rate exposure is not
managed by derivative financial instruments.
Foreign exchange risk is generated by cardmember cross-currency charges,
foreign currency denominated balance sheet exposures, translation exposure of foreign operations,
and foreign currency earnings in international units. The Company’s foreign exchange risk is
managed primarily by entering into agreements to buy and sell currencies on a spot basis or by
hedging this market exposure to the extent it is economically justified through various means,
including the use of derivative financial instruments such as foreign exchange forward, options,
and cross-currency swap contracts, which can help “lock in” the Company’s exposure to specific
currencies.
At December 31, 2006 and 2005, foreign currency products with total notional
amounts of approximately $48 billion and $30 billion, respectively, were outstanding. Derivative
hedging activities related to cross-currency charges, balance sheet exposures, and foreign currency
earnings generally do not qualify for hedge accounting; however, derivative hedging activities
related to translation exposure of foreign operations generally do.
With respect to cross-currency charges and balance sheet exposures, including
related foreign exchange forward contracts outstanding, the effect on the Company’s earnings of a
hypothetical 10 percent change in the value of the U.S. dollar would be immaterial as of December
31, 2006. With respect to foreign currency earnings, the adverse impact on pretax income of a 10
percent strengthening of the U.S. dollar related to anticipated overseas operating results for the
next twelve months, including any related foreign exchange option contracts entered into in January
2007, would hypothetically be $71 million as of December 31, 2006. With respect to translation
exposure of foreign operations, including related foreign exchange forward contracts outstanding, a
10 percent strengthening in the U.S. dollar would result in an immaterial reduction in equity as of
December 31, 2006.
In conjunction with its international banking operations, the Company uses
derivative financial instruments to manage market risk related to specific interest rate, foreign
exchange and price risk exposures arising from deposits, loans and debt and equity securities
holdings, and limited trading positions. At December 31, 2006 and 2005, interest rate products
related to trading and non-trading
positions with notional amounts totaling approximately $29 billion and $17 billion, respectively,
were outstanding. Additionally,equity products related to trading and non-trading positions with
notional amounts of $533 million and $740 million, respectively, were outstanding at December 31,
2006 and 2005. These derivatives generally do not qualify for hedge accounting.
As noted, market risk arises from the international banking trading activities
in foreign exchange (both directly through daily exchange transactions as well as through foreign
exchange derivatives), interest rate derivatives (primarily swaps), equity derivatives and
securities trading. Proprietary positions taken in foreign exchange instruments, interest rate risk
instruments and the securities portfolios are monitored daily against Value-at-Risk (VaR) limits.
The VaR methodology the
Company uses to measure the daily exposure from trading activities is
calculated using a parametric technique with a correlation matrix based upon historical data. The
VaR measure uses a 99 percent confidence interval to estimate potential trading losses over a
one-day period. The average VaR for trading activities was less than $1 million for both 2006 and
2005.
[ 52 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
OPERATIONAL RISK MANAGEMENT PROCESS
The Company defines operational risk as the risk of not achieving business objectives due to
inadequate or failed processes or information systems, human error or the external environment
(e.g., natural disasters) including losses due to failures to comply with laws and regulations.
Operational risk is inherent in all business activities and can impact an organization through
direct or indirect financial loss, brand damage, customer dissatisfaction, or legal or regulatory
penalties.
The Company’s operational risk governance structure includes the Operational
Risk Management Committee, which is responsible for maintaining the operational risk framework and
related policies and for overseeing the Company’s operational risk program. The Committee is
chaired by the Chief Operational Risk Officer and Vice Chairman of the ERMC, and has member
representation from business units and support groups. The business units have the responsibility
for implementing the framework as well as for the day-to-day management of operational risk.
Managing operational risk is an important priority for the Company. To mitigate
such risk, the Company has developed a comprehensive program to identify, measure, monitor, and
report inherent and emerging operational risks. The Company has a multi-year program, which uses
the same process risk self-assessment methodology used to facilitate compliance with Section 404 of
the Sarbanes-Oxley Act, to effect non-financial operational risk self assessments. The Company also
has a reporting process that provides business unit leaders with operational risk information on a
quarterly basis to help them assess the overall operational risks of their business units. These
initiatives have resulted in improved operational risk intelligence and a heightened level of
preparedness to manage risk events and conditions that may adversely impact the Company’s
operations.
BUSINESS SEGMENT RESULTS
The Company is principally engaged in businesses comprising three reportable operating segments:
U.S. Card Services, International Card & Global Commercial Services, and Global Network & Merchant
Services.
Results of the business segments essentially treat each segment as a
stand-alone business. The management reporting process that derives these results allocates income
and expense using various methodologies as described below.
NET REVENUES
The Company allocates discount revenue and certain other revenues among segments using a transfer
pricing methodology. Segments earn discount revenue based on the volume of merchant business
generated by cardmembers. Within the U.S. Card Services and International Card & Global Commercial
Services segments, discount revenue reflects the issuer component of the overall discount rate;
within the Global Network & Merchant Services segment, discount revenue reflects the network and
merchant component of the overall discount rate. Net finance charge revenue and net card fees are
directly attributable to the segment in which they are reported.
EXPENSES
Marketing, promotion, rewards and cardmember services expenses are reflected in each segment based
on actual expenses incurred, with the exception of brand advertising, which is reflected in the
Global Network & Merchant Services segment.
The provision for losses and benefits includes credit-related expenses and
interest credited on investment certificates directly attributable to the segment in which they are
reported.
Human resources and other operating expenses reflect expenses incurred directly
within each segment. In addition, expenses related to the Company’s support services are allocated
to each segment based on support service activities directly attributable to the segment. Other
overhead expenses are allocated to segments based on each segment’s level of pretax income.
Financing requirements are managed on a consolidated basis. Funding costs are allocated based on
segment funding requirements.
CAPITAL
Each business segment is allocated capital based on established business model operating
requirements, risk measures, and regulatory capital requirements. Business model operating
requirements include capital needed to support operations and specific balance sheet items. The
risk measures include considerations for credit, market, and operational risk.
INCOME TAXES
Income tax provision (benefit) is allocated to each business segment based on the effective tax
rates applicable to various businesses that make up the segment.
ASSETS
Assets are those that are used or generated exclusively by each segment.
The following segment results are presented on a GAAP basis except as otherwise
noted in the U.S. Card Services discussion.
[ 53 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
U.S. CARD SERVICES
SELECTED INCOME STATEMENT DATA GAAP BASIS PRESENTATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount revenue, net card fees and other
|
|
$
|
9,989
|
|
|
$
|
8,926
|
|
|
$
|
7,940
|
|
|
Cardmember lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance charge revenue
|
|
|
3,434
|
|
|
|
2,408
|
|
|
|
1,776
|
|
|
Interest expense
|
|
|
957
|
|
|
|
616
|
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance charge revenue
|
|
|
2,477
|
|
|
|
1,792
|
|
|
|
1,370
|
|
|
Securitization income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess spread, net (excluding servicing fees)
(a)
|
|
|
1,055
|
|
|
|
811
|
|
|
|
671
|
|
|
Servicing fees
|
|
|
407
|
|
|
|
412
|
|
|
|
388
|
|
|
Gains on sales from securitizations
(b)
|
|
|
27
|
|
|
|
37
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization income, net
|
|
|
1,489
|
|
|
|
1,260
|
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
13,955
|
|
|
|
11,978
|
|
|
|
10,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing, promotion, rewards and cardmember services
|
|
|
4,509
|
|
|
|
3,911
|
|
|
|
3,325
|
|
|
Provision for losses
|
|
|
1,630
|
|
|
|
1,676
|
|
|
|
1,508
|
|
|
Human resources and other operating expenses
|
|
|
4,511
|
|
|
|
3,820
|
|
|
|
3,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
10,650
|
|
|
|
9,407
|
|
|
|
8,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax segment income
|
|
|
3,305
|
|
|
|
2,571
|
|
|
|
2,160
|
|
|
Income tax provision
|
|
|
1,028
|
|
|
|
755
|
|
|
|
629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income
|
|
$
|
2,277
|
|
|
$
|
1,816
|
|
|
$
|
1,531
|
|
|
|
|
|
|
|
|
(a)
|
|
Excess spread 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.
|
|
|
|
(b)
|
|
Excludes $83 million and $(104) million in 2006,
$144 million and $(118) million in 2005, and $157
million and $(79) million in 2004, of impact from
cardmember loan sales and maturities, respectively,
reflected in credit provision.
|
SELECTED STATISTICAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
(Billions, except percentages and where indicated)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Card billed business
|
|
$
|
333.4
|
|
|
$
|
292.8
|
|
|
$
|
251.7
|
|
|
Total cards-in-force (millions)
|
|
|
40.7
|
|
|
|
37.5
|
|
|
|
35.0
|
|
|
Basic cards-in-force (millions)
|
|
|
30.1
|
|
|
|
27.7
|
|
|
|
25.7
|
|
|
Average basic cardmember spending (dollars)
|
|
$
|
11,521
|
|
|
$
|
10,996
|
|
|
$
|
10,118
|
|
|
U.S. Consumer Travel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel sales
|
|
$
|
2.4
|
|
|
$
|
1.9
|
|
|
$
|
1.5
|
|
|
Travel commissions and fees/sales
|
|
|
8.4
|
%
|
|
|
8.7
|
%
|
|
|
8.9
|
%
|
|
Worldwide Travelers Cheque and prepaid products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
19.7
|
|
|
$
|
19.7
|
|
|
$
|
19.9
|
|
|
Average outstanding
|
|
$
|
7.0
|
|
|
$
|
7.1
|
|
|
$
|
7.0
|
|
|
Average investments
|
|
$
|
7.7
|
|
|
$
|
7.8
|
|
|
$
|
7.5
|
|
|
Investment yield
(a)
|
|
|
4.9
|
%
|
|
|
5.1
|
%
|
|
|
5.4
|
%
|
|
Tax equivalent yield — managed
(a)
|
|
|
7.6
|
%
|
|
|
7.9
|
%
|
|
|
8.4
|
%
|
|
Total segment assets
|
|
$
|
79.7
|
|
|
$
|
70.3
|
|
|
$
|
58.3
|
|
|
Segment capital
|
|
$
|
5.0
|
|
|
$
|
5.1
|
|
|
$
|
4.5
|
|
|
Return on segment capital
(b)
|
|
|
46.2
|
%
|
|
|
38.9
|
%
|
|
|
38.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
20.6
|
|
|
$
|
19.2
|
|
|
$
|
17.4
|
|
|
90 days past due as a % of total
|
|
|
2.1
|
%
|
|
|
1.8
|
%
|
|
|
2.0
|
%
|
|
Net loss ratio as a % of charge volume
|
|
|
0.28
|
%
|
|
|
0.30
|
%
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember lending — owned basis
(c)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
33.6
|
|
|
$
|
24.8
|
|
|
$
|
19.6
|
|
|
30 days past due loans as a % of total
|
|
|
2.7
|
%
|
|
|
2.3
|
%
|
|
|
2.4
|
%
|
|
Average loans
|
|
$
|
27.6
|
|
|
$
|
21.0
|
|
|
$
|
17.9
|
|
|
Net write-off rate
|
|
|
3.0
|
%
|
|
|
3.9
|
%
|
|
|
3.9
|
%
|
|
Net finance charge revenue/ average loans
|
|
|
9.0
|
%
|
|
|
8.5
|
%
|
|
|
7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember lending — managed basis
(d)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
53.8
|
|
|
$
|
46.0
|
|
|
$
|
39.9
|
|
|
30 days past due loans as a % of total
|
|
|
2.6
|
%
|
|
|
2.3
|
%
|
|
|
2.5
|
%
|
|
Average loans
|
|
$
|
48.0
|
|
|
$
|
41.5
|
|
|
$
|
37.3
|
|
|
Net write-off rate
|
|
|
2.9
|
%
|
|
|
4.1
|
%
|
|
|
4.3
|
%
|
|
Net finance charge revenue/ average loans
|
|
|
9.1
|
%
|
|
|
9.0
|
%
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
(a)
|
|
Investment yield represents earnings on certain tax-exempt securities. The tax equivalent yield — managed
represents earnings on such tax-exempt securities as if it had been earned on a taxable basis and assumes a federal
income tax rate of 35 percent.
|
|
|
|
(b)
|
|
Computed on a trailing 12-month basis using segment income and equity capital allocated to segments based upon specific
business operational needs, risk measures, and regulatory capital requirements.
|
|
|
|
(c)
|
|
“Owned,” a GAAP basis measurement, reflects only cardmember loans included in the Company’s Consolidated Balance Sheets.
|
|
|
|
(d)
|
|
Includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. The difference between
the “owned basis” (GAAP) information and “managed basis” information is attributable to the effects of securitization
activities. Refer to the information set forth under “Differences between GAAP and Managed Basis Presentation” below
for further discussion of the managed basis presentation.
|
[ 54 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2006 — GAAP BASIS
The following discussion of U.S. Card Services’ segment results of operations is presented on a
GAAP basis.
U.S. Card Services reported segment income of $2.3 billion for 2006, a 25
percent increase from $1.8 billion in 2005, which increased 19 percent from 2004.
Net Revenues
In 2006, U.S. Card Services’ net revenues increased 17 percent to $14.0 billion primarily due to
higher discount revenue, net card fees and other, increased cardmember lending net finance charge
revenue, and as discussed previously, greater securitization income, net. Discount revenue, net
card fees and other of $10.0 billion in 2006, rose 12 percent from 2005, largely due to higher
billed business volumes and the Travelers Cheque and Gift Card investment portfolio gain discussed
previously. The 14 percent increase in billed business in 2006 reflected a 5 percent increase in
spending per proprietary basic card and a 9 percent growth in basic cards-in-force. Within the U.S.
consumer business, billed business grew 13 percent and small business volumes rose 16 percent in
2006. Net finance charge revenue of $2.5 billion in 2006 was 38 percent higher than in 2005,
primarily due to 31 percent growth in average owned lending balances and a higher net portfolio
yield, partially offset by the impact of higher than anticipated cardmember completion of consumer
debt repayment programs and associated payment waivers. Net revenues of $12.0 billion in 2005 were
15 percent higher than 2004 as a result of increased discount revenues, net card fees and other,
and cardmember lending net finance charge revenue.
Expenses
During 2006, U.S. Card Services’ expenses increased 13 percent to $10.7 billion, primarily due to
greater human resources and other operating expenses, and higher marketing, promotion, rewards and
cardmember services expenses, partially offset by a lower provision for losses. Expenses in 2006
and 2005 included $35 million and $10 million, respectively, of charges related to reengineering
activities primarily within the Travelers Cheque business and operations area. Expenses in 2005 of
$9.4 billion were 14 percent higher than in 2004, primarily due to higher marketing, promotion,
rewards and cardmember services expenses, greater human resources and other operating expenses, and
higher provisions for losses.
Marketing, promotion, rewards and cardmember services expenses increased 15
percent in 2006 to $4.5 billion, due to higher volume-related rewards costs, the charge related to
a higher ultimate redemption rate estimate within the Membership Rewards reserve in the U.S.
discussed previously, and increased marketing and promotion costs. Provision for losses decreased 3
percent in 2006 compared to 2005 due to a comparatively lower level of bankruptcy-related charge
offs, lower than expected costs for Hurricane Katrina losses that were provided for in 2005, as
well as improved collections, and continued strong credit quality, partially offset by the impact
of strong volume and loan growth. Human resources and other operating expenses of $4.5 billion in
2006 increased 18 percent from 2005. The increase was due to higher interest expense, greater
professional services expenses, increased human resources expenses, higher technology service fees,
and generally higher volume-related and business-building expenses.
The effective tax rate was 31 percent in 2006, compared to 29 percent in 2005
and 2004. 2005 included a $29 million tax benefit primarily related to the finalization of state
tax returns.
DIFFERENCES BETWEEN GAAP AND MANAGED BASIS PRESENTATION
For U.S. Card Services, the managed basis presentation reflects an increase to interest income
recorded to enable management to evaluate tax exempt investments on a basis consistent with taxable
investment securities. On a GAAP basis, interest income associated with tax exempt investments is
recorded based on amounts earned. Accordingly, information presented on a managed basis assumes
that tax exempt securities earned income at rates as if the securities produced taxable income with
a corresponding increase in the provision for income taxes.
The managed basis presentation also assumes that there have been no off-balance
sheet securitization transactions, i.e., all securitized cardmember loans and related income
effects are reflected as if they were in the Company’s balance sheets and income statements,
respectively. For the managed basis presentation, revenue and expenses related to securitized
cardmember loans are reflected in net card fees and other, net finance charge revenue, and credit
provision. On a managed basis, there is no securitization income, net, as the managed basis
presentation assumes no securitization transactions have occurred.
The Company presents U.S. Card Services information on a managed basis because
that is the way the Company’s management views and manages the business. Management believes that a
full picture of trends in the Company’s cardmember lending business can only be derived by
evaluating the performance
[ 55 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
of both securitized and non-securitized cardmember loans. Management also believes that use of
a managed basis presentation presents a more accurate picture of the key dynamics of the cardmember
lending business. Irrespective of the on- and off-balance sheet funding mix, it is
important for management and investors to see metrics for the entire cardmember lending portfolio
because they are 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 in order to evaluate market share. These
metrics are significant in evaluating the Company’s performance and can only be properly assessed
when all non-securitized and securitized cardmember loans are viewed together on a managed basis.
The Company does not currently securitize international loans.
On a GAAP basis, revenue and expenses from securitized cardmember loans are
reflected in the Company’s income statements in securitization income, net, fees and commissions,
and credit provision for cardmember lending. At the time of a securitization transaction, the
securitized cardmember loans are removed from the Company’s balance sheet, and the resulting gain
on sale is reflected in securitization income, net, as well as an impact to credit provision
(credit reserves are no longer recorded for the cardmember loans once sold). Over the life of a
securitization transaction, the Company recognizes servicing fees and other net revenues (referred
to as “excess spread”) related to the interests sold to investors (i.e. the investors’ interests).
These amounts are reflected in securitization income, net, and fees and commissions. The Company
also recognizes net finance charge revenue over the life of the securitization transaction related
to the interest it retains (i.e. the seller’s interest). At the maturity of a securitization
transaction, cardmember loans on the balance sheet increase, and the impact of the incremental
required loss reserves is recorded in credit provision.
As presented, in aggregate over the life of a securitization transaction, the
pretax income impact to the Company is the same whether or not the Company had securitized
cardmember loans or funded these loans through other financing activities (assuming the same
financing costs). The income statement classifications, however, of specific items will differ.
U.S. CARD SERVICES
SELECTED FINANCIAL INFORMATION MANAGED BASIS PRESENTATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Discount revenue, net card fees and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported for the period (GAAP)
|
|
$
|
9,989
|
|
|
$
|
8,926
|
|
|
$
|
7,940
|
|
|
Securitization adjustments
(a)
|
|
|
199
|
|
|
|
210
|
|
|
|
210
|
|
|
Tax adjustments
(b)
|
|
|
217
|
|
|
|
226
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed discount revenue, net card fees and other
|
|
$
|
10,405
|
|
|
$
|
9,362
|
|
|
$
|
8,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance charge revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported for the period (GAAP)
|
|
$
|
2,477
|
|
|
$
|
1,792
|
|
|
$
|
1,370
|
|
|
Securitization adjustments
(a)
|
|
|
1,880
|
|
|
|
1,953
|
|
|
|
1,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed net finance charge revenue
|
|
$
|
4,357
|
|
|
$
|
3,745
|
|
|
$
|
3,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported for the period (GAAP)
|
|
$
|
1,489
|
|
|
$
|
1,260
|
|
|
$
|
1,132
|
|
|
Securitization adjustments
(a)
|
|
|
(1,489
|
)
|
|
|
(1,260
|
)
|
|
|
(1,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed securitization income, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported for the period (GAAP)
|
|
$
|
1,630
|
|
|
$
|
1,676
|
|
|
$
|
1,508
|
|
|
Securitization adjustments
(a)
|
|
|
550
|
|
|
|
924
|
|
|
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed provision for losses
|
|
$
|
2,180
|
|
|
$
|
2,600
|
|
|
$
|
2,450
|
|
|
|
|
|
|
|
|
(a)
|
|
The managed basis presentation assumes that
there have been no off-balance sheet
securitization transactions, i.e., all securitized
cardmember loans and related income effects are
reflected as if they were in the Company’s balance
sheets and income statements, respectively. For
the managed basis presentation, revenue and
expenses related to securitized cardmember loans
are reflected in net card fees and other, net
finance charge revenue, and credit provision. On a
managed basis, there is no securitization income,
net, as the managed basis presentation assumes no
securitization transactions have occurred.
|
|
|
|
(b)
|
|
The managed basis presentation reflects an
increase to interest income recorded to enable
management to evaluate tax exempt investments on a
basis consistent with taxable investment
securities. On a GAAP basis, interest income
associated with tax exempt investments is recorded
based on amounts earned. Accordingly, information
presented on a managed basis assumes that tax
exempt securities earned income at rates as if the
securities produced taxable income with a
corresponding increase in the provision for income
taxes.
|
[ 56 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2006 — MANAGED BASIS
The following discussion of U.S. Card Services is on a managed basis.
Discount revenue, net card fees and other in 2006 and 2005 increased 11 percent
and 12 percent to $10.4 billion and $9.4 billion, respectively, largely due to increases in billed
business volumes, and also, the Travelers Cheque and Gift Card investment portfolio gain in 2006
discussed previously. Net finance charge revenue increased 16 percent to $4.4 billion in 2006,
primarily due to 16 percent growth in the average managed lending balances and a higher net
portfolio yield, partially offset by charges related to the higher than anticipated cardmember
completion of consumer debt repayment programs and associated payment waivers. Net finance charge
revenue of $3.7 billion in 2005 rose 17 percent compared to 2004, primarily due to growth in
average lending balances and a higher portfolio yield. Total provision for losses decreased 16
percent to $2.2 billion for 2006, reflecting a comparatively lower level of bankruptcy-related
charge offs, lower than expected costs for Hurricane Katrina losses that were provided for in 2005,
as well as improved collections, and continued strong credit quality, partially offset by the
impact of strong volume and loan growth. Total provision for losses increased 6 percent
in 2005 due to strong volume increases, higher provision rates, reflecting the impact of the
bankruptcy legislation enacted in October 2005, and a provision for the estimated costs related to
Hurricane Katrina.
INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
SELECTED INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount revenue, net card fees and other
|
|
$
|
8,656
|
|
|
$
|
8,221
|
|
|
$
|
7,783
|
|
|
Cardmember lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance charge revenue
|
|
|
1,240
|
|
|
|
1,035
|
|
|
|
907
|
|
|
Interest expense
|
|
|
432
|
|
|
|
351
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance charge revenue
|
|
|
808
|
|
|
|
684
|
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
9,464
|
|
|
|
8,905
|
|
|
|
8,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing, promotion, rewards and cardmember services
|
|
|
1,429
|
|
|
|
1,269
|
|
|
|
1,130
|
|
|
Provision for losses and benefits
|
|
|
1,358
|
|
|
|
1,023
|
|
|
|
740
|
|
|
Human resources and other operating expenses
|
|
|
5,529
|
|
|
|
5,520
|
|
|
|
5,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
8,316
|
|
|
|
7,812
|
|
|
|
7,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax segment income
|
|
|
1,148
|
|
|
|
1,093
|
|
|
|
1,073
|
|
|
Income tax provision
|
|
|
263
|
|
|
|
194
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income
|
|
$
|
885
|
|
|
$
|
899
|
|
|
$
|
754
|
|
|
|
INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
SELECTED STATISTICAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
(Billions, except percentages and where indicated)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Card billed business
|
|
$
|
193.1
|
|
|
$
|
168.5
|
|
|
$
|
148.6
|
|
|
Total cards-in-force (millions)
(a)
|
|
|
22.3
|
|
|
|
22.7
|
|
|
|
21.6
|
|
|
Basic cards-in-force (millions)
|
|
|
17.9
|
|
|
|
18.0
|
|
|
|
17.2
|
|
|
Average basic cardmember spending (dollars)
|
|
$
|
10,681
|
|
|
$
|
9,641
|
|
|
$
|
8,610
|
|
|
Global Corporate & International Consumer Travel
Travel sales
|
|
$
|
19.4
|
|
|
$
|
18.8
|
|
|
$
|
18.4
|
|
|
Travel commissions and fees/sales
|
|
|
8.1
|
%
|
|
|
8.6
|
%
|
|
|
9.0
|
%
|
|
International banking:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
7.2
|
|
|
$
|
7.1
|
|
|
$
|
6.9
|
|
|
Private banking holdings
|
|
$
|
22.5
|
|
|
$
|
20.3
|
|
|
$
|
18.6
|
|
|
Total segment assets
|
|
$
|
57.7
|
|
|
$
|
51.7
|
|
|
$
|
47.9
|
|
|
Segment capital
|
|
$
|
4.1
|
|
|
$
|
4.1
|
|
|
$
|
3.8
|
|
|
Return on segment capital
(b)
|
|
|
20.9
|
%
|
|
|
23.2
|
%
|
|
|
21.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
16.3
|
|
|
$
|
14.5
|
|
|
$
|
13.7
|
|
|
90 days past due as a % of total
|
|
|
1.4
|
%
|
|
|
1.3
|
%
|
|
|
1.5
|
%
|
|
Net loss ratio as a % of charge volume
|
|
|
0.18
|
%
|
|
|
0.21
|
%
|
|
|
0.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
9.7
|
|
|
$
|
8.3
|
|
|
$
|
7.3
|
|
|
30 days past due loans as a % of total
|
|
|
2.9
|
%
|
|
|
2.8
|
%
|
|
|
2.3
|
%
|
|
Average loans
|
|
$
|
8.9
|
|
|
$
|
7.4
|
|
|
$
|
6.7
|
|
|
Net write-off rate
|
|
|
5.9
|
%
|
|
|
4.7
|
%
|
|
|
5.2
|
%
|
|
Net finance charge revenue/average loans
|
|
|
9.1
|
%
|
|
|
9.3
|
%
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
(a)
|
|
Cards-in-force at December 31, 2006, reflect
the transfer of 1.3 million proprietary cards in
Brazil, and approximately 200,000 proprietary
cards in Malaysia and Indonesia to Global Network
Services during 2006.
|
|
|
|
(b)
|
|
Computed on a trailing 12-month basis using
segment income and equity capital allocated to
segments based upon specific business operational
needs, risk measures and regulatory capital
requirements.
|
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2006
International Card & Global Commercial Services reported segment income of $885 million for 2006, a
2 percent decrease from $899 million in 2005, which increased 19 percent from 2004.
Net Revenues
In 2006, International Card & Global Commercial Services’ discount revenue, net card fees, and
other revenues increased 5 percent to $8.7 billion driven primarily by the higher level of card
spending, which was offset by a decrease in net card fees due to the reclassification of certain
card acquisition-related costs
[ 57 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
as discussed previously. Growth was also suppressed by the corporate travel environment,
increased incentives for corporate clients associated with growth in corporate volumes, and the
impact of the sales of card-related activities in Brazil, Malaysia, and Indonesia. The 15 percent
increase in billed business in 2006 reflected an 11 percent increase in spending per proprietary
basic card and a 1 percent decline in basic cards-in-force after the transfer of cards in Brazil,
Malaysia, and Indonesia to Global Network Services during 2006. Assuming no changes in foreign
currency exchange rates from 2005 to 2006 and excluding the impact of the sales of Brazil,
Malaysia, and Indonesia, billed business and spending per proprietary basic card-in-force increased
15 percent and 9 percent, respectively, in 2006, and all of the Company’s major geographic regions
experienced double digit growth. International consumer and small business spending, and global
corporate spending rose 13 percent and 16 percent, respectively, compared to 2005. Net finance
charge revenue rose 18 percent to $808 million in 2006, primarily due to 20 percent growth in the
average cardmember lending balances, which was partially offset by a lower net portfolio yield. Net
revenues of $8.9 billion in 2005 were 6 percent higher than 2004 as a result of increased discount
revenue, net card fees, and other revenues.
Expenses
During 2006, International Card & Global Commercial Services’ expenses increased 6 percent to $8.3
billion, due to increased provisions for losses and benefits, and higher marketing, promotion,
rewards and cardmember services expenses. Expenses in 2006 reflected a $240 million gain related to
the sales of card-related activities in Brazil, Malaysia, and Indonesia as well as the sale of an
investment in EAB, which was reported as a reduction to human resources and other operating
expenses. Expenses in 2006 and 2005 included $94 million and $168 million, respectively, of
reengineering costs primarily related to restructuring efforts in the Corporate Travel business,
and international operations areas. Expenses in 2005 of $7.8 billion were 6 percent higher than
2004 primarily due to increased provision for losses and benefits, higher marketing and promotion
expenses, and greater rewards costs.
Marketing, promotion, rewards and cardmember services expenses of $1.4 billion
increased 13 percent in 2006, due to greater volume-related rewards costs, which was partially
offset by a moderate reduction in marketing and promotion costs. The increased marketing,
promotion, rewards and cardmember services expenses in 2006 also reflected the adjustments related
to Membership Rewards ultimate redemption rate estimate previously discussed. Total provisions for
losses and benefits increased 33 percent in 2006 compared to 2005, principally due to higher
interest rates on investment certificate balances, strong volume and loan growth, and a higher
level of charge offs primarily related to industry-wide credit issues in Taiwan.
The effective tax rate was 23 percent in 2006 versus 18 percent in 2005 and 30
percent in 2004. The effective tax rate in 2006 reflected a higher tax expense related to
uncertainty regarding the Company’s ability to obtain tax benefits for certain expenses
attributable to foreign subsidiaries, a relatively high effective tax rate due to the impact of
foreign exchange translation on the gain on the sale of the Company’s investment in EAB, and a
relatively low effective tax rate benefit on credit losses in Taiwan. These items were offset by a
relatively low effective tax rate on the sale of the Company’s card and merchant-related activities
in Brazil, resulting principally from the difference between the applicable Brazil tax rate and the
higher U.S. statutory rate.
The effective tax rate was lower in 2005 as compared to 2004 primarily due to
tax benefits of $33 million, resulting from the resolution of IRS audits of previous years’
returns, in addition to the positive effect of changes in the Company’s international funding
strategy in 2004.
GLOBAL NETWORK & MERCHANT SERVICES
SELECTED INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount revenue, fees and other
|
|
$
|
3,161
|
|
|
$
|
2,747
|
|
|
$
|
2,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and promotion
|
|
|
518
|
|
|
|
604
|
|
|
|
389
|
|
|
Provision (benefit) for losses
|
|
|
89
|
|
|
|
66
|
|
|
|
(2
|
)
|
|
Human resources and other operating expenses
|
|
|
1,366
|
|
|
|
1,195
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,973
|
|
|
|
1,865
|
|
|
|
1,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax segment income
|
|
|
1,188
|
|
|
|
882
|
|
|
|
911
|
|
|
Income tax provision
|
|
|
409
|
|
|
|
309
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income
|
|
$
|
779
|
|
|
$
|
573
|
|
|
$
|
579
|
|
|
|
[ 58 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
GLOBAL NETWORK & MERCHANT SERVICES
SELECTED STATISTICAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
(Billions, except percentages and where indicated)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Global Card billed business
(a)
|
|
$
|
561.5
|
|
|
$
|
484.4
|
|
|
$
|
416.1
|
|
|
Global Network & Merchant Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
$
|
4.4
|
|
|
$
|
4.5
|
|
|
$
|
3.9
|
|
|
Segment capital
|
|
$
|
1.3
|
|
|
$
|
1.3
|
|
|
$
|
1.1
|
|
|
Return on segment capital
(b)
|
|
|
60.3
|
%
|
|
|
49.2
|
%
|
|
|
56.2
|
%
|
|
Global Network Services
(c)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Card billed business
|
|
$
|
35.4
|
|
|
$
|
24.0
|
|
|
$
|
17.7
|
|
|
Total cards-in-force (millions)
(d)
|
|
|
15.0
|
|
|
|
10.8
|
|
|
|
8.8
|
|
|
|
|
|
|
|
|
(a)
|
|
Global Card billed business includes
activities (including cash advances) related to
proprietary cards, cards issued under network
partnership agreements, and certain insurance fees
charged on proprietary cards.
|
|
|
|
(b)
|
|
Computed on a trailing 12-month basis using
segment income and equity capital allocated to
segments based upon specific business operational
needs, risk measures, and regulatory capital
requirements.
|
|
|
|
(c)
|
|
Billed business and cards-in-force reflect the
transfer, effective January 1, 2006, to
International Card & Global Commercial Services’
segment of corporate card accounts in certain
emerging markets that had been managed within
Global Network Services.
|
|
|
|
(d)
|
|
Cards-in-force for 2006 reflect the transfer of
1.3 million proprietary cards in Brazil, and
approximately 200,000 proprietary cards-in-force
in Malaysia and Indonesia from the International
Card & Global Commercial Services segment during
second quarter 2006 and third quarter 2006,
respectively.
|
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2006
Net Revenues
Global Network & Merchant Services reported segment income of $779 million in 2006, a 36 percent
increase from $573 million in 2005, which was 1 percent lower than in 2004.
In 2006, Global Network & Merchant Services’ net revenues increased 15 percent
to $3.2 billion reflecting growth in merchant-related fees, primarily generated from the 16 percent
increase in global card billed business as well as higher network partner-related revenues. Net
revenues of $2.7 billion in 2005 were 9 percent higher than 2004 as a result of higher discount
revenue, fees and other revenues primarily due to growth in merchant-related fees generated from
strong growth in global card billed business, partially offset by a decrease in other revenues as a
result of the 2004 sale of the ATM business and the impact of a lower overall discount rate.
Expenses
During 2006, Global Network & Merchant Services’ expenses increased 6 percent to $2.0 billion due
to increased human resources and other operating expenses and provision for losses, offset by lower
marketing and promotion expenses. Expenses in 2006 and 2005 included $8 million and $3 million of
reengineering costs, respectively. Expenses in 2005 of $1.9 billion were 15 percent higher than
2004, primarily due to higher marketing and promotion expenses, and increased costs for provision
for losses offset by a decrease in human resources expenses and other operating expenses.
Marketing and promotion expenses decreased 14 percent in 2006 to $518 million,
reflecting a reduction in brand-related advertising costs versus last year when the “MyLife, MyCard
(SM)
” campaign was in a particularly active phase. Provision for losses increased 35
percent due to higher merchant-related provisions. Human resources and other operating expenses of
$1.4 billion in 2006 increased 14 percent, reflecting higher business volumes, greater salary,
incentive and benefit costs, and an adjustment in amortization of an intangible asset relating to
an overseas joint venture. This was partially offset by a larger interest expense credit that
recognizes the merchant services’ accounts payable-related funding benefit and the previously
discussed merchant-related Brazil gain.
The effective tax rate was 34 percent in 2006 versus 35 percent in 2005 and 36
percent in 2004.
CORPORATE & OTHER
Corporate & Other had net expense of $212 million, $67 million, and $178 million in 2006, 2005, and
2004, respectively. Net expense in 2006 reflected $17 million ($11 million after-tax) of
reengineering costs. 2005 items included a $159 million tax benefit resulting from the resolution
of prior years’ tax items, a $112 million ($73 million after-tax) September 11, 2001-related
insurance recovery, partially offset by $105 million ($68 million after-tax) of reengineering
costs. In addition, the comparison of 2006 to 2005 and 2004 reflects efforts to eliminate overhead
that was supportive of Ameriprise.
The Company maintained a $200 million equity investment in the Industrial &
Commercial Bank of China (ICBC), which was accounted for at cost. On October 27, 2006, ICBC
completed an initial public offering. The Company will continue to be required to account for its
investment at cost for approximately two years due to contractual sales restrictions, at which time
the Company will make a determination whether to classify the investment as either
Available-for-Sale or Trading securities.
[ 59 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
AIRLINE INDUSTRY MATTERS
Historically, the Company has not experienced significant revenue declines when a particular
airline scales back or ceases operations due to a bankruptcy or other financial challenges. This is
because volumes generated by that 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.” 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, this business
arrangement creates a potential exposure for the Company. This credit exposure is included in the
maximum amount of undiscounted future payments disclosed in Note 11 to the Consolidated Financial
Statements. Historically, this type of exposure has not generated any significant losses for the
Company because an airline operating under bankruptcy protection needs to continue accepting credit
and charge cards and honoring requests for credits and refunds in the ordinary course of its
business. Typically, as an airline’s financial situation deteriorates, the Company delays payment
to the airline thereby increasing cash withheld to protect the Company in the event the airline is
liquidated. 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.
There has been some speculation that there will be consolidation in the airline
industry, both in the United States and internationally. While the Company would not expect its
merchant relationships to change in the event of consolidation, it is possible that the Company’s
co-brand relationships might be affected if one of the Company’s partners merged with an airline
that had a different co-brand partner.
As part of Delta Air Lines’ (Delta) decision to file for protection under
Chapter 11 of the Bankruptcy Code, the Company lent funds to Delta as part of Delta’s
post-petition, debtor-in-possession financing under the Bankruptcy Code. At December 31, 2006, the
remaining principal balance was $176 million and is scheduled to be repaid on a monthly basis
through September 2007. This post-petition facility continues to be structured as an advance
against the Company’s obligations to purchase Delta SkyMiles rewards points under the Company’s
co-brand and Membership Rewards agreements.
Given the depth of the Company’s business relationships with Delta through the
SkyMiles Credit Card and Delta’s participation as a key partner in the Company’s Membership Rewards
program, in the event Delta’s reorganization under the bankruptcy laws is not successful or
otherwise negatively impacts the Company’s relationship with Delta, the Company’s future financial
results could be adversely impacted. As previously disclosed, American Express’ Delta SkyMiles
Credit Card co-brand portfolio accounts for less than 10 percent of the Company’s worldwide billed
business and less than 15 percent of worldwide managed lending receivables.
OTHER REPORTING MATTERS
ACCOUNTING DEVELOPMENTS
See the Recently Issued Accounting Standards section of Note 1 to the Consolidated Financial
Statements.
GLOSSARY OF SELECTED TERMINOLOGY
Asset securitizations
— Asset securitization involves the transfer and sale of receivables or
loans to a special purpose entity, which is a separate legal entity, created for the securitization
activity, typically a trust. The trust, in turn, issues securities, commonly referred to as
asset-backed securities, that are secured by the transferred receivables or loans. The trust uses
the proceeds from the sale of such securities to pay the purchase price for the underlying
receivables or loans.
Average discount rate
— Represents discount revenue from all card spending (proprietary and Global
Network Services) at merchants divided by all billed business (proprietary and Global Network
Services) generating discount revenue at such merchants. Only merchants acquired by the Company are
included in the computation. Discount rates have been restated on a historical basis from those
previously disclosed, primarily to retain in the computation the Global Network Services partner
portion of the discount revenue, as well as the Company’s portion of discount revenue.
Basic cards-in-force
— Represents the number of cards issued and outstanding to the primary
account owners and does not include additional supplemental cards issued on such accounts.
Billed business
— Represents the dollar amount of charges on all American Express cards; also
referred to as spend or charge volume. Proprietary billed business includes charges made on the
Company’s proprietary
[ 60 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
cards-in-force, cash advances on proprietary cards and certain insurance fees charged on
proprietary cards. Non-proprietary billed business represents the charges through the Company’s
global network on cards issued by the Company’s network partners.
Card acquisition
— Primarily represents the issuance of new cards to either new or existing
cardmembers through marketing and promotion efforts.
Cardmember
— The individual holder of an issued American Express branded charge or credit card.
Cardmember lending finance charge revenue, net of interest
— Represents the net revenue earned on
outstanding cardmember loans. Cardmember lending finance charges are assessed using the average
daily balance method. They are recognized based upon the principal amount outstanding in accordance
with the terms of the applicable account agreement until the outstanding balance is paid or
written-off. Cardmember lending finance charges are presented net of the interest expense incurred
by the Company to finance lending receivables.
Cardmember loans
— Represents the outstanding amount due from cardmembers for charges made on
their American Express credit cards, as well as any interest charges and card-related fees.
Cardmember loans also include balances with extended payment terms on certain charge card products.
Cardmember receivables
— Represents the outstanding amount due from cardmembers for charges made
on their American Express charge cards as well as any card-related fees.
Charge cards
— Represents cards that carry no pre-set spending limits and are primarily designed
as a method of payment and not as a means of financing purchases. Cardmembers generally must pay
the full amount billed each month. No finance charges are assessed on charge cards.
Credit cards
— Represents cards that have a range of revolving payment terms, grace periods, and
rate and fee structures.
Discount revenue
— Represents revenue earned from fees charged to merchants with whom the Company
has entered into a card acceptance agreement for processing cardmember transactions. The discount
fee generally is deducted from the Company’s payment reimbursing the merchant for cardmember
purchases.
Interest-only strip
— Interest-only strips are generated from U.S. Card Services’ securitization
activity and are a form of retained interest held by the Company in the securitization. This
financial instrument represents the present value of estimated future “excess spread” expected to
be generated by the securitized assets over the estimated life of those assets. Excess spread is
the net positive cash flow from interest and fee collections allocated to the third-party
investors’ interests in the securitization after deducting the interest paid on the investor
certificates, credit losses, contractual servicing fees, and other expenses.
Merchant acquisition
— Represents the signing of merchants to accept American Express-branded
charge and credit cards.
Net card fees
— Represents the card membership fees earned during the period. These fees are
recognized as revenue over the covered card membership period (typically one year), net of
provision for projected refunds for cancellation of card membership. Beginning prospectively as of
July 1, 2006, certain card
acquisition-related costs were reclassified from other expenses to a reduction in net card fees
over the membership period covered by the card fee.
Net loss ratio
— Represents the ratio of write offs, net of recoveries on cardmember receivables
expressed as a percentage of the total charge card volume.
Net write-off rate
— Represents the amount of loans written off, net of recoveries as a percentage
of the average loan balance during the period.
Return on average equity
— Computed on a trailing 12-month basis using total shareholders’ equity
as included in the Consolidated Financial Statements prepared in accordance with U.S. GAAP.
Return on segment capital
— Computed on a trailing 12-month basis using segment income and equity
capital allocated to segments based upon specific business operational needs, risk measures, and
regulatory capital requirements.
[ 61 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Securitization income, net
— Net securitization income includes non-credit provision
components of the net gains and charges from securitization activities; impairment charges, if any,
of the related interest-only strip; excess spread related to securitized cardmember loans; net
finance charge revenue on retained interests in securitized cardmember loans, and servicing income,
net of related discounts or fees. Excess spread is the net positive cash flow from interest and fee
collections allocated to the third-party investors’ interests in the securitization after deducting
the interest paid on the investor certificates, credit losses, contractual servicing fees, and
other expenses. Excess spread is recognized as it is earned.
Stored value and prepaid products
— Include Travelers Cheques and other prepaid products such as
gift cheques and cards as well as reloadable Travelers Cheque cards. These products are sold as
safe and convenient alternatives to currency for purchasing goods and services.
Total cards-in-force
— Represents the number of cards that are issued and outstanding. Total
consumer cards-in-force includes basic cards issued to the primary account owner and any
supplemental cards which represent additional cards issued on that account. Total small business
and corporate cards-in-force include basic cards issued to employee cardmembers. Proprietary
cards-in-force represent card products where the Company owns the cardmember relationship including
card issuance, billing and credit management and strategic plans such as marketing, promotion, and
development of card products and offerings. Proprietary cards-in-force include co-brand and
affinity cards. For non-proprietary cards-in-force (except for certain network partnership
agreements), the Company maintains the responsibility to acquire and service merchants that accept
the Company’s cards and the cardmember relationship is owned by the Company’s network partners that
issue the cards.
Travel sales
— Represents the total dollar amount of travel transaction volume for airline, hotel,
car rental, and other travel arrangements made for consumers and corporate clients. The Company
earns revenue on these transactions by charging a transaction or management fee.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which are subject to risks and uncertainties. The
words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,”
“should,” “could,” “would,” “likely,” and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are made. The Company
undertakes no obligation to update or revise any forward-looking statements. Factors that could
cause actual results to differ materially from these forward-looking statements include, but are
not limited to, the following: the Company’s ability to meet its ROE target range of 33 to 36
percent on average and over time, which will depend in part on factors such as the Company’s
ability to generate sufficient revenue growth and achieve sufficient margins, fluctuations in the
capital required to support its businesses, the mix of the Company’s financings, and fluctuations
in the level of the Company’s shareholders’ equity due to share repurchases, dividends, changes in
accumulated other comprehensive income and accounting changes, among other things; the Company’s
ability to grow its business and meet or exceed its return on shareholders’ equity target by
reinvesting approximately 35 percent of annually-generated capital, and returning approximately 65
percent of such capital to shareholders, over time, which will depend on the Company’s ability to
manage its capital needs and the effect of business mix, acquisitions and rating agency
requirements; consumer and business spending on the Company’s credit and charge card products and
Travelers Cheques and other prepaid products and growth in card lending balances, which depend in
part on the ability to issue new and enhanced card and prepaid products, services and rewards
programs, and increase revenues from such products, attract new cardmembers, reduce cardmember
attrition, capture a greater share of existing cardmembers’ spending, and
sustain premium discount rates on its card products in light of regulatory and market pressures,
increase merchant coverage, retain cardmembers after low introductory lending rates have expired,
and expand the Global Network Services business; the success of the Global Network Services
business in partnering with banks in the United States, which will depend in part on the extent to
which such business further enhances the
[ 62 ]
2006 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Company’s brand, allows the Company to leverage its significant processing scale, expands
merchant coverage of the network, provides Global Network Services’ bank partners in the United
States the benefits of greater cardmember loyalty and higher spend per customer, and merchant
benefits such as greater transaction volume and additional higher spending customers; fluctuations
in interest rates, which impact the Company’s borrowing costs and return on lending products; the
continuation of favorable trends, including increased travel and entertainment spending, and the
overall level of consumer confidence; the costs and integration of acquisitions; the success,
timeliness and financial impact (including costs, cost savings and other benefits including
increased revenues), and beneficial effect on the Company’s operating expense to revenue ratio,
both in the short-term and over time, of reengineering initiatives being implemented or considered
by the Company, including cost management, structural and strategic measures such as vendor,
process, facilities and operations consolidation, outsourcing (including, among others,
technologies operations), relocating certain functions to lower-cost overseas locations, moving
internal and external functions to the Internet to save costs, and planned staff reductions
relating to certain of such reengineering actions; the Company’s ability to reinvest the benefits
arising from such reengineering actions in its businesses; the ability to control and manage
operating, infrastructure, advertising and promotion expenses as business expands or changes,
including the ability to accurately estimate the provision for the cost of the Membership Rewards
program; the Company’s ability to manage credit risk related to consumer debt, business loans,
merchant bankruptcies and other credit trends and the rate of bankruptcies, which can affect
spending on card products, debt payments by individual and corporate customers and businesses that
accept the Company’s card products and returns on the Company’s investment portfolios;
bankruptcies, restructurings, consolidations or similar events affecting the airline or any other
industry representing a significant portion of the Company’s billed business, including any
potential negative effect on particular card products and services and billed business generally
that could result from the actual or perceived weakness of key business partners in such
industries; the triggering of obligations to make payments to certain co-brand partners, merchants,
vendors and customers under contractual arrangements with such parties under certain circumstances;
a downturn in the Company’s businesses and/or negative changes in the Company’s and its
subsidiaries’ credit ratings, which could result in contingent payments under contracts, decreased
liquidity and higher borrowing costs; risks associated with the Company’s agreements with Delta Air
Lines to prepay a remaining balance of $176 million for the future purchases of Delta SkyMiles
rewards points; fluctuations in foreign currency exchange rates; accuracy of estimates for the fair
value of the assets in the Company’s investment portfolio and, in particular, those investments
that are not readily marketable, including the valuation of the interest-only strip relating to the
Company’s lending securitizations; the potential negative effect on the Company’s businesses and
infrastructure, including information technology, of terrorist attacks, natural disasters or other
catastrophic events in the future; political or economic instability in certain regions or
countries, which could affect lending and other commercial activities, among other businesses, or
restrictions on convertibility of certain currencies; changes in laws or government regulations;
outcomes and costs associated with litigation and compliance and regulatory matters; and
comp
etitive pressures in all of the Company’s major businesses. See also “Risk Factors” in the
Company’s 2006 Form 10-K filed with the SEC.
[ 63 ]
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of American Express Company (the Company) is responsible for establishing and
maintaining adequate internal control over financial reporting.
The Company’s internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted
accounting principles in the United States of America, and includes those policies and procedures
that:
|
|
•
|
|
Pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company;
|
|
|
|
|
•
|
|
Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management
and directors of the Company; and
|
|
|
|
|
•
|
|
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that could
have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2006. In making this assessment, the Company’s
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in
Internal Control — Integrated Framework
.
Based on management’s assessment and those criteria, we believe that, as of
December 31, 2006, the Company’s internal control over financial reporting is effective.
PricewaterhouseCoopers LLP, the Company’s independent registered public
accounting firm, has issued an audit report appearing on the following page on our assessment of
the effectiveness of the Company’s internal control over financial reporting as of December 31,
2006.
[ 65 ]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of American Express Company:
We have completed integrated audits of American Express Company’s 2006 and 2005 consolidated
financial statements and of its internal control over financial reporting as of December 31, 2006
in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of shareholders’ equity and of cash flows present fairly, in all material
respects, the financial position of American Express Company and its subsidiaries (the “Company”)
at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on
Internal Control over Financial Reporting, that the Company maintained effective internal control
over financial reporting as of December 31, 2006 based on criteria established in
Internal Control
— Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, based on criteria established in
Internal
Control — Integrated Framework
issued by the COSO. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on management’s assessment and on the effectiveness of the Company’s internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an understanding
of internal control over financial reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
[ 66 ]
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 2007
[ 67 ]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of American Express Company
We have audited the accompanying consolidated statements of income, shareholders’ equity, and cash
flows of American Express Company for the year ended December 31, 2004. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of the Company’s operations and its cash flows for
the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of American Express Company’s
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 18, 2005 (not included herein) expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
February 18, 2005, except for notes 2 and 19, as to which the date is February 27, 2006
[ 68 ]
CONSOLIDATED STATEMENTS OF INCOME
AMERICAN EXPRESS COMPANY
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|
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|
|
|
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|
|
|
|
|
|
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Years Ended December 31,
(Millions, except per share amounts)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount revenue
|
|
$
|
12,978
|
|
|
$
|
11,489
|
|
|
$
|
10,126
|
|
|
Cardmember lending finance charge revenue, net of interest
|
|
|
3,457
|
|
|
|
2,580
|
|
|
|
2,224
|
|
|
Net card fees
|
|
|
1,994
|
|
|
|
2,033
|
|
|
|
1,909
|
|
|
Travel commissions and fees
|
|
|
1,778
|
|
|
|
1,780
|
|
|
|
1,795
|
|
|
Other commissions and fees
|
|
|
2,555
|
|
|
|
2,375
|
|
|
|
2,200
|
|
|
Securitization income, net
|
|
|
1,489
|
|
|
|
1,260
|
|
|
|
1,132
|
|
|
Other investment and interest income, net of interest
|
|
|
1,078
|
|
|
|
1,055
|
|
|
|
997
|
|
|
Other
|
|
|
1,807
|
|
|
|
1,496
|
|
|
|
1,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,136
|
|
|
|
24,068
|
|
|
|
21,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing, promotion, rewards and cardmember services
|
|
|
6,516
|
|
|
|
5,841
|
|
|
|
4,965
|
|
|
Human resources
|
|
|
5,065
|
|
|
|
4,829
|
|
|
|
4,538
|
|
|
Provisions for losses and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge card
|
|
|
935
|
|
|
|
1,038
|
|
|
|
833
|
|
|
Cardmember lending
|
|
|
1,623
|
|
|
|
1,349
|
|
|
|
1,130
|
|
|
Investment certificates and other
|
|
|
529
|
|
|
|
386
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,087
|
|
|
|
2,773
|
|
|
|
2,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
|
2,710
|
|
|
|
2,308
|
|
|
|
2,141
|
|
|
Occupancy and equipment
|
|
|
1,491
|
|
|
|
1,428
|
|
|
|
1,353
|
|
|
Interest
|
|
|
1,236
|
|
|
|
920
|
|
|
|
814
|
|
|
Communications
|
|
|
449
|
|
|
|
457
|
|
|
|
474
|
|
|
Other
|
|
|
1,254
|
|
|
|
1,264
|
|
|
|
1,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,808
|
|
|
|
19,820
|
|
|
|
18,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income from continuing operations
|
|
|
5,328
|
|
|
|
4,248
|
|
|
|
3,831
|
|
|
Income tax provision
|
|
|
1,599
|
|
|
|
1,027
|
|
|
|
1,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
3,729
|
|
|
|
3,221
|
|
|
|
2,686
|
|
|
(Loss) Income from discontinued operations, net of tax
|
|
|
(22
|
)
|
|
|
513
|
|
|
|
830
|
|
|
Cumulative effect of accounting change related to discontinued
operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,707
|
|
|
$
|
3,734
|
|
|
$
|
3,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share — Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
3.08
|
|
|
$
|
2.61
|
|
|
$
|
2.13
|
|
|
(Loss) Income from discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.42
|
|
|
|
0.66
|
|
|
Cumulative effect of accounting change
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3.06
|
|
|
$
|
3.03
|
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share — Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
3.01
|
|
|
$
|
2.56
|
|
|
$
|
2.09
|
|
|
(Loss) Income from discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.41
|
|
|
|
0.65
|
|
|
Cumulative effect of accounting change
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.99
|
|
|
$
|
2.97
|
|
|
$
|
2.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding for earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,212
|
|
|
|
1,233
|
|
|
|
1,259
|
|
|
Diluted
|
|
|
1,238
|
|
|
|
1,258
|
|
|
|
1,285
|
|
|
|
See Notes to Consolidated Financial Statements.
[ 70 ]
CONSOLIDATED BALANCE SHEETS
AMERICAN EXPRESS COMPANY
|
|
|
|
|
|
|
|
|
|
|
December 31,
(Millions, except share data)
|
|
2006
|
|
|
2005
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 1)
|
|
$
|
7,956
|
|
|
$
|
7,126
|
|
|
Accounts receivable and accrued interest:
|
|
|
|
|
|
|
|
|
|
Cardmember receivables, less reserves: 2006, $981; 2005, $942
|
|
|
36,386
|
|
|
|
33,216
|
|
|
Other receivables, less reserves: 2006, $42; 2005, $66
|
|
|
2,465
|
|
|
|
2,281
|
|
|
Investments (Note 3)
|
|
|
20,990
|
|
|
|
21,334
|
|
|
Loans: (Note 4)
|
|
|
|
|
|
|
|
|
|
Cardmember lending, less reserves: 2006, $1,171; 2005, $996
|
|
|
42,135
|
|
|
|
32,108
|
|
|
International banking, less reserves: 2006, $64; 2005, $64
|
|
|
7,160
|
|
|
|
7,049
|
|
|
Other, less reserves: 2006, $34; 2005, $37
|
|
|
953
|
|
|
|
1,644
|
|
|
Land, buildings and equipment — at cost, less accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
2006, $3,169; 2005, $2,868
|
|
|
2,448
|
|
|
|
2,230
|
|
|
Other assets
|
|
|
7,360
|
|
|
|
6,972
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
127,853
|
|
|
$
|
113,960
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Customers’ deposits
|
|
$
|
24,656
|
|
|
$
|
24,579
|
|
|
Travelers Cheques outstanding
|
|
|
7,215
|
|
|
|
7,175
|
|
|
Accounts payable
|
|
|
8,764
|
|
|
|
7,503
|
|
|
Investment certificate reserves
|
|
|
6,058
|
|
|
|
6,872
|
|
|
Short-term debt (Note 8)
|
|
|
15,162
|
|
|
|
15,633
|
|
|
Long-term debt (Note 8)
|
|
|
42,747
|
|
|
|
30,781
|
|
|
Other liabilities
|
|
|
12,740
|
|
|
|
10,868
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
117,342
|
|
|
|
103,411
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Common shares, $.20 par value, authorized 3.6 billion shares; issued and
outstanding 1,199 million shares in 2006 and 1,241 million shares in 2005 (Note 9)
|
|
|
240
|
|
|
|
248
|
|
|
Additional paid-in capital
|
|
|
9,638
|
|
|
|
8,652
|
|
|
Retained earnings
|
|
|
1,153
|
|
|
|
1,788
|
|
|
Accumulated other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
Net unrealized securities gains, net of tax: 2006, $(61); 2005, $(88)
|
|
|
92
|
|
|
|
137
|
|
|
Net unrealized derivatives gains, net of tax: 2006, $(16); 2005, $(77)
|
|
|
27
|
|
|
|
143
|
|
|
Foreign currency translation adjustments, net of tax: 2006, $22; 2005, $34
|
|
|
(222
|
)
|
|
|
(400
|
)
|
|
Net unrealized pension and other postretirement benefit costs, net of tax: 2006, $210
|
|
|
(417
|
)
|
|
|
—
|
|
|
Minimum pension liability, net of tax: 2005, $10
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
|
(520
|
)
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
10,511
|
|
|
|
10,549
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
127,853
|
|
|
$
|
113,960
|
|
|
|
See Notes to Consolidated Financial Statements.
[ 71 ]
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMERICAN EXPRESS COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,707
|
|
|
$
|
3,734
|
|
|
$
|
3,445
|
|
|
Loss (Income) from discontinued operations, net of tax
|
|
|
22
|
|
|
|
(513
|
)
|
|
|
(830
|
)
|
|
Add: Cumulative effect of accounting change related to discontinued
operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
3,729
|
|
|
|
3,221
|
|
|
|
2,686
|
|
|
Adjustments to reconcile income from continuing operations to net cash
provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for losses and benefits
|
|
|
3,102
|
|
|
|
2,816
|
|
|
|
2,399
|
|
|
Depreciation and amortization
|
|
|
645
|
|
|
|
602
|
|
|
|
600
|
|
|
Deferred taxes, acquisition costs and other
|
|
|
(524
|
)
|
|
|
(226
|
)
|
|
|
934
|
|
|
Stock-based compensation
|
|
|
298
|
|
|
|
256
|
|
|
|
183
|
|
|
Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and accrued interest
|
|
|
(309
|
)
|
|
|
(623
|
)
|
|
|
(716
|
)
|
|
Other operating assets
|
|
|
(483
|
)
|
|
|
526
|
|
|
|
302
|
|
|
Accounts payable and other liabilities
|
|
|
2,520
|
|
|
|
1,243
|
|
|
|
854
|
|
|
Increase (decrease) in Travelers Cheques outstanding
|
|
|
35
|
|
|
|
(111
|
)
|
|
|
468
|
|
|
Net cash (used in) provided by operating activities
attributable to discontinued operations
|
|
|
(8
|
)
|
|
|
341
|
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
9,005
|
|
|
|
8,045
|
|
|
|
9,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of investments
|
|
|
5,964
|
|
|
|
3,795
|
|
|
|
4,884
|
|
|
Maturity and redemption of investments
|
|
|
13,224
|
|
|
|
7,545
|
|
|
|
3,348
|
|
|
Purchase of investments
|
|
|
(18,457
|
)
|
|
|
(11,824
|
)
|
|
|
(10,623
|
)
|
|
Net increase in cardmember loans/receivables
|
|
|
(15,096
|
)
|
|
|
(13,012
|
)
|
|
|
(8,706
|
)
|
|
Proceeds from cardmember loan securitizations
|
|
|
3,491
|
|
|
|
5,386
|
|
|
|
3,888
|
|
|
Maturities of cardmember loan securitizations
|
|
|
(4,435
|
)
|
|
|
(4,463
|
)
|
|
|
(3,000
|
)
|
|
Loan operations and principal collections for international banking, net
|
|
|
(134
|
)
|
|
|
(399
|
)
|
|
|
(489
|
)
|
|
Purchase of land, buildings and equipment
|
|
|
(861
|
)
|
|
|
(608
|
)
|
|
|
(616
|
)
|
|
Sale of land, buildings and equipment
|
|
|
95
|
|
|
|
248
|
|
|
|
252
|
|
|
Dispositions (acquisitions), net of cash sold/acquired
|
|
|
993
|
|
|
|
(136
|
)
|
|
|
1,347
|
|
|
Cash spun-off to Ameriprise
|
|
|
—
|
|
|
|
(3,678
|
)
|
|
|
—
|
|
|
Net cash used in investing activities attributable to discontinued
operations
|
|
|
(1
|
)
|
|
|
(113
|
)
|
|
|
(1,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(15,217
|
)
|
|
|
(17,259
|
)
|
|
|
(11,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in customers’ deposits
|
|
|
(338
|
)
|
|
|
5,331
|
|
|
|
(488
|
)
|
|
Sale of investment certificates
|
|
|
4,670
|
|
|
|
5,728
|
|
|
|
4,579
|
|
|
Redemption of investment certificates
|
|
|
(5,554
|
)
|
|
|
(4,296
|
)
|
|
|
(3,561
|
)
|
|
Net decrease in debt with maturities of three months or less
|
|
|
(3,017
|
)
|
|
|
(339
|
)
|
|
|
(3,453
|
)
|
|
Issuance of debt
|
|
|
29,545
|
|
|
|
14,389
|
|
|
|
19,791
|
|
|
Principal payments on debt
|
|
|
(14,978
|
)
|
|
|
(14,426
|
)
|
|
|
(9,449
|
)
|
|
Issuance of American Express common shares and other
|
|
|
1,203
|
|
|
|
1,129
|
|
|
|
1,055
|
|
|
Repurchase of American Express common shares
|
|
|
(4,093
|
)
|
|
|
(1,853
|
)
|
|
|
(3,578
|
)
|
|
Dividends paid
|
|
|
(661
|
)
|
|
|
(597
|
)
|
|
|
(535
|
)
|
|
Net cash provided by financing activities attributable to discontinued
operations
|
|
|
1
|
|
|
|
1,377
|
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
6,778
|
|
|
|
6,443
|
|
|
|
6,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
264
|
|
|
|
(10
|
)
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
830
|
|
|
|
(2,781
|
)
|
|
|
3,751
|
|
|
Cash and cash equivalents at beginning of year includes cash of
discontinued operations: 2005, $2,099; 2004, $2,189
|
|
|
7,126
|
|
|
|
9,907
|
|
|
|
6,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year includes cash of discontinued
operations: 2004, $2,099
|
|
$
|
7,956
|
|
|
$
|
7,126
|
|
|
$
|
9,907
|
|
|
|
See Notes to Consolidated Financial Statements.
[ 72 ]
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AMERICAN EXPRESS COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Three Years Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions, except per share amounts)
|
|
Total
|
|
|
Shares
|
|
|
Capital
|
|
|
Income/(Loss)
|
|
|
Earnings
|
|
|
Balances at December 31, 2003
|
|
$
|
15,323
|
|
|
$
|
257
|
|
|
$
|
6,081
|
|
|
$
|
192
|
|
|
$
|
8,793
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,445
|
|
|
Change in net unrealized securities gains
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
(171
|
)
|
|
|
|
|
|
Change in net unrealized derivatives losses
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
Derivatives losses reclassified to earnings
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
298
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
3,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common shares
|
|
|
(3,578
|
)
|
|
|
(14
|
)
|
|
|
(338
|
)
|
|
|
|
|
|
|
(3,226
|
)
|
|
Other changes, primarily employee plans
|
|
|
1,320
|
|
|
|
7
|
|
|
|
1,573
|
|
|
|
|
|
|
|
(260
|
)
|
|
Cash dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common, $0.44 per share
|
|
|
(556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
16,020
|
|
|
|
250
|
|
|
|
7,316
|
|
|
|
258
|
|
|
|
8,196
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,734
|
|
|
Change in net unrealized securities gains
|
|
|
(607
|
)
|
|
|
|
|
|
|
|
|
|
|
(607
|
)
|
|
|
|
|
|
Change in net unrealized derivatives gains
(losses)
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
319
|
|
|
|
|
|
|
Derivatives gains reclassified to earnings
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
(81
|
)
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
3,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spin-off of Ameriprise
|
|
|
(7,746
|
)
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
(7,764
|
)
|
|
Repurchase of common shares
|
|
|
(1,853
|
)
|
|
|
(7
|
)
|
|
|
(209
|
)
|
|
|
|
|
|
|
(1,637
|
)
|
|
Other changes, primarily employee plans
|
|
|
1,405
|
|
|
|
5
|
|
|
|
1,545
|
|
|
|
|
|
|
|
(145
|
)
|
|
Cash dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common, $0.48 per share
|
|
|
(596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
10,549
|
|
|
|
248
|
|
|
|
8,652
|
|
|
|
(139
|
)
|
|
|
1,788
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,707
|
|
|
Change in net unrealized securities gains
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
Change in net unrealized derivatives gains
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
Derivatives gains reclassified to earnings
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
(158
|
)
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
3,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply SFAS No. 158, net of tax
|
|
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
(396
|
)
|
|
|
|
|
|
Repurchase of common shares
|
|
|
(4,093
|
)
|
|
|
(15
|
)
|
|
|
(534
|
)
|
|
|
|
|
|
|
(3,544
|
)
|
|
Acquisition of Harbor Payments, Inc.
|
|
|
147
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
Other changes, primarily employee plans
|
|
|
1,274
|
|
|
|
7
|
|
|
|
1,373
|
|
|
|
|
|
|
|
(106
|
)
|
|
Cash dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common, $0.57 per share
|
|
|
(692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
$
|
10,511
|
|
|
$
|
240
|
|
|
$
|
9,638
|
|
|
$
|
(520
|
)
|
|
$
|
1,153
|
|
|
|
See Notes to Consolidated Financial Statements.
[ 73 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
American Express Company (the Company) is a leading global payments, network, and travel company.
The Company offers a broad range of products and services including charge and credit cards; stored
value products such as Travelers Cheques and gift cards; travel agency services; travel and
business expense management products and services; network services and merchant acquisition and
merchant processing for the Company’s network partners and proprietary payments businesses; lending
products; point-of-sale and back-office products and services for merchants; magazine publishing;
and international banking products. The Company’s various products and services are sold globally
to diverse customer groups, including consumers, small businesses, mid-market companies, large
corporations, and banking institutions. These products and services are sold through various
channels including direct mail, on-line applications, targeted sales-forces, and direct response
advertising.
ACQUISITIONS AND DIVESTITURES
Effective December 31, 2006, the Company acquired Harbor Payments, Inc. (Harbor Payments) for
approximately $150 million which was paid primarily in the Company’s common stock. Harbor Payments
is a technology provider that specializes in electronic invoice and payment capabilities. The
acquisition is reflected in the International Card & Global Commercial Services segment.
During the third quarter of 2006, the Company completed the sale of its card
and merchant-related activities in Malaysia to Maybank, and its card and merchant-related
activities in Indonesia to Bank Danamon for combined proceeds of $94 million. The transactions
generated a gain of $33 million ($24 million after-tax), and are reported as a reduction to other
expenses in the Company’s continuing operations. The gain is reported within the
International Card & Global Commercial Services segment.
On June 30, 2006, the Company completed the sale of its card and
merchant-related activities and international banking activities in Brazil to Banco Bradesco S.A.
(Bradesco), for approximately $470 million. The transaction generated a net after-tax gain of $109
million. $144 million ($131 million after-tax) of the gain relates to the card and merchant-related
activities sold and is reported as a reduction to other operating expenses in the Company’s
continuing operations ($119 million in the International Card & Global Commercial Services segment
and $25 million in the Global Network & Merchant Services segment). A $22 million
after-tax loss related to the sale of the Company’s international banking activities to Bradesco is
reported in discontinued operations for banking activities the Company exited in Brazil.
The Company will continue to maintain its presence in the card and
merchant-related businesses within Malaysia, Indonesia, and Brazil through its Global Network
Services arrangements with acquirers.
On September 30, 2005, the Company completed the spin-off of Ameriprise
Financial, Inc. (Ameriprise), formerly known as American Express Financial Corporation, the
Company’s financial planning and financial services business. In addition, during the third quarter
of 2005, the Company completed certain dispositions including the sale of its tax, accounting, and
consulting business, American Express Tax and Business Services, Inc. (TBS). The operating results
and cash flows related to Ameriprise and certain dispositions (including TBS) have been reflected
as discontinued operations in the Consolidated Financial Statements and the Notes to the
Consolidated Financial Statements have been adjusted to exclude discontinued operations unless
otherwise noted.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements of the Company are prepared in conformity with U.S. generally
accepted accounting principles (GAAP). All significant intercompany transactions are eliminated.
The Company consolidates all non-variable interest entities in which the
Company holds a greater than 50 percent voting interest. Entities in which the Company’s voting
interest exceeds 20 percent but is less than 50 percent are accounted for under the equity method.
All other investments are accounted for under the cost method unless the Company determines that it
exercises significant influence over an entity by means other than voting rights, in which case the
entity is accounted for under the equity method.
The Company also consolidates all Variable Interest Entities (VIEs) for which
it is considered to be the primary beneficiary pursuant to Financial Accounting Standards Board
(FASB) Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”
(FIN 46(R)). The determination of whether an
[ 74 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
entity is a VIE is based on the amount and characteristics of the entity’s equity. In general,
FIN 46(R) requires an enterprise to consolidate a VIE when it has a variable interest and it is
deemed to be the primary beneficiary (meaning that it will absorb a majority of the VIE’s expected
losses or receive a majority of the VIE’s expected residual return).
Qualifying Special Purpose Entities (QSPEs) under Statement of Financial
Accounting Standards (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities” (SFAS No. 140), are not consolidated. The Company utilizes
QSPEs in connection with cardmember lending securitizations within the U.S. Card Services segment.
Certain reclassifications of prior period amounts have been made to conform to
the current presentation, including revenue and expense reclassifications contained in the current
report on Form 8-K dated April 5, 2006. In addition, beginning prospectively as of July 1, 2006,
certain card acquisition-related costs were reclassified from other expenses to a reduction in net
card fees.
FOREIGN CURRENCY
Assets and liabilities denominated in foreign currencies are translated into U.S. dollars based
upon exchange rates prevailing at the end of each year. The resulting translation adjustments,
along with any related qualifying hedge and tax effects, are included in accumulated other
comprehensive (loss) income, a component of shareholders’equity. Revenues and expenses are
translated at the average month-end exchange rates during the year. Gains and losses related to
non-functional currency transactions, including non-U.S. operations where the functional currency
is the U.S. dollar, are reported net in other revenue or other expense, depending on the nature of
the activity, in the Company’s Consolidated Statements of Income. Net foreign currency transaction
gains (losses) amounted to approximately $9 million, $5 million, and $(113) million in 2006, 2005,
and 2004, respectively.
AMOUNTS BASED ON ESTIMATES AND ASSUMPTIONS
Accounting estimates are an integral part of the Consolidated Financial Statements. These estimates
are based, in part, on management’s assumptions concerning future events. Among the more
significant assumptions are those that relate to reserves for cardmember losses, asset
securitizations, and Membership Rewards, as discussed below. These accounting estimates reflect the
best judgment of management, but actual results could differ.
NET REVENUES
The Company generates revenue from a variety of sources including global payments, such as charge
and credit cards, travel services and investments funded by the sale of stored value products, such
as Travelers Cheques.
Discount revenue
The Company earns discount revenue from fees charged to merchants with which the Company has
entered into card acceptance agreements for processing cardmember transactions. The discount
generally is deducted from the payment to the merchant and recorded as discount revenue at the time
the charge is captured.
Cardmember lending finance charge revenue, net of interest
Cardmember lending finance charges are assessed using the average daily balance method for
receivables owned. These amounts are recognized based upon the principal amount outstanding in
accordance with the terms of the applicable account agreement until the outstanding balance is paid
or written-off. Cardmember lending finance charge revenue is presented net of interest expense of
$1,222 million, $868 million, and $571 million for 2006, 2005, and 2004, respectively.
Net card fees
Card fees are deferred and recognized as revenue on a straight-line basis over the twelve-month
card membership period, net of deferred direct card acquisition costs and a reserve for projected
membership cancellations. The carrying amount of deferred card fees, net of direct acquisition
costs and the reserves for membership cancellations, is included in other liabilities on the
Consolidated Balance Sheet. The amounts of each as of December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Deferred card fees
|
|
$
|
1,252
|
|
|
$
|
1,176
|
|
|
Deferred direct acquisition costs
|
|
|
(145
|
)
|
|
|
(123
|
)
|
|
Reserves for membership cancellations
|
|
|
(120
|
)
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
Deferred card fees, net of direct acquisition costs and
reserves
|
|
$
|
987
|
|
|
$
|
929
|
|
|
|
Travel commissions and fees
The Company earns customer revenue by charging a transaction or management fee for airline or other
transactions. Customer-related fees and other revenues are recognized at the time a client books
travel arrangements. Travel suppliers pay commissions on airline tickets issued and on sales and
transaction volumes, based on contractual agreements. These
[ 75 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
revenues are recognized at the time a ticket is purchased. Other travel suppliers that pay
commissions on hotels and car rentals generally are not under firm contractual agreements, and,
therefore, revenue is not recognized until cash is received.
Other commissions and fees
Other commissions and fees include foreign exchange conversion fees and other card-related
assessments, which are recognized primarily in the period in which they are charged to the
cardmember. Fees related to the Company’s Membership Rewards program are deferred and recognized
over the period covered by the fee and included in deferred card fees, net of deferred acquisition
costs.
Securitization income, net
Net securitization income includes non-credit provision components of the net gains and charges
from securitization activities; impairment charges, if any, of the related interest-only strip;
excess spread related to securitized cardmember loans; net finance charge revenue on retained
interests in securitized cardmember loans; and servicing income, net of related discounts or fees.
Excess spread is the net positive cash flow from interest and fee collections allocated to the
third-party investors’ interests in the securitization after deducting the interest paid on the
investor certificates, credit losses, contractual servicing fees and other expenses. Excess spread
is recognized as it is earned.
Other investment and interest income, net of interest
Investment and interest income for the Company’s performing fixed-income securities is accrued as
earned using the effective interest method, which adjusts the yield for security premiums and
discounts, fees and other payments, so that the related security recognizes a constant rate of
return on the outstanding balance throughout its term. The Company also accrues investment income
using the straight-line method for a certain investment portfolio. The difference between the
straight-line and the effective interest method for this portfolio was not significant.
Interest income for the Company’s international banking and other loans is
accrued on unpaid principal balances using the effective interest method unless collection of
interest is in doubt. In those cases, interest income is recognized only to the extent it is
received in cash. Generally, the accrual of interest on these loans and advances is discontinued if
a loan is 90 days delinquent (depending on loan type) or when an impairment is determined. When
management doubts outstanding balances will be paid in full, all cash received is applied to reduce
the carrying value of the loan or advance. Fees are deferred and amortized over the life of the
loan or advance using the effective interest method.
Other investment income and interest income is presented net of interest
expense of $420 million, $321 million, and $220 million for 2006, 2005, and 2004, respectively,
related primarily to the Company’s international banking operations.
Contra-revenue
The Company regularly makes payments to its customers through a variety of arrangements, including
both cash and non-cash awards to cardmembers in conjunction with loyalty programs such as
Membership Rewards, as well as through other contractual arrangements with merchants, Corporate
Card Clients and other customers. Cash payments to customers are classified as contra-revenue
unless management can
identify a specifically identifiable benefit (e.g., goods or services) received by the Company in
consideration for that payment. If no such benefit is identified, then the entire payment is
classified as contra-revenue. If such a benefit is identified, then the payment is classified as
expense up to the estimated fair value of the benefit. Non-cash payments, such as Membership
Rewards points earned and redeemed by cardmembers and those stored value products provided to
cardmembers that cannot be redeemed for cash, are classified as expenses along with cash payments
to co-brand partners for the participation of the Company’s cardmembers in the partners’ reward
programs.
Other revenue
Other revenue includes insurance premiums earned from cardmember travel and other insurance
programs, publishing revenues, and other miscellaneous revenue and fees.
EXPENSES
Stock-based compensation
Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment”
(SFAS No. 123(R)), using the modified prospective application. The adoption of 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. The adoption of
SFAS No. 123(R) did not materially impact the Company’s Consolidated Financial Statements since the
Company has been expensing share-based awards granted after January 1, 2003, under the provisions
of SFAS No. 123, “Accounting for Stock-
[ 76 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
Based Compensation” (SFAS No. 123). The Company recognizes the cost of these awards on a
straight-line basis over their vesting periods.
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(R) for all outstanding and unvested stock options and other stock-based compensation for
the two years ended December 31, 2005. Pro forma disclosures are not required for periods after the
adoption of SFAS No. 123(R):
|
|
|
|
|
|
|
|
|
|
|
(Millions, except per share amounts)
|
|
2005
|
|
|
2004
|
|
|
Net income as reported
|
|
$
|
3,734
|
|
|
$
|
3,445
|
|
|
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects
(a)
|
|
|
208
|
|
|
|
185
|
|
|
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of related tax
effects
(b)
|
|
|
(217
|
)
|
|
|
(369
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
3,725
|
|
|
$
|
3,261
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
3.03
|
|
|
$
|
2.74
|
|
|
Pro forma
|
|
$
|
3.02
|
|
|
$
|
2.59
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
2.97
|
|
|
$
|
2.68
|
|
|
Pro forma
|
|
$
|
2.96
|
|
|
$
|
2.54
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes $27 million and $28 million for 2005 and 2004, respectively, related to Ameriprise.
|
|
|
|
(b)
|
|
Includes $(28) million and $(67) million for 2005 and 2004, respectively, related to Ameriprise.
|
Marketing, promotion, rewards and cardmember services
These expenses include the costs of rewards programs (including Membership Rewards, which is
discussed further in the other liabilities section below), protection plans and complimentary
services provided to cardmembers, and advertising costs, which are expensed in the year in which
the advertising first takes place. Cash payments to customers for which the Company does not
receive a specific identifiable benefit (e.g., cash-back payments to cardmembers) are classified as
a reduction to revenue.
Interest
This expense includes interest incurred primarily to fund charge card product receivables and
general corporate purposes.
BALANCE SHEET
Cash and cash equivalents
The Company has defined cash equivalents to include time deposits and other highly liquid
investments with original maturities of 90 days or less. Restricted cash totaling $425 million and
$451 million at
December 31, 2006 and 2005, respectively, is classified in other assets in cases where cash cannot
be utilized for operations.
Accounts receivable
Cardmember receivables
Cardmember receivables represent amounts due from charge card customers. These receivables are
recorded at the time a cardmember enters into a point-of-sale transaction with a merchant.
Cardmember receivable balances are presented on the Consolidated Balance Sheets net of reserves for
losses, discussed below, and includes principal and any related accrued fees.
Reserves for losses — cardmember receivables
Reserves for losses relating to cardmember receivables represent management’s estimate of the
losses inherent in the Company’s outstanding portfolio of receivables. Management’s evaluation
process requires certain estimates and judgments. Reserves for these losses are primarily based
upon models that analyze specific portfolio statistics and reflect, to a lesser extent,
management’s judgment regarding overall reserve adequacy. The analytic models take into account
several factors, including average write-off rates for various stages of receivable aging (i.e.,
current, 30 days, 60 days, 90 days) over a 24-month period and average bankruptcy and recovery
rates. Management considers whether to adjust the analytic models based on other factors, such as
the level of coverage of past-due accounts, as well as leading economic and market indicators, such
as the unemployment rate, the consumer confidence index, the purchasing manager’s index, bankruptcy
filings and the legal and regulatory environment.
Cardmember receivable balances are written off when management deems amounts to
be uncollectible and is generally determined by the number of days past due. In general,
receivables in bankruptcy or owed by deceased individuals are written off upon notification, while
other accounts are written off when 360 days past due. To the extent historical credit experience
is not indicative of future performance, actual loss experience could differ significantly from
management’s judgments and expectations, resulting in either higher or lower future provisions for
losses, as applicable.
[ 77 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
Investments
Investments include debt and equity securities and are classified within both the
available-for-sale and trading categories.
Available-for-sale investment securities are carried at fair value on the
Consolidated Balance Sheets with unrealized gains (losses) recorded in accumulated other
comprehensive (loss) income, net of income tax provisions (benefits). Gains and losses are
recognized in results of operations upon disposition of the securities. Gains and losses on these
investments are recognized using the specific identification method on a trade date basis. In
addition, realized losses are recognized when management determines that a decline in value is
other-than-temporary, which requires judgment regarding the amount and timing of recovery.
Indicators of other-than-temporary impairment for debt securities include issuer downgrade,
default, or bankruptcy. The Company also considers the extent to which cost exceeds fair value, the
duration and size of that gap, and management’s judgment about the issuer’s current and prospective
financial condition.
Trading investment securities are carried at fair value on the Consolidated
Balance Sheets, and changes are recorded in results of operations.
The Company uses quoted market prices to determine fair value. If quoted market
prices are not available, the Company estimates fair value using prices of similar assets or the
present value of estimated expected future cash flows when similar assets do not exist.
Loans
Cardmember lending
Cardmember loans represent amounts due from lending product customers. These loans are recorded at
the time a cardmember enters into a point-of-sale transaction with a merchant or when a charge card
customer enters into an extended payment arrangement. Cardmember loans are presented on the
Consolidated Balance Sheets net of reserves for cardmember losses, discussed below, and include
accrued interest receivable and fees as of the balance sheet date. Cardmember loans also include
balances with extended payment terms on certain charge card products. The Company’s policy is to
cease accruing for interest receivable once a cardmember loan is more than 180 days past due.
Reserve for losses — cardmember lending
The Company’s methodology for reserving for losses relating to cardmember loans is consistent with
reserving for losses relating to cardmember receivables, with the exception that cardmember loan
balances are written off when 180 days past due.
International banking
International banking loans include amounts due from consumers, high net worth individuals, banks
and other institutions, and corporations. Consumer and private banking loans include unsecured
lines of credit, installment loans, mortgage loans, and auto loans to retail customers as well as
secured lending to high net worth individuals. Loans to banks and other institutions represent
trade-related financing and other extensions of credit. Corporate loans represent commercial and
industrial loans as well as mortgage and real estate loans to corporate customers. International
banking loans are stated at the principal amount
outstanding net of unearned income and are presented on the Consolidated Balance Sheets net of
reserves for losses, which are discussed below.
Reserve for losses — international banking
For smaller-balance consumer loans, management establishes reserves for losses inherent in the
portfolio. Generally, these loans are written off in full when an impairment is determined based
upon bankruptcy or other customer specific circumstances, or when the loan becomes 120 or 180 days
past due, depending on loan type. Loans, other than smaller-balance consumer loans, are placed on
nonperforming status and considered impaired when payments of principal or interest are 90 days
past due or if, in management’s opinion, it is probable that the Company will be unable to collect
all amounts due according to the contractual terms of the loan agreement. Any interest accrued on
impaired loans is reversed and charged against current earnings, and interest is thereafter
included in earnings only to the extent actually received in cash. When there is doubt regarding
the ultimate collectibility of principal, all cash receipts are thereafter applied to reduce the
recorded investment in the impaired loan. In such cases, amounts received after the recorded
investment in the impaired loan has been completely drawn down are recognized as interest income.
The allowance for impaired loans is measured as the excess of the loan’s recorded investment over
either the present value of expected principal and interest payments discounted at the loan’s
effective interest rate or, if more practical for collateral-dependent loans, the fair value of
collateral. For floating rate impaired loans, the effective interest rate is fixed at the
[ 78 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
rate in effect at the date the impairment criteria are met. Impaired loans are returned to
accrual status when all remaining contractual principal and interest amounts are reasonably assured
of repayment.
Other loans
Other loans primarily represent installment loans, revolving credit due from U.S. Card Services’
customers, and loans and interest-bearing advances to airline partners.
Asset securitizations
The Company periodically securitizes cardmember receivables and loans by transferring those assets
to a trust, which then issues securities to third-party investors that are collateralized by the
transferred assets. The Company accounts for its transfers of financial assets in accordance with
SFAS No. 140.
In order for a securitization of financial assets to be accounted for as a
sale, the transferor must surrender control over those financial assets to the extent that the
transferor receives consideration other than beneficial interests in the transferred assets.
Cardmember loans are transferred to a QSPE, and such transactions are structured to meet the sales
criteria. Accordingly, when loans are sold through securitizations, the Company removes the loans
from its Consolidated Balance Sheets and recognizes both a gain on sale and the retained interests
in the securitization.
In contrast, cardmember receivables are transferred to a special purpose
entity, a trust that does not meet the requirements for treatment as a qualifying sale. Therefore,
securitizations of cardmember receivables are accounted for as secured borrowings.
Land, buildings and equipment
Land, buildings and equipment
Buildings and equipment, including leasehold improvements, are carried at cost less accumulated
depreciation. Costs incurred during construction, as well as related interest, are capitalized and
are depreciated once an asset is placed in service. Depreciation is generally computed using the
straight-line method over the estimated useful lives of assets, which range from three to eight
years for equipment. Buildings are depreciated based upon their estimated useful life at the
acquisition date, which generally ranges from 40 to 60 years.
Leasehold improvements are depreciated using the straight-line method over the
lesser of the remaining term of the leased facility or the economic life of the improvement, which
ranges from five to ten years.
The Company maintains operating leases worldwide for facilities and equipment.
Rent expense for facility leases is recognized ratably over the lease term, and is calculated to
include adjustments for rent concessions, all known rent escalations, and leasehold improvement
allowances.
Software development costs
The Company capitalizes certain costs associated with the acquisition or development of
internal-use software. Once the software is ready for its intended use, these costs are amortized
on a straight-line basis over the software’s estimated useful life of five years.
Goodwill and other intangible assets
Goodwill
Goodwill represents the excess of acquisition cost of an acquired company over the fair value of
assets acquired and liabilities assumed. Goodwill is included in other assets on the Consolidated
Balance Sheets. The Company evaluates goodwill for impairment annually and whenever events and
circumstances make it possible that impairment may have occurred, such as a significant adverse
change in the business environment or a decision to sell or dispose of a reporting unit. In
determining whether impairment has occurred, the Company generally uses a comparative market
multiples approach for calculating fair value.
Intangible assets
Intangible assets, primarily customer relationships, are amortized over their estimated useful
lives on a straight-line basis, unless they are deemed to have indefinite useful lives. Intangible
assets are included in other assets on the Consolidated Balance Sheets. The Company reviews
intangible assets for impairment quarterly. In addition, the Company fully evaluates intangible
assets annually and whenever events and circumstances make it possible that impairment may have
occurred, such as a significant adverse change in the business environment or a decision to sell or
dispose of a reporting unit. For intangible assets subject to amortization, impairment is
recognized if the carrying amount is not recoverable and exceeds the asset’s fair value.
Other liabilities
Membership Rewards
The Company’s Membership Rewards program allows enrolled cardmembers to earn points that can be
redeemed for a broad range of rewards, including travel, entertainment, retail certificates, and
merchandise. The Company establishes balance sheet reserves to cover the cost of future reward
redemptions for points earned to
[ 79 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
date. The reserve for Membership Rewards is estimated using models that analyze historical
redemption statistics and reflect, to a lesser extent, management’s judgment regarding overall
adequacy. The provision for the cost of Membership Rewards, which is included in marketing,
promotion, rewards and cardmember services, is based upon points earned that are expected to
ultimately be redeemed by cardmembers and the current weighted-average cost per point of
redemption. The estimated points to be redeemed are based on many factors, including past
redemption behavior of cardmembers, card product type, year of program enrollment, and card spend
level. The weighted-average cost per point is affected by the mix of rewards redeemed. The Company
continually evaluates its reserve methodology and assumptions based on developments in redemption
patterns, cost per point redeemed, and other factors. During 2006, management revised the ultimate
redemption rate assumption to reflect program redemption statistics of cardmembers who left the
program in the previous five years, rather than redemption statistics of the entire population of
cardmembers who left the program since inception. Management believes that using recent redemption
statistics is a better indicator of future redemption behavior of active cardmembers.
The liability for Membership Rewards was approximately $3.8 billion and $3.1
billion at December 31, 2006 and 2005, respectively, and is included in other liabilities.
Derivative financial instruments and hedging activities
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133), as
amended, requires recognition of all derivatives on balance sheet at fair value as either assets or
liabilities. The fair value of the Company’s derivative financial instruments are determined using
either market quotes or valuation models that are based upon the net present value of estimated
future cash flows and incorporate current market data inputs. The Company reports its derivative
assets and liabilities in other assets and other liabilities, respectively, on a net by
counterparty basis where management believes it has the legal right of offset under enforceable
netting arrangements. The accounting for the change in the fair value of a derivative financial
instrument depends on its intended use and the resulting hedge designation, if any, as discussed
below.
Cash flow hedges
A cash flow hedge is a derivative designated to hedge the exposure of variable future cash flows
that is attributable to a particular risk associated with an existing recognized asset or
liability, or a forecasted transaction. For derivative financial instruments that qualify as cash
flow hedges, the effective portions of the gain or loss on the derivatives are recorded in
accumulated other comprehensive (loss) income and reclassified into earnings when the hedged item
or transactions impact earnings. The amount that is reclassified into earnings is presented in the
Consolidated Statements of Income with the hedged instrument or transaction impact, generally, in
net other investment and interest income or interest expense. Any ineffective portion of the gain
or loss, as determined by the accounting requirements, is reported as a component of other revenue.
If a hedge is de-designated or terminated prior to maturity, the amount previously recorded in
accumulated other comprehensive (loss) income is recognized into earnings over the period that the
hedged item impacts earnings. If a hedge relationship is discontinued because it is probable that
the forecasted transaction will not occur according to the original strategy, any related amounts
previously recorded in accumulated other comprehensive (loss) income are recognized into earnings
immediately.
Fair value hedges
A fair value hedge is a derivative designated to hedge the exposure of future changes in the fair
value of an asset or liability, or an identified portion thereof that is attributable to a
particular risk. For derivative financial instruments that qualify as fair value hedges, changes in
the fair value of the derivatives, as well as of the corresponding hedged assets, liabilities or
firm commitments, are recorded in earnings as a component of other revenue. If a fair value hedge
is de-designated or terminated prior to maturity, previous adjustments to the carrying value of the
hedged item are recognized into earnings to match the earnings pattern of the hedged item.
Net investment hedges in foreign operations
A net investment hedge in foreign operations is a derivative used to hedge future changes in
currency exposure of a net investment in a foreign operation. For derivative financial instruments
that qualify as net investment hedges in foreign operations, the effective portions of the change
in fair value of the derivatives are recorded in accumulated other comprehensive (loss) income as
part of the cumulative translation adjustment. Any ineffective portions of net investment hedges
are recognized in other revenue during the period of change.
Non-designated derivatives and trading activities
For derivative financial instruments that do not qualify for hedge accounting, are not designated
as hedges, or consist of customer or proprietary trading activities, changes in fair value are
reported in current period earnings generally as a component of other revenue,
[ 80 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
other operating expenses or interest expense, depending on the type of derivative instrument
and the nature of the transaction.
Derivative financial instruments that qualify for hedge accounting
Derivative financial instruments that are entered into for hedging purposes are designated as such
when the Company enters into the contract. For all derivative financial instruments that are
designated for hedging activities, the Company formally documents all of the hedging relationships
between the hedge instruments and the hedged items at the inception of the relationships.
Management also formally documents its risk management objectives and strategies for entering into
the hedge transactions. The Company formally assesses, at inception and on a quarterly basis,
whether derivatives designated as hedges are highly effective in offsetting the fair value or cash
flows of hedged items. These assessments usually are made through the application of statistical
measures. The Company only applies the “short cut” method of hedge accounting in very limited cases
when this method’s requirements are strictly met. Beginning in 2006, the Company discontinued using
the “short cut” method on any new transactions.
In accordance with its risk management policies, the Company generally
structures its hedges with very similar terms to the hedged items; therefore, when applying the
accounting requirements, the Company generally recognizes insignificant amounts of ineffectiveness
through earnings. If it is determined that a derivative is not highly effective as a hedge, the
Company will discontinue the application of hedge accounting.
Income taxes
The Company, its 80 percent or more owned U.S. subsidiaries, and certain non-U.S. subsidiaries file
a consolidated federal income tax return. Deferred tax assets and liabilities are determined based
on the differences between the financial statement and tax bases of assets and liabilities using
the enacted tax rates expected to be in effect for the years in which the differences are expected
to reverse. A valuation allowance is established when management determines that it is more likely
than not the benefit of deferred tax assets will not be realized. The Company does not provide for
federal income taxes on foreign earnings intended to be permanently reinvested outside the United
States.
The Company is under continuous examination by the Internal Revenue Service
(IRS) and tax authorities in other countries and states in which the Company has significant
business operations. The tax years under examination vary by jurisdiction. The examination
currently being conducted by the IRS covers 1997-2004. Due to the inherent complexities of the
business and given the Company is subject to taxation in a substantial number of jurisdictions, the
Company is required to make certain judgments and estimates. The Company routinely assesses the
likelihood of additional assessments in each of the taxing jurisdictions, and has established tax
reserves that management believes to be adequate. Once established, reserves are adjusted if more
accurate information is available or a change in circumstance, or an event occurs necessitating a
change to the reserves.
Restricted net assets of subsidiaries
Certain of the Company’s subsidiaries are subject to restrictions on the transfer of net assets
under debt agreements and regulatory requirements. These restrictions have not had any effect on
the Company’s shareholder dividend policy and management does not anticipate any impact in the
future. Procedures exist to transfer net assets between the Company and its subsidiaries, while
ensuring compliance with the various contractual and regulatory constraints. At December 31, 2006,
the aggregate amount of net assets of
subsidiaries that may not be transferred to American Express’ Parent Company (Parent Company) was
approximately $6 billion.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans —
an amendment of the FASB Statements No. 87, 88, 106, and 132(R)” (SFAS No. 158), requires the
funded status of pension and other postretirement plans to be recorded on the balance sheet as of
December 31, 2006, with a corresponding offset, net of tax effects, recorded in accumulated other
comprehensive income (loss) within shareholders’ equity. Under SFAS No. 158, all previously
unrecognized gains and losses, prior service costs and credits, and remaining transition amounts
under SFAS Nos. 87 and 106 will be recognized in accumulated other comprehensive income (loss), net
of tax effects, which is a component of shareholders’ equity and does not result in an immediate
charge to earnings. Those previously unrecognized amounts will be amortized as a component of net
periodic pension expense in future periods. Upon implementation of SFAS No. 158, the Company
recorded additional liabilities of $179 million in other liabilities, a reduction of assets of $416
million in other assets and a $396 million charge to shareholders’ equity, net of a deferred income
tax benefit
[ 81 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
of $199 million, related to its defined benefit and other postretirement benefit plans. The
Company currently uses a September 30 measurement date. Effective for years ending after December
15, 2008, the measurement date for the benefit obligation and plan assets is required to be the
Company’s fiscal year end.
SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of
FASB Statement No. 140” (SFAS No. 156), requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable. Subsequent accounting
may be elected under either the amortization method, which systematically amortizes the servicing
asset or liability to income, or the fair value measurement method, which remeasures the servicing
asset or liability at fair value with the changes recorded in income. Election of the fair value
method is made on a class-by-class basis for each separately recognized servicing asset and
liability. SFAS No. 156 applies to all financial instruments acquired or issued after December 31,
2006. The Company does not expect any impact to its Consolidated Financial Statements.
SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an
amendment of FASB Statements No. 133 and 140” (SFAS No. 155), ends the temporary exemption of
beneficial interests in securitized assets from the bifurcation requirements of SFAS No. 133. SFAS
No. 155 permits fair value remeasurement of any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation. This will primarily affect the
Company’s accounting for its interest-only strips, where the changes in fair value are currently
recorded in other comprehensive (loss) income in shareholders’ equity. After adoption of SFAS No.
155 on January 1, 2007, once the interest-only strip is subject to a re-measurement event, the
Company will elect fair value measurement for the instrument, which will require changes in its
fair value to be recognized in earnings rather than in other comprehensive (loss) income from the
re-measurement date forward. SFAS No. 155 applies to all financial instruments acquired or issued
after December 31, 2006. The adoption of this new standard will result in an increase in first
quarter net income by approximately $50 million ($80 million pretax) for amounts previously
recognized in other comphensive (loss) income due to a re-measurement of the interest-only strip
asset. In addition, any future changes in fair value of the interest-only strip in the first
quarter of 2007 subsequent to the re-measurement date and all future periods will be reflected in
the Company’s net income.
Emerging Issues Task Force (EITF) No. 06-3, “How Taxes Collected from Customers
and Remitted to Governmental Authorities Should be Presented in the Income Statement (That is,
Gross versus Net Presentation)” allows for a policy decision to present certain taxes collected
from customers and remitted to taxing authorities as either gross or net within the income
statement. For any such taxes that are reported on a gross basis, the amounts should be disclosed
if significant. The guidance will not be effective until January 1, 2007, and will not result in
any impact to the Company’s Consolidated Financial Statements.
The FASB has recently issued the following accounting standards, which are
effective after December 31, 2006. The Company is currently evaluating the impact of these recently
issued accounting standards on the Company’s Consolidated Financial Statements.
|
|
•
|
|
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” (FIN 48), is an interpretation that clarifies the
accounting for tax positions accounted for under FASB Statement No. 109, “Accounting for
Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of benefits associated with tax positions
taken or expected to be taken in a tax return. For any amount of those benefits to be
recognized, a tax position must be more-likely-than-not to be sustained upon examination by
taxing authorities based on the technical merits of the position. The amount of
benefit recognized is based on the Company’s assertion of
the most likely outcome resulting from an examination. FIN 48 is applicable to all tax positions as
of January 1, 2007. The initial effect of adoption will be reflected in first quarter of 2007 as a
cumulative effect adjustment to income taxes payable (in other liabilities) and retained earnings.
Subsequent to the adoption of FIN 48, all increases and decreases in the Company’s estimated
recognizable tax benefits will be recorded as a benefit/provision for income taxes.
|
|
|
|
|
•
|
|
SFAS No. 157, “Fair Value Measurements” (SFAS No. 157), establishes a framework for
measuring fair value and applies broadly to financial and non-financial assets and liabilities
measured at fair value under existing authoritative accounting pronouncements. SFAS No. 157
establishes a fair value hierarchy that prioritizes inputs to valuation techniques used for
financial instruments without active markets and for non-financial assets and
|
[ 82 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
liabilities. SFAS No. 157 also expands disclosure requirements regarding methods used to
measure fair value and the effects on earnings. SFAS No. 157 is effective as of the first quarter
of 2008.
|
|
•
|
|
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115” (SFAS No. 159), provides
companies with an option to report selected financial assets and liabilities at fair value.
SFAS No. 159 is effective as of the first quarter of 2008.
|
NOTE 2 DISCONTINUED OPERATIONS
On June 30, 2006, the Company completed the sale of its card and merchant-related activities and
international banking activities in Brazil for approximately $470 million. The international
banking portion of the transaction generated an after-tax loss of $22 million reported in
discontinued operations for banking activities the Company exited in Brazil. These banking
activities previously were reflected in the International Card & Global Commercial Services
segment. Financial results for these operations, prior to the second quarter of 2006, were not
reclassified as discontinued operations because such results are not material. Refer to Note 1 for
a discussion of the impact of the sale of the Brazilian card and merchant-related activities, which
are included in continuing operations.
On September 30, 2005, the Company completed the distribution of Ameriprise
common stock to the Company’s shareholders in a tax-free transaction for U.S. federal income tax
purposes. The Ameriprise distribution was treated as a non-cash dividend to shareholders and, as
such, reduced the Company’s shareholders’ equity by $7.7 billion as of December 31, 2005, which
included an approximate $1.1 billion capital contribution to Ameriprise in connection with the
distribution. The Company’s Consolidated Balance Sheet as of December 31, 2005, reflects the
non-cash dividend and a decrease in assets and liabilities.
Also during 2005, the Company completed certain dispositions including the sale
of TBS for cash proceeds of approximately $190 million. These dispositions resulted in a net
after-tax gain of approximately $63 million during the third quarter of 2005.
The operating results and cash flows of discontinued operations are presented
separately in the Company’s Consolidated Financial Statements and the Notes to the Consolidated
Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted.
Summary operating results of the discontinued operations for the years ended December 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues
|
|
$
|
9
|
|
|
$
|
5,813
|
|
|
$
|
7,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax (loss) income from discontinued operations
|
|
$
|
(68
|
)
|
|
$
|
690
|
|
|
$
|
1,120
|
|
|
Income tax (benefit) provision
|
|
|
(46
|
)
|
|
|
177
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from discontinued operations, net of tax
|
|
$
|
(22
|
)
|
|
$
|
513
|
|
|
$
|
830
|
|
|
|
Less than $1 million of goodwill was included in the assets of the Brazilian banking
activities that were discontinued as of June 30, 2006. Approximately $670 million of goodwill
related to Ameriprise and
certain dispositions, including TBS, was included in the assets that were discontinued as of
September 30, 2005.
NOTE 3 INVESTMENTS
The following is a summary of investments at December 31:
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Available-for-Sale, at fair value:
|
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
|
$
|
6,863
|
|
|
$
|
7,120
|
|
|
U.S. Government and agencies obligations
(a)
|
|
|
5,077
|
|
|
|
5,033
|
|
|
Mortgage and other asset-backed securities
|
|
|
3,791
|
|
|
|
3,838
|
|
|
Corporate debt securities
|
|
|
2,512
|
|
|
|
3,202
|
|
|
Foreign government bonds and obligations
|
|
|
680
|
|
|
|
716
|
|
|
Other
|
|
|
1,772
|
|
|
|
1,194
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale, at fair value
|
|
|
20,695
|
|
|
|
21,103
|
|
|
Trading, at fair value
|
|
|
295
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,990
|
|
|
$
|
21,334
|
|
|
|
|
|
|
|
|
(a)
|
|
U.S. Government and agencies obligations at December 31, 2006,
included $716 million of securities loaned out on an overnight
basis to financial institutions under the securities lending
program described on page 86. At December 31, 2005, there were
no securities loaned out.
|
[ 83 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
AVAILABLE-FOR-SALE INVESTMENTS
The following is a summary of investments classified as Available-for-Sale at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
(Millions)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
State and municipal obligations
|
|
$
|
6,678
|
|
|
$
|
195
|
|
|
$
|
(10
|
)
|
|
$
|
6,863
|
|
|
$
|
6,832
|
|
|
$
|
293
|
|
|
$
|
(5
|
)
|
|
$
|
7,120
|
|
|
U.S. Government and agencies
obligations
|
|
|
5,082
|
|
|
|
10
|
|
|
|
(15
|
)
|
|
|
5,077
|
|
|
|
5,080
|
|
|
|
1
|
|
|
|
(48
|
)
|
|
|
5,033
|
|
|
Mortgage and other asset-backed
securities
|
|
|
3,858
|
|
|
|
8
|
|
|
|
(75
|
)
|
|
|
3,791
|
|
|
|
3,900
|
|
|
|
13
|
|
|
|
(75
|
)
|
|
|
3,838
|
|
|
Corporate debt securities
|
|
|
2,539
|
|
|
|
17
|
|
|
|
(44
|
)
|
|
|
2,512
|
|
|
|
3,170
|
|
|
|
79
|
|
|
|
(47
|
)
|
|
|
3,202
|
|
|
Foreign government bonds and
obligations
|
|
|
688
|
|
|
|
3
|
|
|
|
(11
|
)
|
|
|
680
|
|
|
|
718
|
|
|
|
7
|
|
|
|
(9
|
)
|
|
|
716
|
|
|
Other
|
|
|
1,773
|
|
|
|
3
|
|
|
|
(4
|
)
|
|
|
1,772
|
|
|
|
1,184
|
|
|
|
10
|
|
|
|
—
|
|
|
|
1,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,618
|
|
|
$
|
236
|
|
|
$
|
(159
|
)
|
|
$
|
20,695
|
|
|
$
|
20,884
|
|
|
$
|
403
|
|
|
$
|
(184
|
)
|
|
$
|
21,103
|
|
|
|
The following tables provide information about Available-for-Sale investments with gross
unrealized losses and the length of time that individual securities have been in a continuous
unrealized loss position as of December 31, 2006 and 2005:
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Description of Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
State and municipal obligations
|
|
$
|
818
|
|
|
$
|
(9
|
)
|
|
$
|
23
|
|
|
$
|
(1
|
)
|
|
$
|
841
|
|
|
$
|
(10
|
)
|
|
U.S. Government and agencies obligations
|
|
|
1,522
|
|
|
|
(3
|
)
|
|
|
1,537
|
|
|
|
(12
|
)
|
|
|
3,059
|
|
|
|
(15
|
)
|
|
Mortgage and other asset-backed securities
|
|
|
345
|
|
|
|
(2
|
)
|
|
|
2,518
|
|
|
|
(73
|
)
|
|
|
2,863
|
|
|
|
(75
|
)
|
|
Corporate debt securities
|
|
|
441
|
|
|
|
(5
|
)
|
|
|
1,511
|
|
|
|
(39
|
)
|
|
|
1,952
|
|
|
|
(44
|
)
|
|
Foreign government bonds and obligations
|
|
|
269
|
|
|
|
(1
|
)
|
|
|
174
|
|
|
|
(10
|
)
|
|
|
443
|
|
|
|
(11
|
)
|
|
Other
|
|
|
191
|
|
|
|
(4
|
)
|
|
|
16
|
|
|
|
—
|
|
|
|
207
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,586
|
|
|
$
|
(24
|
)
|
|
$
|
5,779
|
|
|
$
|
(135
|
)
|
|
$
|
9,365
|
|
|
$
|
(159
|
)
|
|
|
As of December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Description of Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
State and municipal obligations
|
|
$
|
392
|
|
|
$
|
(4
|
)
|
|
$
|
19
|
|
|
$
|
(1
|
)
|
|
$
|
411
|
|
|
$
|
(5
|
)
|
|
U.S. Government and agencies obligations
|
|
|
1,716
|
|
|
|
(17
|
)
|
|
|
2,893
|
|
|
|
(31
|
)
|
|
|
4,609
|
|
|
|
(48
|
)
|
|
Mortgage and other asset-backed securities
|
|
|
1,803
|
|
|
|
(31
|
)
|
|
|
1,298
|
|
|
|
(44
|
)
|
|
|
3,101
|
|
|
|
(75
|
)
|
|
Corporate debt securities
|
|
|
750
|
|
|
|
(15
|
)
|
|
|
821
|
|
|
|
(32
|
)
|
|
|
1,571
|
|
|
|
(47
|
)
|
|
Foreign government bonds and obligations
|
|
|
283
|
|
|
|
(2
|
)
|
|
|
58
|
|
|
|
(7
|
)
|
|
|
341
|
|
|
|
(9
|
)
|
|
Other
|
|
|
10
|
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
16
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,954
|
|
|
$
|
(69
|
)
|
|
$
|
5,095
|
|
|
$
|
(115
|
)
|
|
$
|
10,049
|
|
|
$
|
(184
|
)
|
|
|
[ 84 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The Company reviews and evaluates investments on a quarterly basis to identify investments
that have indications of possible other-than-temporary impairments. Accordingly, the Company
considers the extent to which amortized cost exceeds fair value and the duration and size of that
difference. A key metric in performing this evaluation is the ratio of fair value to amortized
cost. The following table summarizes the unrealized losses of temporary impairments by ratio of
fair value to amortized cost as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions, except
|
|
|
|
|
|
|
|
|
|
|
number of securities)
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Ratio of Fair Value to
|
|
Number of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Number of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Number of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Amortized Cost
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
90%—100%
|
|
|
618
|
|
|
$
|
3,586
|
|
|
$
|
(24
|
)
|
|
|
554
|
|
|
$
|
5,734
|
|
|
$
|
(128
|
)
|
|
|
1,172
|
|
|
$
|
9,320
|
|
|
$
|
(152
|
)
|
|
Less than 90%
|
|
|
123
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66
|
|
|
|
45
|
|
|
|
(7
|
)
|
|
|
189
|
|
|
|
45
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
741
|
|
|
$
|
3,586
|
|
|
$
|
(24
|
)
|
|
|
620
|
|
|
$
|
5,779
|
|
|
$
|
(135
|
)
|
|
|
1,361
|
|
|
$
|
9,365
|
|
|
$
|
(159
|
)
|
|
|
Unrealized losses may be caused by changes to interest rates, credit spreads, and specific
credit events associated with individual issuers. Substantially all of the gross unrealized losses
on the securities are attributable to changes in interest rates. The securities with a fair value
to amortized cost ratio of less than 90 percent consist primarily of Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation issued mortgage-backed securities, as well
as foreign government and specific corporate issued bonds. The securities with a fair value to
amortized cost ratio of 90 percent to 100 percent do not contain a concentration of any one
security or type of security. The Company has the ability and the intent to hold these securities
for a time sufficient to recover the unrealized losses and expects that contractual principal and
interest will be received on these securities.
The change in net unrealized securities gains (losses) in other comprehensive
(loss) income includes three components: (i) holding gains (losses), which are unrealized gains
(losses) that arise from changes in market value of securities that were held during the period;
(ii) reclassification for realized (gains) losses, which are gains (losses) that were previously
unrealized, but have been recognized in current period net income due to sales of
Available-for-Sale securities; and (iii) other (losses) gains primarily related to changes in the
mark of the interest-only strip.
Changes in net unrealized securities gains (losses) for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions, net of tax)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Holding losses
|
|
$
|
(17
|
)
|
|
$
|
(187
|
)
|
|
$
|
(83
|
)
|
|
Reclassification for realized gains
|
|
|
(75
|
)
|
|
|
(11
|
)
|
|
|
(35
|
)
|
|
Other gains (losses)
|
|
|
47
|
|
|
|
(18
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized securities losses in other comprehensive (loss) income
|
|
$
|
(45
|
)
|
|
$
|
(216
|
)
|
|
$
|
(171
|
)
|
|
|
For 2005 activity, the table above excludes $391 million of net change in accumulated other
comprehensive loss related to discontinued operations. As of December 31, 2006 and 2005, net
unrealized securities gains,
net of tax, reflected in accumulated other comprehensive loss were $92 million and $137 million,
respectively.
The following is a distribution of investments classified as Available-for-Sale
by maturity as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
(Millions)
|
|
Cost
|
|
|
Value
|
|
|
Due within 1 year
|
|
$
|
3,324
|
|
|
$
|
3,314
|
|
|
Due after 1 year through 5 years
|
|
|
6,705
|
|
|
|
6,689
|
|
|
Due after 5 years through 10 years
|
|
|
788
|
|
|
|
797
|
|
|
Due after 10 years
|
|
|
5,895
|
|
|
|
6,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,712
|
|
|
|
16,854
|
|
|
Mortgage and other asset-backed securities
|
|
|
3,858
|
|
|
|
3,791
|
|
|
Equity securities
|
|
|
48
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,618
|
|
|
$
|
20,695
|
|
|
|
The expected payments on mortgage and other asset-backed securities may not coincide with
their contractual maturities. Accordingly, these securities, as well as equity securities, are not
included in the maturities distribution.
[ 85 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
Other revenues include gross realized gains and losses on sales of securities,
as well as other-than-temporary losses on investments classified as Available-for-Sale, as noted in
the following table for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Gross investment gains from sales and prepayments
(a)
|
|
$
|
117
|
|
|
$
|
21
|
|
|
$
|
23
|
|
|
Gross investment losses from sales and prepayments
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
Other-than-temporary impairments
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
116
|
|
|
$
|
17
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes $68 million of gains related to a rebalancing program
in the fourth quarter of 2006 to better align the maturity
profile of the Travelers Cheque and Gift Card investment
portfolio with its business liquidity needs.
|
The table below includes purchases, sales and maturities of investments classified as
Available-for-Sale for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
(Billions)
|
|
2006
|
|
|
2005
|
|
|
Purchases
|
|
$
|
18
|
|
|
$
|
12
|
|
|
Sales
|
|
$
|
6
|
|
|
$
|
4
|
|
|
Maturities
|
|
$
|
13
|
|
|
$
|
8
|
|
|
|
The Company entered into securities lending agreements in June 2006 with other financial
institutions. Under these agreements, certain investment securities are loaned on an overnight
basis to financial institutions and are secured by collateral equal to at least 102 percent of the
fair market value of the investment securities lent. Collateral received by the Company can be in
the form of cash or marketable U.S. Treasury or government agency securities. The Company may only
retain or sell these securities in the event of a borrower default. The Company’s loaned investment
securities continued to be classified as investments on the Consolidated Balance Sheet, but are now
considered restricted and pledged assets. The marketable securities received as collateral are not
recorded in the Consolidated Balance Sheet, as the Company is not permitted to sell or repledge
these securities absent a borrower default. Fees received from the securities lending transactions
are recorded as other investment and interest income, net of interest. At December 31, 2006,
approximately $716 million of investment securities were loaned under these agreements.
TRADING INVESTMENTS
Trading investments consist principally of certain foreign government bonds and seed money
investments in mutual funds for which the Company’s equity ownership is less than 20 percent. There
were $13 million, $16 million, and $13 million of realized net gains for 2006, 2005, and 2004,
respectively, related to trading investments held at each balance sheet date.
NOTE 4 LOANS
Loans at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Cardmember lending
|
|
$
|
43,306
|
|
|
$
|
33,104
|
|
|
|
|
|
|
|
|
|
|
International banking:
|
|
|
|
|
|
|
|
|
|
Consumer and private banking
|
|
|
4,734
|
|
|
|
4,822
|
|
|
Banks and other institutions
|
|
|
2,470
|
|
|
|
2,268
|
|
|
Corporate
|
|
|
20
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Total international banking
|
|
|
7,224
|
|
|
|
7,113
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
987
|
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
Total loans — gross
|
|
|
51,517
|
|
|
|
41,898
|
|
|
Less: Reserve for losses
|
|
|
1,269
|
|
|
|
1,097
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,248
|
|
|
$
|
40,801
|
|
|
|
The following table presents changes in the reserve for losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance, January 1
|
|
$
|
1,097
|
|
|
$
|
1,084
|
|
|
$
|
1,121
|
|
|
Provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember lending
|
|
|
1,623
|
|
|
|
1,349
|
|
|
|
1,130
|
|
|
International banking and other
|
|
|
76
|
|
|
|
32
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
|
1,699
|
|
|
|
1,381
|
|
|
|
1,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember lending
|
|
|
(1,635
|
)
|
|
|
(1,449
|
)
|
|
|
(1,205
|
)
|
|
International banking and other
|
|
|
(104
|
)
|
|
|
(67
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total write offs
|
|
|
(1,739
|
)
|
|
|
(1,516
|
)
|
|
|
(1,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember lending
|
|
|
187
|
|
|
|
124
|
|
|
|
49
|
|
|
International banking and other
|
|
|
25
|
|
|
|
24
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries and other
|
|
|
212
|
|
|
|
148
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
1,269
|
|
|
$
|
1,097
|
|
|
$
|
1,084
|
|
|
|
[ 86 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
Individually “impaired” loans are defined by GAAP as larger balance or restructured loans for
which it is probable that the lender will be unable to collect all amounts due according to the
original contractual terms of the loan agreement. An analysis of impaired loans follows:
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Loans requiring allowance for losses
|
|
$
|
136
|
|
|
$
|
20
|
|
|
Loans expected to be fully recoverable
|
|
|
104
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
240
|
|
|
$
|
290
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses
|
|
$
|
72
|
|
|
$
|
15
|
|
|
Average investment during the year
|
|
$
|
301
|
|
|
$
|
121
|
|
|
Interest income recognized while impaired
|
|
$
|
3
|
|
|
$
|
—
|
|
|
|
Loans amounting to $508 million and $311 million at December 31, 2006 and 2005, respectively,
were past due 90 days or more and still accruing interest. These amounts primarily relate to
cardmember lending for which the Company’s policy is to cease accruing for interest receivable once
a related cardmember loan is more than 180 days past due.
NOTE 5 SECURITIZED LOANS
The Company periodically securitizes cardmember loans through the American Express Credit Account
Master Trust (the Lending Trust). The following table illustrates the activity in the Lending Trust
(including the securitized cardmember loans and seller’s interest) for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Lending Trust assets, January 1
|
|
$
|
28,854
|
|
|
$
|
24,720
|
|
|
Account additions, net
|
|
|
5,932
|
|
|
|
3,862
|
|
|
Cardmember activity, net
|
|
|
(202
|
)
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
Lending Trust assets, December 31
|
|
$
|
34,584
|
|
|
$
|
28,854
|
|
|
|
|
|
|
|
|
|
|
Securitized cardmember loans, January 1
|
|
$
|
21,175
|
|
|
$
|
20,275
|
|
|
Impact of issuances
|
|
|
3,500
|
|
|
|
5,400
|
|
|
Impact of maturities
|
|
|
(4,505
|
)
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
|
Securitized cardmember loans, December 31
|
|
$
|
20,170
|
|
|
$
|
21,175
|
|
|
|
|
|
|
|
|
|
|
Seller’s interest, January 1
|
|
$
|
7,679
|
|
|
$
|
4,445
|
|
|
Impact of issuances
|
|
|
(3,500
|
)
|
|
|
(5,400
|
)
|
|
Impact of maturities
|
|
|
4,505
|
|
|
|
4,500
|
|
|
Account additions, net
|
|
|
5,932
|
|
|
|
3,862
|
|
|
Cardmember activity, net
|
|
|
(202
|
)
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
Seller’s interest, December 31
|
|
$
|
14,414
|
|
|
$
|
7,679
|
|
|
|
|
|
|
|
|
|
The Company, through its subsidiaries, is required to maintain an undivided interest in the
transferred cardmember loans (seller’s interest), which is equal to the balance of all cardmember
loans transferred to
the Lending Trust (Lending Trust assets) less the investors’ portion of those assets (securitized
cardmember loans). Seller’s interest is reported as cardmember loans on the Company’s Consolidated
Balance Sheets. Any billed finance charges related to the transferred cardmember loans are reported
as other receivables on the Company’s Consolidated Balance Sheets. The Company also retains
subordinated interests in the securitized cardmember loans. These interests may include one or more
investments in tranches of the securitization (subordinated securities) and an interest-only strip.
The following table presents retained subordinated interests for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Interest-only strip
|
|
$
|
266
|
|
|
$
|
209
|
|
|
Subordinated securities
|
|
|
—
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
266
|
|
|
$
|
279
|
|
|
|
The subordinated securities are accounted for at fair value as Available-for-Sale investment
securities and are reported in investments on the Company’s Consolidated Balance Sheets as of
December 31, 2005. The Company had no subordinated securities at December 31, 2006. The
interest-only strip is also accounted for at fair value as an Available-for-Sale investment
security, and is reported in other assets. The fair value of the interest-only strip is the present
value of estimated future excess spread expected to be generated by the securitized loans over the
estimated life of those loans.
The following table summarizes the activity related to securitized loans
reported in securitization income, net for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Excess spread, net
(a)
|
|
$
|
1,055
|
|
|
$
|
811
|
|
|
$
|
671
|
|
|
Servicing fees
|
|
|
407
|
|
|
|
412
|
|
|
|
388
|
|
|
Gains on sales from securitizations
|
|
|
27
|
|
|
|
37
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitization income
|
|
$
|
1,489
|
|
|
$
|
1,260
|
|
|
$
|
1,132
|
|
|
|
|
|
|
|
|
(a)
|
|
Excess spread 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.
|
At the time of a cardmember loan securitization, the Company records a gain on sale, which is
calculated as the difference between the proceeds from the sale and the book basis of the
cardmember loans sold. The book basis is determined by allocating the carrying amount of the sold
cardmember loans, net of applicable credit reserves, between the cardmember loans sold and the
interests retained based on their relative fair values. Such fair values are based on market prices
at the date of transfer for the sold cardmember loans and on the estimated present value of future
cash flows for
[ 87 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
retained interests. Gains on sale from securitizations are reported in securitization income,
net on the Company’s Consolidated Statements of Income. The income component resulting from the
release of credit reserves upon sale is reported as a reduction of provision for losses from
cardmember lending.
The Company retains servicing responsibilities for the transferred cardmember
loans through its subsidiary, American Express Travel Related Services Company, Inc., and earns a
related fee. No servicing asset or liability is recognized at the time of a securitization because
the Company receives adequate compensation relative to current market servicing fees.
Management utilizes certain estimates and assumptions to determine the fair
value of the retained subordinated interests, including subordinated securities and the
interest-only strip. These estimates and assumptions are based on projections of finance charges
and fees paid related to the securitized assets, expected credit losses, average loan life (i.e.,
monthly payment rate), the contractual fee to service the transferred assets, and a discount rate
applied to the cash flows from the subordinated retained interests which is commensurate with the
inherent risk. Changes in the estimates and assumptions used may have a significant impact in the
Company’s valuation. The key economic assumptions used in measuring the retained subordinated
interests at the time of issuance and during 2006 and 2005 were as follows (rates are per annum):
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average loan life (months)
|
|
|
4
|
|
|
|
4
|
|
|
Expected credit losses
|
|
|
2.60% - 3.37%
|
|
|
|
3.30% - 3.90%
|
|
|
Subordinated certificates discounted at
|
|
|
4.9% - 5.3%
|
|
|
|
2.6% - 4.8%
|
|
|
Residual cash flows discounted at
|
|
|
12.0%
|
|
|
|
12.0%
|
|
|
Returns to investors:
|
|
|
|
|
|
|
|
|
|
Variable
|
|
Contractual spread
over LIBOR
ranging from
-0.01% to .90%
|
|
Contractual spread
over LIBOR ranging
from .00% to .90%
|
|
Fixed
|
|
|
1.7% - 5.8%
|
|
|
|
1.7% - 5.8%
|
|
|
|
The following table presents quantitative information about delinquencies, net credit losses,
and components of securitized cardmember loans on a trust basis at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
Net
|
|
|
|
|
Total
|
|
|
Loans 30
|
|
|
Credit
|
|
|
|
|
Principal
|
|
|
Days or
|
|
|
Losses
|
|
|
|
|
Amount
|
|
|
More Past
|
|
|
During
|
|
|
(Billions)
|
|
of Loans
|
|
|
Due
|
|
|
the Year
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember loans managed
|
|
$
|
63.5
|
|
|
$
|
1.7
|
|
|
$
|
1.9
|
|
|
Less: Cardmember loans sold
|
|
|
20.2
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember loans on-balance sheet
|
|
$
|
43.3
|
|
|
$
|
1.2
|
|
|
$
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember loans managed
|
|
$
|
54.3
|
|
|
$
|
1.3
|
|
|
$
|
2.1
|
|
|
Less: Cardmember loans sold
|
|
|
21.2
|
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember loans on-balance sheet
|
|
$
|
33.1
|
|
|
$
|
0.7
|
|
|
$
|
1.1
|
|
|
|
The three key economic assumptions and the sensitivity of the current year’s fair value of the
interest-only strip to immediate 10 percent and 20 percent adverse changes in these assumptions are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from
|
|
|
|
|
Monthly
|
|
|
Expected
|
|
|
Interest-only
|
|
|
|
|
Payment
|
|
|
Credit
|
|
|
Strips
|
|
|
(Millions, except rates per annum)
|
|
Rate
|
|
|
Losses
|
|
|
Discounted at
|
|
|
Assumption
|
|
|
25.6
|
%
|
|
|
2.6
|
%
|
|
|
12.0
|
%
|
|
Impact on fair value of 10% adverse change
|
|
$
|
(17
|
)
|
|
$
|
(12
|
)
|
|
$
|
(0.5
|
)
|
|
Impact on fair value of 20% adverse change
|
|
$
|
(33
|
)
|
|
$
|
(24
|
)
|
|
$
|
(1.0
|
)
|
|
|
These sensitivities are hypothetical. Management cannot extrapolate changes in fair value
based on a 10 percent or 20 percent change in all key assumptions simultaneously in part because
the relationship of the change in one assumption on the fair value of the retained interest is
calculated independent from any change in another assumption. Changes in one factor may cause
changes in another, which could magnify or offset the sensitivities.
[ 88 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The table below summarizes cash flows received from the Lending Trust for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Proceeds from new securitizations during the period
|
|
$
|
3,491
|
|
|
$
|
5,386
|
|
|
Proceeds from collections reinvested in revolving cardmember securitizations
|
|
$
|
62,411
|
|
|
$
|
63,011
|
|
|
Servicing fees received
|
|
$
|
407
|
|
|
$
|
412
|
|
|
Other cash flows received on retained interests from interest-only strips
|
|
$
|
2,517
|
|
|
$
|
2,194
|
|
|
|
NOTE 6 VARIABLE INTEREST ENTITIES
During the third quarter of 2005 and in conjunction with the spin-off of Ameriprise, the Company
and Ameriprise executed a reinsurance agreement providing that the Company would retain the risks
and rewards of the travel and other card insurance businesses of AMEX Assurance Company (AAC), a
subsidiary of Ameriprise. The Company also entered into a share purchase agreement with Ameriprise
under which the Company will acquire all of the ownership interests in and the rights and
obligations of AAC within a period not to exceed two years from the spin-off date of September 30,
2005. The purchase price equals AAC’s net book value as of September 30, 2005, which was $115
million. As a result of these agreements, the Company consolidates AAC as a variable interest
entity for which the Company is considered the primary beneficiary. The Company recorded a $115
million liability related to the purchase of AAC, which is included in other liabilities on the
Consolidated Balance Sheets as of December 31, 2006 and 2005.
The following table presents a summary of the consolidated assets and
liabilities of AAC at December 31, for which the assets are restricted from use by the Company and
not available to the Company’s creditors:
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21
|
|
|
$
|
29
|
|
|
Investments
|
|
|
90
|
|
|
|
83
|
|
|
Other assets
|
|
|
408
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
519
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
399
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
120
|
|
|
$
|
117
|
|
|
|
The Company’s securitizations of cardmember receivables are accounted for as secured
borrowings, rather than as qualifying sales, because the receivables are transferred to a
non-qualifying special purpose entity, the American Express Issuance Trust (the Charge Trust). The
cardmember receivables securitized through this entity are not accounted for as sold and the
securities issued by this entity to third-party investors are reported as long-term debt on the
Company’s Consolidated Balance Sheets.
The following table summarizes the total assets and liabilities held by the
Charge Trust at December 31:
|
|
|
|
|
|
|
|
|
|
|
(Billions)
|
|
2006
|
|
|
2005
|
|
|
Assets
|
|
$
|
9.6
|
|
|
$
|
9.9
|
|
|
Liabilities
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
|
|
The Charge Trust is consolidated by American Express Receivables Financing Corporation V LLC,
a variable interest entity, which is in turn consolidated by the Company.
The Company has other variable interests for which it is not considered the
primary beneficiary and, therefore, does not consolidate. For these variable interests the Company
is a limited partner in affordable housing partnerships in which the Company typically has a less
than 50 percent interest and receives the benefits and accepts the risks consistent with its
limited partners. In the limited cases in which the Company has a greater than 50 percent interest
in affordable housing partnerships, it was determined that the general partner acts as the
Company’s agent and the general partner is most closely related to the partnership as it is the key
decision maker and controls the operations. These partnership interests are accounted for under
EITF No. 94-01, “Accounting for Tax Benefits Resulting from Investments in Affordable Housing
Projects,” and the related accounting guidance of Statement of Position No. 78-9, “Accounting for
Investments in Real Estate Ventures” and EITF Topic D-46, “Accounting for Limited Partnership
Investments.” Affordable housing partnerships interest are represented by a carrying value of $120
million and $134 million at December 31, 2006 and 2005, respectively. The Company’s maximum
exposure to loss as a result of its investment in these partnerships is represented by the carrying
value.
[ 89 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 7 GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The changes in the carrying amount of goodwill reported in the Company’s reportable operating
segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Card &
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
Network &
|
|
|
|
|
|
|
|
U.S. Card
|
|
|
Commercial
|
|
|
Merchant
|
|
|
|
|
|
(Millions)
|
|
Services
|
|
|
Services
|
|
|
Services
|
|
|
Total
|
|
|
Balance at January 1, 2005
|
|
$
|
183
|
|
|
$
|
1,222
|
|
|
$
|
104
|
|
|
$
|
1,509
|
|
|
Other, including foreign currency translation
|
|
|
—
|
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
183
|
|
|
|
1,202
|
|
|
|
104
|
|
|
|
1,489
|
|
|
Acquisitions
(a)
|
|
|
—
|
|
|
|
105
|
|
|
|
2
|
|
|
|
107
|
|
|
Dispositions
(b)
|
|
|
—
|
|
|
|
(33
|
)
|
|
|
—
|
|
|
|
(33
|
)
|
|
Other, including foreign currency translation and reclassifications
|
|
|
—
|
|
|
|
12
|
|
|
|
(79
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
183
|
|
|
$
|
1,286
|
|
|
$
|
27
|
|
|
$
|
1,496
|
|
|
|
|
|
|
|
|
(a)
|
|
Approximately $100 million related to Harbor Payments. See Note 1 for further discussion.
|
|
|
|
(b)
|
|
Relates to the disposition of the card and merchant-related activities in Brazil to
Bradesco, effective June 30, 2006. See Note 1 for further discussion.
|
OTHER INTANGIBLE ASSETS
The gross carrying value and accumulated amortization related to other intangible assets, primarily
customer relationships, at December 31 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Other intangible assets
|
|
$
|
343
|
|
|
$
|
186
|
|
|
$
|
157
|
|
|
$
|
271
|
|
|
$
|
159
|
|
|
$
|
112
|
|
|
|
During 2006, the Company acquired $108 million of intangible assets, which are being
amortized, on average, over 6 years. The aggregate intangible asset amortization expense was $60
million, $49 million, and $46 million in 2006, 2005, and 2004, respectively.
Estimated intangible amortization expense for the next five years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Estimated amortization expense
|
|
$
|
41
|
|
|
$
|
35
|
|
|
$
|
27
|
|
|
$
|
21
|
|
|
$
|
10
|
|
|
|
NOTE 8 SHORT- AND LONG-TERM DEBT AND BORROWING AGREEMENTS
SHORT-TERM DEBT
The Company’s short-term debt outstanding, defined as debt with original maturities of less than
one year, at December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions, except percentages)
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-End
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Year-End
|
|
|
Effective
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Year-End
|
|
|
Effective
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Stated
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Stated
|
|
|
Interest
|
|
|
|
|
|
|
|
Outstanding
|
|
|
of
|
|
|
Rate on
|
|
|
Rate with
|
|
|
Maturity
|
|
|
Outstanding
|
|
|
of
|
|
|
Rate on
|
|
|
Rate with
|
|
|
Maturity
|
|
|
|
|
Balance
|
|
|
Swaps
|
|
|
Debt
(a)
|
|
|
Swaps
(a)
|
|
|
of Swaps
|
|
|
Balance
|
|
|
Swaps
|
|
|
Debt
(a)
|
|
|
Swaps
(a)
|
|
|
of Swaps
|
|
|
Commercial paper
|
|
$
|
5,782
|
|
|
$
|
—
|
|
|
|
5.23
|
%
|
|
|
—
|
|
|
|
—
|
|
|
$
|
7,742
|
|
|
$
|
—
|
|
|
|
4.19
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Borrowed funds
|
|
|
2,535
|
|
|
|
210
|
|
|
|
4.74
|
%
|
|
|
4.74
|
%
|
|
|
2007–2010
|
|
|
|
3,257
|
|
|
|
133
|
|
|
|
4.72
|
%
|
|
|
4.73
|
%
|
|
|
2006–2010
|
|
|
Bank notes payable
|
|
|
6,100
|
|
|
|
—
|
|
|
|
5.31
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
3,748
|
|
|
|
—
|
|
|
|
4.51
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
745
|
|
|
|
—
|
|
|
|
2.41
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
886
|
|
|
|
—
|
|
|
|
2.86
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,162
|
|
|
$
|
210
|
|
|
|
5.04
|
%
|
|
|
|
|
|
|
|
|
|
$
|
15,633
|
|
|
$
|
133
|
|
|
|
4.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
For floating rate debt issuances, the stated and effective
interest rates were based on the respective rates at December
31, 2006 and 2005. These rates are not indicative of future
interest rates.
|
Unused lines of credit to support commercial paper borrowings were approximately $8.1 billion
and $9.3 billion at December 31, 2006 and 2005, respectively.
[ 90 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
LONG-TERM DEBT
The Company’s long-term debt outstanding, defined as debt with original maturities of one year or
greater, at December 31, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions, except percentages)
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-
|
|
|
Effective
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-End
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Stated
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Stated
|
|
|
Rate
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Rate on
|
|
|
with
|
|
|
Maturity
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Rate on
|
|
|
with
|
|
|
Maturity
|
|
|
|
|
Balance
|
|
|
of Swaps
|
|
|
Debt
(a)
|
|
|
Swaps
(a)
|
|
|
of Swaps
|
|
|
Balance
|
|
|
of Swaps
|
|
|
Debt
(a)
|
|
|
Swaps
(a)
|
|
|
of Swaps
|
|
|
American Express
Company (Parent
Company only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Debentures
due September 1, 2033
(b)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,000
|
|
|
$
|
—
|
|
|
|
1.85
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Fixed and Floating Rate
Senior Notes due 2007–2033
|
|
|
5,244
|
|
|
|
—
|
|
|
|
5.04
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
3,242
|
|
|
|
—
|
|
|
|
4.79
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Subordinated Debentures
due 2036
(c)
|
|
|
750
|
|
|
|
—
|
|
|
|
6.80
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
American Express Travel
Related Services
Company, Inc.
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed and Floating Rate
Senior Notes due 2009–2011
|
|
|
2,000
|
|
|
|
500
|
|
|
|
4.95
|
%
|
|
|
4.98
|
%
|
|
|
2011
|
|
|
|
500
|
|
|
|
—
|
|
|
|
3.63
|
%
|
|
|
—
|
|
|
|
—
|
|
|
American Express Credit
Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed and Floating Rate
Senior and Medium-
Term Notes due 2007–
2017
(e)
|
|
|
19,037
|
|
|
|
4,248
|
|
|
|
5.10
|
%
|
|
|
5.10
|
%
|
|
|
2008–2015
|
|
|
|
13,600
|
|
|
|
6,350
|
|
|
|
4.48
|
%
|
|
|
2.99
|
%
|
|
|
2006–2015
|
|
|
Borrowings under Bank
Credit Facilities due
2009
|
|
|
2,753
|
|
|
|
916
|
|
|
|
6.69
|
%
|
|
|
6.49
|
%
|
|
|
2007–2010
|
|
|
|
3,329
|
|
|
|
3,028
|
|
|
|
5.25
|
%
|
|
|
5.12
|
%
|
|
|
2006–2010
|
|
|
American Express
Centurion Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed and Floating Rate
Senior and Medium-
Term Notes due 2007–2009
|
|
|
7,541
|
|
|
|
1,300
|
|
|
|
5.33
|
%
|
|
|
5.34
|
%
|
|
|
2007–2009
|
|
|
|
4,342
|
|
|
|
1,000
|
|
|
|
4.44
|
%
|
|
|
4.31
|
%
|
|
|
2006–2009
|
|
|
American Express Bank,
FSB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating Rate Medium-
Term Notes due 2007–2009
|
|
|
4,000
|
|
|
|
300
|
|
|
|
5.38
|
%
|
|
|
5.27
|
%
|
|
|
2007
|
|
|
|
2,350
|
|
|
|
1,000
|
|
|
|
4.39
|
%
|
|
|
4.18
|
%
|
|
|
2006–2007
|
|
|
American Express
Receivables Financing
Corporation V LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating Rate Senior Notes
due 2010–2012
|
|
|
1,116
|
|
|
|
—
|
|
|
|
5.38
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
1,116
|
|
|
|
—
|
|
|
|
4.42
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Floating Rate
Subordinated Notes due
2010–2012
|
|
|
84
|
|
|
|
—
|
|
|
|
5.66
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
84
|
|
|
|
—
|
|
|
|
4.70
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate and Floating
Rate Notes due 2007–
2014
(f)
|
|
|
222
|
|
|
|
69
|
|
|
|
6.83
|
%
|
|
|
7.59
|
%
|
|
|
2007
|
|
|
|
218
|
|
|
|
105
|
|
|
|
5.77
|
%
|
|
|
6.38
|
%
|
|
|
2006–2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,747
|
|
|
$
|
7,333
|
|
|
|
5.30
|
%
|
|
|
|
|
|
|
|
|
|
$
|
30,781
|
|
|
$
|
11,483
|
|
|
|
4.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
For floating rate debt issuances, the stated and effective
interest rates were based on the respective rates at December
31, 2006 and 2005. These rates are not indicative of future
interest rates.
|
|
|
|
(b)
|
|
At December 1, 2006, American Express Parent Company remarketed
the $2 billion Convertible Debentures outstanding at December
31, 2005 into unsecured 5.48 percent floating rate senior notes
due 2033.
|
|
|
|
(c)
|
|
During 2006, American Express Parent Company issued
approximately $750 million of Subordinated Debentures due 2036.
The maturity date will automatically be extended to September 1,
2066, except in the case of (1) prior redemption or (2) default
related to the debentures.
|
|
|
|
(d)
|
|
American Express Travel Related Services Company, Inc. fixed and
floating rate senior notes were issued by the Travel Related
Services Parent Company.
|
|
|
|
(e)
|
|
These balances include $2 billion and $1 billion notes which are
subject to extension by the holders through March 5, 2008 and
June 20, 2011, respectively.
|
|
|
|
(f)
|
|
This balance includes $92 million and $93 million related to
sale-leaseback transactions as of December 31, 2006 and 2005,
respectively, as described in Note 11.
|
[ 91 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
Debt issuance costs are deferred and amortized over the term of the related instrument or, if
the holder has a put option, over the put term.
As of December 31, 2006, the Company had $750 million principal outstanding of
Subordinated Debentures due 2036 and automatically extendible until 2066 unless certain events
occur prior to that date. The Subordinated Debentures will accrue interest at an annual rate of
6.80 percent until September 1, 2016 and at an annual rate of three-month LIBOR plus 2.23 percent
thereafter. At the Company’s option, the Subordinated Debentures are redeemable for cash after
September 1, 2016 at 100 percent of the principal amount plus any accrued but unpaid interest. If
the Company fails to achieve specified performance measures it would be required to issue shares of
its common stock and apply the net proceeds to make interest payments on the Subordinated
Debentures.
As of December 31, 2005, the Company had $2 billion principal outstanding of
1.85 percent Convertible Senior Debentures due 2033 (the Senior Debentures), which were unsecured
obligations of the Company. On December 1, 2006, the Senior Debentures were remarketed into
unsecured, floating rate Senior Notes due 2033 (the Senior Notes). The Senior Notes may be put to
the Company at par on June 5, 2008, and accrue interest at an annual rate of three-month LIBOR plus
11.435 basis points. Contingent interest payments up to 4 percent are required if the Senior Notes
are not rated at certain levels by rating agencies.
Aggregate annual maturities on long-term debt obligations (based on final
maturity dates) at December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
American Express Company (Parent
Company only)
|
|
$
|
749
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
400
|
|
|
$
|
4,345
|
|
|
$
|
5,994
|
|
|
American Express Travel Related
Services Company, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
800
|
|
|
|
—
|
|
|
|
1,200
|
|
|
|
—
|
|
|
|
2,000
|
|
|
American Express Credit Corporation
|
|
|
3,440
|
|
|
|
7,313
|
|
|
|
7,157
|
|
|
|
2,029
|
|
|
|
1,453
|
|
|
|
398
|
|
|
|
21,790
|
|
|
American Express Centurion Bank
|
|
|
3,691
|
|
|
|
1,150
|
|
|
|
2,700
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,541
|
|
|
American Express Bank, FSB
|
|
|
800
|
|
|
|
2,100
|
|
|
|
1,100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,000
|
|
|
American Express Receivables
Financing Corporation V LLC
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
600
|
|
|
|
—
|
|
|
|
600
|
|
|
|
1,200
|
|
|
Other
|
|
|
74
|
|
|
|
43
|
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
|
|
92
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,754
|
|
|
$
|
10,606
|
|
|
$
|
12,270
|
|
|
$
|
2,629
|
|
|
$
|
3,053
|
|
|
$
|
5,435
|
|
|
$
|
42,747
|
|
|
|
As of December 31, 2006 and 2005, the Company maintained total bank lines of credit, including
lines supporting commercial paper borrowings, of $11.6 billion and $13.4 billion, respectively, of
which $8.9 billion and $10.1 billion were unutilized as of December 31, 2006 and 2005,
respectively.
The Company paid total interest (including amounts related to discontinued
operations) primarily related to short- and long-term debt, corresponding interest rate products
and customer deposits (net of amounts capitalized or refunded) of $3.2 billion, $2.4 billion, and
$1.6 billion in 2006, 2005, and 2004, respectively.
SHORT- AND LONG-TERM DEBT HEDGING ACTIVITY
As of December 31, 2006, in addition to the hedges of existing short- and long-term debt, the
Company has designated the interest rate risk associated with cash flows related to future short-
and long-term debt issuances as part of its hedging program. The notional amount of such designated
derivative financial instruments was $3 billion, reflecting the hedge of future cash flows of
anticipated issuances in 2007 through 2010.
See Note 10 for additional discussion of the Company’s cash flow hedging
strategies.
[ 92 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 9 COMMON AND PREFERRED SHARES
The Company has a share repurchase program to return equity capital in excess of business needs to
shareholders. The share repurchases both offset the issuance of new shares as part of employee
compensation plans and reduce the number of shares outstanding. In May 2006, the Company’s Board of
Directors authorized the repurchase of an additional 200 million shares of the Company’s common
stock. At December 31, 2006, the Company has 165 million shares remaining under the share
repurchase authorizations. Such authorizations do not have an expiration date, and at present,
there is no intention to modify or otherwise rescind the current authorizations.
Of the common shares authorized but unissued at December 31, 2006,
approximately 174 million shares were reserved for issuance for employee stock, employee benefit
and dividend reinvestment plans.
The following table provides a reconciliation of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Shares outstanding at beginning of year
|
|
|
1,241
|
|
|
|
1,249
|
|
|
|
1,284
|
|
|
Repurchases of common shares
|
|
|
(75
|
)
|
|
|
(34
|
)
|
|
|
(69
|
)
|
|
Acquisition of Harbor Payments
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
Other, primarily employee benefit plans
|
|
|
31
|
|
|
|
26
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding at end of year
|
|
|
1,199
|
|
|
|
1,241
|
|
|
|
1,249
|
|
|
|
The Board of Directors is authorized to permit the Company to issue up to 20 million preferred
shares without further shareholder approval.
At December 31, 2006 and 2005, no preferred shares had been issued.
NOTE 10 DERIVATIVES AND HEDGING ACTIVITIES
The Company uses derivative financial instruments to manage exposure to various market risks and
for customer accommodation and for limited proprietary trading purposes. These instruments enable
end users to increase, reduce, or alter exposure to various market risks and, for that reason, are
an integral component of the Company’s market risk and related asset/liability management strategy
and processes. Within each business, market risk exposures are monitored and managed by various
asset/liability committees, guided by Board-approved policies covering derivative financial
instruments, funding, and investments. The value of derivative instruments is derived from an
underlying variable or multiple variables, including commodity, equity, foreign exchange, and
interest rate indices or prices.
For the Company’s charge card and fixed-rate lending products, interest rate
exposure is managed by shifting the mix of funding toward fixed-rate debt and by using derivative
instruments, with an emphasis on interest rate swaps, which effectively fix interest expense for
the length of the swap. The Company endeavors to lengthen the maturity of interest rate hedges in
periods of low or falling interest rates and to shorten their maturity in periods of high or rising
interest rates. For the majority of its cardmember loans, which are linked to a floating rate base
and generally reprice each month, the Company uses floating rate funding. The Company regularly
reviews its strategy and may modify it based on the market conditions.
Credit risk associated with the Company’s derivatives is limited to the risk
that a derivative counterparty will not perform in accordance with the terms of the contract. To
mitigate the risk, counterparties are required to be pre-approved and rated as investment grade.
Counterparty risk exposures are monitored by the Company’s Institutional Risk Management Committee
(IRMC). The IRMC formally reviews large institutional exposures to ensure compliance with
Enterprise-wide Risk Management Committee guidelines and procedures and determines the risk
mitigation actions, when necessary. Additionally, the Company may, from time to time, enter into
master netting agreements where practical.
The following table summarizes the total fair value, excluding accruals, of
derivative product assets and liabilities at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Cash flow hedges
|
|
$
|
64
|
|
|
$
|
21
|
|
|
$
|
226
|
|
|
$
|
5
|
|
|
Fair value hedges
|
|
|
—
|
|
|
|
74
|
|
|
|
4
|
|
|
|
97
|
|
|
Net investment hedges
|
|
|
8
|
|
|
|
20
|
|
|
|
20
|
|
|
|
13
|
|
|
Derivatives not designated as hedges
|
|
|
355
|
|
|
|
303
|
|
|
|
280
|
|
|
|
214
|
|
|
Embedded derivatives accounted for separately from the host contract
|
|
|
—
|
|
|
|
30
|
|
|
|
—
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value, excluding accruals
|
|
$
|
427
|
|
|
$
|
448
|
|
|
$
|
530
|
|
|
$
|
354
|
|
|
|
[ 93 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The following table summarizes the income effects of derivatives for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flow hedges
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ineffective net (losses) gains
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
|
$
|
1
|
|
|
Gains (losses) on forecasted transactions no longer probable to occur
|
|
$
|
6
|
|
|
$
|
(2
|
)
|
|
$
|
16
|
|
|
Reclassification of realized gains (losses) from other comprehensive (loss) income, net
of tax of $85, $23, and $(161), respectively
|
|
$
|
158
|
|
|
$
|
44
|
|
|
$
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ineffective net gains
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of loss from cumulative translation adjustment as a result of sales of
foreign entities
|
|
$
|
(183
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
(a)
|
|
There were no (losses) gains due to exclusion from the assessment of hedge effectiveness for 2006, 2005, and 2004.
|
The following table summarizes the net change in accumulated other comprehensive (loss) income of derivatives for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flow hedges
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains, net of tax of $22, $161, and $3, respectively
|
|
$
|
42
|
|
|
$
|
300
|
|
|
$
|
6
|
|
|
Reclassification for realized (gains) losses, net of tax of $(85), $(23), and $161, respectively
|
|
|
(158
|
)
|
|
|
(44
|
)
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in accumulated other comprehensive (loss) income
|
|
$
|
(116
|
)
|
|
$
|
256
|
|
|
$
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (losses) gains related to hedges in cumulative translation adjustment
|
|
$
|
(241
|
)
|
|
$
|
(8
|
)
|
|
$
|
259
|
|
|
Reclassification of loss from cumulative translation adjustment as a result of sales of
foreign entities
|
|
|
183
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in accumulated other comprehensive (loss) income
|
|
$
|
(58
|
)
|
|
$
|
(8
|
)
|
|
$
|
259
|
|
|
|
|
|
|
|
|
(a)
|
|
For 2005 cash flow hedge activity, the table above excludes a $19 million net increase in
accumulated other comprehensive (loss) income related to discontinued operations.
|
CASH FLOW HEDGES
A cash flow hedge is a derivative designated to hedge the exposure of variable future cash flows
that is attributable to a particular risk associated with an existing recognized asset or
liability, or a forecasted transaction. The Company uses interest rate products, primarily interest
rate swaps, to manage interest rate risk related to the charge card business. These swaps are used to achieve a targeted mix of fixed
and floating rate funding, as well as to protect the Company from interest rate risk by hedging
existing long-term variable-rate debt, the rollover of short-term debt and the anticipated
forecasted issuance of additional funding. Note 8 provides additional discussion of the cash flow
hedging strategies related to short- and long-term debt. During 2006, the Company discontinued its
foreign currency risk cash flow hedge program, which related to the forecasted purchase of
investment securities by foreign subsidiaries. The anticipated transactions were no longer likely
to occur in accordance with the original strategy.
As of December 31, 2006 and 2005, net unrealized derivatives gains, net of tax,
reflected in accumulated other comprehensive loss were $27 million and $143 million, respectively.
At December 31, 2006, the Company expects to reclassify $27 million of net
pretax gains on derivative instruments from accumulated other comprehensive (loss) income to
earnings during the next twelve months. In the event that cash flow hedge accounting is no longer
applied (i.e., the Company de-designates a derivative as a hedge, a hedge is no longer considered
to be highly effective, or the forecasted transaction being hedged is no longer probable of
occurring), the reclassification from accumulated other comprehensive
[ 94 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
(loss) income into earnings may be accelerated and all future market value fluctuations of the
derivative will be reflected in earnings.
Currently, the longest period of time over which the Company is hedging
exposure to variability in future cash flows is approximately four years, which is related to
long-term debt.
FAIR VALUE HEDGES
A fair value hedge is a derivative designated to hedge the exposure of future changes in the fair
value of an asset or a liability, or an identified portion thereof that is attributable to a
particular risk. The Company is exposed to interest rate risk associated with its fixed-rate
long-term debt and fixed-rate corporate debt securities. The Company uses interest rate swaps to
convert certain fixed-rate long-term debt to floating rate at the time of issuance. From time to
time, the Company enters into interest rate swaps to hedge its exposure related to fixed-rate
corporate debt securities. Prior to 2006, in conjunction with its international banking activities,
the Company hedged the fair value changes related to a portion of its callable term customer
deposits using callable interest rate swaps. The Company no longer hedges the fair value changes
related to callable term customer deposits because the term certificate of deposit was modified and
hedge accounting is no longer deemed applicable to prospective transactions.
NET INVESTMENT HEDGES
A net investment hedge in a foreign operation is a derivative used to hedge future changes in
currency exposure of a net investment in a foreign operation. The Company designates foreign
currency derivatives, primarily forward agreements, as hedges of net investments in certain foreign
operations. These derivatives reduce exposure to changes in currency exchange rates on the
Company’s investments in non-U.S. subsidiaries.
DERIVATIVES NOT DESIGNATED AS HEDGES
The Company has economic hedges that either do not qualify or are not designated for hedge
accounting treatment. Foreign currency transactions and non-U.S. dollar cash flow exposures are
economically hedged, where practical, through foreign currency contracts, primarily forward
contracts, foreign currency options, and cross-currency swaps, and generally mature within one
year. Foreign currency contracts involve the purchase and sale of a designated currency at an
agreed upon rate for settlement on a specified date. From time to time, the Company will enter into
interest rate swaps to specifically manage funding costs related to the credit card business.
Within its international banking operations, the Company enters into derivative contracts to meet
the needs of its clients and, to a limited extent, for trading purposes, including taking
proprietary positions. The international banking derivative activities also include economic
hedging of various foreign currency and interest rate exposures related to the Company’s other
banking activities. The following table provides the total fair value, excluding accruals, of these
derivative products assets and liabilities as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Foreign currency transactions
|
|
$
|
13
|
|
|
$
|
3
|
|
|
$
|
13
|
|
|
$
|
13
|
|
|
Interest rate swaps
|
|
$
|
12
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
International banking operations
(a)
|
|
$
|
330
|
|
|
$
|
320
|
|
|
$
|
267
|
|
|
$
|
226
|
|
|
|
|
|
|
|
|
(a)
|
|
2006 and 2005 liabilities include embedded derivatives of $30 million and $25 million, respectively.
|
EMBEDDED DERIVATIVES
The Company has identified certain derivatives embedded in other financial instruments that are
required to be accounted for separately from the host financial instrument. Such items included
certain structured customer deposit products issued by the international banking operations which
have returns tied to the performance of equity markets, interest rates or other indices, and
financial instruments.
NOTE 11 GUARANTEES AND CERTAIN OFF-BALANCE SHEET ITEMS
The Company provides cardmember protection plans that cover losses associated with purchased
products, as well as other guarantees in the ordinary course of business that are within the scope
of FASB Financial Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (FIN 45). For the Company,
FIN 45 guarantees primarily consist of card and travel protection programs, including those that
(i) cancel and request replacements of lost or stolen cards, and provide for fraud liability
coverage; (ii) protect eligible purchases made with the card against accidental damage or theft for
up to 90 days from the date of purchase; (iii) provide account protection in the event that a
cardmember is unable to make payments on the account due to unforeseen hardship; (iv) protect
cardmembers against billing disputes with the merchant,
[ 95 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
primarily for non-delivery of goods and services; and (v) indemnify cardmembers against losses
due to lost baggage while traveling.
The following table provides information related to such guarantees as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
amount of
|
|
|
|
|
|
|
amount of
|
|
|
|
|
|
|
|
undiscounted
|
|
|
Amount
|
|
|
undiscounted
|
|
|
Amount
|
|
|
|
|
future
|
|
|
of related
|
|
|
future
|
|
|
of related
|
|
|
|
|
payments
(a)
|
|
|
liability
(b)
|
|
|
payments
(a)
|
|
|
liability
(b)
|
|
|
Type of Guarantee
|
|
(Billions)
|
|
|
(Millions)
|
|
|
(Billions)
|
|
|
(Millions)
|
|
|
Card and travel operations
(c)
|
|
$
|
75
|
|
|
$
|
119
|
|
|
$
|
95
|
|
|
$
|
124
|
|
|
International banking and other
(d)
|
|
|
2
|
|
|
|
77
|
|
|
|
2
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77
|
|
|
$
|
196
|
|
|
$
|
97
|
|
|
$
|
206
|
|
|
|
|
|
|
|
|
(a)
|
|
Calculated based on the hypothetical scenario that all claims occur within the next 12 months.
|
|
|
|
(b)
|
|
Included as part of other liabilities on the Company’s Consolidated Balance Sheets.
|
|
|
|
(c)
|
|
Includes Credit Card Registry, Merchandise Protection, Account Protection, Merchant Protection and
Baggage Protection. The Company generally has no collateral or other recourse provisions related to
these guarantees.
|
|
|
|
(d)
|
|
Includes contingent consideration obligations as well as guarantees the Company provides through
its international banking business, such as financial letters of credit, performance guarantees and
financial guarantees. The international banking guarantees range in term from three months to one
year. The Company receives a fee related to these guarantees, many of which help facilitate
cross-border transactions. The maximum potential exposure related to the Company’s international
banking guarantees at both December 31, 2006 and 2005, was approximately $1 billion for which the
Company held supporting collateral of approximately $940 million at such dates.
|
The
Company’s commitments related to bank letters of credit are
included in Note 14.
The Company also has certain contingent obligations to make payments under
contractual agreements entered into as part of the ongoing operation of the Company’s business,
primarily with co-brand partners. The contingent obligations under such arrangements were $3
billion as of December 31, 2006.
The Company leases certain facilities and equipment under noncancelable and
cancelable agreements. Total rental expense amounted to $311 million, $367 million, and $316
million in 2006, 2005, and 2004, respectively. At December 31, 2006, the minimum aggregate rental
commitment under all noncancelable operating leases (net of subleases of $33 million) was:
|
|
|
|
|
|
|
(Millions)
|
|
|
|
|
2007
|
|
$
|
227
|
|
|
2008
|
|
|
217
|
|
|
2009
|
|
|
187
|
|
|
2010
|
|
|
169
|
|
|
2011
|
|
|
144
|
|
|
Thereafter
|
|
|
1,491
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,435
|
|
|
|
Obligations under capital leases or other similar arrangements entered into by the Company are not
material.
During 2005, the Company completed sale-leaseback transactions on four of its
owned properties which were sold at fair value. Pursuant to SFAS No. 13, “Accounting for Leases,”
as amended, all of these transactions are included in total operating lease obligations. Proceeds
totaled $172 million and the aggregate net book value of the properties removed from the Company’s
Consolidated Balance Sheet was $124 million. The pretax gain of approximately $46 million, net of
$2 million in closing costs, has been deferred and is amortized over the ten-year term of the
operating leasebacks as a reduction to rental expense.
In December 2004, the Company completed sale-leaseback transactions on five of
its owned properties which were sold at fair value. Four of these transactions were accounted for
as sale-leasebacks and are included in total operating lease obligations. Proceeds totaled $187
million. The pretax gain of approximately $94 million, net of $2 million in closing costs, has been
deferred and is amortized over the ten-year term of the operating leasebacks as a reduction to
rental expense.
One of the 2004 sale-leaseback transactions has been accounted for as a
financing because of certain terms contained in the lease agreement. The $95 million in proceeds
from this transaction has been classified as long-term debt, and the balance was $92 million and
$93 million as of December 31, 2006 and 2005, respectively. At December 31, 2006, the Company’s
minimum aggregate rental commitment under this transaction is approximately $6 million per annum
from 2007 through 2011 and $20 million thereafter.
There were no sale-leaseback transactions in 2006.
[ 96 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 12 CONTINGENCIES
In the ordinary course of their business, the Company and its subsidiaries are involved in a number
of legal and arbitration proceedings. These include several class actions involving the Company’s
card businesses. The Company believes it has meritorious defenses to each of the actions it faces
and intends to defend them vigorously.
The Company believes that it is not a party to, nor are any of its properties
the subject of, any pending legal, arbitration, regulatory, or tax proceedings that would have a
material adverse effect on the Company’s consolidated financial condition, results of operations,
or liquidity. However, it is possible that the outcome of any proceeding could have a material
impact on results of operations in the particular reporting period in which it is resolved.
NOTE 13 FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table discloses fair value information of the Company’s financial assets and
liabilities as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Billions)
|
|
2006
|
|
|
2005
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets for which carrying values equal or approximate fair value
|
|
$
|
69
|
|
|
$
|
69
|
|
|
$
|
65
|
|
|
$
|
65
|
|
|
Loans
|
|
$
|
50
|
|
|
$
|
50
|
|
|
$
|
41
|
|
|
$
|
41
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for which carrying values equal or approximate fair value
|
|
$
|
67
|
|
|
$
|
66
|
|
|
$
|
57
|
|
|
$
|
57
|
|
|
Long-term debt
|
|
$
|
43
|
|
|
$
|
43
|
|
|
$
|
31
|
|
|
$
|
31
|
|
|
|
The fair values of these financial instruments are estimates based upon market conditions and
perceived risks as of December 31, 2006 and 2005 and require management judgment. These figures may
not be indicative of their future fair values. The fair value of the Company, therefore, cannot be
estimated by aggregating the amounts presented. The following methods were used to determine fair
values.
Financial assets and liabilities for which carrying values equal or approximate
fair values include cash and cash equivalents, cardmember receivables, accrued interest,
investments, customers’ deposits, Travelers Cheques outstanding, investment certificate reserves,
short-term debt, and certain other assets and liabilities. For these assets and liabilities, the
carrying value approximates fair value because these are short-term in duration, variable rate in
nature or recorded at fair value on the Consolidated Balance Sheets.
INVESTMENTS
Generally, investments are carried at fair value on the Consolidated Balance Sheets and gains and
losses are recognized in the Consolidated Statements of Income upon disposition of the securities
or when management determines that a decline in value is other-than-temporary. See Note 3
for carrying and fair value information regarding investments.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are also carried at fair value on the Consolidated Balance Sheets,
with gains and losses recognized in the Consolidated Statements of Income or Consolidated Balance
Sheets based upon the nature of the derivative. See Note 10 for fair value information regarding
derivative financial instruments.
LOANS
For variable-rate loans that reprice within one year and for which there has been no significant
change in counterparties’ creditworthiness, fair values approximate carrying values. The fair
values of all other loans, except those with significant credit deterioration, are estimated using
discounted cash flow analysis, based on current interest rates for loans with similar terms to
borrowers of similar credit quality. For loans with significant credit deterioration, fair values
are based on estimates of future cash flows discounted at rates commensurate with the inherent risk
in the revised cash projections. For collateral-dependent loans with significant credit
deterioration, fair values are based on estimates of collateral values.
LONG-TERM DEBT
For variable-rate long-term debt that reprices within one year, fair value approximates carrying
value. For other long-term debt, fair value is estimated using either quoted market prices or
discounted cash flows based on the Company’s current borrowing rates for similar types of
borrowing.
See Note 11 for discussion of carrying and fair value information regarding
guarantees and certain off-balance sheet items.
[ 97 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 14 SIGNIFICANT CREDIT CONCENTRATIONS
Credit concentrations arise when customers operate in similar industries, economic sectors or
geographic regions. The Company’s customers operate in diverse industries, economic sectors and
geographic regions.
The following table represents the Company’s maximum credit exposure by
industry, including the credit exposure associated with derivative financial instruments, at
December 31:
|
|
|
|
|
|
|
|
|
|
|
(Billions, except percentages)
|
|
2006
|
|
|
2005
|
|
|
Financial institutions
(a)
|
|
$
|
18.5
|
|
|
$
|
16.7
|
|
|
On-balance sheet
|
|
|
17.0
|
|
|
|
15.6
|
|
|
Off-balance sheet
|
|
|
1.5
|
|
|
|
1.1
|
|
|
Individuals, including cardmember receivables and loans
(b)
|
|
|
342.9
|
|
|
|
280.4
|
|
|
On-balance sheet
|
|
|
78.2
|
|
|
|
66.6
|
|
|
Off-balance sheet
|
|
|
264.7
|
|
|
|
213.8
|
|
|
U.S. Government and agencies
(c)
|
|
|
11.9
|
|
|
|
12.2
|
|
|
On-balance sheet
|
|
|
11.9
|
|
|
|
12.2
|
|
|
All other
|
|
|
14.9
|
|
|
|
14.2
|
|
|
On-balance sheet
|
|
|
14.8
|
|
|
|
14.1
|
|
|
Off-balance sheet
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total
(d)
|
|
$
|
388.2
|
|
|
$
|
323.5
|
|
|
|
|
|
|
|
|
|
|
Composition:
|
|
|
|
|
|
|
|
|
|
On-balance sheet
|
|
|
31
|
%
|
|
|
34
|
%
|
|
Off-balance sheet
|
|
|
69
|
%
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
(a)
|
|
Financial institutions primarily include banks, broker-dealers, insurance companies and savings and loan associations.
|
|
|
|
(b)
|
|
Because charge card products have no preset spending limit, the associated credit limit on cardmember receivables is not
quantifiable. Therefore, the quantified credit amount only includes the credit line available on cardmember loans. The
unused lines aggregating $264 billion and $213 billion in 2006 and 2005, respectively, represent commitments of the
Company.
|
|
|
|
(c)
|
|
U.S. Government and agencies represent the U.S. Government and its agencies, states and municipalities, and
quasi-government agencies.
|
|
|
|
(d)
|
|
Certain distinctions between categories require management judgment.
|
As disclosed in the table above, at December 31, 2006, the Company’s most significant
concentration of credit risk was with individuals, including cardmember receivables and loans.
These amounts are generally advanced on an unsecured basis. However, the Company reviews each
potential customer’s credit application and evaluates the applicant’s financial history and ability
and willingness to repay.
EXPOSURE TO AIRLINE INDUSTRY
Historically, the Company has not experienced significant revenue declines when a particular
airline scales back or ceases operations due to a bankruptcy or other financial challenges. This is
because volumes generated by that 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.” 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, this business
arrangement creates a potential exposure for the Company. This credit exposure is included in the
maximum amount of undiscounted future payments disclosed in Note 11. Historically, this type of
exposure has not generated any significant losses for the Company because an airline operating
under bankruptcy protection needs to continue accepting credit and charge cards and honoring
requests for credits and refunds in the ordinary course of its business. Typically, as an airline’s
financial situation deteriorates, the Company delays payment to the airline thereby increasing cash
withheld to protect the Company in the event the airline is liquidated. 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.
There has been some speculation that there will be consolidation in the airline
industry, both in the United States and internationally. While the Company would not expect its
merchant relationships to change in the event of consolidation, it is possible that the Company’s
co-brand relationships might be affected if one of the Company’s partners merged with an airline
that had a different co-brand partner.
As part of Delta Air Lines’ (Delta) decision to file for protection under
Chapter 11 of the Bankruptcy Code, the Company lent funds to Delta as part of Delta’s
post-petition, debtor-in-possession financing under the Bankruptcy Code. At December 31, 2006, the
remaining principal balance was $176 million and is scheduled to be repaid on a monthly basis
through September 2007. This post-petition facility continues to be structured as an advance
against the Company’s obligations to purchase Delta SkyMiles rewards points under the Company’s
co-brand and Membership Rewards agreements.
[ 98 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
Given the depth of the Company’s business relationships with Delta through the
SkyMiles Credit Card and Delta’s participation as a key partner in the Company’s Membership Rewards
program, in the event Delta’s reorganization under the bankruptcy laws is not successful or
otherwise negatively impacts the Company’s relationship with Delta, the Company’s future financial
results could be adversely impacted. American Express’ Delta SkyMiles Credit Card co-brand
portfolio accounts for less than 10 percent of the Company’s worldwide billed business and less
than 15 percent of worldwide managed lending receivables.
NOTE 15 STOCK PLANS
STOCK OPTION AND AWARD PROGRAMS
Under the 1998 Incentive Compensation Plan, awards may be granted to officers and other key
individuals who perform services for the Company and its participating subsidiaries. These awards
may be in the form of stock options, restricted stock, portfolio grants and similar awards designed
to meet the requirements of non-U.S. jurisdictions. The Company also has options that remain
outstanding pursuant to a Directors’ Stock Option Plan that expired in 2003.
For these plans, there were a total of 66 million, 71 million, and 68 million
common shares available for grant at December 31, 2006, 2005, and 2004, respectively.
A summary of stock option and nonvested restricted stock award activity as of
December 31, 2006, and changes during the year are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Stock Options
|
|
|
RSAs
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Grant
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
123,775
|
|
|
$
|
35.75
|
|
|
|
8,978
|
|
|
$
|
40.77
|
|
|
Granted
|
|
|
6,051
|
|
|
$
|
51.87
|
|
|
|
3,406
|
|
|
$
|
52.14
|
|
|
Exercised/vested
|
|
|
(30,686
|
)
|
|
$
|
33.89
|
|
|
|
(3,315
|
)
|
|
$
|
38.75
|
|
|
Forfeited/expired
|
|
|
(1,830
|
)
|
|
$
|
46.84
|
|
|
|
(595
|
)
|
|
$
|
43.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
97,310
|
|
|
$
|
37.60
|
|
|
|
8,474
|
|
|
$
|
45.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
81,269
|
|
|
$
|
35.99
|
|
|
|
|
|
|
|
|
|
|
|
STOCK OPTIONS
Each stock option has an exercise price equal to the market price of the Company’s common stock on
the date of grant and a term of no more than 10 years. Vesting provisions relating to
stock options are as follows:
|
|
|
|
|
Grant Year
|
|
Vesting Provisions
|
|
2003 and after
|
|
Generally vest ratably at 25 percent per year beginning with the first anniversary of the grant date
|
|
Prior to 1999 and in 2002
|
|
Generally vest ratably at 33 1/3 percent per year beginning with the first anniversary of the grant date
|
|
2001—2000—1999
|
|
Generally vest ratably at 33 1/3 percent per year beginning with the second anniversary of the grant date
|
|
|
The weighted average remaining contractual life and intrinsic value of the stock options
outstanding and excercisable as of December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Aggregate intrinsic value
(millions)
|
|
$
|
2,245
|
|
|
$
|
2,006
|
|
|
Weighted average contractual remaining life
(years)
|
|
|
4.6
|
|
|
|
3.9
|
|
|
|
The total intrinsic value of options exercised during 2006, 2005, and 2004 was $661 million, $455
million, and $633 million, respectively.
The fair value of each option is estimated on the date of grant using a
Black-Scholes option-pricing model with the following weighted average assumptions used for grants
in 2006, 2005, and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Dividend yield
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
|
|
0.8
|
%
|
|
Expected volatility
|
|
|
23
|
%
|
|
|
24
|
%
|
|
|
30
|
%
|
|
Risk-free interest rate
|
|
|
4.3
|
%
|
|
|
3.6
|
%
|
|
|
2.9
|
%
|
|
Expected life of stock option
(years)
|
|
|
4.6
|
|
|
|
4.5
|
|
|
|
4.2
|
|
|
Weighted average fair value per option
|
|
$
|
12.76
|
|
|
$
|
12.59
|
|
|
$
|
13.27
|
|
|
|
The dividend yield reflects the assumption that the current dividend payout will continue with no
anticipated increases. The expected volatility was based on weighted historical and implied
volatilities of the Company’s common stock price. The expected life of the options is based on
historical data and is not necessarily indicative of exercise patterns that may occur.
As of December 31, 2006, the total unrecognized compensation cost related to
unvested options was $111 million. This cost is expected to be recognized over a weighted-average
period of 2.2 years.
[ 99 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
RESTRICTED STOCK AWARDS
Restricted Stock Awards (RSAs) granted in 2003 and thereafter, generally vest ratably at 25 percent
per year beginning with the first anniversary of the grant date. RSAs granted prior to 2003
generally cliff vest four years after the grant date. The compensation expense associated with
these awards is recognized straight-line over the vesting period.
As of December 31, 2006, the total unrecognized compensation cost related to
unvested RSAs was $221 million. This cost is expected to be recognized over a weighted-average
period of 2.4 years. The total fair value of shares vested during 2006, 2005, and 2004 was $176
million, $290 million, and $97 million, respectively.
PORTFOLIO GRANTS
The Company awards Portfolio Grants (PG) that earn value based on the Company’s financial
performance and the Company’s total shareholder return versus that of the S&P Financial Index and,
beginning with PGs granted in 2006 the S&P 500, over a 3-year performance period, subject to
certain adjustments. The fair value of the PG is estimated at the date of grant and updated
quarterly and recognized over the performance period.
SUMMARY OF STOCK PLAN EXPENSE
The components of the Company’s pretax stock-based compensation expense (net of cancellations) and
associated income tax benefit are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Restricted stock awards
|
|
$
|
153
|
|
|
$
|
144
|
|
|
$
|
112
|
|
|
Stock options
|
|
|
86
|
|
|
|
84
|
|
|
|
69
|
|
|
Portfolio grants
(a)
|
|
|
55
|
|
|
|
26
|
|
|
|
—
|
|
|
Other
|
|
|
4
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation expense, pretax
|
|
$
|
298
|
|
|
$
|
256
|
|
|
$
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
104
|
|
|
$
|
90
|
|
|
$
|
64
|
|
|
|
|
|
|
|
|
(a)
|
|
2005 expense represents PG expenses
subsequent to July 1, 2005, when as a result of the
adoption of SFAS No. 123(R), these awards were
accounted for as stock-based compensation. PG
expense for the first six months of 2005 and for
the year ended December 31, 2004 was $23 million
and $60 million, respectively.
|
NOTE 16 RETIREMENT PLANS
DEFINED BENEFIT PENSION PLANS
The Company sponsors the American Express Retirement Plan (the Plan) for eligible employees in the
United States. The Plan is a noncontributory defined benefit plan which is a qualified plan under
the Employee Retirement Income Security Act of 1974, as amended (ERISA). Under the Plan, the cost
of retirement benefits is measured by length of service, compensation and other factors. These
benefits are funded through a trust and the Company’s funding of retirement costs
complies with the applicable minimum funding requirements specified by ERISA. The funded status of
the Plan on an ERISA basis for the years ended 2006 and 2005 was 113 percent and 114 percent, respectively. The Plan is a cash
balance plan and employees’ accrued benefits are based on notional account balances, which are
maintained for each individual. Each pay period these balances are credited with an amount
determined by an employee’s age, years of service, and compensation as defined by the Plan
(primarily base pay, certain incentive pay and commissions, shift differential, and overtime).
Employees’ balances are also credited daily with interest at a fixed-rate that is updated each
January 1 and is based on the average of the daily five-year U.S. Treasury Note yields for the
previous October 1 through November 30. The interest rate varies from a minimum of 5 percent to a
maximum equal to the lesser of (i) 10 percent or (ii) the annual maximum interest rate set by the
U.S. government for determining lump-sum values. Employees and their beneficiaries have the option
to receive annuity payments upon retirement or a lump-sum payout at vested termination, death,
disability or retirement.
The Company also sponsors an unfunded non-qualified Supplemental Retirement
Plan (the SRP) for all employees who are compensated over a certain level to supplement their
pension benefits that are limited by the Internal Revenue Service. The SRP is a supplemental plan
and its terms generally parallel those of the Plan but the SRP’s definition of compensation and
payment options differ.
Most employees outside the United States are covered by local retirement plans,
some of which are funded, while other employees receive payments at the time of retirement or
termination under applicable labor laws or agreements. The Company complies with the minimum
funding requirements in all countries.
Effective July 2006, the Company amended its U.K. pension plans. Employees who
were participating in the existing defined benefit plans were given a choice between remaining in
the plans and making contributions toward their benefits or moving to the new defined contribution
plan. Participants who chose to move no longer accrue benefits under these plans as of July 1,
2006. There was no gain or loss as a result of this change and the overall impact to the projected
benefit obligation was minimal.
The Company measures the obligations and related asset values for its pension
and other postretirement benefit plans as of September 30th of each year.
Adoption of SFAS No. 158
On September 29, 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” (SFAS No. 158), which amends FASB Statements No.
[ 100 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
87, 88, 106, and 132(R). This standard requires that companies record an asset or liability on
the Consolidated Balance Sheet equal to the over or under funded status of their defined benefit
and other postretirement benefit plans effective for fiscal years ending after December 15, 2006.
For each plan, the funded status is defined by SFAS No. 158 as the difference between the fair
value of plan assets (for funded plans) and the respective plan’s projected benefit obligation. The
projected benefit obligation represents a liability based on the plan participant’s service to date
and their expected future compensation at their projected retirement date. Upon adoption of SFAS
No. 158 and recognition of the funded status on the Company’s Consolidated Balance Sheet, all
previously unrecognized amounts (e.g. unrecognized gains or losses and prior service cost) are
reflected in accumulated other comprehensive income (loss), net of tax, in a one-time cumulative
effect adjustment. Any future changes in unrecognized gains or losses and prior service cost will
be recognized in other comprehensive income, net of tax, in the periods in which they occur.
Under SFAS No. 158, accounting for plan expense and payments will remain unchanged.
The following table provides the cumulative effect of the change in accounting
principle with respect to recognizing the net funded status of defined benefit pension plans (the
Plan, the SRP and other international plans) in the Consolidated Balance Sheet as of December 31,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
|
|
|
Post-
|
|
|
|
|
Pre-SFAS
|
|
|
No. 158
|
|
|
SFAS
|
|
|
(Millions)
|
|
No. 158
|
|
|
impact
|
|
|
No. 158
|
|
|
Accrued benefit liability (a)
|
|
$
|
(248
|
)
|
|
$
|
(39
|
)
|
|
$
|
(287
|
)
|
|
Prepaid benefit asset (b)
|
|
$
|
440
|
|
|
$
|
(416
|
)
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net funded status
|
|
|
|
|
|
|
|
|
|
$
|
(263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of tax (c)
|
|
$
|
21
|
|
|
$
|
310
|
|
|
$
|
331
|
|
|
|
|
|
|
|
|
(a)
|
|
The post-SFAS No. 158 accrued benefit
liability represents the excess of the projected
benefit obligation over the fair value of the plan
assets for all plans in an underfunded position.
The projected benefit obligation and related fair
value of plan assets for these plans was $1.5
billion and $1.2 billion, respectively, at December
31, 2006 and $2.3 billion and $2.1 billion,
respectively, at December 31, 2005.
|
|
|
|
(b)
|
|
The post-SFAS No. 158 prepaid benefit asset
represents the excess of the fair value of the plan
assets over the projected benefit obligation for
all plans in an overfunded position.
|
|
|
|
(c)
|
|
The post-SFAS No. 158 accumulated other
comprehensive loss, net of tax includes the
unrecognized gains and losses and unamortized prior
service cost related to the plans. See the table
below for further information.
|
Accumulated Other Comprehensive Loss
The following table provides the items comprising the amount in accumulated other comprehensive
loss as of December 31:
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
Net actuarial loss
|
|
$
|
474
|
|
|
Net prior service cost
|
|
|
13
|
|
|
|
|
|
|
|
Total, pretax effect
|
|
|
487
|
|
|
Tax impact
|
|
|
(156
|
)
|
|
|
|
|
|
|
Total, net of taxes
|
|
$
|
331
|
|
|
|
The estimated portion of the net actuarial loss and net prior service cost above that is expected
to be recognized as a component of net periodic benefit cost in 2007 is $40 million and $2 million,
respectively.
Plan Assets and Obligations
The following tables provide a reconciliation of the changes in the plans’ projected benefit
obligation, the fair value of assets and the net funded status for all plans:
Reconciliation of Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Projected benefit obligation, October 1 prior year
|
|
$
|
2,392
|
|
|
$
|
2,168
|
|
|
Service cost
|
|
|
117
|
|
|
|
104
|
|
|
Interest cost
|
|
|
127
|
|
|
|
117
|
|
|
Benefits paid
|
|
|
(55
|
)
|
|
|
(59
|
)
|
|
Actuarial loss
|
|
|
33
|
|
|
|
220
|
|
|
Settlements/curtailments
|
|
|
(95
|
)
|
|
|
(51
|
)
|
|
Foreign currency exchange rate changes
|
|
|
147
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at September 30,
|
|
$
|
2,666
|
|
|
$
|
2,392
|
|
|
|
Reconciliation of Change in Fair Value of Plan Assets
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Fair value of plan assets, October 1 prior year
|
|
$
|
2,135
|
|
|
$
|
1,975
|
|
|
Actual return on plan assets
|
|
|
232
|
|
|
|
326
|
|
|
Employer contributions
|
|
|
46
|
|
|
|
41
|
|
|
Benefits paid
|
|
|
(55
|
)
|
|
|
(59
|
)
|
|
Settlements
|
|
|
(95
|
)
|
|
|
(51
|
)
|
|
Foreign currency exchange rate changes
|
|
|
135
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at September 30,
|
|
$
|
2,398
|
|
|
$
|
2,135
|
|
|
|
[ 101 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
Net Funded Status
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Funded status at September 30,
|
|
$
|
(268
|
)
|
|
$
|
(257
|
)
|
|
Unrecognized net actuarial loss
|
|
|
—
|
|
|
|
508
|
|
|
Unrecognized prior service cost
|
|
|
—
|
|
|
|
14
|
|
|
Unrecognized net transition obligation
|
|
|
—
|
|
|
|
1
|
|
|
Fourth quarter contributions
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized at December 31,
|
|
$
|
(263
|
)
|
|
$
|
271
|
|
|
|
As noted previously, due to the adoption of SFAS No. 158 as of December 31, 2006, the funded
status of $(268) million, less fourth quarter contributions of $5 million, is reflected in the
December 31, 2006 Consolidated Balance Sheet.
The following table provides the amounts recognized on the Consolidated Balance
Sheets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Other liabilities
|
|
$
|
(287
|
)
|
|
$
|
(203
|
)
|
|
Other assets
|
|
|
24
|
|
|
|
445
|
|
|
Minimum pension liability adjustment
|
|
|
—
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized at December 31,
|
|
$
|
(263
|
)
|
|
$
|
271
|
|
|
|
Accumulated Benefit Obligation
The accumulated benefit obligation is the present value of benefits earned to date by plan
participants computed based on current compensation levels as contrasted to the projected benefit
obligation which is the present value of benefits earned to date by plan participants based on
their expected future compensation at their projected retirement date. The unvested portion of the
accumulated benefit obligation is minimal.
The accumulated benefit obligation for all pension plans was $2.4 billion at
September 30, 2006 and $2.2 billion at September 30, 2005.
The accumulated benefit obligation for pension plans where the accumulated
benefit obligation exceeds the fair value of plan assets (primarily unfunded international plans
and the SRP) was $234 million (with fair value of related plan assets of $19 million) as of
September 30, 2006 and $221 million (with fair value of related plan assets of $17 million) as of
September 30, 2005.
Net Periodic Pension Benefit Cost
SFAS No. 87, “Employers’ Accounting for Pensions” (SFAS No. 87), provides for the delayed
recognition of the net actuarial loss and the net prior service cost remaining in accumulated other
comprehensive income (loss).
Service cost is the component of net periodic benefit cost which represents the
current value of benefits earned by an employee during the period.
Net periodic benefit
cost also includes the estimated interest incurred on the outstanding projected benefit obligation
during the period.
A plan amendment that retroactively increases benefits is recognized as an
increase to the projected benefit obligation and a corresponding charge to other comprehensive
income, net of tax, at the date of the amendment. These prior service costs are amortized as a
component of net periodic pension benefit cost on a straight-line basis over the average remaining
service period of active participants. Actuarial gains and losses that are not recognized
immediately as a component of net periodic pension cost are recognized as increases or decreases in
other comprehensive income, net of tax, as they arise. Cumulative net actuarial loss included in
accumulated other comprehensive income (loss) which exceeds 10 percent of the greater of the
projected benefit obligation and the estimated market value of plan assets are amortized over the
average remaining service period of active participants.
The components of the net periodic pension cost for all defined benefit plans
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Service cost
|
|
$
|
117
|
|
|
$
|
104
|
|
|
$
|
99
|
|
|
Interest cost
|
|
|
127
|
|
|
|
117
|
|
|
|
109
|
|
|
Expected return on plan assets
|
|
|
(153
|
)
|
|
|
(141
|
)
|
|
|
(142
|
)
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service costs
|
|
|
1
|
|
|
|
1
|
|
|
|
(4
|
)
|
|
Transition obligation
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Recognized net actuarial loss
|
|
|
40
|
|
|
|
27
|
|
|
|
19
|
|
|
Settlements/curtailment loss
|
|
|
1
|
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit cost
|
|
$
|
133
|
|
|
$
|
112
|
|
|
$
|
85
|
|
|
|
Assumptions
The weighted average assumptions used to determine benefit obligations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Discount rates
|
|
|
5.2
|
%
|
|
|
5.1
|
%
|
|
Rates of increase in compensation levels
|
|
|
4.1
|
%
|
|
|
4.2
|
%
|
|
|
The weighted average assumptions used to determine net periodic benefit cost were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Discount rates
|
|
|
5.1
|
%
|
|
|
5.5
|
%
|
|
|
5.7
|
%
|
|
Rates of increase in compensation levels
|
|
|
4.2
|
%
|
|
|
4.0
|
%
|
|
|
3.9
|
%
|
|
Expected long-term rates of return on assets
|
|
|
`
7.8
|
%
|
|
|
7.8
|
%
|
|
|
7.8
|
%
|
|
|
The Company assumes a long-term rate of return on assets on a weighted average basis. In developing
this assumption, management evaluates historical returns
[ 102 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
on plan assets as well as benchmark information including projections of asset class returns
and long-term inflation.
The discount rate assumptions for the Company’s material plans (U.S. and U.K.)
are determined by using a model consisting of bond portfolios that match the cash flows of the
plan’s projected benefit payments. Use of the rate produced by this model generates a projected
obligation that equals the current market value of a portfolio of high-quality zero coupon bonds
whose maturity dates and amounts match the timing and amount of expected future benefit payments.
Asset Allocation
The asset allocation for the Company’s pension plans at September 30, 2006 and 2005, and the target
allocation for 2007, by asset category, are below. Actual allocations generally will be within 5
percent of these targets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
Percentage of
|
|
|
|
|
Allocation
|
|
|
Plan assets at
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Equity securities
|
|
|
67
|
%
|
|
|
67
|
%
|
|
|
68
|
%
|
|
Debt securities
|
|
|
27
|
%
|
|
|
27
|
%
|
|
|
26
|
%
|
|
Other
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
The Company invests in a diversified portfolio to ensure that adverse or unexpected results from a
security class will not have a detrimental impact on the entire portfolio. The portfolio is
diversified by asset type, risk characteristics and concentration of investments. Asset classes and
ranges considered appropriate for investment of each plan’s assets are determined by the plan’s
investment committee. The asset classes typically include domestic and foreign equities, emerging
market equities, domestic and foreign investment grade and high-yield bonds and domestic real
estate.
Benefit Payments
The Company’s retirement plans expect to make benefit payments to retirees as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012-
|
|
|
(Millions)
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2016
|
|
|
Expected payments
|
|
$
|
142
|
|
|
$
|
144
|
|
|
$
|
151
|
|
|
$
|
157
|
|
|
$
|
168
|
|
|
$
|
1,116
|
|
|
|
In addition, the Company expects to contribute $40 million to its pension plans in 2007.
DEFINED CONTRIBUTION RETIREMENT PLANS
The Company sponsors defined contribution retirement plans, the principal plan being the Incentive
Savings Plan (ISP), a 401(k) savings plan with a profit sharing and stock bonus feature.
The ISP is a qualified plan under ERISA and covers most employees in the United States. Under the
terms of the ISP, employees have the option of investing in the American Express Company Stock
Fund, which invests primarily in the Company’s common stock, through accumulated payroll
deductions. In addition, at least quarterly the Company makes automatic cash contributions equal to
1 percent per annum of each qualifying employee’s base salary. These contributions are invested
automatically in the American Express Company Stock Fund and can be directed at any time into other
ISP investment options.
Compensation expense related to the Company’s contribution to the ISP was $14
million in 2006, and $15 million in each of 2005 and 2004; this amount is included in defined
contribution plan expense discussed below. The ISP held 16 million and 17 million shares of
American Express Common Stock at December 31, 2006 and 2005, respectively, beneficially for
employees.
In 2006, as part of the amendment to the U.K. pension plan, the Company
established a defined contribution plan in the U.K. As a result, expense and contributions related
to defined contribution plans have increased in the current year as compared to previous periods.
The total expense for all defined contribution plans globally was $114 million,
$116 million, and $117 million in 2006, 2005, and 2004, respectively.
OTHER POSTRETIREMENT BENEFITS PLANS
The Company sponsors unfunded defined postretirement benefit plans that provide health care and
life insurance to certain retired U.S. employees.
Adoption of SFAS No. 158
The following table provides the cumulative effect of the change in accounting principle with
respect to recognizing the funded status of the other postretirement benefit plans in the
Consolidated Balance Sheet as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
|
|
|
Post-
|
|
|
|
|
Pre-SFAS
|
|
|
No. 158
|
|
|
SFAS
|
|
|
(Millions)
|
|
No. 158
|
|
|
impact
|
|
|
No. 158
|
|
|
Accrued benefit liability (a)
|
|
$
|
(229
|
)
|
|
$
|
(140
|
)
|
|
$
|
(369
|
)
|
|
Accumulated other comprehensive loss, net of tax (b)
|
|
$
|
—
|
|
|
$
|
86
|
|
|
$
|
86
|
|
|
|
|
|
|
|
|
(a)
|
|
The accrued benefit liability represents the projected benefit obligation for all plans as these plans are unfunded.
|
|
|
|
(b)
|
|
The $86 million adjustment to accumulated other comprehensive loss represents the recognition of the previously
unrecognized actuarial losses and prior service credit of $140 million, net of $54 million of deferred taxes.
|
[ 103 ]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
american express company
Accumulated Other Comprehensive Loss
The following table provides the items comprising the amount in accumulated other comprehensive
loss as of December 31:
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
Net actuarial loss
|
|
$
|
146
|
|
|
Net prior service credit
|
|
|
(6
|
)
|
|
|
|
|
|
|
Total, pretax effect
|
|
|
140
|
|
|
Tax impact
|
|
|
(54
|
)
|
|
|
|
|
|
|
Total, net of taxes
|
|
$
|
86
|
|
|
|
The estimated portion of the net actuarial loss and net prior service credit above that is
expected to be recognized as a component of net periodic benefit cost in 2007 is $13 million and
$(2) million, respectively.
Plan Obligations
The following table provides a reconciliation of the changes in the plans’ projected benefit
obligation for all plans accounted for under SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions” (SFAS No. 106):
Reconciliation of Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Projected benefit obligation, October 1 prior year
|
|
$
|
388
|
|
|
$
|
357
|
|
|
Service cost
|
|
|
7
|
|
|
|
6
|
|
|
Interest cost
|
|
|
21
|
|
|
|
20
|
|
|
Benefits paid
|
|
|
(28
|
)
|
|
|
(25
|
)
|
|
Actuarial (gain) loss
|
|
|
(12
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at September 30,
|
|
$
|
376
|
|
|
$
|
388
|
|
|
|
The liabilities for the Company’s defined postretirement benefit plans recognized in the
Consolidated Balance Sheets as of December 31 are included in the table below. As noted
previously, due to the adoption of SFAS No. 158 as of December 31, 2006, the funded status of $376
million, less fourth quarter contributions of $7 million, is reflected in the December 31, 2006
Consolidated Balance Sheet.
Reconciliation of Accrued Benefit Cost and Total Amount Recognized
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Funded status of the plan
|
|
$
|
(376
|
)
|
|
$
|
(388
|
)
|
|
Unrecognized prior service cost
|
|
|
—
|
|
|
|
(8
|
)
|
|
Unrecognized net actuarial loss
|
|
|
—
|
|
|
|
172
|
|
|
Fourth quarter payments
|
|
|
7
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized at December 31,
|
|
$
|
(369
|
)
|
|
$
|
(218
|
)
|
|
|
Net Periodic Benefit Cost
SFAS No. 106 provides for the delayed recognition of the net actuarial loss and the net prior
service credit remaining in accumulated other comprehensive income (loss).
The components of the net periodic benefit cost for all defined postretirement
benefit plans accounted for under SFAS No. 106, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Service cost
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
Interest cost
|
|
|
21
|
|
|
|
20
|
|
|
|
20
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service costs
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
Recognized net actuarial loss
|
|
|
14
|
|
|
|
12
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
40
|
|
|
$
|
36
|
|
|
$
|
35
|
|
|
|
Assumptions
The weighted average assumptions used to determine benefit obligations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Discount rates
|
|
|
5.7
|
%
|
|
|
5.4
|
%
|
|
Health care cost increase rate:
|
|
|
|
|
|
|
|
|
|
Following year
|
|
|
9.5
|
%
|
|
|
10.0
|
%
|
|
Decreasing to the year 2016
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
A one percentage-point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
|
|
|
|
|
|
|
One
|
|
|
|
|
|
|
|
|
percentage-
|
|
|
|
|
|
|
percentage-
|
|
|
|
|
|
|
|
|
point
|
|
|
|
|
|
|
point
|
|
|
|
|
|
|
|
|
increase
|
|
|
|
|
|
|
decrease
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Increase (Decrease) on benefits earned and interest cost for U.S. plans
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
Increase (Decrease) on postretirement benefit obligation for U.S. plans
|
|
$
|
19
|
|
|
$
|
20
|
|
|
$
|
(17
|
)
|
|
$
|
(18
|
)
|
|
|
Benefit Payments
The Company’s other postretirement benefit plans expect to make benefit payments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012-
|
|
|
(Millions)
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2016
|
|
|
Expected payments
|
|
$
|
28
|
|
|
$
|
28
|
|
|
$
|
29
|
|
|
$
|
29
|
|
|
$
|
29
|
|
|
$
|
157
|
|
|
|
In addition, the Company expects to contribute $28 million to its other postretirement benefit
plans in 2007.
[104]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
american express company
NOTE 17 INCOME TAXES
The components of income tax provision included in the Consolidated Statements of Income on income
from continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current income tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
1,189
|
|
|
$
|
864
|
|
|
$
|
756
|
|
|
U.S. state and local
|
|
|
156
|
|
|
|
97
|
|
|
|
12
|
|
|
Non-U.S.
|
|
|
351
|
|
|
|
385
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
1,696
|
|
|
|
1,346
|
|
|
|
933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit) provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(68
|
)
|
|
|
(236
|
)
|
|
|
308
|
|
|
U.S. state and local
|
|
|
(36
|
)
|
|
|
(46
|
)
|
|
|
7
|
|
|
Non-U.S.
|
|
|
7
|
|
|
|
(37
|
)
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit) provision
|
|
|
(97
|
)
|
|
|
(319
|
)
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
1,599
|
|
|
$
|
1,027
|
|
|
$
|
1,145
|
|
|
|
A reconciliation of the U.S. federal statutory rate of 35 percent to the Company’s effective
income tax rate for 2006, 2005, and 2004 on continuing operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Combined tax at U.S. statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
Changes in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-preferred investments
|
|
|
(3.0
|
)
|
|
|
(3.7
|
)
|
|
|
(4.2
|
)
|
|
State and local income taxes
|
|
|
1.5
|
|
|
|
0.8
|
|
|
|
0.3
|
|
|
Non-U.S. subsidiaries earnings
|
|
|
(3.6
|
)
|
|
|
(3.4
|
)
|
|
|
(2.4
|
)
|
|
IRS tax settlements
|
|
|
(0.3
|
)
|
|
|
(4.5
|
)
|
|
|
(0.5
|
)
|
|
All other
|
|
|
0.4
|
|
|
|
—
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rates
|
|
|
30.0
|
%
|
|
|
24.2
|
%
|
|
|
29.8
|
%
|
|
|
Accumulated earnings of certain non-U.S. subsidiaries, which totaled approximately $3.9
billion at December 31, 2006, are intended to be permanently reinvested outside the United States.
Accordingly, federal taxes, which would have aggregated approximately $856 million, have not been
provided on those earnings.
Company records a deferred income tax (benefit) provision when there are
differences between assets and liabilities measured for financial reporting and for income tax
return purposes. The significant components of deferred tax assets and liabilities at
December 31 are reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Reserves not yet deducted for tax purposes
|
|
$
|
2,868
|
|
|
$
|
2,583
|
|
|
Employee compensation and benefits
|
|
|
602
|
|
|
|
274
|
|
|
Other
|
|
|
103
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
3,573
|
|
|
|
2,962
|
|
|
Valuation allowance
|
|
|
(51
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,522
|
|
|
|
2,907
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
582
|
|
|
|
533
|
|
|
Deferred revenue
|
|
|
380
|
|
|
|
345
|
|
|
Asset securitizations
|
|
|
323
|
|
|
|
310
|
|
|
Deferred foreign tax credits
|
|
|
209
|
|
|
|
61
|
|
|
Other
|
|
|
388
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
1,882
|
|
|
|
1,637
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,640
|
|
|
$
|
1,270
|
|
|
|
The valuation allowances at December 31, 2006 and 2005 relate to deferred tax assets
associated with non-U.S. operations.
Income taxes paid by the Company (including amounts related to discontinued
operations) during 2006, 2005, and 2004 were approximately $1.4 billion, $1.7 billion, and $1.1
billion, respectively. These amounts include estimated tax payments and cash settlements relating
to prior tax years.
The tax benefit realized for tax deductions from stock option exercises which
are recorded in additional paid-in capital totaled $128 million, $234 million, and $158 million for
the years ended December 31, 2006, 2005, and 2004, respectively.
Comprehensive income in the Consolidated Statements of Shareholders’ Equity is
presented net of the following income tax (benefit) provision amounts:
COMPREHENSIVE INCOME COMPONENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net unrealized securities losses
|
|
$
|
(27
|
)
|
|
$
|
(103
|
)
|
|
$
|
(92
|
)
|
|
Net unrealized derivative (losses) gains
|
|
|
(61
|
)
|
|
|
139
|
|
|
|
152
|
|
|
Foreign currency translation gains
|
|
|
12
|
|
|
|
29
|
|
|
|
11
|
|
|
Minimum pension liability
|
|
|
10
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
Net unrealized pension and other postretirement benefit costs
|
|
|
(210
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision
|
|
$
|
(276
|
)
|
|
$
|
63
|
|
|
$
|
71
|
|
|
|
[105]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
american express company
The table above excludes 2005 activity associated with discontinued operations. Income tax
(benefit) provision amounts in 2005 on net unrealized securities gains, net unrealized derivative
losses and foreign currency translation adjustments included in accumulated other comprehensive
loss associated with discontinued operations were $(218) million, $15 million, and $(8) million,
respectively.
NOTE 18 EARNINGS PER COMMON SHARE (EPS)
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, RSAs, and other financial instruments
that may be converted into common shares. The computations of basic and diluted EPS for the years
ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions, except per share amounts)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
3,729
|
|
|
$
|
3,221
|
|
|
$
|
2,686
|
|
|
(Loss) Income from discontinued operations, net of tax
|
|
|
(22
|
)
|
|
|
513
|
|
|
|
830
|
|
|
Cumulative effect of accounting change, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,707
|
|
|
$
|
3,734
|
|
|
$
|
3,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: Weighted-average shares outstanding during the period
|
|
|
1,212
|
|
|
|
1,233
|
|
|
|
1,259
|
|
|
Add: Dilutive effect of stock options, restricted stock
awards and other dilutive securities
|
|
|
26
|
|
|
|
25
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,238
|
|
|
|
1,258
|
|
|
|
1,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
3.08
|
|
|
$
|
2.61
|
|
|
$
|
2.13
|
|
|
(Loss) Income from discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.42
|
|
|
|
0.66
|
|
|
Cumulative effect of accounting change, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3.06
|
|
|
$
|
3.03
|
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
3.01
|
|
|
$
|
2.56
|
|
|
$
|
2.09
|
|
|
(Loss) Income from discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.41
|
|
|
|
0.65
|
|
|
Cumulative effect of accounting change, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.99
|
|
|
$
|
2.97
|
|
|
$
|
2.68
|
|
|
|
For the years ended December 31, 2006, 2005, and 2004, the dilutive effect of unexercised
stock options excludes 6 million, 14 million, and 13 million options, respectively, from the
computation of EPS because inclusion of the options would have been anti-dilutive.
The Subordinated Debentures, discussed in Note 8, will not affect the EPS
computation unless the Company fails to achieve specified performance measures related to the
Company’s tangible common equity and consolidated net income. The Company will reflect the
additional common shares in the EPS computation only in the event the Company fails to achieve the
specified performance measures, which the Company believes is unlikely.
NOTE 19 REPORTABLE OPERATING SEGMENTS AND GEOGRAPHIC OPERATIONS
REPORTABLE OPERATING SEGMENTS
The Company is a leading global payments, network, and travel company that is principally engaged
in businesses comprising three reportable operating segments: U.S. Card Services, International
Card & Global Commercial Services, and Global Network & Merchant Services. The Company considers a
combination of factors when evaluating the composition of
its reportable operating segments and the
aggregation of operating segments with similar attributes (in all material respects), including
economic characteristics, products and services offered, classes of customers, product distribution
channels, geographic considerations (primarily U.S. versus international), and regulatory
environment considerations.
U.S. Card Services issues a wide range of card products and services to
consumers and small businesses in the U.S., provides consumer travel services to cardmembers and
other consumers, and also issues Travelers Cheques and other prepaid products on a global basis.
International Card & Global Commercial Services issues proprietary consumer and
small business cards outside the U.S., offers global corporate payment and travel-related products
and services, and provides international banking services through American Express Bank Ltd.
Global Network & Merchant Services operates a global merchant services
business, which includes signing merchants to accept cards as well as processing and settling card
transactions for those merchants. This segment also offers merchants point-of-sale and back-
[106]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
american express company
office products, services, and marketing programs and also manages a global general-purpose charge
and credit card network, which includes both proprietary cards and cards issued under network
partnership agreements.
Corporate & Other consists of corporate functions and auxiliary businesses,
including the Company’s publishing business, and for 2004, the
leasing product line of
the Company’s small business financing unit, which was sold in 2004.
The following table presents certain selected financial information at December
31, 2006, 2005, and 2004 and for each of the years then ended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Card &
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
Network &
|
|
|
|
|
|
|
|
|
|
|
U.S. Card
|
|
|
Commercial
|
|
|
Merchant
|
|
|
Corporate
|
|
|
|
|
|
(Millions, except where indicated)
|
|
Services
|
|
|
Services
|
|
|
Services
|
|
|
& Other
|
|
|
Consolidated
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
13,955
|
|
|
$
|
9,464
|
|
|
$
|
3,161
|
|
|
$
|
556
|
|
|
$
|
27,136
|
|
|
Cardmember lending finance charge revenue, net
of interest
|
|
|
2,477
|
|
|
|
808
|
|
|
|
98
|
|
|
|
74
|
|
|
|
3,457
|
|
|
Interest expense
|
|
|
799
|
|
|
|
500
|
|
|
|
(183
|
)
|
|
|
120
|
|
|
|
1,236
|
|
|
Pretax income (loss) from continuing operations
|
|
|
3,305
|
|
|
|
1,148
|
|
|
|
1,188
|
|
|
|
(313
|
)
|
|
|
5,328
|
|
|
Income tax provision (benefit)
|
|
|
1,028
|
|
|
|
263
|
|
|
|
409
|
|
|
|
(101
|
)
|
|
|
1,599
|
|
|
Income (Loss) from continuing operations
|
|
$
|
2,277
|
|
|
$
|
885
|
|
|
$
|
779
|
|
|
$
|
(212
|
)
|
|
$
|
3,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (billions)
|
|
$
|
79.7
|
|
|
$
|
57.7
|
|
|
$
|
4.4
|
|
|
$
|
(13.9
|
)
|
|
$
|
127.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity (billions)
|
|
$
|
5.0
|
|
|
$
|
4.1
|
|
|
$
|
1.3
|
|
|
$
|
0.1
|
|
|
$
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
11,978
|
|
|
$
|
8,905
|
|
|
$
|
2,747
|
|
|
$
|
438
|
|
|
$
|
24,068
|
|
|
Cardmember lending finance charge revenue, net
of interest
|
|
|
1,792
|
|
|
|
684
|
|
|
|
67
|
|
|
|
37
|
|
|
|
2,580
|
|
|
Interest expense
|
|
|
562
|
|
|
|
389
|
|
|
|
(145
|
)
|
|
|
114
|
|
|
|
920
|
|
|
Pretax income (loss) from continuing operations
|
|
|
2,571
|
|
|
|
1,093
|
|
|
|
882
|
|
|
|
(298
|
)
|
|
|
4,248
|
|
|
Income tax provision (benefit)
|
|
|
755
|
|
|
|
194
|
|
|
|
309
|
|
|
|
(231
|
)
|
|
|
1,027
|
|
|
Income (Loss) from continuing operations
|
|
$
|
1,816
|
|
|
$
|
899
|
|
|
$
|
573
|
|
|
$
|
(67
|
)
|
|
$
|
3,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (billions)
|
|
$
|
70.3
|
|
|
$
|
51.7
|
|
|
$
|
4.5
|
|
|
$
|
(12.5
|
)
|
|
$
|
114.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity (billions)
|
|
$
|
5.1
|
|
|
$
|
4.1
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
10,442
|
|
|
$
|
8,423
|
|
|
$
|
2,531
|
|
|
$
|
501
|
|
|
$
|
21,897
|
|
|
Cardmember lending finance charge revenue, net
of interest
|
|
|
1,370
|
|
|
|
640
|
|
|
|
29
|
|
|
|
185
|
|
|
|
2,224
|
|
|
Interest expense
|
|
|
453
|
|
|
|
280
|
|
|
|
(108
|
)
|
|
|
189
|
|
|
|
814
|
|
|
Pretax income (loss) from continuing operations
|
|
|
2,160
|
|
|
|
1,073
|
|
|
|
911
|
|
|
|
(313
|
)
|
|
|
3,831
|
|
|
Income tax provision (benefit)
|
|
|
629
|
|
|
|
319
|
|
|
|
332
|
|
|
|
(135
|
)
|
|
|
1,145
|
|
|
Income (Loss) from continuing operations
|
|
$
|
1,531
|
|
|
$
|
754
|
|
|
$
|
579
|
|
|
$
|
(178
|
)
|
|
$
|
2,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (billions)
(b)
|
|
$
|
58.3
|
|
|
$
|
47.9
|
|
|
$
|
3.9
|
|
|
$
|
84.1
|
|
|
$
|
194.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity (billions)
|
|
$
|
4.5
|
|
|
$
|
3.8
|
|
|
$
|
1.1
|
|
|
$
|
6.6
|
|
|
$
|
16.0
|
|
|
|
|
|
|
|
|
(a)
|
|
Amounts for 2005 and 2004 include certain revenue and expense reclassifications, as well as
certain revisions to expenses allocated to segments. These items had no impact on the Company’s
consolidated pretax income from continuing operations, income tax provision, income from
continuing operations or total assets.
|
|
|
|
(b)
|
|
Corporate & Other total assets for 2004 include $87.1 billion of assets of discontinued operations.
|
[107]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
american express company
Net Revenues
The Company allocates discount revenue and certain other revenues among segments using a transfer
pricing methodology. Segments earn discount revenue based on the volume of merchant business
generated by cardmembers. Within the U.S. Card Services and International Card & Global Commercial
Services segments, discount revenue reflects the issuer component of the overall discount rate;
within the Global Network & Merchant Services segment, discount revenue reflects the network and
merchant component of the overall discount rate. Net finance charge revenue and net card fees are
directly attributable to the segment in which they are reported.
Expenses
Marketing, promotion, rewards and cardmember services expenses are reflected in each segment based
on actual expenses incurred, with the exception of brand advertising, which is reflected in the
Global Network & Merchant Services segment.
The provision for losses and benefits includes credit-related expenses and
interest credited on investment certificates directly attributable to the segment in which they are
reported.
Human resources and other operating expenses reflect expenses incurred directly
within each segment. In addition, expenses related to the Company’s support services are allocated
to each segment based on support service activities directly attributable to the segment. Other
overhead expenses are allocated to segments based on each segment’s level of pretax income.
Financing requirements are managed on a consolidated basis. Funding costs are allocated based on
segment funding requirements.
Capital
Each business segment is allocated capital based on established business model operating
requirements, risk measures and regulatory capital requirements. Business model operating
requirements include capital needed to support operations and specific balance sheet items. The
risk measures include considerations for credit, market and operational risk.
Income taxes
Income tax provision (benefit) is allocated to each business segment based on the effective tax
rates applicable to various businesses that make up the segment.
Assets
Assets are those that are used or generated exclusively by each segment.
GEOGRAPHIC OPERATIONS
The following table presents the Company’s net revenues and pretax income in different geographic
regions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
United States
|
|
|
Europe
|
|
|
Asia/Pacific
|
|
|
All Other
|
|
|
Consolidated
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
18,376
|
|
|
$
|
3,564
|
|
|
$
|
2,482
|
|
|
$
|
2,714
|
|
|
$
|
27,136
|
|
|
Pretax income from continuing operations
|
|
$
|
4,264
|
|
|
$
|
369
|
|
|
$
|
193
|
|
|
$
|
502
|
|
|
$
|
5,328
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
15,888
|
|
|
$
|
3,274
|
|
|
$
|
2,333
|
|
|
$
|
2,573
|
|
|
$
|
24,068
|
|
|
Pretax income from continuing operations
|
|
$
|
3,337
|
|
|
$
|
289
|
|
|
$
|
310
|
|
|
$
|
312
|
|
|
$
|
4,248
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
14,490
|
|
|
$
|
3,096
|
|
|
$
|
2,142
|
|
|
$
|
2,169
|
|
|
$
|
21,897
|
|
|
Pretax income from continuing operations
|
|
$
|
2,784
|
|
|
$
|
293
|
|
|
$
|
286
|
|
|
$
|
468
|
|
|
$
|
3,831
|
|
|
|
The data in the above table are, in part, based upon internal allocations, which necessarily
involve management’s judgment. Therefore, it is not practicable to separate precisely the U.S. and
international services.
[108]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
american express company
NOTE 20 QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions, except per share amounts)
|
|
2006
(a)
|
|
|
2005
(a)
|
|
|
Quarters Ended
|
|
12/31
|
|
|
9/30
|
|
|
6/30
|
|
|
3/31
|
|
|
12/31
|
|
|
9/30
|
|
|
6/30
|
|
|
3/31
|
|
|
Net revenues
|
|
$
|
7,208
|
|
|
$
|
6,759
|
|
|
$
|
6,850
|
|
|
$
|
6,319
|
|
|
$
|
6,380
|
|
|
$
|
6,028
|
|
|
$
|
6,020
|
|
|
$
|
5,640
|
|
|
Pretax income from continuing operations
|
|
|
1,223
|
|
|
|
1,338
|
|
|
|
1,442
|
|
|
|
1,325
|
|
|
|
959
|
|
|
|
1,080
|
|
|
|
1,121
|
|
|
|
1,088
|
|
|
Income from continuing operations
|
|
|
925
|
|
|
|
956
|
|
|
|
972
|
|
|
|
876
|
|
|
|
751
|
|
|
|
865
|
|
|
|
860
|
|
|
|
745
|
|
|
(Loss) Income from discontinued operations, net
of tax
|
|
|
(3
|
)
|
|
|
11
|
|
|
|
(27
|
)
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
165
|
|
|
|
153
|
|
|
|
201
|
|
|
Net income
|
|
|
922
|
|
|
|
967
|
|
|
|
945
|
|
|
|
873
|
|
|
|
745
|
|
|
|
1,030
|
|
|
|
1,013
|
|
|
|
946
|
|
|
Earnings Per Common Share — Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.77
|
|
|
$
|
0.79
|
|
|
$
|
0.80
|
|
|
$
|
0.71
|
|
|
$
|
0.61
|
|
|
$
|
0.70
|
|
|
$
|
0.70
|
|
|
$
|
0.60
|
|
|
Discontinued operations
|
|
|
—
|
|
|
|
0.01
|
|
|
|
(0.02
|
)
|
|
|
—
|
|
|
|
(0.01
|
)
|
|
|
0.14
|
|
|
|
0.12
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.77
|
|
|
$
|
0.80
|
|
|
$
|
0.78
|
|
|
$
|
0.71
|
|
|
$
|
0.60
|
|
|
$
|
0.84
|
|
|
$
|
0.82
|
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share — Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.76
|
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
|
$
|
0.70
|
|
|
$
|
0.60
|
|
|
$
|
0.69
|
|
|
$
|
0.69
|
|
|
$
|
0.59
|
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.01
|
|
|
|
(0.02
|
)
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
0.13
|
|
|
|
0.12
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.75
|
|
|
$
|
0.79
|
|
|
$
|
0.76
|
|
|
$
|
0.69
|
|
|
$
|
0.59
|
|
|
$
|
0.82
|
|
|
$
|
0.81
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
Common share price
(b)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
62.50
|
|
|
$
|
56.19
|
|
|
$
|
54.91
|
|
|
$
|
55.00
|
|
|
$
|
53.06
|
(b)
|
|
$
|
59.50
|
|
|
$
|
55.30
|
|
|
$
|
58.03
|
|
|
Low
|
|
$
|
55.00
|
|
|
$
|
49.73
|
|
|
$
|
50.92
|
|
|
$
|
51.05
|
|
|
$
|
46.59
|
(b)
|
|
$
|
52.30
|
|
|
$
|
49.51
|
|
|
$
|
50.01
|
|
|
|
|
|
|
|
|
(a)
|
|
The spin-off of Ameriprise and certain
dispositions were completed in 2006 and 2005, and
the results of these operations are presented as
discontinued operations. Note 2 provides additional
information on discontinued operations.
|
|
|
|
(b)
|
|
The market price per share beginning with the
fourth quarter of 2005 reflects the spin-off of
Ameriprise as of September 30, 2005. The opening
share price on the first trading day after the
spin-off was $50.75.
|
NOTE 21 RESTRUCTURING CHARGES
During 2006, the Company recorded restructuring charges of $100 million relating to the Company’s
business travel, operations, finance, and technology areas. These charges principally
relate to the consolidation of business operations, closing of operating sites, and exiting certain
businesses, and are comprised of $89 million of severance and $11 million of other exit costs.
During 2005 and 2004, the Company recorded restructuring charges of $193
million and $99 million, respectively, relating to consolidation and site closures in the Company’s
business travel and international operations, and relocation of certain functions in the Company’s
finance and technologies operations.
Charges related to severance obligations are included in human resources. Other
exit costs are included in occupancy and equipment, professional services, and other expenses in
the Company’s Consolidated Statements of Income for the years ended December 31, 2006, 2005, and
2004.
Cash payments related to remaining restructuring liabilities at December 31,
2006, are expected to be completed by the end of the first quarter of 2008, except for certain
lease obligations which will continue until their expiration in 2010.
[109]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
american express company
The following table summarizes by category the Company’s restructuring charge
activity for each of the Company’s reportable operating segments (U.S. Card Services (USCS),
International Card & Global Commercial Services (ICGCS), and Global Network & Merchant Services
(GNMS)).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at
|
|
|
2006 Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at
|
|
|
|
|
December 31, 2005
|
|
|
charges, net of reversals
|
|
|
Cash paid during 2006
|
|
|
Other-non-cash
(b)
|
|
|
December 31, 2006
|
|
|
(Millions)
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
Severance
(a)
|
|
|
Other
|
|
|
Total
|
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
USCS
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
21
|
|
|
$
|
6
|
|
|
$
|
27
|
|
|
$
|
(4
|
)
|
|
$
|
(2
|
)
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
ICGCS
|
|
|
48
|
|
|
|
4
|
|
|
|
52
|
|
|
|
55
|
|
|
|
5
|
|
|
|
60
|
|
|
|
(60
|
)
|
|
|
(3
|
)
|
|
|
(63
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
41
|
|
|
|
4
|
|
|
|
45
|
|
|
GNMS
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
|
Corporate &
Other
|
|
|
44
|
|
|
|
5
|
|
|
|
49
|
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
|
|
(30
|
)
|
|
|
(5
|
)
|
|
|
(35
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
—
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
98
|
|
|
$
|
9
|
|
|
$
|
107
|
|
|
$
|
89
|
|
|
$
|
11
|
|
|
$
|
100
|
|
|
$
|
(96
|
)
|
|
$
|
(10
|
)
|
|
$
|
(106
|
)
|
|
$
|
(2
|
)
|
|
$
|
(6
|
)
|
|
$
|
(8
|
)
|
|
$
|
89
|
|
|
$
|
4
|
|
|
$
|
93
|
|
|
|
|
|
|
|
|
(a)
|
|
Reversals of $21 million ($3 million, $3 million, $1
million, and $14 million, primarily due to a greater portion
of impacted employees finding other opportunities with the
Company than was originally anticipated, were recorded in
USCS, ICGCS, GNMS, and Corporate & Other, respectively), for
the year ended December 31, 2006.
|
|
|
|
(b)
|
|
Represents primarily asset write-downs and non-cash severance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at
|
|
|
2005 Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at
|
|
|
|
|
December 31, 2004
|
|
|
charges
|
|
|
Cash paid during 2005
|
|
|
December 31, 2005
|
|
|
(Millions)
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
USCS
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
ICGCS
|
|
|
63
|
|
|
|
13
|
|
|
|
76
|
|
|
|
88
|
|
|
|
12
|
|
|
|
100
|
|
|
|
(103
|
)
|
|
|
(21
|
)
|
|
|
(124
|
)
|
|
|
48
|
|
|
|
4
|
|
|
|
52
|
|
|
GNMS
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
Corporate &
Other
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
63
|
|
|
|
17
|
|
|
|
80
|
|
|
|
(22
|
)
|
|
|
(12
|
)
|
|
|
(34
|
)
|
|
|
44
|
|
|
|
5
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66
|
|
|
$
|
13
|
|
|
$
|
79
|
|
|
$
|
164
|
|
|
$
|
29
|
|
|
$
|
193
|
|
|
$
|
(132
|
)
|
|
$
|
(33
|
)
|
|
$
|
(165
|
)
|
|
$
|
98
|
|
|
$
|
9
|
|
|
$
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at
|
|
|
|
|
charges
|
|
|
Cash paid during 2004
|
|
|
December 31, 2004
|
|
|
(Millions)
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
USCS
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
ICGCS
|
|
|
71
|
|
|
|
19
|
|
|
|
90
|
|
|
|
(8
|
)
|
|
|
(6
|
)
|
|
|
(14
|
)
|
|
|
63
|
|
|
|
13
|
|
|
|
76
|
|
|
GNMS
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Corporate &
Other
|
|
|
5
|
|
|
|
4
|
|
|
|
9
|
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
76
|
|
|
$
|
23
|
|
|
$
|
99
|
|
|
$
|
(10
|
)
|
|
$
|
(10
|
)
|
|
$
|
(20
|
)
|
|
$
|
66
|
|
|
$
|
13
|
|
|
$
|
79
|
|
|
|
The Company makes decisions on restructuring initiatives as the economic environment dictates.
As of December 31, 2006, the total expenses to be incurred for previously approved restructuring
activities that were in-progress during 2006 are not expected to be materially different than the
cumulative expenses incurred to date for these programs. The amounts in the table below relate to
the in-progress restructuring programs initiated at various dates between the fourth quarter of
2004 and the fourth quarter of 2006.
CUMULATIVE RESTRUCTURING EXPENSE INCURRED TO DATE ON IN-PROGRESS RESTRUCTURING PROGRAMS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
USCS
|
|
$
|
31
|
|
|
$
|
6
|
|
|
$
|
37
|
|
|
ICGCS
|
|
|
214
|
|
|
|
36
|
|
|
|
250
|
|
|
GNMS
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
|
Corporate & Other
|
|
|
74
|
|
|
|
21
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
329
|
|
|
$
|
63
|
|
|
$
|
392
|
|
|
|
[110]
CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions, except per share amounts, percentages, and where indicated)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Operating Results
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
27,136
|
|
|
$
|
24,068
|
|
|
$
|
21,897
|
|
|
$
|
19,549
|
|
|
$
|
18,079
|
|
|
Expenses
|
|
|
21,808
|
|
|
|
19,820
|
|
|
|
18,066
|
|
|
|
16,134
|
|
|
|
15,058
|
|
|
Income from continuing operations
|
|
|
3,729
|
|
|
|
3,221
|
|
|
|
2,686
|
|
|
|
2,335
|
|
|
|
2,142
|
|
|
(Loss) Income from discontinued operations
|
|
|
(22
|
)
|
|
|
513
|
|
|
|
830
|
|
|
|
665
|
|
|
|
529
|
|
|
Income before cumulative effect of accounting change
|
|
|
3,707
|
|
|
|
3,734
|
|
|
|
3,516
|
|
|
|
3,000
|
|
|
|
2,671
|
|
|
Net income
|
|
|
3,707
|
|
|
|
3,734
|
|
|
|
3,445
|
|
|
|
2,987
|
|
|
|
2,671
|
|
|
Return on average equity
(b)
|
|
|
34.7
|
%
|
|
|
25.4
|
%
|
|
|
22.0
|
%
|
|
|
20.6
|
%
|
|
|
20.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,956
|
|
|
$
|
7,126
|
|
|
$
|
7,808
|
|
|
$
|
3,967
|
|
|
$
|
3,939
|
|
|
Accounts receivable and accrued interest, net
|
|
|
38,851
|
|
|
|
35,497
|
|
|
|
32,398
|
|
|
|
29,394
|
|
|
|
27,677
|
|
|
Investments
|
|
|
20,990
|
|
|
|
21,334
|
|
|
|
21,675
|
|
|
|
19,305
|
|
|
|
20,272
|
|
|
Loans, net
|
|
|
50,248
|
|
|
|
40,801
|
|
|
|
34,256
|
|
|
|
31,706
|
|
|
|
27,212
|
|
|
Assets of discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
87,141
|
|
|
|
80,207
|
|
|
|
69,242
|
|
|
Total assets
|
|
|
127,853
|
|
|
|
113,960
|
|
|
|
194,216
|
|
|
|
175,861
|
|
|
|
158,299
|
|
|
Customers’ deposits
|
|
|
24,656
|
|
|
|
24,579
|
|
|
|
20,107
|
|
|
|
20,252
|
|
|
|
17,252
|
|
|
Travelers Cheques outstanding
|
|
|
7,215
|
|
|
|
7,175
|
|
|
|
7,287
|
|
|
|
6,819
|
|
|
|
6,623
|
|
|
Short-term debt
|
|
|
15,162
|
|
|
|
15,633
|
|
|
|
14,316
|
|
|
|
18,983
|
|
|
|
21,172
|
|
|
Long-term debt
|
|
|
42,747
|
|
|
|
30,781
|
|
|
|
32,676
|
|
|
|
20,209
|
|
|
|
16,188
|
|
|
Liabilities of discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
80,675
|
|
|
|
73,193
|
|
|
|
63,112
|
|
|
Shareholders’ equity
|
|
|
10,511
|
|
|
|
10,549
|
|
|
|
16,020
|
|
|
|
15,323
|
|
|
|
13,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Share Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.08
|
|
|
$
|
2.61
|
|
|
$
|
2.13
|
|
|
$
|
1.82
|
|
|
$
|
1.62
|
|
|
Diluted
|
|
$
|
3.01
|
|
|
$
|
2.56
|
|
|
$
|
2.09
|
|
|
$
|
1.80
|
|
|
$
|
1.61
|
|
|
(Loss) Income from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.42
|
|
|
$
|
0.66
|
|
|
$
|
0.52
|
|
|
$
|
0.40
|
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.41
|
|
|
$
|
0.65
|
|
|
$
|
0.51
|
|
|
$
|
0.40
|
|
|
Cumulative effect of accounting change, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
—
|
|
|
Diluted
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
—
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.06
|
|
|
$
|
3.03
|
|
|
$
|
2.74
|
|
|
$
|
2.33
|
|
|
$
|
2.02
|
|
|
Diluted
|
|
$
|
2.99
|
|
|
$
|
2.97
|
|
|
$
|
2.68
|
|
|
$
|
2.30
|
|
|
$
|
2.01
|
|
|
Cash dividends declared per share
|
|
$
|
0.57
|
|
|
$
|
0.48
|
|
|
$
|
0.44
|
|
|
$
|
0.38
|
|
|
$
|
0.32
|
|
|
Book value per share
|
|
$
|
8.76
|
|
|
$
|
8.50
|
|
|
$
|
12.83
|
|
|
$
|
11.93
|
|
|
$
|
10.63
|
|
|
Market price per share
(c)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
62.50
|
|
|
$
|
59.50
|
|
|
$
|
57.05
|
|
|
$
|
49.11
|
|
|
$
|
44.91
|
|
|
Low
|
|
$
|
49.73
|
|
|
$
|
47.01
|
|
|
$
|
47.32
|
|
|
$
|
30.90
|
|
|
$
|
26.55
|
|
|
Close
|
|
$
|
60.67
|
|
|
$
|
51.46
|
|
|
$
|
56.37
|
|
|
$
|
48.23
|
|
|
$
|
35.35
|
|
|
Average common shares outstanding for earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,212
|
|
|
|
1,233
|
|
|
|
1,259
|
|
|
|
1,284
|
|
|
|
1,320
|
|
|
Diluted
|
|
|
1,238
|
|
|
|
1,258
|
|
|
|
1,285
|
|
|
|
1,298
|
|
|
|
1,330
|
|
|
Shares outstanding at period end
|
|
|
1,199
|
|
|
|
1,241
|
|
|
|
1,249
|
|
|
|
1,284
|
|
|
|
1,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at period end (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
32
|
|
|
|
29
|
|
|
|
41
|
|
|
|
42
|
|
|
|
41
|
|
|
Outside United States
|
|
|
33
|
|
|
|
37
|
|
|
|
37
|
|
|
|
36
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(d)
|
|
|
65
|
|
|
|
66
|
|
|
|
78
|
|
|
|
78
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shareholders of record
|
|
|
51,644
|
|
|
|
55,409
|
|
|
|
50,394
|
|
|
|
47,967
|
|
|
|
51,061
|
|
|
|
|
|
|
|
|
(a)
|
|
The spin-off of Ameriprise and certain dispositions were completed
in 2006 and 2005, and the results of these operations are
presented as discontinued operations. Note 2 provides additional
information on discontinued operations.
|
|
|
|
(b)
|
|
Computed on a trailing 12-month basis using total shareholders’
equity as included in the Consolidated Financial Statements
prepared in accordance with GAAP.
|
|
|
|
(c)
|
|
The market price per share beginning with the fourth quarter of
2005 reflects the spin-off of Ameriprise as of September 30, 2005.
The opening share price on the first trading day after the
spin-off was $50.75.
|
|
|
|
(d)
|
|
Years prior to 2005 include employees from discontinued operations.
|
[111]
