-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pmr3CfHq0OF8zDwlYpcSnG4UZhncepDapZbm3j0K55v3bpV7iNm73EYW6zaFsuEL j23G7Fr6zQQ+79DxwhMm3Q== 0000004962-99-000012.txt : 19990331 0000004962-99-000012.hdr.sgml : 19990331 ACCESSION NUMBER: 0000004962-99-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN EXPRESS CO CENTRAL INDEX KEY: 0000004962 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 134922250 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07657 FILM NUMBER: 99577687 BUSINESS ADDRESS: STREET 1: AMERICAN EXPRESS TWR WORLD FINANCIAL CN STREET 2: 200 VESEY ST 49TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10285 BUSINESS PHONE: 2126402000 MAIL ADDRESS: STREET 1: AMERICAN EXPRESS TOWER STREET 2: 200 VESEY ST 49TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10285 10-K 1 AMERICAN EXPRESS COMPANY 1998 10-K =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________to ________ Commission File No. 1-7657 American Express Company (Exact name of registrant as specified in its charter) New York 13-4922250 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) World Financial Center 200 Vesey Street New York, New York 10285 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 640-2000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ___________________ ___________________ Common Shares (par value $.60 per Share) New York Stock Exchange Boston Stock Exchange Chicago Stock Exchange Pacific Exchange 7.00% Cumulative Quarterly Income New York Stock Exchange Preferred Securities, Series I of American Express Company Capital Trust I (and the guarantee of American Express Company with respect thereto) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _ Common shares of the registrant outstanding at March 4, 1999 were 450, 324,448. The aggregate market value, as of March 4, 1999, of voting shares held by non-affiliates of the registrant was approximately $50.1 billion. Documents Incorporated By Reference ___________________________________ Parts I, II and IV: Portions of Registrant's 1998 Annual Report to Shareholders. Part III: Portions of Registrant's Proxy Statement dated March 11, 1999. TABLE OF CONTENTS Form 10-K Item Number Part I Page ------ ---- 1. Business Travel Related Services . . . . . . . . . . . . . . . . . . . . . 1 American Express Financial Advisors . . . . . . . . . . . . . . . 12 American Express Bank/Travelers Cheque . . . . . . . . . . . . . 20 Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . 31 Foreign Operations . . . . . . . . . . . . . . . . . . . . . . . . 31 Important Factors Regarding Forward-Looking Statements . . . . 32 Segment Information and Classes of Similar Services . . . . . . 35 Executive Officers of the Company . . . . . . . . . . . . . . . 35 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 39 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 40 Part II ------- 5. Market for Company's Common Equity and Related Stockholder Matters . 40 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . 40 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 40 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . 40 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . 41 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 41 Part III -------- 10. Directors and Executive Officers of the Company . . . . . . . . . . . .41 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . .41 12. Security Ownership of Certain Beneficial Owners and Management . . . . .41 13. Certain Relationships and Related Transactions . . . . . . . . . . . .41 Part IV ------- 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . .41 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Index to Financial Statements . . . . . . . . . . . . . . . . . . . F-1 Consent of Independent Auditors . . . . . . . . . . . . . . . . . . . F-2 Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1 PART I ------ ITEM 1. BUSINESS American Express Company (including its subsidiaries, unless the context indicates otherwise, the "Company") was founded in 1850 as a joint stock association and was incorporated under the laws of the State of New York in 1965. The Company is primarily engaged in the business of providing travel related services, financial advisory services and international banking services throughout the world.* TRAVEL RELATED SERVICES ----------------------- American Express Travel Related Services Company, Inc. (including its subsidiaries, unless the context indicates otherwise, "TRS") provides a variety of products and services, including, among others, global network services, the American Express(R) Card, the Optima(R) Card and other consumer and corporate lending products, stored value products, business expense management products and services, corporate and consumer travel products and services, tax preparation and business planning services, magazine publishing, and merchant transaction processing, point of sale and back office products and services. TRS offers products and services in approximately 160 countries. In certain countries, partly owned affiliates and unaffiliated entities offer some of these products and services under licenses from TRS. TRS' business as a whole has not experienced significant seasonal fluctuation, although Card billed business tends to be moderately higher in the fourth quarter than in other quarters. TRS places significant importance on its trademarks and service marks and diligently protects its intellectual property rights around the world. GLOBAL NETWORK SERVICES ----------------------- TRS operates a global general purpose credit and charge card network which performs functions essential to the acceptance by merchants of cards issued by network issuers. These functions include, for example, brand advertising, new product development and telecommunications and other technologies, including systems to authorize and settle card transactions. Cards bearing the American Express logo ("Cards") are issued by qualified institutions and are accepted at all merchant locations worldwide that accept the American Express Card. __________________ *Various forward-looking statements are made in this 10-K Annual Report, which generally include the words "believe," "expect," "anticipate," "optimistic," "intend," "aim," "will," and similar expressions. Certain factors that may cause actual results to differ materially from these forward-looking statements, including the Company's goals referred to herein, are discussed on pages 32-34. 1 TRS is the largest issuer of Cards on the American Express global network; however, there are currently 43 arrangements in place with banks and other qualified institutions around the world providing for Card issuance by those entities. Some of these arrangements have been in place for more than 20 years; the vast majority have been established since 1995. In May 1996, the Company invited banks and other qualified institutions in the United States to begin issuing Cards on the American Express network. In 1997, the Company established a separate internal organization, Global Network Services, to manage its network business, bringing increased focus and resources to this area. During 1998, TRS established 16 new network arrangements outside the United States, adding to the 27 network arrangements already in place (see TRS International below). In addition, Global Network Services showed strong volume growth in 1998 with a 30% increase in billed business. To date, the only U.S. issuers on the American Express network are TRS and National Westminster Bank, Plc (a United Kingdom financial institution with no other card issuing activities in the United States). This is the result of rules and policies of VISA USA, Inc. and MasterCard International, Incorporated ("MasterCard") in the United States calling for expulsion of members who issue American Express-branded cards. No banks have been willing to forfeit membership in VISA USA, Inc. and/or MasterCard to issue cards on the American Express network. In a lawsuit filed on October 7, 1998 against VISA USA, Inc. and VISA International Corp. (collectively, "VISA") and MasterCard, the U.S. Department of Justice alleged that these rules and policies violate the U.S. antitrust laws. As a network, TRS encounters intense worldwide competition from card systems like VISA, MasterCard, Diners Club, the Discover/NOVUS Network of Morgan Stanley Dean Witter & Co. (U.S. only) and JCB. The principal competitive factors that affect the network business are (i) the number of cards in force and extent of spending done with these cards; (ii) the quantity and quality of establishments that will accept the cards; (iii) the success of targeted marketing and promotional campaigns; (iv) reputation and brand recognition; (v) the ability to develop and implement innovative systems and technologies; and (vi) the ability to develop and implement innovative types of card products and merchant support services. CONSUMER CARD SERVICES ---------------------- TRS and its licensees offer individual consumers charge cards such as the American Express(R) Card, the American Express(R) Gold Card and the Platinum Card(R), revolving credit cards such as the Optima(R) Card and the American Express(R) Credit Card, among others, and a variety of cards sponsored by and co-branded with other corporations and institutions. Cards are currently issued in 45 currencies (including cards issued by banks and other qualified institutions) and permit Cardmembers to charge purchases of goods or services in the United States and in most countries around the world at establishments that have agreed to accept them, and to access cash through automated teller machines at approximately 227,000 locations worldwide. Charge Cards, which are marketed in the United States and many other countries and carry no pre-set spending limit, are primarily designed as a method of payment and not as a 2 means of financing purchases of goods or services. Charges are approved based on a variety of factors including a Cardmember's account history, credit record and personal resources. Except in the case of extended payment plans (such as Sign & Travel(R) and the Special Purchase Account(SM), Charge Cards require payment by the Cardmember of the full amount billed each month, and no finance charges are assessed. Charge Card accounts that are past due are subject, in most cases, to a delinquency assessment and, if not brought to current status, subject to cancellation. The Optima Card comprises a family of revolving credit cards marketed in the United States and other countries. TRS makes available to customers a variety of Optima Cards with different payment terms, grace periods and rate structures. TRS and its licensees also issue revolving credit cards which do not carry the Optima brand, primarily outside the United States. TRS intends to issue more of these non-Optima revolving credit products in the U.S., which will carry the American Express brand. American Express Centurion Bank ("Centurion Bank"), a wholly-owned subsidiary of TRS, issues the Optima Card in the United States and owns most of the receivables arising from the use of these Cards. In addition, Centurion Bank has outstanding lines of credit in association with certain Charge Cards and offers unsecured loans to Cardmembers in connection with their Sign & Travel Account and Special Purchase Account. The Sign & Travel program gives qualified United States Cardmembers the option of extended payments for airline, cruise and certain travel charges that are purchased with the Charge Card. The Special Purchase Account offers qualified United States Cardmembers the option of extending payment for certain charges on the Charge Card in excess of a specified amount. In several markets outside the United States, other subsidiaries of TRS engage in consumer lending activities, subject to local regulations. Centurion Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per depositor. Centurion Bank is a Utah-chartered industrial loan company regulated, supervised and regularly examined by the Utah Department of Financial Institutions and the FDIC. TRS Cardmembers generally are charged an annual fee, which varies based on the type of card, the number of cards for each account, the currency in which the card is denominated and the country of residence of the Cardmember. Many Optima Cards are offered with no annual fee. Each Cardmember must meet standards and criteria for creditworthiness which are applied through a variety of means both at the time of initial solicitation or application and on an ongoing basis during the Card relationship. The Company uses sophisticated credit models and techniques in its risk management operations. Cardmembers have access to a variety of special services and programs, depending on the type of Card they have, including: Membership Rewards(R), Global Assist(R) Hotline, Buyer's Assurance Plan, Car Rental Loss and Damage Insurance Plan, Travel Accident Insurance, Purchase Protection Plan, and Return Protection. Gold Card Cardmembers in the 3 United States have access to certain additional services, including a Year End Summary of Charges Report. The Platinum Card, offered to certain Cardmembers in the United States and certain other countries, provides access to additional and enhanced travel, financial, insurance, personal assistance and other services. Under the Express Cash program, enrolled Cardmembers can obtain cash or American Express(R) Travelers Cheques 24 hours a day from automated teller machines worldwide. Personal, Gold and Platinum Cardmembers receive the Customer Relationship Statement, which is used to communicate special offers for products and services of both merchants and the Company. American Express Credit Corporation, a wholly-owned subsidiary of TRS, along with its subsidiaries ("Credco"), purchase most Charge Card receivables arising from the use of cards issued in the United States and in designated currencies outside the United States. Credco finances the purchase of receivables principally through the issuance of commercial paper and the sale of medium- and long-term notes. Centurion Bank finances its revolving credit receivables through the sale of short- and medium-term notes and certificates. TRS and Centurion Bank also fund receivables through asset securitization programs. The cost of funding Cardmember receivables is a major expense of Card operations. The Charge Card and consumer lending businesses are subject to extensive regulation in the United States under a number of federal laws and regulations, including the Equal Credit Opportunity Act, which generally prohibits discrimination in the granting and handling of credit; the Fair Credit Reporting Act, which, among other things, regulates use by creditors of consumer credit reports and credit prescreening practices and requires certain disclosures when an application for credit is rejected; the Truth in Lending Act, which, among other things, requires extensive disclosure of the terms upon which credit is granted; the Fair Credit Billing Act, which, among other things, regulates the manner in which billing inquiries are handled and specifies certain billing requirements; and the Fair Credit and Charge Card Disclosure Act, which mandates certain disclosures on credit and charge card applications. Federal legislation also regulates abusive debt collection practices. In addition, a number of states and foreign countries have similar consumer credit protection and disclosure laws. The application of federal and state bankruptcy and debtor relief laws affect the Company to the extent such laws result in amounts owed being classified as delinquent and/or charged off as uncollectible. The laws and regulations discussed above have not had, and are not expected to have, a material adverse effect on the Charge Card and consumer lending businesses either in the United States or on a worldwide basis. Centurion Bank is subject to a variety of state and federal laws and regulations applicable to FDIC-insured, state-chartered financial institutions. Changes in such laws and regulations or judicial interpretation thereof could impact the manner in which Centurion Bank conducts its business. In 1998, TRS continued to focus on deepening its relationships with core Cardmembers and gaining a greater share of the plastic spending of its customers. It introduced existing Cardmembers to other card products, including upgrades to Gold and Platinum Cards, increased usage of lending products such as Sign & Travel and the Special Purchase Account, and provided incentives to increase everyday spending by Cardmembers in categories such as 4 gasoline and groceries. TRS also selectively expanded the size of credit lines and encouraged Cardmembers to transfer outstanding balances from other card issuers. As a result, TRS significantly increased lending balances and continued to capture a greater share of the credit card lending market. In 1998, TRS also launched several new card products. It introduced a card which offers special services and discounts to National Restaurant Association members, and began issuing the American Express(R) Cash Rebate Card, which gives Cardmembers up to two percent cash back on their purchases. TRS also had strong growth in Platinum Cards. TRS is continuing to make a significant investment in its card processing system and infrastructure to allow faster introduction and greater customization of products. Over the past few years, TRS has expanded its Membership Rewards program (formerly the Membership Miles(R) travel rewards program) to include a broader range of travel rewards and retail merchandise and gourmet gifts. Membership Rewards is an important part of TRS' strategy to increase Cardmember spending and loyalty. Membership Rewards is one of the industry's most popular rewards programs with over seven-and-one-half million enrollees worldwide. Enrollees now represent a significant portion of Cardmember spending. TRS makes payments to merchants pursuant to contractual arrangements when Cardmembers redeem their Membership Rewards points and establishes reserves in connection with estimated future redemptions. Due to higher charge volumes and reward redemption rates, the cost of Membership Rewards has increased over the past several years and continues to grow. In 1997 and 1998, TRS took certain steps to contain the overall costs of the program, and plans to continue to consider and, as appropriate, introduce changes to the program to both maintain its value to Cardmembers and operate it more efficiently. TRS encounters substantial and increasingly intense competition worldwide with respect to the Card issuing business. As a Card issuer, TRS is faced with competition from other financial institutions (such as Citigroup, First USA/Bank One, MBNA, Chase Manhattan, Bank of America and Barclays Bank) that are members of VISA and/or MasterCard and that issue general purpose cards, primarily under revolving credit plans, on one or both of those systems, and from Morgan Stanley Dean Witter & Co., the issuer of the Discover(R) Card. TRS also encounters some very limited competition from businesses that issue their own cards or otherwise extend credit to their customers, such as retailers and airline associations, although these cards are not generally substitutes for TRS' Cards due to their limited acceptance. Numerous United States banks issuing credit cards under revolving credit plans charge annual fees in addition to interest charges where permitted by state law. However, the issuer of the Discover Card on the Discover/NOVUS Network, as well as many issuers of VISA cards and MasterCard cards, generally charge no annual fees. Competing card issuers offer a variety of products and services to attract cardholders including premium cards with enhanced services or lines of credit, airline frequent flyer program mileage credits and other reward or rebate programs, "teaser" promotional rates for both card acquisition and balance transfers, and co-branded arrangements with partners that 5 offer benefits to cardholders. Recently mergers and consolidations among banking and financial services companies and credit card portfolio acquisitions by major issuers have resulted in some issuers becoming larger, with greater resources, economies of scale and potential brand recognition to compete, and a smaller number of dominant issuers has emerged. There has also been an increased use of debit cards for point of sale purchases as many banks have replaced ATM cards with general purpose debit cards bearing either the VISA or MasterCard logo. The principal competitive factors that affect the Card issuing business are (i) the quality of the services and products, including rewards programs, provided to Cardmembers; (ii) the number, spending characteristics and credit performance of Cardmembers; (iii) the quantity and quality of the establishments that will accept a card; (iv) the cost of cards to Cardmembers; (v) the terms of payment available to Cardmembers; (vi) the number and quality of other payment instruments available to Cardmembers; (vii) the nature and quality of expense management data capture and reporting capability; (viii) the success of targeted marketing and promotional campaigns; (ix) reputation and brand recognition; and (x) the ability of issuers to implement operational and cost efficiencies. MERCHANT SERVICES ----------------- Over the past several years, TRS' Establishment Services Group has focused on expanding the TRS network of merchants and increasing merchant acceptance, both through internal personnel and third party sales agents. In 1998, TRS increased its merchant coverage in various industries, including supermarkets, retailers, furniture stores, government agencies and charitable organizations. The total number of new merchants signed in the U.S. in 1998 increased 16 percent from the prior year. The merchant network in the United States can now accommodate over 94 percent of American Express Cardmembers' general purpose plastic spending, up slightly from last year. TRS' objective is to achieve merchant coverage that is at parity with bankcard networks. In the United States, TRS acquires merchants through three sales channels: a proprietary sales force, third party sales agents and telemarketing. As a merchant processor, TRS accepts and processes from each participating establishment the charges arising from Cardmember purchases at a discount that varies with the type of participating establishment, the charge volume, the timing and method of payment to the establishment, the method of submission of charges and, in certain instances, the average charge amount and the amount of information provided. As a result of TRS' attractive Cardmember base with loyal, high-spending Personal and Corporate cardmembers, TRS is generally able to charge higher discount rates to participating establishments than its competitors. While many establishments understand this pricing in relation to the value provided, TRS has encountered complaints from some establishments, as well as suppression of the Card's use, and continues to devote significant resources to respond to these issues. TRS focuses on understanding and addressing key factors that influence merchant satisfaction, on executing programs that increase card usage at merchants and on strengthening its relationships with merchants through an expanded roster of services that help them meet 6 their business goals. These include software and internet based services that assist with back office reconciliation and that help to secure online transactions. In 1998, TRS expanded its ATM business in the United States with the acquisition of nearly 3,000 terminals, making TRS the ninth largest operator of ATMs in the U.S. TRS plans to use these ATMs to deliver a range of services to Cardmembers and to help build retail sales for merchants. On a global basis, the American Express network manages the acquiring relationship with merchants, as well as the issuing side of the business. This "closed loop", which distinguishes the American Express network from the bankcard networks, provides a rich source of information at both ends of the Card transaction and enables TRS to provide targeted marketing opportunities for merchants and special offers to Cardmembers. In 1998, TRS expanded the CustomExtras program, which is used to make special offers of merchant products and services to Cardmembers in their billing statements, and enables merchants to tailor offers to their best customers. CORPORATE SERVICES, SMALL BUSINESS SERVICES AND TRAVEL ------------------------------------------------------ TRS, through its Corporate Services Group and Small Business Services Group, is the leading provider to large and small businesses of expense management systems and travel services. The Corporate Services Group ("CSG") provides Corporate Charge Card expense management services to large and mid-sized companies for travel and entertainment spending. Companies are offered these services through the American Express Corporate Card, which is a charge card issued to individuals through a corporate account established by their employer for business purposes. CSG integrates the Corporate Card and business travel services in the United States and certain foreign countries to meet the competition for the business traveler and to provide client companies with a customized approach to managing their travel and entertainment budgets. Clients are provided an information package to plan, account for and control travel and entertainment expenses. The Corporate Services business continued to grow in 1998. However, the economic slowdown outside the U.S. dampened corporate spending and travel. In addition, the ongoing trend of commission rate reductions from airlines resulted in decreased business travel revenue and price increases for travelers and corporations. Competitors also continue to increase their focus on the Corporate Card business. For a discussion of competition relating to the Card issuing business, see pages 5 and 6. In 1998, TRS decided not to pursue further bidding on the United States Government Card contract after reevaluating the earnings potential of this business. As a result, in November 1998, TRS' Card contract with the U.S. government terminated. The Government account represented approximately 1.6 million Cards outstanding and approximately $3.5 billion in annual billed business. 7 In 1998, CSG continued to develop electronic solutions to assist companies in managing costs by leveraging technologies. TRS enhanced American Express Interactive, or AXI(R), an interactive business travel product jointly developed with Microsoft Corporation, which now has nearly 250,000 registered users. TRS also launched, along with Concur Technologies, a service that allows customers to file an expense report online by combining Corporate Card charges with travel information, thereby permitting business travelers to obtain reimbursement more quickly. TRS also offers products to enhance client company management of non-travel and entertainment business expenses through the Corporate Purchasing Card. This product assists large companies in managing indirect spending including traditional purchasing administration expenses. Employees can use the Purchasing Card to order directly from manufacturers and suppliers, rather than using the traditional system of requisitions, purchase orders and invoices and retail store purchasing. TRS pays the suppliers and submits a single monthly billing statement to the company. TRS, through its Small Business Services Group, is also a leading provider of financial and travel services to small businesses (i.e., less than 100 employees and/or sales of $10 million or less). TRS continued to achieve substantial growth in the Small Business Services Group in 1998. TRS serves the needs of small businesses with a portfolio of charge and credit card products. In addition, TRS offers its customers a Privileged Rates program which includes specifically negotiated rates on services such as car rental, gasoline, hotel and office services. TRS also maintains a website, the American Express Small Business Exchange, through which it provides small business owners with relevant information, expert advice and customer servicing applications. A key strategy for TRS is the creation of products to meet better the credit needs of small business owners. Equipment financing is a key lending category for small business owners. In 1998, TRS expanded this business by acquiring 100% ownership of the equipment financing company, CapitaFinance, in which TRS previously had a 50% interest. In February 1999, TRS also purchased Rockford Industries, a firm that provides point-of-purchase equipment financing. In 1998, TRS also introduced an International Payments site on the internet, which provides a convenient and cost-effective way for small businesses in the U.S. to pay international vendors in more than 40 foreign currencies, 24 hours a day, seven days a week. TRS also entered into a marketing arrangement with, and purchased a minority investment in, Administaff Inc., which offers American Express' small business clients human resource services on an outsourced basis. American Express Tax and Business Services ("TBS") is a part of the Small Business Services Group. TBS provides a wide range of services including tax preparation and compliance; preparation of non-attest financial statements; business continuation and transition 8 planning; business valuation; loan consultation and preparation; business plan development; money management assistance; bookkeeping and payroll consultation services; cash flow planning; and other business consulting services. TBS has offices in approximately 60 locations in 18 states, and continued to acquire accounting firms in 1998. TRS provides a wide variety of travel services to customers traveling for business and personal purposes and is the leading business travel provider worldwide. Travel services include trip planning, reservations, ticketing and other incidental services. In addition, for business travel accounts, TRS provides corporate travel policy consultation and management information systems as well as group and incentive travel services. TRS receives commissions and fees for travel bookings and arrangements from airlines, hotels, car rental companies and other travel suppliers, service fees for certain transactions such as re-ticketing, courier services and complex itineraries and management and transaction fees from certain business travel accounts. In 1998, TRS continued its strategy of bolstering its travel industry presence to improve its ability to negotiate with key suppliers and reduce profit margin pressure. During the year it acquired Travel One, the ninth largest travel agency in the U.S., with a large number of middle-sized business travel clients. In 1998, TRS also further strengthened its roster of Business Travel clients and also focused on deepening its partnerships with major airlines and hotel companies through, among other initiatives, the launching of co-branded cards and programs offering special amenities to travelers. TRS' retail travel network of more than 1,700 owned and representative offices is important in supporting the American Express brand and providing customer service throughout the world. TRS continually evaluates this structure to determine the best way to leverage the strength of the travel network. At the same time, TRS is developing ways to better serve the travel consumer, including 1-800-type services, and internet-based products and services. During 1998, TRS acquired Travel Impressions, a developer and marketer of vacation packages, and Empress Travel, a retail travel agency franchiser. In March 1999, TRS acquired Golden Bear Travel Agency, a travel agency specializing in cruises. TRS faces vigorous competition from more than 30,000 travel agents as well as direct sales by airlines and travel suppliers in the United States and abroad. This competition is mainly based on price, service, convenience and proximity to the customer and has increased due to several factors in recent years, including the acquisition of independent agencies by larger travel companies. Travel agency groups and consortia also have increased in size, enabling participating independent agencies to be more competitive in providing travel services to regional and national business travel clients and in other activities. In addition, many companies have established in-house business travel departments. Airlines have continued efforts to reduce their distribution expenses, including travel agency commissions, through techniques such as caps on commission fees and decreases in base commission rates. This has caused some independent agencies to go out of business. In response, TRS has accelerated its efforts to rely less on commissions by establishing more service fee-based client relationships. Consolidation of travel agencies is likely to continue as agencies seek to better serve national and multinational business travel clients and negotiate 9 more effectively with the airlines with respect to computer reservation systems and compensation and pricing arrangements. It is also expected that travel agencies will continue to look for expense reduction opportunities. Customers may increasingly seek alternative channels to make travel arrangements, such as on-line vendors or "ticketless" airline services that require booking directly with the airlines. TRS INTERNATIONAL ----------------- The TRS International group is focusing on expanding its proprietary card business and network alliances in key markets, expanding the network of merchants that accept American Express Cards, leveraging opportunities for growth in Corporate Card, Corporate Travel and in other areas of Corporate Services and re-engineering its business to improve key processes and reduce costs. In 1998, TRS continued to bolster its proprietary business through the launch of more than 30 new proprietary and co-branded charge and revolving credit cards in a number of markets outside the United States. These included a Small Business Card in the U.K.; Blue Cards, which are revolving credit cards targeted to young consumers, in the U.K., Germany, Canada and Singapore; Platinum Cards in Argentina, Taiwan, Malaysia, Brazil and Singapore; co-branded cards with Aeromexico in Mexico, Thai Airways and the Dusit Group in Thailand and Air France, Accor and Credit Lyonnais in France; and a co-branded Travel Rewards Card in Thailand. TRS International also continued to pursue alliances through joint ventures or with qualified institutions that issue cards with an American Express logo. These cards are accepted worldwide on the American Express merchant network. In 1998, TRS established 16 new network arrangements, launching cards with Banco Popular in Puerto Rico, AMP Banking in Australia and Komercni Banka in the Czech Republic, among others. TRS also formed joint ventures with Generale Bank in Belgium/Luxembourg and Credit Suisse in Switzerland. As of December 31, 1998, TRS had established 43 network arrangements in over 53 countries. TRS expects to continue establishing similar types of arrangements outside the United States while at the same time deepening its relationships with existing partners. TRS International also strengthened its corporate travel business in 1998. It increased its ownership in Havas Voyages SA, the largest travel agency in France, from a minority to a wholly-owned interest, and established a joint venture with BBL Travel in Belgium and Luxembourg. These acquisitions bolster TRS' position in the global travel business, provide a platform for Corporate Card sales and further increase the importance of TRS' customer base with key travel suppliers. This is important in the current travel agency business, both internationally and domestically, with ongoing pressure to reduce commissions by major airlines and other suppliers. Significant re-engineering initiatives by TRS International during 1998 include a franchise agreement in Germany whereby Otto Reiseburo GmbH, a member of the Otto Versand Group, will operate 25 American Express retail travel offices and co-brand a number 10 of their own offices, thereby expanding the American Express travel office network in Germany on a cost-effective basis. TRS also launched a campaign similar to the successful program it used in the U.S. in order to address suppression issues in key international markets. In 1998, spending billed on TRS' International Cards and corporate and personal travel softened in certain markets outside the U.S. due in part to difficult economic conditions during the year. TRS International also provides foreign exchange services to consumers in American Express Travel Offices, dedicated bureaus, airports and other outlets, and cross-border money transfer services for small business, banking and travel customers. OTHER PRODUCTS AND SERVICES --------------------------- American Express Relationship Services ("AERS") sells products and services which address some of the information, access, security, financial and telecommunications needs of American Express customers. Services offered for a fee to Cardmembers include travel, health and credit insurance products, credit card registry, credit bureau monitoring and telecommunication services. In 1998, AERS launched three fee-for-service programs, including Charge Card credit protection, discounts on home repair and improvement services, and extended warranties for major home systems and appliances. AERS also offers merchandise directly to Cardmembers, who may elect to pay in installments with no finance charges and also markets educational loans to students and parents. AERS is also developing new stored value products. In 1998, AERS introduced the Electronic Gift Card, a magnetic stripe stored value card that replaces retail gift certificates. AERS is also responsible for three enterprise-wide utilities, including interactive, smart cards and customer information management. The group is seeking to develop the Company's enterprise-wide interactive strategy with a focus on providing internet and interactive capabilities to meet customers' needs. This is expected to be an increasingly important part of the Company's business in the future. Over the last several years, TRS has made a number of minority investments in internet firms, which typically also include a marketing arrangement with such companies. In 1998, AERS invested in Ticketmaster Online-CitySearch, Inc., which supplies online information guides and event ticketing for consumers and merchants; Concur Technologies, which provides employee desktop solutions including travel and expense management; SaveSmart, which offers personalized online offers from participating merchants; and @Back-up, which offers computer back-up service over the internet. AERS is also developing global strategies for smart cards and customer information management. Smart cards are cards with computer chips that can store and process data without the need for a direct telecommunications link with the card issuer. During the year TRS invested in Proton World International, a leading developer and licensor of smart card electronic purse technology, and became a licensee of the Multos(TM) smart card operating 11 system. AERS will continue to focus on the fast-changing electronic commerce, smart card and information management arenas and seek to craft solid strategies for the Company. Currently through the Company's website, consumer and small business Cardmembers can access account information, pay their American Express Card bills and apply for certain Card products. Cardmembers may also utilize the Quicken(R) software offered by Intuit(R), Inc. and Microsoft(R) Money software offered by Microsoft Corporation, to view their American Express Card account information. Through the Company's website customers can also invest in securities, check their 401(k) account, book travel reservations, apply for an educational loan, plus many other services; merchants also can apply to accept the card and reconcile their accounts. The Company anticipates further developments in this area in 1999. TRS also publishes lifestyle magazines such as Travel & Leisure(R), Travel & Leisure(R) Golf, Food & Wine(R), travel resources such as SkyGuide(R), Departures(TM), and business resources such as the American Express Appointment Book and Your Company(R) magazine. AMERICAN EXPRESS FINANCIAL ADVISORS ----------------------------------- American Express Financial Corporation ("AEFC") provides a variety of financial products and services to help individuals, businesses and institutions establish and achieve their financial goals. AEFC's products and services include financial planning and advice, insurance and annuities, a variety of investment products, including investment certificates, mutual funds and limited partnerships, investment advisory services, trust and employee plan administration services, personal auto and homeowner's insurance and retail securities brokerage services. At December 31, 1998, American Express Financial Advisors Inc. ("AXP Advisors"), AEFC's principal marketing subsidiary, maintained a nationwide financial planning field force of 10,350 persons, which includes approximately 1,100 advisors from the acquisition of Securities America, Inc. in 1998. DISTRIBUTION OF PRODUCTS AND SERVICES ------------------------------------- AXP Advisors has three primary financial service distribution channels: retail, consisting of financial advisors and direct access (online, telephone and fax), institutional and third party. AXP Advisors' primary distribution channel is its corps of financial advisors. Through this channel, AXP Advisors offers financial planning and investment advisory services (for which it charges a fee) to individuals and business owners which address six basic areas of financial planning: financial position, protection, investment, income tax, retirement and estate planning, as well as asset allocation. AXP Advisors' financial advisors provide clients with recommendations from the more than 100 products distributed by subsidiaries and affiliates of AEFC as well as products of approved third parties. 12 First-year financial advisors are compensated primarily by salary; veteran financial advisors receive compensation based largely on sales and assets maintained from sales. The compensation system is structured to encourage advisor retention and product persistency, while adding stability to the financial advisor's income. In attracting and retaining members of the field force, AXP Advisors competes with financial planning firms, insurance companies, securities broker-dealers and other financial institutions. During 1998, AXP Advisors continued a major initiative to improve advisor retention and client satisfaction. It implemented on a nationwide basis Advisor Link(TM), which is an integrated desktop financial planning, client management and communication software package which helps advisors generate more sophisticated, easy-to-read financial plans more quickly. The use of a dedicated field force may entail higher initial costs than other forms of marketing, such as direct-response or independent agency distribution. However, AXP Advisors believes that its ability to provide broad-based integrated services on a relationship basis is a competitive advantage. At the same time, AXP Advisors recognizes that it needs to continue its efforts to increase the size of its dedicated field force due to its main competitors' larger sales forces and more developed alternative distribution channels. Consistent with the Company's goal of promoting cross-selling across all of its units, AXP Advisors has increased its sales to customers from other American Express businesses. In 1998, American Express Cardmembers accounted for over 30 percent of all new clients of AXP Advisors' financial advisors, and substantial investment certificate sales were made to American Express Bank Ltd. foreign customers. Further cross-selling will be sought through AXP Advisors' recently established office in Japan, which plans to offer financial products and services to TRS' Cardmembers in Japan (as well as to non-Cardmembers). To enhance its ability to retain advisors, AXP Advisors is working on plans to add choices to how advisors fit into the organization, with various levels of service, compensation and branding. This includes providing options to the current American Express-branded advisor network, which will differ in the level of service and payout rate offered. Advisors will be able to choose a salaried employee advisor network with a high level of service and a lower payout rate; a branded advisor network in which advisors get a higher payout rate and can purchase the service they prefer; or an unbranded independent broker/dealer network with a minimal level of service and higher payout. AXP Advisors took a step toward implementing this plan when it acquired in March 1998 Securities America, Inc., an independent broker-dealer servicing approximately 1,100 financial advisors and a distributor of mutual funds, annuities and insurance products. During 1998 the American Express Financial Direct unit ("Financial Direct"), the Company's other financial services retail distribution channel, was moved into the AXP Advisors' organization to more closely align Financial Direct with AXP Advisors' product manufacturing capabilities and to provide Financial Direct's clients with alternative methods to access investment products, such as meeting with a financial advisor. To date, results for Financial Direct as a stand alone business have been below the Company's expectations and below scale. AXP Advisors ultimately plans to combine the capabilities of the financial 13 advisors and Financial Direct to provide clients multiple ways to interact with AXP Advisors. The feasibility and impact of this integrated retail business are being tested in a pilot which began its first phase in the fourth quarter of 1998. Financial Direct uses direct marketing and on-line services to help prospects and clients select appropriate products and services. Products developed by AXP Advisors as well as other businesses of the Company and selected outside vendors are offered through Financial Direct. These products are distributed by American Express Service Corporation and other affiliates, and include payment, credit, insurance and investment products such as no load mutual funds from 12 leading fund families (including the Strategist Funds from American Express referred to below); money market funds; certificates of deposit; annuities; and brokerage services (over the internet or through telephone or mail). The Financial Direct product line also offers Investment Rewards, which are points based upon the value of new deposits after opening an Investment Management Account that may be redeemed for airline travel and other rewards. During the year, AXP Advisors expanded its institutional business, which includes 401(k) services and separate account asset management services for corporate, public and union retirement funds. It now serves more than 600 institutions. In addition to the retail and institutional distribution channels, AXP Advisors has a third-party channel, which distributes financial planning services and investment, insurance and annuity products through alliances with financial institutions, such as banks and thrift institutions. The move to multiple distribution channels has implications for how AXP Advisors services its clients. In order to provide clients with a more integrated service, it will be necessary to build the capability to recognize and service the client's entire relationship with the institution regardless of which channel or channels they have used. This will require, among other things, investment in both technology infrastructure and the service organization. In addition, the distribution of proprietary products outside of the traditional advisor channel will require, among other things, that the organization modify its product systems so they can interface according to industry standards with distributors outside of AXP Advisors. AXP Advisors does business as a broker-dealer and investment advisor in all 50 states, the District of Columbia and Puerto Rico. AEFC and AXP Advisors are registered as broker-dealers and investment advisors regulated by the Securities and Exchange Commission ("SEC") and are members of the National Association of Securities Dealers, Inc. ("NASD"). AXP Advisors' financial advisors must obtain all required state and NASD licenses. AXP Advisors has experienced, and believes it will continue to encounter, increased regulatory oversight of the securities and commodities industries at all levels. Among other powers, the SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings, which may result in censure, fine, the issuance of cease-and-desist orders or suspension or expulsion of a broker-dealer or an investment advisor and its officers or employees. 14 Competition in the financial services industry focuses primarily on cost, investment performance, yield, convenience, service, reliability, safety, distribution systems, reputation and brand recognition. Competition in this industry is very intense. AEFC competes with a variety of financial institutions such as banks, securities brokers, mutual funds and insurance companies. Some of these institutions are larger and more global than AEFC, and the current trend towards consolidation and globalization in the financial services industry may increase the number of these stronger competitors. Many of these financial institutions also have products and services that increasingly cross over the traditional lines that previously differentiated one type of institution from another, thereby heightening competition in many of AEFC's markets. The ability of certain financial institutions to offer, and the dramatically increased usage by investors of, on-line investment and information services has also affected the competitive landscape over the past couple of years. Reflecting the competitive environment, certain financial institutions have continued to seek to hire AXP Advisors' financial advisors. AEFC's business does not as a whole experience significant seasonal fluctuations. INSURANCE AND ANNUITIES ----------------------- AEFC's insurance business is carried on primarily by IDS Life Insurance Company ("IDS Life"), a stock life insurance company organized under the laws of the State of Minnesota. IDS Life is a wholly-owned subsidiary of AEFC and serves all states except New York. IDS Life is the fourteenth largest life insurance company in the United States, with consolidated assets at December 31, 1998 of $56.6 billion. IDS Life Insurance Company of New York is a wholly-owned subsidiary of IDS Life and serves New York State residents. IDS Life also owns American Enterprise Life Insurance Company ("American Enterprise Life"), which issues fixed and variable dollar annuity contracts for sale through banks, thrift institutions and stock brokerages. American Centurion Life Assurance Company ("American Centurion Life") is an IDS Life subsidiary that offers fixed and variable annuities to American Express Cardmembers and others in New York, as well as fixed and variable annuities for sale through banks, thrift institutions and stock brokerages in New York. IDS Life owns American Partners Life Insurance Company ("American Partners Life"), which offers fixed and variable annuity contracts to American Express Cardmembers and others who reside in states other than New York. IDS Life's products include whole life, universal life (fixed and variable), single premium life and term products (including waiver of premium and accidental death benefits), disability income and long-term care insurance. IDS Life is one of the nation's largest issuers of single premium and flexible premium deferred annuities on both a fixed and variable dollar basis. Immediate annuities are offered as well. IDS Life markets variable annuity contracts designed for retirement plans. IDS Life's fixed deferred annuities guarantee a relatively low annual interest rate during the accumulation period (the time before annuity payments begin). However, the 15 company has the option of paying a higher rate set at its discretion. In addition, persons owning one type of annuity may have their interest calculated based on any upward movement in a broad-based stock market index. IDS Life also offers a variable annuity, the "Flexible Portfolio Annuity," in which the purchaser may choose between mutual funds, with portfolios of common stocks, bonds, managed assets and/or short-term securities, and IDS Life's "general account" as the underlying investment vehicle. Over the past five years, IDS Life's variable annuity sales have had an increasing impact on total annuity sales. IDS Life, American Enterprise Life and American Partners Life are subject to comprehensive regulation by the Minnesota Department of Commerce (Insurance Division), the Indiana Department of Insurance, and the Arizona Department of Insurance, respectively. American Centurion Life and IDS Life Insurance Company of New York are regulated by the New York State Department of Insurance. The laws of the other states in which these companies do business also regulate such matters as the licensing of sales personnel and, in some cases, the marketing and contents of insurance policies and annuity contracts. The purpose of such regulation and supervision is primarily to protect the interests of policyholders. Regulatory scrutiny of market conduct practices of insurance companies, including sales, marketing and replacements of fixed and variable life insurance and annuities, has increased significantly in recent years and is impacting the manner in which companies approach various operational issues, including compliance efforts. There has also been an increase in the number of private lawsuits alleging violations of laws in connection with insurance and annuity market conduct (see Legal Proceedings on page 39). Virtually all states mandate participation in insurance guaranty associations, which assess insurance companies in order to fund claims of policyholders of insolvent insurance companies. On the federal level, there is periodic interest in enacting new regulations relating to various aspects of the insurance industry including taxation of variable annuities and life insurance policies, accounting procedures, as well as the treatment of persons differently because of sex, with respect to terms, conditions, rates or benefits of an insurance contract. New federal regulation in any of these areas could potentially have an adverse effect upon AEFC's insurance subsidiaries. As a distributor of variable annuity and life insurance contracts, IDS Life is registered as a broker-dealer and is a member of the NASD. As investment manager of various investment companies, IDS Life is registered as an investment advisor under applicable federal requirements. IDS Property Casualty Insurance Company ("IDS Property Casualty") provides personal auto and homeowner's coverage to clients in 35 states and the District of Columbia. This insurance is also underwritten by AMEX Assurance Company, a subsidiary of the American Express Company, and reinsured by IDS Property Casualty. IDS Property Casualty is regulated by the Commissioner of Insurance for Wisconsin. AMEX Assurance Company, which also provides certain American Express Card related insurance products, is regulated by the Commissioner of Insurance for Illinois. The insurance and annuity business is highly competitive, and IDS Life's competitors consist of both stock and mutual insurance companies. Competitive factors applicable to the 16 insurance business include the interest rates credited to its products, the charges deducted from the cash values of such products, the financial strength of the organization and the services provided to policyholders. INVESTMENT CERTIFICATES ----------------------- IDS Certificate Company ("IDSC"), a wholly-owned subsidiary of AEFC, issues face-amount investment certificates. IDSC is registered as an investment company under the Investment Company Act of 1940. IDSC currently offers nine types of face-amount certificates. Owners of IDSC certificates are entitled to receive, at maturity, a stated amount of money equal to the aggregate investments in the certificate plus interest at rates declared from time to time by IDSC. In addition, persons owning two types of certificates may have their interest calculated in whole or in part based on any upward movement in a broad-based stock market index. The certificates issued by IDSC are not insured by any government agency. AEFC acts as investment manager for IDSC. IDSC's certificates are sold primarily by AXP Advisors' field force. Certificates are also marketed by American Express Bank Ltd. to its foreign customers. IDSC is the largest issuer of face-amount certificates in the United States. At December 31, 1998, it had approximately $3.8 billion in assets. IDSC's certificates compete with many other investments offered by banks, savings and loan associations, credit unions, mutual funds, insurance companies and similar financial institutions, which may be viewed by potential customers as offering a comparable or superior combination of safety and return on investment. MUTUAL FUNDS ------------ AXP Advisors offers a variety of mutual funds, for which it acts as principal underwriter (distributor of shares). AEFC acts as investment manager and performs various administrative services. The "IDS(R) MUTUAL FUND GROUP" consists of 38 retail mutual funds, with varied investment objectives, and includes, for example, money market, tax-exempt, bond and stock funds. The IDS MUTUAL FUND GROUP, with combined net assets at December 31, 1998 of $84.8 billion, was the fourteenth largest mutual fund organization in the United States and, excluding money market funds, was the eighth largest. The uneven performance in the global financial markets in 1998 impacted the results of many of the funds in the IDS MUTUAL FUND GROUP, and investment results for the year were mixed overall. For most funds, shares are sold in three classes. Class A shares are sold at net asset value plus any applicable sales charge. The maximum sales charge is five percent of the offering price with reduced sales charges for larger purchases. Class B shares are sold with a rear load. The maximum sales charge is five percent declining to no charge for shares held over six years. Class Y shares are sold to institutional clients with no load. Fifteen of the IDS funds are structured as feeder funds investing in the Preferred Master Trust Group, a group of fifteen master funds, advised by AEFC. A second family of fifteen funds, the no-load 17 Strategist Funds, distributed by American Express Service Corporation, also invests in the Preferred Master Trust Group. This structure provides for potential development of additional channels of distribution. In addition to full-commission and discount brokerage firms, competitors include other financial institutions, such as banks and insurance companies. Recent growth trends in the market, including the increasing sales of mutual funds to retail investors, have expanded the number of competitors in the industry. Some competitors are larger, more diversified and offer a greater number of products, and may have an advantage in their ability to attract and retain customers on the basis of one-stop shopping. The competitive factors affecting the sale of mutual funds include sales charges ("loads") paid, administrative expenses, services received, investment performance, the variety of products and services offered and the convenience to the investor. The funds compete with other investment products, including funds that have no sales charge (known as "no load" funds), funds distributed through independent brokerage firms and those distributed by other "exclusive" sales forces. AXP Advisors, through a subsidiary that has been registered as a broker/dealer in Japan, plans to begin offering mutual funds to individual Japanese investors in March 1999. OTHER PRODUCTS AND SERVICES --------------------------- American Express Asset Management Group Inc. ("AEAMG"), a subsidiary of AEFC, is an SEC registered investment advisor that provides investment management services for pension, profit sharing, employee savings and endowment funds of large- and medium-sized businesses and other institutions ("institutional clients"). AEAMG through its Portfolio Management Group also offers discretionary investment management services to wealthy individuals and small institutions with account sizes between $1 million and $10 million. AEAMG also owns a majority interest in Kenwood Capital Management LLC, which provides investment management services to investment companies, corporations, trusts, estates, charitable organizations and tax qualified pension and profit sharing plans. It employs an active investment strategy that is based on a disciplined approach to stock selection and portfolio risk management, and seeks to achieve consistent excess returns relative to passive index benchmarks for small- and mid-cap segments of the U.S. Equity Market. Advisory Capital Strategies Group, Inc., a subsidiary of AEAMG, is registered with the Commodity Futures Trading Commission as a Commodity Pool Operator and Commodity Trading Advisor and provides investment management services to certain private investment vehicles organized offshore. It owns the majority interest in Advisory Capital Partners LLC ("ACP"), which is registered with the Commodity Futures Trading Commission as a Commodity Pool Operator. ACP acts as general partner to two partnerships seeking superior capital appreciation, which are offered privately to qualified eligible participants and which employ various investment strategies, including among other things, the use of leverage, short selling of securities and investment in options, futures and other derivative instruments. 18 AEAMG also serves as a sub-advisor to American Express Asset Management Ltd. in providing investment advice with respect to the U.S. Equity Fund Portfolio for the American Express Asset Management Pooled Funds, which is an open-end unit trust under Canadian tax law. AEAMG also provides investment management services as collateral manager for various special purpose entities that issue their own securities which are collateralized by a pool of assets, e.g., collateralized bond obligations. At December 31, 1998, AEAMG managed securities portfolios totaling $20.1 billion for 404 accounts. International or global investment management is offered to United States-based institutional clients by American Express Asset Management International Inc. ("AEAMI"), a United States company with offices in Hong Kong, London and Singapore, and to non-United States based institutional clients by American Express Asset Management Ltd. ("AEAML"), a U.K. company with offices in Hong Kong, London and Singapore. International institutional investment management services are also provided, currently on a sub-advisor basis, for the clients of AEAMI and AEAML by American Express Asset Management International (Japan) Ltd., which has offices in Tokyo and which also plans to offer investment management services to Japanese institutional investors. At December 31, 1998, AEAMI managed securities portfolios totaling $8.1 billion for 23 accounts; and AEAML managed securities portfolios totaling $1.9 billion for 25 accounts. AEAMI and AEAML are wholly-owned subsidiaries of AEFC. The institutional investment management business is highly competitive and AEAMG and its affiliates must compete against a substantial number of larger firms in seeking to acquire and maintain assets under management. Competitive factors in this business include fees, investment performance and client service. AXP Advisors also offers investment management services for wealthy individuals and small institutions. IDS Wealth Management Service offers a wrap program marketed to wealthy individuals through AXP Advisors' financial advisors and marketing employees and third-party referrals. American Express Strategic Portfolio Services offers a mutual fund wrap program to wealthy individuals. IDS Wealth Management Service, American Express Strategic Portfolio Services and Portfolio Management Group are operating divisions of AXP Advisors. American Express Trust Company ("AETC") provides trustee, custodial, record keeping and investment management services for pension, profit sharing, 401(k) and other qualified and non-qualified employee benefit plans. AETC is trustee of over 390 benefit plans which represent approximately $22.1 billion in assets and 860,000 participants. AETC has assets under custody in excess of $120.2 billion and provides non-trusteed, investment management of assets in excess of $1.9 billion. AETC is regulated by the Minnesota Department of Commerce (Banking Division). AETC, through its personal trust division, also offers trust services to individuals and organizations. To facilitate expansion of the personal trust business, AEFC filed an application with the Office of Thrift Supervision to operate a federal savings bank. 19 AXP Advisors distributes real estate investment trusts sponsored by other companies. AXP Advisors also distributes from time to time managed futures limited partnerships in which an AEFC subsidiary is a co-general partner. In 1998, AEFC continued to expand its securities brokerage services. American Enterprise Investment Services Inc., a wholly-owned subsidiary of AEFC, provides securities execution and clearance services for approximately 282,750 retail and institutional clients of AXP Advisors and American Express Service Corporation. American Enterprise Investment Services, Inc. holds over $9.7 billion in assets for clients. American Enterprise Investment Services, Inc. is registered as a broker-dealer with the SEC, is a member of the NASD and the Chicago Stock Exchange and is registered with appropriate states. In 1998 AEFC and American Express Bank Ltd. organized a jointly owned subsidiary. American Express International Deposit Company ("AEIDC"), in the Cayman Islands to accept deposits from foreign clients of American Express Bank Ltd. AEIDC is not regulated as a bank in the Cayman Islands. AMERICAN EXPRESS BANK/TRAVELERS CHEQUE -------------------------------------- In the third quarter of 1997, management of the Company's Travelers Cheque unit was moved from TRS' Stored Value Group to the Chief Executive Officer of American Express Bank Ltd., the head of the Company's international banking business. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 131, since the first quarter of 1998, the Company's Travelers Cheque operations has been reported in the same operating segment as American Express Bank Ltd. The financial and other information reported in the following section under American Express Bank relates only to such bank's business, and the information under the caption Travelers Cheque includes only information related to the Travelers Cheque business. AMERICAN EXPRESS BANK --------------------- The Company's wholly-owned indirect subsidiary, American Express Bank Ltd. (together with its subsidiaries, where appropriate, "AEB"), offers products that meet the financial service needs of four client groups: corporations, financial institutions, wealthy individuals and retail customers. AEB does not directly or indirectly do business in the United States except as an incident to its activities outside the United States. Accordingly, the following discussion relating to AEB generally does not distinguish between United States and non-United States based activities. AEB's five primary business lines are corporate banking and finance, correspondent banking, private banking, personal financial services and global trading. Corporate banking and finance is provided to corporations principally in emerging markets and includes trade finance and working capital loans. Correspondent banking serves leading local banks primarily in emerging markets and includes transaction payments and a wide range of trade 20 finance products such as letters of credit and payment guarantees, collections, check clearing and bankers acceptances. Private banking focuses on wealthy individuals by providing such customers with investment management, trust and estate planning, deposit instruments and secured lending. Personal financial services provides consumer products in direct response to specific financial needs of retail customers and includes interest-bearing deposits, unsecured lines of credit, installment loans, money market funds, mortgage loans, and mutual fund and life insurance products. Through global trading, AEB provides treasury and capital market products and services, including foreign exchange, foreign exchange options, derivatives and trading, with a focus on emerging markets. In 1998, AEB had a difficult year overall, primarily due to losses in its corporate banking business. In the first quarter, AEB established a $138 million (after-tax) credit loss provision related to the Bank's Asia/Pacific business, particularly Indonesia. At year-end, loans outstanding worldwide were approximately $5.6 billion, down from $6.2 billion at December 31, 1997, which decrease resulted in part from its decision to de-emphasize corporate and correspondent banking. AEB made progress in 1998 in private banking and personal financial services, which businesses are expected to be the long-term focus for AEB, due in part to the fact that marketing to their individual client bases is more consistent with the overall cross-selling strategy of the Company. During the year, AEB developed a family of euro-denominated mutual funds which was launched in France and Germany in January 1999, and introduced personal mortgages in Greece and auto loans in India. The Private Bank showed significant growth, with client holdings increasing 22 percent, and client volumes in Personal Financial Services increased 23 percent. AEB's global trading unit also benefited from volatility in the financial and foreign exchange markets. AEB has also continued to work more closely with other parts of the Company. AXP Advisors has contracted with AEB to manage most of AEB's Worldfolio and Epic mutual funds. AEB has contracted with IDSC to market IDSC's investment certificates, and has set up a joint venture with AEFC in the Cayman Islands to accept deposits. In 1998, AEB increased client holdings in these deposits by more than $1 billion. TRS makes Platinum Cards available to AEB's private banking clients. In addition, AEB offers credit products such as installment loans and revolving lines of credit to both Cardmembers and non-Cardmembers in France, Germany, Greece, Hong Kong, Singapore and Taiwan. AEB also markets a wide range of investment and savings products to TRS Cardmembers and select non-Cardmembers in France, Germany, Hong Kong, Indonesia, Singapore and Taiwan. In 1994, AEB entered into a 10-year contract with Electronic Data Systems Corporation ("EDS") for the outsourcing of AEB's global systems support and development and data processing functions. Under the contract, EDS is to maintain and operate AEB's existing technology systems and to develop certain other systems. The major focus of EDS in 1998 was the remediation of AEB's computer systems for Year 2000 compliance. 21 AEB has a global network with offices in 38 countries. Its worldwide headquarters is located in New York City. It maintains international banking agencies in New York City and Miami, Florida. 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. In 1998, AEB established a facility office in San Francisco, California. AEB's business does not, as a whole, experience significant seasonal fluctuations. SELECTED FINANCIAL INFORMATION REGARDING AEB -------------------------------------------- AEB's prior years' financial information has been restated to reflect the transfer in 1994 of certain international consumer financial services businesses from TRS. AEB provides banking services to the Company and its subsidiaries. AEB is only one of many international and local banks used by the Company and its other subsidiaries, which constitute only a few of AEB's many customers. AEB's 1998 total assets of $11.6 billion decreased from $12.8 billion in 1997. Liquid assets, consisting of cash and deposits with banks, trading account assets and investments, were $4.9 billion at December 31, 1998 and $4.4 billion at December 31, 1997. 22 The following table sets forth a summary of financial data for AEB at and for each of the three years in the period ended December 31, 1998 (dollars in millions):
1998 1997 1996 ---- ---- ---- Net financial revenues $620 $637 $591 Non-interest expenses 756 487 463 Net (loss) income (84) 82 68 - -------------------------------------------------------------------------- ------------ ----------- Cash and deposits with banks 2,303 2,150 1,709 Investments 2,553 2,265 2,835 Loans, net 5,404 6,062 5,760 Total assets 11,576 12,868 12,350 - -------------------------------------------------------------------------- ------------ ----------- Customers' deposits 8,288 8,547 8,653 Shareholder's equity 743 830 799 - -------------------------------------------------------------------------- ------------ ----------- Return on average assets (a) (0.70)% 0.64% 0.57% Return on average common equity (a) (13.31)% 10.83% 9.22% - -------------------------------------------------------------------------- ------------ ----------- Reserve for loan losses/total loans 3.83% 2.11% 1.99% Total loans/deposits from customers 67.80% 72.45% 67.92% Average common equity/average assets (a) 5.16% 5.61% 5.82% Risk-based capital ratios: Tier 1 9.8% 8.8% 8.8% Total 12.6% 12.3% 12.5% Leverage ratio 5.5% 5.3% 5.6% - -------------------------------------------------------------------------- ------------ ----------- Average interest rates earned: (b) Loans (c) 8.56% 8.59% 8.48% Investments (d) 7.62% 8.22% 8.57% Deposits with banks 6.21% 7.07% 7.52% - -------------------------------------------------------------------------- ------------ ----------- Total interest-earning assets (d) 7.90% 8.18% 8.25% - -------------------------------------------------------------------------- ------------ ----------- Average interest rates paid: (b) Deposits from customers 5.79% 6.04% 6.28% Borrowed funds, including long-term debt 6.17% 6.98% 6.66% - -------------------------------------------------------------------------- ------------ ----------- Total interest-bearing liabilities 5.84% 6.16% 6.33% - -------------------------------------------------------------------------- ------------ ----------- Net interest income/total average interest-earning assets (d) 2.72% 2.91% 3.03% - -------------------------------------------------------------------------- ------------ -----------
(a) Calculated excluding the effect of SFAS No. 115. (b) Based upon average balances and related interest income and expense, including the effect of interest rate products where appropriate and transactions with related parties. (c) Interest rates have been calculated based upon average total loans, including those on non-performing status. (d) On a tax equivalent basis. 23 The following tables set forth the composition of AEB's loan portfolio at year end for each of the five years in the period ended December 31, 1998 (millions):
By Geographical Region (a) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Asia/Pacific $2,143 $2,789 $2,543 $2,151 $2,144 Europe 1,021 1,055 821 876 903 Indian Subcontinent 517 629 833 970 721 Latin America 1,107 1,082 916 617 589 North America 210 51 67 76 81 Middle East 544 482 580 614 345 Africa 77 105 117 124 207 ------ ------ ------ ------ ------ Total $5,619 $6,193 $5,877 $5,428 $4,990 ====== ====== ====== ====== ======
1998 ---------------------------------- Due After 1 Due Due Year After 5 Within 1 Through 5 Years By Type and Maturity Year Years (b) 1998 1997 1996 1995 1994 (b) (d) (d) (d) (d) ---------------------------------- ---- ---- ---- ---- ---- Consumer and private banking loans: Loans secured by real estate $ 7 $ - $ 206 $ 213 $ 146 $ 37 $ 40 $ - Installment, revolving credit and other 1,322 98 9 1,429 1,231 1,090 1,167 1,181 ------ ----- ------ ------ ------ ------ ------ ------ 1,329 98 215 1,642 1,377 1,127 1,207 1,181 ------ ----- ------ ------ ------ ------ ------ ------ Commercial loans: Loans secured by real estate 226 73 3 302 347 386 461 592 Loans to businesses (c) 1,680 264 53 1,997 2,479 2,415 2,364 2,088 Loans to banks and other financial institutions 1,420 169 6 1,595 1,926 1,860 1,240 915 Loans to governments and official institutions 40 3 3 46 41 64 60 81 Equipment Financing - - - - - 1 43 79 All other loans 32 5 - 37 23 24 53 54 ------ ----- ------ ------ ------ ------ ------ ------ 3,398 514 65 3,977 4,816 4,750 4,221 3,809 ------ ----- ------ ------ ------ ------ ------ ------ Total $4,727 $612 $280 $5,619 $6,193 $5,877 $5,428 $4,990 ====== ===== ====== ====== ====== ====== ====== ======
(a) Based primarily on the domicile of the borrower. (b) Loans due after 1 year at fixed (predetermined) interest rates totaled $82 million, while those at floating (adjustable) interest rates totaled $810 million. (c) Business loans, which accounted for approximately 36 percent of the portfolio as of December 31, 1998, were distributed over 26 commercial and industrial categories. (d) Prior year amounts have been restated to conform to the current year's presentation. 24 The following table sets forth AEB's non-performing loans at year end for each of the five years in the period ended December 31, 1998 (millions):
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Consumer loans $ 1 $ 1 $ 1 $ 3 $- Real estate loans--commercial 9 9 5 1 4 Loans to businesses 151 34 29 20 12 Loans to banks and other financial institutions 19 3 - 8 - Loans to governments and official institutions - - - 1 1 Equipment financing - - - 1 3 ---- ---- ---- ---- ---- Total $180 $47 $35 $34 $20 ==== ==== ==== ==== ====
AEB defines an impaired loan as any loan (other than certain consumer loans) on which the accrual of interest is discontinued because the contractual payment of principal or interest has become 90 days past due or if, in management's opinion, the borrower is unlikely to meet its contractual obligations (i.e., non-performing loans). The following is a summary of loans considered to be impaired under SFAS No. 114 and the related interest income: December 31, ----------------- (in millions) 1998 1997 ---- ---- Recorded investment in impaired loans not requiring an allowance (a) $ 3 $ 5 Recorded investment in impaired loans requiring an allowance $177 $ 42 ---- ----- Total recorded investment in impaired loans $180 $ 47 ==== ===== Credit reserves for impaired loans $ 95 $ 19 ===== ===== December 31, -------------------------------- (in millions) 1998 1997 1996 ---- ---- ---- Average recorded investment in impaired loans $176 $ 58 $ 35 Interest income recognized on a cash basis 2 3 1 (a) These loans do not require a reserve for credit losses since the values of the impaired loans equal or exceed the recorded investments in the loans. In addition to the above, AEB had other non-performing assets totaling $63 million at December 31, 1998, $11 million at December 31, 1997 and $36 million at December 31, 1996. The 1998 balance primarily represents matured foreign exchange and derivative contracts, while the 1997 and 1996 amounts represent balances transferred from non-performing loans as a result of foreclosures. The decrease from 1996 to 1997 primarily reflected the sale of a foreclosed property. 25 The following table sets forth a summary of the credit loss experience of AEB at and for each of the five years in the period ended December 31, 1998 (dollars in millions):
1998 1997 1996 1995 1994 ---------- ---------- ----------- ---------- ---------- Reserve for credit losses - January 1, $137 $117 $111 $109 $126 Provision for credit losses (a) 238 20 23 7 8 Translation and other (b) (4) (2) (1) - - ---------- ---------- ----------- ---------- ---------- Subtotal 371 135 133 116 134 ---------- ---------- ----------- ---------- ---------- Writeoffs: Consumer loans 19 13 13 9 19 Real estate loans-commercial 3 - 2 - 1 Loans to businesses (c) 72 17 7 3 21 Loans to banks and other financial institutions 2 - 1 1 3 Loans to governments and official institutions - - - 1 - Foreign exchange and derivative contracts (d) 28 - - - - Equipment financing - - - 1 - Recoveries: Consumer loans - (11) (3) (1) (10) Loans to businesses (5) (3) (2) (5) (4) Loans to banks and other financial institutions - - (1) (3) (3) Loans to governments and official institutions (e) - (18) (1) - - Equipment financing - - - (1) (2) All other loans (7) - - - - ---------- ---------- ----------- ---------- ---------- Net write-offs (recoveries) 112 (2) 16 5 25 ---------- ---------- ----------- ---------- ---------- Reserve for credit losses December 31, (f) $259 $137 $117 $111 $109 ========== ========== =========== ========== ==========
(a) The increase in 1998 was mainly due to first quarter credit loss provision related to business in the Asia/Pacific region, particularly Indonesia. The increase in 1996 was primarily due to loan growth, slightly higher consumer and commercial write-offs and lower commercial banking recoveries. (b) Prior year amounts have been restated to conform to the current year's presentation in accordance with the American Institute of Certified Public Accountants and Savings Institutions Audit and Accounting Guide. (c) The increase in 1998 was primarily due to write-offs in the Asia/Pacific region, primarily Indonesia. (d) The increase in 1998 was due to write-offs of Indonesian foreign exchange and derivative contracts. (e) The increase in 1997 was mainly due to a loan recovery from Peru. (f) Allocation:
Loans $214 $131 $117 $111 $109 Other assets, primarily derivatives 43 6 - - - Other liabilities 2 - - - - ----- ------ ------ ----- ----- Total reserve for credit losses $259 $137 $117 $111 $109 ===== ====== ====== ===== =====
26 Interest income is recognized on the accrual basis. Loans other than certain consumer loans are placed on non-performing status when payments of principal or interest are 90 days past due or if, in management's opinion, the borrower is unlikely to meet its contractual obligations. When loans are placed on non-performing status, all previously accrued but unpaid interest is reversed against current interest income. Cash receipts of interest on non-performing loans are recognized either as interest income or as a reduction of principal, based upon management's judgment as to the ultimate collectibility of principal. A non-performing loan may be returned to performing status when all contractual amounts due are reasonably assured of repayment within a reasonable period and the borrower shows sustained repayment performance, or when the loan has become well secured and is in the process of collection. Consumer loans principally consist of lines of credit and installment loans. These loans are written off against the reserve for credit losses upon reaching specified contractual delinquency stages, or earlier in the event of the borrower's personal bankruptcy or if the loan is otherwise deemed uncollectible. Interest income on these loans generally accrues until the loan is written off. AEB separately maintains and provides for reserves relating to credit losses for loans, derivatives and other credit-related commitments. The reserve is established by charging a provision for credit losses against income. The amount charged to income is based upon several factors, including historical credit loss experience in relation to outstanding credits, a continuous assessment of the collectibility of each credit, and management evaluation of exposures in each applicable country as related to current and anticipated economic and political conditions. Management's assessment of the adequacy of the reserve is inherently subjective, as significant estimates are required. Amounts deemed uncollectible are charged against the reserve, and subsequent recoveries, if any, are credited to the reserve. The reserve for credit losses related to loans is reported as a reduction of loans. The reserve related to derivatives is reported as a reduction of trading assets and the reserve related to other credit-related commitments is reported in other liabilities. RISKS ----- The global nature of AEB's business activities are such that concentrations of credit to particular industries and geographic regions are not unusual. At December 31, 1998, 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 banks and other financial institutions and various commercial and industrial enterprises operating geographically within the Asia/Pacific region, Europe, North America, Latin America and the Indian Subcontinent. AEB continuously monitors its credit concentrations and actively manages to reduce the associated risk. 27 Beginning in 1997 and continuing throughout 1998 certain countries in Asia began experiencing economic pressures that created liquidity constraints associated with public and private sector debt service. At December 31, 1998, AEB had exposures throughout the Asia/Pacific region, including in Hong Kong, Singapore, Taiwan, Indonesia and Korea, among other countries. AEB had approximately $2.1 billion outstanding in loans in the entire Asia/Pacific region at year-end. In addition to these loans, there are other banking activities, such as forward contracts, various contingencies and market placements, which added another approximately $1.1 billion to the credit exposures in the region at year-end. In the first quarter of 1998, AEB established a $213 million ($138 million after-tax) credit loss provision related to AEB's business in the Asia/Pacific region, particularly Indonesia. AEB is carefully monitoring its credit exposures as well as actions being taken by government entities to address and resolve currency and liquidity issues. The continuing economic downturn in Asia is contributing to destabilizing effects upon the currency, liquidity and capital markets of other countries outside the Asia/Pacific region, particularly in Latin America. To the extent these events affect such countries where AEB has credit exposure or market presence, AEB is closely following such events and actively manages the associated risks as the situation warrants. AEB's earnings are sensitive to fluctuations in interest rates, as it is not always possible to match precisely the maturities of interest-related assets and liabilities. However, strict limits have been established for both country and total bank mismatching. On occasion, AEB may decide to mismatch in anticipation of a change in future interest rates in accordance with these guidelines. Term loans extended by AEB include both floating interest rate and fixed interest rate loans. For a discussion relating to AEB's use of derivative financial instruments, see pages 30 through 31 under the caption "Risk Management," and Note 7 on pages 42 through 45, of the Company's 1998 Annual Report to Shareholders, which portions of such report are incorporated herein by reference. COMPETITION ----------- The banking services of AEB are subject to vigorous competition in all markets in which AEB operates. Competitors include local and international banks whose assets often exceed those of AEB, other financial institutions (including certain other subsidiaries of the Company) and, in certain cases, governmental agencies. In some countries, AEB may be one of the more substantial financial institutions offering banking services; in no country, however, is AEB dominant. REGULATION ---------- AEB is a wholly-owned direct subsidiary of American Express Banking Corp. ("AEBC"). 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 the Company. AEBC, 28 AEB and AEB's global network of offices and subsidiaries are subject to the consolidated supervision and examination of the New York State Banking Department ("NYSBD") pursuant to New York Banking Law. AEBC does not directly engage in banking activities. AEB'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. Within the United States, AEB's New York agency is supervised and regularly examined by the NYSBD. In addition, the Florida Department of Banking and Finance supervises and examines AEB's Miami agency, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") regulates, supervises and examines AEBI and the California Department of Financial Institutions supervises and examines AEB's San Francisco facility office. AEB Global Asset Management Inc., a wholly-owned subsidiary of AEB that provides investment advisory services to private banking clients, is registered with the SEC as an investment advisor. Since AEB does not do business in the United States except as an incident to its activities outside the United States, the Company's affiliation with AEB neither causes the Company to be subject to the provisions of the Bank Holding Company Act of 1956, as amended, nor requires it to register as a bank holding company under the Federal Reserve Board's Regulation Y. AEB is not a member of the Federal Reserve System, is not subject to supervision by the FDIC, and is not subject to any of the restrictions imposed by the Competitive Equality Banking Act of 1987 other than anti-tie-in rules with respect to transactions involving products and services of certain of its affiliates. AEB is required to comply with the Federal Reserve Board's risk-based capital guidelines and complementary leverage constraint applicable to state-chartered banks that are members of the Federal Reserve System. Pursuant to the FDIC Improvement Act of 1991, the Federal Reserve Board, among other federal banking agencies, adopted regulations defining levels of capital adequacy. Under these regulations, a bank is deemed to be well capitalized if it maintains a Tier 1 risk-based capital ratio of at least 6.0 percent, a total risk-based capital ratio of at least 10.0 percent, and a leverage ratio of at least 5.0 percent. Based on AEB's total risk-based capital and leverage ratios, which are set forth on page 23, AEB is considered to be well capitalized at December 31, 1998. The Company has taken steps to ensure that AEB remains well capitalized, as defined by regulatory guidelines. In April 1998, the Company purchased $225 million of deferred tax assets from AEB, thereby reducing AEB's nonqualifying assets and increasing its regulatory capital. TRAVELERS CHEQUE ---------------- The Company, through its Travelers Cheque unit, is a leading issuer of travelers cheques. The Company is also expanding the scope of its Money Order and Official Check products in the U.S., and renewing its focus on the TravelFunds Direct(SM) product, which provides direct delivery of foreign bank notes and Travelers Cheques in selected markets. 29 The American Express(R) Travelers Cheque ("Travelers Cheque" or "Cheque") is sold as a safe and convenient alternative to currency. The Travelers Cheque, a negotiable instrument, has no expiration date and is payable by the issuer in the currency of issuance when presented for the purchase of goods and services or for redemption. Travelers Cheques are issued in eleven currencies both directly by the Company and through joint venture companies in which the Company generally holds an equity interest. In 1998, the Travelers Cheque unit announced the issuance of a euro- denominated Travelers Cheque which commenced in early 1999. American Express Travelers Cheques are sold through a broad network of outlets worldwide, including travel offices of the Company, its affiliates and representatives, travel agents, commercial banks, savings banks, savings and loan associations, credit unions and other financial, travel and commercial businesses. The Company generally compensates selling agents for their sale of Travelers Cheques. The proceeds from sales of Travelers Cheques issued by the Company are invested predominantly in highly-rated debt securities consisting primarily of intermediate- and long-term state and municipal obligations. The investment of these proceeds is regulated by various state laws. Although the Company believes it is the leading issuer of travelers checks, its growth in sales of this product has been declining over the past few years. Consumers have a choice of many forms of competitive payment instruments, including other brands of travelers checks, cash, credit and debit cards and national and international automated teller machine networks. The Company expects increasing developments in stored value cards, smart cards and other electronic forms of payment, and plans to offer a range of new stored value and other products in the future to compete in this area. The principal competitive factors affecting the travelers check industry are (i) the availability to the consumer of other forms of payment; (ii) the amount of the fee charged to the consumer; (iii) the acceptability of the checks throughout the world as an alternative to currency; (iv) the compensation paid to, and frequency of settlement by, selling agents; (v) the accessibility of travelers check sales and refunds; (vi) the success of marketing and promotional campaigns; and (vii) the ability to service satisfactorily the check purchaser if the checks are lost or stolen. Other competitive factors affecting stored value products generally include (a) the quality and rate of introduction of stored value products of competitors; (b) the rate of consumer and merchant acceptance of new products; (c) the rate of deployment of card and payment systems worldwide; (d) the global interoperability of card and payment systems; (e) the relative ability of an issuer to control fraud; and (f) the development of governmental regulations relating to stored value products. Travelers Cheque sales and Travelers Cheques outstanding tend to be greatest each year in the summer months, peaking in the third quarter. 30 CORPORATE AND OTHER ------------------- The Balcor Company Holdings, Inc., an indirect, wholly-owned subsidiary of the Company, and its subsidiaries, formerly operating as a diversified real estate investment and management company, discontinued new commercial real estate activities in 1990 and began to liquidate its portfolio of real estate loans and properties. The liquidation was completed in 1998. Balcor and its subsidiaries still serve as general partners in numerous public limited partnerships that have not yet been liquidated. The Company uses information about its customers to develop products and services and to provide personal service. Regulatory activity in the areas of privacy and data protection is growing worldwide and is generally being driven by the growth of technology and concomitant concerns about the potentially rapid and widespread dissemination of information, and the implementation of the European Union Data Protection Directive, which imposes restrictions on the collection, use and processing of personal data. The European Directive became effective in October 1998 and involves potential sanctions for violations which include the possible disruption in the flow of personal data from Europe and in the use of such data. The Company will continue its efforts to vigilantly safeguard the data entrusted to it in accordance with applicable law and its internal data protection policies, while seeking to properly collect and use data to achieve its business objectives. For a discussion of the Company's status relating to the Year 2000 issue, see pages 22 and 23 of the Company's 1998 Annual Report to Shareholders, which discussion is incorporated herein by reference. FOREIGN OPERATIONS ------------------ The Company derives a significant portion of its revenues from the use of the Card, Travelers Cheques and travel services in countries outside the United States and continues to broaden the use of these products and services outside the United States. 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, can have an effect on the Company's revenues. Substantial and sudden devaluation of local Cardmembers' currency can also affect their ability to make payments to the local issuer of the card on account of spending outside the local country. The major portion of AEB's banking revenues is 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 its foreign operations, the Company is exposed to the possibility that, because of foreign exchange rate fluctuations, assets and liabilities denominated in currencies other than the United States dollar may be realized in amounts greater or lesser than the United States dollar amounts at which they are currently recorded in the Company's Consolidated 31 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 the Company's operations. The Company's policy in this area is generally to monitor closely all foreign exchange positions and to minimize foreign exchange gains and losses, for example, by offsetting foreign currency assets with foreign currency liabilities, as in the case of foreign currency loans and receivables, which are financed in the same currency. An additional technique used to manage exposures is the spot and forward purchase or sale of foreign currencies as a hedge of net exposures in those currencies as, for example, in the case of the Cardmember and Travelers Cheque transactions described above. Additionally, Cardmembers may be charged in United States dollars for their spending outside their local country. The Company's investments in foreign operations are hedged by forward exchange contracts or by identifiable transactions, where appropriate. IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS ------------------------------------------------------ Various forward-looking statements have been made in this Form 10-K Annual Report. Forward-looking statements may also be made in the Company's other reports filed under the Securities Exchange Act of 1934, in its press releases and in other documents. In addition, from time to time, the Company through its management may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties, including those identified below, which could cause actual results to differ materially from such statements. The words "believe", "expect", "anticipate", "optimistic", "intend", "aim", "will" or 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 publicly or revise any forward-looking statements. Important factors that could cause actual results to differ materially from the Company's forward-looking statements, including the Company's financial and other goals, include, but are not limited to, the following: o The Company's inability to extend the value of the American Express brand, which historically has been associated with the card and travel businesses (e.g., perception of trust, security and quality service), to a broad range of financial products and services in the financial services industry. This could depend in part on the Company's ability to manage the potential conflicts inherent in its growing multi-channel delivery systems. o The Company's inability to succeed in its ongoing reengineering efforts and in achieving best-in-class economics, while also maintaining high service levels. 32 o The Company's inability to successfully create, and increase distribution channels for, financial, travel, card and other products and services. o The Company's inability to participate in payment and other systems material to its businesses on a fair and competitive basis. o The Company's inability to successfully invest in, and compete at the leading edge of, technology developments across all businesses, e.g., transaction processing, data management, customer interactions and communications, travel reservations systems, stored value products, multi-application smart cards and risk management systems. o The Company's inability to adequately address its Y2K issues, successfully identify its systems containing two digit codes, the nature and amount of programming required to fix the affected systems and the costs of labor and consultants related to such effort, continue to have access to such resources and ensure that third parties that interface with the Company successfully address their Y2K issues. o The Company's inability to successfully modify its computer software and business systems to ensure proper and timely accommodation of the European single currency in its business and operations. o The Company's inability to successfully develop and implement enterprise-wide interactive strategies. o TRS' inability to expand its overall revenues, which depends in part on its ability to increase consumer and/or business spending and borrowing on its credit and charge Cards, gain market share and develop new or enhanced products that capture greater share of customers' total spending on Cards issued on its network. o TRS' inability to enhance significantly its international operations, which will depend in part on its ability to reduce expenses for re-investment in the international business, expand the proprietary and third party-issued Card businesses. o TRS' inability to increase its network of merchants. o TRS' inability to retain Cardmembers in consumer lending products after low introductory rate periods have expired. o TRS' inability to sustain premium discount rates or increase merchant coverage, both of which will depend in part on its ability to maintain a 33 customer base that appeals to merchants and to develop deeper merchant relationships through creation of new products and services. o The inability of TRS and AEB to manage credit risk related to consumer debt, business loans and other credit exposures, both in the United States and abroad, including unseasoned balances in TRS' lending portfolios, all of which could be affected by general political and economic conditions, including interest rates and consumer credit trends, the rate of bankruptcies and movements in currency valuations. o The inability of AXP Advisors to maintain a growing field force and to improve the performance of its mutual funds. o A short-term financial market crash, or a longer term financial market decline or stagnation, which could impact the sale of investment products at AXP Advisors and the market value of AXP Advisors' managed assets, resulting in lower management and distribution fees. o The impact of changing interest rates, which could affect AXP Advisors' spreads between revenues from owned investments and benefits credited to clients fixed income accounts, TRS' borrowing costs and TRS' and AEB's return on lending products. o Changes in laws or government regulations that either restrict the businesses of the Company, or allow a wider range of institutions to compete in such businesses, e.g., banks being allowed to sell products competing with AXP Advisors, non-banking institutions selling bank products in competition with AEB, changes in tax laws affecting the Company's businesses, regulatory activity in the areas of customer privacy and data protection. See also pages 3, 4, 14, 16, 19, 20 and 28 through 31 of this 10-K Report for a discussion of various regulations affecting the Company. o Global developments that could affect the Company's operations abroad, such as political or economic instability in key markets of the Company's businesses or restrictions on convertibility of certain currencies. See also pages 9 through 11, 27, 28, 31 and 32 of this 10-K Report for a discussion of risks relating to foreign operations. o Competitive pressures in all of the Company's major businesses, including those competitive issues referred to on pages 2, 5 through 7, 9, 10, 12, 13, 15 through 19, 28 and 30 in this 10-K Report. o Unforeseen litigation or compliance costs. 34 SEGMENT INFORMATION AND CLASSES OF SIMILAR SERVICES --------------------------------------------------- Information with respect to the Company's segments, geographical operations and classes of similar services is set forth in Note 15 to the Consolidated Financial Statements of the Company, which appears on pages 53 through 54 of the Company's 1998 Annual Report to Shareholders, which Note is incorporated herein by reference. EXECUTIVE OFFICERS OF THE COMPANY --------------------------------- All of the executive officers of the Company as of March 24, 1999, none of whom has any family relationship with any other and none of whom became an officer pursuant to any arrangement or understanding with any other person, are listed below. Each of such officers was 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. HARVEY GOLUB - Chairman and Chief Executive Officer; Chairman, TRS Mr. Golub (60) has been Chief Executive Officer of the Company since February 1993, Chairman of the Company since August 1993 and Chairman, TRS since November 1991. Prior to February 1997 he had been Chief Executive Officer of TRS since November 1991. KENNETH I. CHENAULT - President and Chief Operating Officer; President and Chief Executive Officer, TRS Mr. Chenault (47) has been President and Chief Operating Officer of the Company and President and Chief Executive Officer of TRS since February 1997. Prior to February 1997 he had been Vice Chairman of the Company since January 1995. Prior to May 1995, he had also been President, U.S.A. of TRS since August 1993. RICHARD KARL GOELTZ - Vice Chairman and Chief Financial Officer Mr. Goeltz (56) has been Vice Chairman and Chief Financial Officer of the Company since September 1996. Prior thereto, he had been Group Chief Financial Officer and a member of the Board of Directors of NatWest Group. JONATHAN S. LINEN - Vice Chairman Mr. Linen (55) has been Vice Chairman of the Company since August 1993. 35 STEVEN W. ALESIO - President, Small Business Services, TRS Mr. Alesio (44) has been President, Small Business Services, TRS since February 1996. Prior thereto, he had been Executive Vice President, Corporate Card, TRS since November 1993. ANNE M. BUSQUET - President, American Express Relationship Services, TRS Mrs. Busquet (49) has been President, American Express Relationship Services, TRS since October 1995. Prior thereto, she had been Executive Vice President, Consumer Card Group since November 1993. JAMES M. CRACCHIOLO - President, International, TRS Mr. Cracchiolo (40) has been President, International, TRS since May 1998. Prior thereto he had been President, Global Network Services, TRS since February 1996. Prior thereto he had been Senior Vice President, Quality, Reengineering and Business Strategy, TRS since August 1993. URSULA F. FAIRBAIRN - Executive Vice President, Human Resources and Quality Mrs. Fairbairn (56) has been Executive Vice President, Human Resources and Quality of the Company since December 1996. Prior thereto, she had been Senior Vice President, Human Resources of Union Pacific Corporation. EDWARD P. GILLIGAN - President, Corporate Services, TRS Mr. Gilligan (39) has been President, Corporate Services, TRS since February 1996. Prior thereto, he had been Executive Vice President, Travel Management Services, TRS since June 1995. Prior thereto, he had been Senior Vice President and General Manager, Eastern Region of Travel Management Services, TRS. JOHN D. HAYES - Executive Vice President, Global Advertising Mr. Hayes (44) has been Executive Vice President, Global Advertising since May 1995. Prior thereto, he had been President of Lowe & Partners/SMS. 36 DAVID C. HOUSE - President, Establishment Services Worldwide, TRS Mr. House (49) has been President, Establishment Services Worldwide, TRS since October 1995. Prior thereto, he had been Senior Vice President of Sales and Field Marketing for the United States Establishment Services Group since January 1993. DAVID R. HUBERS - President and Chief Executive Officer, American Express Financial Corporation Mr. Hubers (56) has been President and Chief Executive Officer of American Express Financial Corporation since August 1993. ALFRED F. KELLY, JR. - President, Consumer Card Services Group, TRS Mr. Kelly (40) has been President, Consumer Card Services Group, TRS since October 1998. Prior thereto he had been Executive Vice President and General Manager of Consumer Marketing, TRS since February 1997. Prior thereto he had been Executive Vice President of Customer Loyalty, TRS since September 1995. Prior thereto he had been Senior Vice President, Customer Information Services, TRS. ALLAN Z. LOREN - Executive Vice President and Chief Information Officer Mr. Loren (60) has been Executive Vice President and Chief Information Officer of the Company since May 1994. Prior thereto, he had been President and Chief Executive Officer of Galileo International. LOUISE M. PARENT - Executive Vice President and General Counsel Ms. Parent (48) has been Executive Vice President and General Counsel of the Company since May 1993. THOMAS SCHICK - Executive Vice President, Corporate Affairs and Communications Mr. Schick (52) has been Executive Vice President, Corporate Affairs and Communications of the Company since March 1993. 37 JOHN A. WARD, III - Chairman and Chief Executive Officer, American Express Bank Ltd.; President, Travelers Cheque Group Mr. Ward (52) has been Chairman and Chief Executive Officer, American Express Bank Ltd. since January 1996. Since August 1997 he has also been President of Travelers Cheque Group. Prior thereto, he had been Executive Vice President of Chase Manhattan Bank since September 1993 and Chief Executive Officer of Chase BankCard Services since July 1993. EMPLOYEES --------- The Company had approximately 85,000 employees on December 31, 1998. ITEM 2. PROPERTIES The Company's headquarters is in a 51-story, 2.2 million square foot building located in lower Manhattan, which also serves as the headquarters for TRS and AEB. This building, which is on land leased from the Battery Park City Authority for a term expiring in 2069, is one of five office buildings in a complex known as the World Financial Center. Lehman Brothers Holdings Inc. is also headquartered at, and owns 52% of, the building. Other principal locations of TRS include: the American Express Service Centers in Fort Lauderdale, Florida; Phoenix, Arizona; Greensboro, North Carolina and Salt Lake City, Utah; the American Express Canada, Inc. headquarters in Markham, Ontario, Canada, all of which are owned by the Company or its subsidiaries. AEFC's principal locations are its headquarters, the IDS Tower, a portion of which the company leases until 2002, and its Operations Center, which the company owns; both are in Minneapolis, Minnesota. AXP Advisors also owns Oak Ridge Conference Center, a training facility and conference center, in Chaska, Minnesota. AEFC has entered into a contract with a developer to construct a 30-story office tower in Minneapolis which should be ready for initial occupancy in February 2000. The new tower will become AEFC's headquarters. AEFC's lease term is for 20 years with several options to extend the term. AEFC is also building a new Client Service Center in downtown Minneapolis. Construction should start July 1999 and the building should be ready for occupancy in June 2002. Generally, the Company and its subsidiaries lease the premises they occupy in other locations. Facilities owned or occupied by the Company and its subsidiaries are believed to be adequate for the purposes for which they are used and are well maintained. 38 ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are involved in a number of legal and arbitration proceedings 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. The Company believes that it is not a party to, nor are any of its properties the subject of, any pending legal or arbitration proceedings which would have a material adverse effect on the Company's consolidated financial condition, although it is possible that the outcome of any such proceedings could have a material impact on the Company's net income in any particular period. Certain legal proceedings involving the Company are set forth below. On December 13, 1996, an action entitled LESA BENACQUISTO AND DANIEL BENACQUISTO V. IDS LIFE INSURANCE COMPANY ("IDS Life") AND AMERICAN EXPRESS FINANCIAL CORPORATION was commenced in Minnesota state court. The action is brought by individuals who replaced an existing IDS Life insurance policy with a new IDS Life policy. The plaintiffs purport to represent a class consisting of all persons who replaced existing IDS Life policies with new IDS Life policies from and after January 1, 1985. The complaint puts at issue various alleged sales practices and misrepresentations, alleged breaches of fiduciary duties and alleged violations of consumer fraud statutes. Plaintiffs seek damages in an unspecified amount and also seek to establish a claims resolution facility for the determination of individual issues. IDS Life and AEFC filed an answer to the complaint on February 18, 1997, denying the allegations. A second action, entitled ARNOLD MORK, ISABELLA MORK, RONALD MELCHERT AND SUSAN MELCHERT V. IDS LIFE INSURANCE COMPANY AND AMERICAN EXPRESS FINANCIAL CORPORATION was commenced in the same court on March 21, 1997. In addition to claims that are included in the Benacquisto lawsuit, the second action includes an allegation of improper replacement of an existing IDS Life annuity contract. It seeks similar relief to the initial lawsuit. On October 13, 1998, an action entitled RICHARD W. AND ELIZABETH J. THORESEN V. AMERICAN EXPRESS FINANCIAL CORPORATION, AMERICAN CENTURION LIFE ASSURANCE COMPANY, AMERICAN ENTERPRISE LIFE INSURANCE COMPANY, AMERICAN PARTNERS LIFE INSURANCE COMPANY, IDS LIFE INSURANCE COMPANY AND IDS LIFE INSURANCE COMPANY OF NEW YORK was also commenced in Minnesota state court. The action was brought by individuals who purchased an annuity in a qualified plan. They allege that the sale of annuities in tax-deferred contributory retirement investment plans (e.g., IRAs) is never appropriate. The plaintiffs purport to represent a class consisting of all persons who made similar purchases. The plaintiffs seek damages in an unspecified amount, including restitution of allegedly lost investment earnings and restoration of contract values. The Company commenced an action, AMERICAN EXPRESS COMPANY V. THE UNITED STATES, on September 16, 1997 in the United States Court of Federal Claims seeking a refund from the United States of Federal income taxes paid (plus related interest) for the year 1987. The Company contends that the Internal Revenue Service abused its discretion by denying the 39 Company's request to include annual fees from Cardmembers in taxable income ratably over the twelve-month period to which the fees relate rather than in full at the time they are billed. The defendant filed an answer on January 16, 1998, and pre-trial discovery proceedings are now underway. If the Company's position is sustained, it would receive interest on $198,649,152 of taxes paid for 1987 that should have been deferred to a subsequent period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the last quarter of its fiscal year ended December 31, 1998. PART II ------- ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market for the Company's Common Shares is The New York Stock Exchange. Its Common Shares are also listed on the Boston, Chicago, Pacific, London, Swiss, Dusseldorf, Frankfurt, Paris and Brussels Stock Exchanges. The Company had 51,597 common shareholders of record at December 31, 1998. For price and dividend information with respect to such Common Shares, see Note 18 to the Consolidated Financial Statements on page 55 of the Company's 1998 Annual Report to Shareholders, which Note is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The "Consolidated Five-Year Summary of Selected Financial Data" appearing on page 57 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the heading "Financial Review" appearing on pages 22 through 31 of the Company's 1998 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 30 through 31 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The "Consolidated Financial Statements", the "Notes to Consolidated Financial Statements" and the "Report of Ernst & Young LLP Independent Auditors" appearing on pages 32 through 56 of the Company's 1998 Annual Report to Shareholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III -------- ITEMS 10, 11, 12 and 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company filed with the SEC, within 120 days after the close of its last fiscal year, a definitive proxy statement dated March 11, 1999 pursuant to Regulation 14A, which involves the election of directors. The following portions of such proxy statement are incorporated herein by reference: pages 2 through 4 under the heading "The Shares Voting," pages 5 through 7 under the headings "Security Ownership of Directors and Executive Officers" and "Security Ownership of Named Executives" (excluding the paragraph under the heading "Share Ownership Guidelines for Directors" appearing on pages 6 and 7), pages 11 through 13 under the heading "Directors' Fees and Other Compensation," pages 13 beginning at "Election of Directors" through 34 ending at "Selection of Auditors" (excluding the portions under the headings, "Board Compensation Committee Report on Executive Compensation" appearing on pages 16 through 21 and "Performance Graph" appearing on page 28). In addition, the Company has provided, under the caption "Executive Officers of the Company" at pages 35 through 38 above, the information regarding executive officers called for by Item 401(b) of Regulation S-K. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements: --------------------- See Index to Financial Statements on page F-1 hereof. 41 2. Financial Statement Schedules: ------------------------------ See Index to Financial Statements on page F-1 hereof. 3. Exhibits: --------- See Exhibit Index on pages E-1 through E-5 hereof. (b) Reports on Form 8-K: Form 8-K, dated October 26, 1998, Item 5, reporting the Company's earnings for the quarter ended September 30, 1998. Form 8-K, dated January 25, 1999, Item 5, reporting the Company's earnings for the quarter and year ended December 31, 1998. Form 8-K, dated February 3, 1999, Item 5, reporting certain information from speeches presented by Harvey Golub, the Company's Chairman and Chief Executive Officer and James M. Cracchiolo, President, International TRS, to the financial community on February 3, 1999. Form 8-K, dated February 22, 1999, Item 5, reporting the election of Robert L. Crandall to the Board of Directors of the Company. 42 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. AMERICAN EXPRESS COMPANY March 29, 1999 By /s/ Richard Karl Goeltz -------------------------- Richard Karl Goeltz Vice Chairman and 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. By /s/ Robert L. Crandall ---------------------------- Robert L. Crandall Director By /s/ Harvey Golub By /s/ Charles W. Duncan, Jr. ---------------------------- ---------------------------- Harvey Golub Charles W. Duncan, Jr. Chairman, Chief Executive Director Officer and Director By /s/ Kenneth I. Chenault By /s/ Beverly Sills Greenough ---------------------------- ---------------------------- Kenneth I. Chenault Beverly Sills Greenough President, Chief Operating Director Officer and Director By /s/ Richard Karl Goeltz By /s/ F. Ross Johnson ---------------------------- ---------------------------- Richard Karl Goeltz F. Ross Johnson Vice Chairman and Director Chief Financial Officer By /s/ Daniel T. Henry By /s/ Vernon E. Jordan, Jr. ---------------------------- ---------------------------- Daniel T. Henry Vernon E. Jordan, Jr. Senior Vice President Director and Comptroller By /s/ Daniel F. Akerson By /s/ Jan Leschly ---------------------------- ---------------------------- Daniel F. Akerson Jan Leschly Director Director By /s/ Anne L. Armstrong By /s/ Drew Lewis ---------------------------- ---------------------------- Anne L. Armstrong Drew Lewis Director Director By /s/ Edwin L. Artzt By /s/ Richard A. McGinn ---------------------------- ---------------------------- Edwin L. Artzt Richard A. McGinn Director Director By /s/ William G. Bowen By /s/ Frank P. Popoff ---------------------------- ---------------------------- William G. Bowen Frank P. Popoff Director Director March 29, 1999 43
AMERICAN EXPRESS COMPANY INDEX TO FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT AUDITORS (Item 14(a)) Annual Report to Shareholders Form 10-K (Page) ----------- ------------ American Express Company and Subsidiaries: Data incorporated by reference from attached 1998 Annual Report to Shareholders: Report of independent auditors . . . . . . . . . . . . . . . 56 Consolidated statements of income for the three years ended December 31, 1998 . . . . . . . . . . . . . 32 Consolidated balance sheets at December 31, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . 33 Consolidated statements of cash flows for the three years ended December 31, 1998 . . . . . . . . . . 34 Consolidated statements of shareholders' equity for the three years ended December 31, 1998 . . . . . . . . . . 35 Notes to consolidated financial statements . . . . . . . . . 36-55 Consent of independent auditors . . . . . . . . . . . . . . .. F-2 Schedules: I - Condensed financial information of the Company . . . . . F-3-6 II - Valuation and qualifying accounts for the three years ended December 31, 1998 . . . . . . . . . . . . . . . . . F-7
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 report of independent auditors) listed in the above index, which are included in the Annual Report to Shareholders for the year ended December 31, 1998, 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 1998 Annual Report to Shareholders is not to be deemed filed as part of this report. F-1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of American Express Company of our report dated February 4, 1999 (hereinafter referred to as our Report), included in the 1998 Annual Report to Shareholders of American Express Company. Our audits included the financial statement schedules of American Express Company listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. 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. 33-36422, No. 33-48629, No. 33-62124, No. 33-65008, No. 33-53801, No. 333-12683, No. 333-41779, No. 333-52699 and No. 333-73111; Form S-3 No. 2-89469, No. 33-43268, No. 33-50997, No. 333-32525, No. 333-45445, No. 333-47085 and No. 333-55761) and in the related Prospecti of our Report with respect to the consolidated financial statements and schedules of American Express Company included and incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1998. /s/ Ernst & Young LLP New York, New York March 26, 1999 F-2
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, --------------------------------------------------------- 1998 1997 1996 --------------- ---------------- ------------------ Revenues $ 260 $ 236 $ 245 --------------- ---------------- ------------------ Expenses: Interest 293 224 261 Human resources 80 68 71 Other (A) - 314 (310) --------------- ---------------- ------------------ Total 373 606 22 --------------- ---------------- ------------------ Pretax (loss) income (113) (370) 223 Income tax (benefit) provision (107) (193) 43 --------------- ---------------- ------------------ Net (loss) income before equity in net income of subsidiaries and affiliates (6) (177) 180 Equity in net income of subsidiaries and affiliates 2,147 2,168 1,721 --------------- ---------------- ------------------ Net income $2,141 $1,991 $1,901 =============== ================ ==================
(A) 1998 includes pretax income of $106 million ($78 million after-tax) comprising a $60 million ($39 million after-tax) gain from sales of common stock of First Data Corporation and $46 million ($39 million after-tax) preferred stock dividend based on earnings from Lehman Brothers. 1996 includes a pretax gain of $480 million ($300 million after-tax) on the exchange of DECS (Debt Exchangeable for Common Stock) for FDC common stock. See Notes to Condensed Financial Information of the Company on page F-6. F-3
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY CONDENSED BALANCE SHEETS (Parent Company Only) (millions, except share amounts) ASSETS December 31, ------------------------------------------- 1998 1997 ------------------ ------------------- Cash and cash equivalents $ 6 $ 13 Equity in net assets of subsidiaries and affiliates 10,127 9,731 Accounts receivable and accrued interest, less reserves 13 13 Land, buildings and equipment--at cost, less accumulated depreciation: 1998, $65; 1997, $61 69 67 Due from subsidiaries (net) 1,060 1,285 Other assets 779 666 ------------------ ------------------- Total assets $12,054 $11,775 ================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and other liabilities $ 756 $ 1,122 Long-term debt 1,085 1,079 Intercompany debentures 515 - ------------------ ------------------- Total liabilities 2,356 2,201 Shareholders' equity: Common shares, $.60 par value, authorized 1.2 billion shares; issued and outstanding 450.5 million shares in 1998 and 466.4 million shares in 1997 270 280 Capital surplus 4,809 4,624 Retained earnings 4,148 4,188 Other comprehensive income, net of tax: Net unrealized securities gains 583 579 Foreign currency translation adjustments (112) (97) ------------------ ------------------- Accumulated other comprehensive income 471 482 ------------------ ------------------- Total shareholders' equity 9,698 9,574 ------------------ ------------------- Total liabilities and shareholders' equity $12,054 $11,775 ================== ===================
See Notes to Condensed Financial Information of the Company on page F-6. F-4
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY STATEMENTS OF CASH FLOWS (Parent Company Only) (millions) Years Ended December 31, ------------------------------------------ 1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities: Net income $2,141 $1,991 $1,901 Adjustments to reconcile net income to cash provided by operating activities: Equity in net income of subsidiaries and affiliates (2,147) (2,168) (1,721) Dividends received from subsidiaries and affiliates 1,666 1,489 1,426 (FDC Gain)/Restructuring - - (287) ----------- ----------- ----------- Net cash provided by operating activities 1,660 1,312 1,319 ----------- ----------- ----------- Net cash provided (used) by investing activities 91 51 124 ----------- ----------- ----------- Cash flows from financing activities: Issuance of American Express common shares 137 168 176 Repurchase of American Express common shares (1,890) (1,259) (1,041) Dividends paid (414) (423) (436) Net increase (decrease) in debt 6 411 (427) Issuance of intercompany debentures 515 - - Other (112) (278) 297 ----------- ----------- ----------- Net cash used by financing activities (1,758) (1,381) (1,431) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (7) (18) 12 ----------- ----------- ----------- Cash and cash equivalents at beginning of year 13 31 19 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 6 $ 13 $ 31 =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest (net of amounts capitalized) in 1998, 1997, and 1996 was $81 million, $88 million and $216 million, respectively. Net cash received for income taxes was $145 million for 1998; net cash paid for income taxes was $98 million for 1997; net cash received for income taxes was $296 million for 1996. F-5 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 financial statements include the accounts of American Express Company and on an equity basis its subsidiaries and affiliates. These financial statements should be read in conjunction with the consolidated financial statements of the Company. Certain prior year's amounts have been reclassified to conform to the current year's presentation.
2. Long-term debt consists of (millions): December 31, ---------------------------------- 1998 1997 --------------- -------------- 6 3/4% Senior Debentures due June 23, 2004 $499 $ 499 8 1/2% Notes due August 15, 2001 299 299 8 5/8% Senior Debentures due 2022 122 122 Floating Medium-Term Note due December 31, 2000 88 88 WFC Series Z Zero Coupon Notes due December 12, 2000 52 46 Other Fixed and Floating rate notes maturing 1999-2001 25 25 --------------- -------------- $1,085 $1,079 =============== ==============
Aggregate annual maturities of long-term debt for the five years ending December 31, 2003 are as follows (millions): 1999, $8; 2000, $163; 2001, $305; 2002, $0; 2003, $0. 3. Intercompany debentures consist solely of Junior Subordinated Debentures issued to American Express Company Capital Trust I, a wholly-owned subsidiary of the Company. See Note 5 to the Consolidated Financial Statements on page 41 of the Company's 1998 Annual Report to Shareholders, which Note is incorporated herein by reference. F-6
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1998 (millions) Reserve for credit losses, Reserve for doubtful loans and discounts accounts receivable ------------------------------------- --------------------------------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Balance at beginning of period $707 $601 $602 $712 $722 $829 Additions: Charges to income 1,165 837 658 948 (a) 1,153 (a) 1,081 (a) Recoveries of amounts previously written-off 74 159 136 - - - Deductions: Charges for which reserves were provided (1,134) (890) (795) (1,061) (1,163) (1,188) ------- ------ ------ ------- ------- -------- Balance at end of period $812 $707 $601 $599 $712 $722 ======= ====== ====== ======= ======= ========
(a) Before recoveries on accounts previously written-off, which are credited to income (millions): 1998--$231, 1997--$237 and 1996--$232. F-7 EXHIBIT INDEX ------------- The following exhibits are filed as part of this Annual Report or, where indicated, were heretofore filed and are hereby incorporated by reference (*indicates exhibits electronically filed here with.) Exhibits numbered 10.1 through 10.14 and 10.23 through 10.32 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 By-Laws, as amended through February 23, 1998 (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1997). 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 1998 Incentive Compensation Plan (incorporated by reference to Exhibit 4.4 of the Company's Registration Statement on Form S-8, dated May 15, 1998 (Commission File No. 333-52699)). 10.3 American Express Company Deferred Compensation Plan for Directors, as amended effective July 28, 1997 (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 June 30, 1997). 10.4 Description of American Express Pay for Performance Deferral Program (incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1994). 10.5 American Express Company 1983 Stock Purchase Assistance Plan, as amended (incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1988). E-1 10.6 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). 10.7 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). 10.8 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). 10.9 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). 10.10 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). 10.11 Description of separate pension arrangement and loan agreement between the Company and Harvey Golub (incorporated by reference to Exhibit 10.17 of Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1988). 10.12 Shearson Lehman Brothers Capital Partners I Amended and Restated Agreement of Limited Partnership (incorporated by reference to Exhibit 10.18 of Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1988). 10.13 Shearson Lehman Hutton Capital Partners II, L.P. Amended and Restated Agreement of Limited Partnership (incorporated by reference to Exhibit 10.19 of Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1988). 10.14 American Express Company Salary/Bonus Deferral Plan (incorporated by reference to Exhibit 10.20 of Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1988). E-2 10.15 Restated and Amended Agreement of Tenants-In-Common, dated May 27, 1994, by and among the Company, American Express Bank Ltd., American Express Travel Related Services Company, Inc., Lehman Brothers Inc., Lehman Government Securities, Inc. and Lehman Commercial Paper Incorporated (incorporated by reference to Exhibit 10.1 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). 10.16 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). 10.17 Intercompany Agreement, dated May 27, 1994, between the Company and Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.3 of Lehman Brothers Holdings Inc.'s Transition Report on Form 10-K 1994 (Commission File No. 1-9466) for the transition period from January 1, 1994 to November 30, 1994). 10.18 Purchase and Exchange Agreement, dated April 28, 1994, between Lehman Brothers Holdings Inc. and the Company (incorporated by reference to Exhibit 10.29 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). 10.19 Registration Rights Agreement, dated as of May 27, 1994, between the Company and Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.30 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). 10.20 Option Agreement, dated May 27, 1994, by and among the Company, American Express Bank Ltd., American Express Travel Related Services Company, Inc., Lehman Brothers Holdings Inc., Lehman Brothers Inc., Lehman Government Securities, Inc. and Lehman Commercial Paper Incorporated (incorporated by reference to Exhibit 10.31 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). 10.21 Letter Agreement, dated January 30, 1998, between the Company and Nippon Life Insurance Company (incorporated by reference to Exhibit 10.24 of the Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1997). E-3 10.22 Asset Purchase Agreement dated as of March 12, 1993 between Smith Barney, Harris Upham & Co. Incorporated, Primerica Corporation and Shearson Lehman Brothers Inc. (incorporated by reference to Exhibit 10.16 of Shearson Lehman Brothers Holdings Inc.'s Annual Report on Form 10-K (Commission File No. 1-9466) for the fiscal year ended December 31, 1992). 10.23 American Express Company 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 28.2 of the Company's Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31, 1993). 10.24 American Express Senior Executive Severance Plan (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 June 30, 1994). 10.25 Amendment of American Express Senior Executive Severance Plan (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, 1994). 10.26 Amendment of 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). 10.27 Amendment of 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). 10.28 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). 10.29 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). E-4 10.30 IDS Current Service Deferred Compensation Plan (incorporated by reference to Exhibit 10.42 of the Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1994). 10.31 Amended and Restated American Express Supplemental Retirement Plan (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, 1995). 10.32 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)). 10.33 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). 10.34 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). *12.1 Computation in Support of Ratio of Earnings to Fixed Charges. *12.2 Computation in Support of Ratio of Earnings to Fixed Charges and Preferred Share Dividends. *13 Portions of the Company's 1998 Annual Report to Shareholders that are incorporated herein by reference. *21 Subsidiaries of the Company. *23 Consent of Ernst & Young LLP (contained on page F-2 of this Annual Report on Form 10-K). *27 Financial Data Schedule. E-5 ================================================================================ 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, 1998 Commission File No. 1-7657 ------------------------ American Express Company (Exact name of Company as specified in charter) E X H I B I T S ================================================================================ EXHIBIT INDEX ------------- The following exhibits are filed as part of this Annual Report or, where indicated, were heretofore filed and are hereby incorporated by reference (*indicates exhibits electronically filed herewith.) Exhibits numbered 10.1 through 10.14 and 10.23 through 10.32 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 By-Laws, as amended through February 23, 1998 (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1997). 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 1998 Incentive Compensation Plan (incorporated by reference to Exhibit 4.4 of the Company's Registration Statement on Form S-8, dated May 15, 1998 (Commission File No. 333-52699)). 10.3 American Express Company Deferred Compensation Plan for Directors, as amended effective July 28, 1997 (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 June 30, 1997). 10.4 Description of American Express Pay for Performance Deferral Program (incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1994). 10.5 American Express Company 1983 Stock Purchase Assistance Plan, as amended (incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1988). E-1 10.6 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). 10.7 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). 10.8 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). 10.9 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). 10.10 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). 10.11 Description of separate pension arrangement and loan agreement between the Company and Harvey Golub (incorporated by reference to Exhibit 10.17 of Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1988). 10.12 Shearson Lehman Brothers Capital Partners I Amended and Restated Agreement of Limited Partnership (incorporated by reference to Exhibit 10.18 of Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1988). 10.13 Shearson Lehman Hutton Capital Partners II, L.P. Amended and Restated Agreement of Limited Partnership (incorporated by reference to Exhibit 10.19 of Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1988). 10.14 American Express Company Salary/Bonus Deferral Plan (incorporated by reference to Exhibit 10.20 of Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1988). E-2 10.15 Restated and Amended Agreement of Tenants-In-Common, dated May 27, 1994, by and among the Company, American Express Bank Ltd., American Express Travel Related Services Company, Inc., Lehman Brothers Inc., Lehman Government Securities, Inc. and Lehman Commercial Paper Incorporated (incorporated by reference to Exhibit 10.1 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). 10.16 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). 10.17 Intercompany Agreement, dated May 27, 1994, between the Company and Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.3 of Lehman Brothers Holdings Inc.'s Transition Report on Form 10-K 1994 (Commission File No. 1-9466) for the transition period from January 1, 1994 to November 30, 1994). 10.18 Purchase and Exchange Agreement, dated April 28, 1994, between Lehman Brothers Holdings Inc. and the Company (incorporated by reference to Exhibit 10.29 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). 10.19 Registration Rights Agreement, dated as of May 27, 1994, between the Company and Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.30 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). 10.20 Option Agreement, dated May 27, 1994, by and among the Company, American Express Bank Ltd., American Express Travel Related Services Company, Inc., Lehman Brothers Holdings Inc., Lehman Brothers Inc., Lehman Government Securities, Inc. and Lehman Commercial Paper Incorporated (incorporated by reference to Exhibit 10.31 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). 10.21 Letter Agreement, dated January 30, 1998, between the Company and Nippon Life Insurance Company (incorporated by reference to Exhibit 10.24 of the Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1997). E-3 10.22 Asset Purchase Agreement dated as of March 12, 1993 between Smith Barney, Harris Upham & Co. Incorporated, Primerica Corporation and Shearson Lehman Brothers Inc. (incorporated by reference to Exhibit 10.16 of Shearson Lehman Brothers Holdings Inc.'s Annual Report on Form 10-K (Commission File No. 1-9466) for the fiscal year ended December 31, 1992). 10.23 American Express Company 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 28.2 of the Company's Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31, 1993). 10.24 American Express Senior Executive Severance Plan (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 June 30, 1994). 10.25 Amendment of American Express Senior Executive Severance Plan (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, 1994). 10.26 Amendment of 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). 10.27 Amendment of 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). 10.28 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). 10.29 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). E-4 10.30 IDS Current Service Deferred Compensation Plan (incorporated by reference to Exhibit 10.42 of the Company's Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1994). 10.31 Amended and Restated American Express Supplemental Retirement Plan (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, 1995). 10.32 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)). 10.33 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). 10.34 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). *12.1 Computation in Support of Ratio of Earnings to Fixed Charges. *12.2 Computation in Support of Ratio of Earnings to Fixed Charges and Preferred Share Dividends. *13 Portions of the Company's 1998 Annual Report to Shareholders that are incorporated herein by reference. *21 Subsidiaries of the Company. *23 Consent of Ernst & Young LLP (contained on page F-2 of this Annual Report on Form 10-K). *27 Financial Data Schedule. E-5 EX-12 2
EXHIBIT 12.1 AMERICAN EXPRESS COMPANY COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions) Years Ended December 31, ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- --------- -------- Earnings: Pretax income from continuing operations $ 2,925 $ 2,750 $ 2,664 $ 2,183 $ 1,891 Interest expense 2,224 2,122 2,160 2,343 1,925 Other adjustments 124 127 139 95 103 ---------- ---------- ---------- --------- -------- Total earnings (a) $ 5,273 $ 4,999 $ 4,963 $ 4,621 $ 3,919 ---------- ---------- ---------- --------- -------- Fixed charges: Interest expense $ 2,224 $ 2,122 $ 2,160 $ 2,343 $ 1,925 Other adjustments 129 129 130 135 142 ---------- ---------- ---------- --------- -------- Total fixed charges (b) $ 2,353 $ 2,251 $ 2,290 $ 2,478 $ 2,067 ---------- ---------- ---------- --------- -------- Ratio of earnings to fixed charges (a/b) 2.24 2.22 2.17 1.86 1.90
Included in interest expense in the above computation is interest expense related to the international banking operations of American Express Company (the "Company") and Travel Related Services' Cardmember lending activities, which is netted against interest and dividends and Cardmember lending net finance charge revenue, respectively, in the Consolidated Statements of Income. For purposes of the "earnings" computation, other adjustments include adding the amortization of capitalized interest, the net loss of affiliates accounted for at equity whose debt is not guaranteed by the Company, the minority interest in the earnings of majority-owned subsidiaries with fixed charges, and the interest component of rental expense and subtracting undistributed net income of affiliates accounted for at equity. For purposes of the "fixed charges" computation, other adjustments include capitalized interest costs and the interest component of rental expense. On May 31, 1994, the Company completed the spin-off of Lehman Brothers through a dividend to American Express common shareholders. Accordingly, Lehman Brothers' results are reported as a discontinued operation and are excluded from the above computation. In the fourth quarter of 1995, the Company's ownership in First Data Corporation ("FDC") was reduced to approximately 10 percent as a result of shares issued by FDC in connection with a merger transaction. Accordingly, as of December 31, 1995, the Company's investment in FDC is accounted for as Investments - Available for Sale.
EXHIBIT 12.2 AMERICAN EXPRESS COMPANY COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED SHARE DIVIDENDS (Dollars in millions) Years Ended December 31, ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- --------- ---------- --------- -------- Earnings: Pretax income from continuing operations $ 2,925 $ 2,750 $ 2,664 $ 2,183 $ 1,891 Interest expense 2,224 2,122 2,160 2,343 1,925 Other adjustments 124 127 139 95 103 -------- --------- ---------- --------- -------- Total earnings (a) $ 5,273 $ 4,999 $ 4,963 $ 4,621 $ 3,919 -------- --------- ---------- --------- -------- Fixed charges and preferred share dividends: Interest expense $ 2,224 $ 2,122 $ 2,160 $ 2,343 $ 1,925 Dividends on preferred shares - - 8 24 50 Other adjustments $ 129 129 130 135 142 --------- --------- ---------- --------- ------- Total fixed charges and preferred share dividends (b) $ 2,353 $ 2,251 $ 2,298 $ 2,502 $ 2,117 --------- --------- --------- --------- -------- Ratio of earnings to fixed charges and preferred share dividends (a/b) 2.24 2.22 2.16 1.85 1.85
Included in interest expense in the above computation is interest expense related to the international banking operations of American Express Company (the "Company") and Travel Related Services' Cardmember lending activities, which is netted against interest and dividends and Cardmember lending net finance charge revenue, respectively, in the Consolidated Statements of Income. For purposes of the "earnings" computation, other adjustments include adding the amortization of capitalized interest, the net loss of affiliates accounted for at equity whose debt is not guaranteed by the Company, the minority interest in the earnings of majority-owned subsidiaries with fixed charges, and the interest component of rental expense and subtracting undistributed net income of affiliates accounted for at equity. For purposes of the "fixed charges and preferred share dividends" computation, dividends on outstanding preferred shares have been increased to an amount representing the pretax earnings required to cover such dividend requirements. Other adjustments include capitalized interest costs and the interest component of rental expense. On May 31, 1994, the Company completed the spin-off of Lehman Brothers through a dividend to American Express common shareholders. Accordingly, Lehman Brothers' results are reported as a discontinued operation and are excluded from the above computation. In the fourth quarter of 1995, the Company's ownership in First Data Corporation ("FDC") was reduced to approximately 10 percent as a result of shares issued by FDC in connection with a merger transaction. Accordingly, as of December 31, 1995, the Company's investment in FDC is accounted for as Investments - Available for Sale. EX-13 3 Exhibit 13 FINANCIAL REVIEW CONSOLIDATED RESULTS OF OPERATIONS 1998 was another solid year for American Express Company (the Company). We posted strong financial results and made further progress on our strategies, notwithstanding the difficult economic environments in many areas and volatile financial markets. We prudently deployed capital through strategic acquisitions that helped strengthen our competitive position in a number of businesses, successfully launched card products outside the United States and partnered with other institutions to issue cards on our network. At the core of our performance is a determined focus on three basic operating principles: offering superior value to customers, continually driving toward best-in-class economics and building the American Express brand. The Company reported record 1998 net income of $2.14 billion, 8 percent higher than net income of $1.99 billion in 1997. The 1998 results include several first quarter items: a $138 million (after-tax) credit loss provision at American Express Bank (AEB) relating to its Asia/Pacific portfolio, as well as income in the Corporate segment of $78 million (after-tax) representing gains on the sale of First Data Corporation (FDC) shares and a preferred dividend based on Lehman Brothers' earnings. Excluding these items, 1998 income was $2.2 billion, an increase of 11%. In 1996, operating income was $1.74 billion, excluding two fourth quarter items: a $300 million (after-tax) gain on the exchange of Debt Exchangeable for Common Stock (DECS) for shares of common stock of FDC and a $138 million (after-tax) restructuring charge. The Company's 1998 results were in line with its long-term targets of achieving, on average and over time: 12-15 percent earnings per share growth and at least 8 percent growth in revenues, but were at the low end of the range. Return on equity exceeded the Company's long-term target of 18-20 percent. Diluted earnings per share were $4.63, $4.15 and $3.89 in 1998, 1997 and 1996, respectively. After adjusting 1998 for the above-mentioned AEB credit loss provision and the Corporate gains and after adjusting 1996 for the restructuring charge and the DECS gain, diluted earnings per share were $4.76, $4.15 and $3.56 in 1998, 1997 and 1996, respectively. On this basis, 1998 earnings per share rose 15%. The rise in adjusted earnings per share for 1998 and 1997 reflects revenue growth, margin improvement and a reduction in average shares outstanding. Consolidated revenues rose 7.7 percent in 1998 to $19.1 billion, compared with $17.8 billion and $16.4 billion in 1997 and 1996, respectively. Revenues, net of American Express Financial Advisors' provisions for losses and benefits, rose 8.3 percent and 9.2 percent in 1998 and 1997, respectively. Contributing to both years' results were increases in worldwide billed business, higher management and distribution fees and greater loans outstanding and interest margins in Cardmember lending. Growth in 1998 was also enhanced by travel acquisitions. -1- (1998 Annual Report p. 22) YEAR 2000 The Year 2000 (Y2K) issue is the result of computer programs having been written using two digits rather than four to define a year. Some programs may recognize a date using "00" as the year 1900 rather than 2000. This misinterpretation could result in the failure of major systems or miscalculations, which could have a material impact on the Company and its businesses or subsidiaries through business interruption or shutdown, financial loss, reputational damage and legal liability to third parties. The Company began addressing the Y2K issue in 1995 and has established a plan for resolution, which involves the remediation, decommissioning and replacement of relevant systems, including mainframe, mid-range and desktop computers, application software, operating systems, systems software, date back-up archival and retrieval services, telephone and other communications systems, and hardware peripherals and facilities dependent on embedded technology. As a part of our plan, we have generally followed and utilized the specific policies and guidelines established by the Federal Financial Institutions Examination Council, as well as other U.S. and international regulatory agencies. Additionally, we continue to participate in Y2K related industry consortia sponsored by various partners and suppliers. Progress is reviewed regularly with the Company's senior management and Board of Directors. Our Y2K compliance effort related to information technology (IT) systems is divided into two initiatives. The first, which is the much larger initiative, is known internally as "Millenniax," and relates to mainframe and other technological systems maintained by the American Express Technologies organization (AET). The second, known as "Business T," relates to the technological assets that are owned, managed or maintained by the Company's individual business units. Business T also encompasses the remediation of non-IT systems. These initiatives involve a substantial number of employees and external consultants. This multiple sourcing approach is intended to mitigate the risk of becoming dependent on any one vendor or resource. While the vast majority of our systems that require modification are being remediated, in some cases we have chosen to migrate to new applications that are already Y2K compliant. The Company's plans for remediation with respect to Millenniax and Business T include the following program phases: (i)employee awareness and mobilization, (ii)inventory collection and assessment, (iii)impact analysis, (iv)remediation/decommission, (v)testing and (vi)implementation. As part of the first three phases, we have identified the Company's mission-critical systems for purposes of prioritization. The Company's goals are to complete testing of critical systems by early 1999, and to continue compliance efforts, including but not limited to, the testing of systems on an integrated basis and independent validation of such testing, through 1999.* We are currently on schedule to meet these goals. With respect to systems maintained by the Company, the first three phases referred to above have been substantially completed for both Millenniax and Business T. In addition, remediation of critical systems is substantially complete. As of December 31, 1998, for Millenniax, the remediation/decommission, testing and implementation phases for critical and non-critical systems in total are 82%, 75% and 60% complete, respectively. For Business T, such phases are 85%, 70% and 69% complete, respectively. Certain critical systems have already been made Y2K compliant, such as the Worldwide -2- (1998 Annual Report p. 22) Credit Authorization System, and we have completed testing of the global point of sale infrastructure. As a result, we have begun issuing Year 2000 dated charge and credit cards. Our most commonly used methodology for remediation is the sliding window. Once an application/system has been remediated, we apply specific types of tests, such as stress, regression, unit, future date and baseline to ensure that the remediation process has achieved Y2K compliance while maintaining the fundamental data processing integrity of the particular system. To assist with remediation and testing, we are using various standardized tools obtained from a variety of vendors. The Company's cumulative costs since inception of the Y2K initiatives were $383 million through December 31, 1998 and are estimated to be in the range of $135-$160 million for the remainder through 2000.* These include both remediation costs and costs related to replacements that were or will be required as a result of Y2K. These costs, which are expensed as incurred, relate to both Millenniax and Business T, and have not had, nor are they expected to have, a material adverse impact on the Company's results of operations or financial condition.* Costs related to Millenniax, which represent most of the total Y2K costs of the Company, are managed by and included in the Corporate and Other segment; costs related to Business T are included in the business segments. Y2K costs related to Millenniax represent 14%, 6% and 1% of the AET budget for the years 1998, 1999 and 2000, respectively. The Company has not deferred other critical technology projects or investment spending as a result of Y2K. However, because the Company must continually prioritize the allocation of finite financial and human resources, certain non-critical spending initiatives have been deferred. The Company's major businesses are heavily dependent upon internal computer systems, and all have significant interaction with systems of third parties, both domestically and internationally. The Company is working with key external parties, including merchants, clients, counterparties, vendors, exchanges, utilities, suppliers, agents and regulatory agencies to mitigate the potential risks to us of Y2K. The failure of external parties to resolve their own Y2K issues in a timely manner could result in a material financial risk to the Company. As part of our overall compliance program, the Company is actively communicating with third parties through face-to-face meetings and correspondence, on an ongoing basis, to ascertain their state of readiness. Although numerous third parties have indicated to us in writing that they are addressing their Y2K issues on a timely basis, the readiness of third parties overall varies across the spectrum. Because the Company's Y2K compliance is dependent on key third parties being compliant on a timely basis, there can be no assurances that the Company's efforts alone will resolve all Y2K issues. At this point, the Company is in the process of performing an assessment of reasonably likely Y2K systems failures and related consequences. The Company is also preparing specific Y2K contingency plans for all key American Express business units to mitigate the potential impact of such failures. This effort is a full-scale initiative that includes both internal and external experts under the guidance of a Company-wide steering committee. Our contingency plans, which will be based in part on an assessment of the magnitude and probability of potential risks, will primarily focus on proactive steps to prevent Y2K failures from occurring, or if they should occur, to detect them quickly, minimize their -3- (1998 Annual Report p. 23) impact and expedite their repair. The Y2K contingency plans will supplement disaster recovery and business continuity plans already in place, and are expected to include measures such as selecting alternative suppliers and channels of distribution, and developing our own technology infrastructure in lieu of those provided by third parties. Development of the Y2K contingency plans is expected to be substantially complete by the end of the first quarter of 1999, and will continue to be refined throughout 1999 as additional information related to our exposures is gathered.* *Statements in this Y2K discussion marked with an asterisk are forward-looking statements which are subject to risks and uncertainties. Important factors that could cause results to differ materially from these forward-looking statements include, among other things, the ability of the Company to successfully identify systems containing two-digit codes, the nature and amount of programming required to fix the affected systems, the costs of labor and consultants related to such efforts, the continued availability of such resources, and the ability of third parties that interface with the Company to successfully address their Y2K issues. ACCOUNTING DEVELOPMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," which was effective for fiscal years beginning after December 15, 1997 and redefines how operating segments are determined. The Company adopted the provisions of SFAS No. 131 in the first quarter of 1998. As a result, the Travelers Cheque Group, which had been included in the Travel Related Services segment, is now reported in the same segment as American Express Bank, consistent with our management structure. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP, which the Company will adopt on January 1, 1999, requires the capitalization of certain costs incurred to develop or obtain software for internal use. The Company's policy has been to expense such costs as incurred. As a result of adopting the new SOP, the Company expects to capitalize approximately $250 million in 1999 that otherwise would have been expensed as incurred. The Company plans to increase investment spending by the amount capitalized, net of depreciation, and therefore, expects no significant effect on net income. In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." The SOP, which the Company will adopt on January 1, 1999, provides guidance on accounting by insurance and other enterprises for assessments related to insurance activities. Adoption of this statement will not have a material effect on the Company's financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective January 1, 2000. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of -4- (1998 Annual Report p. 23) a derivative depends on the intended use of the derivative and the resulting designation. The ultimate financial effect of the new rule will be measured based on the derivatives in place at adoption and cannot be estimated at this time. Based on the Company's current derivatives position, the effect on the Company's earnings and financial position upon adoption would not be significant. TRAVEL RELATED SERVICES RESULTS OF OPERATIONS
STATEMENTS OF INCOME (Amounts in millions) Years Ended December 31, 1998 1997 1996 ------- ------- ------- Net Revenues: Discount Revenue $ 6,115 $ 5,666 $ 5,024 Net Card Fees 1,587 1,604 1,668 Travel Commissions and Fees 1,647 1,489 1,422 Other Revenues 2,534 2,211 2,175 Lending: Finance Charge Revenue 2,007 1,848 1,575 Interest Expense 653 604 507 ------- ------- ------ Net Finance Charge Revenue 1,354 1,244 1,068 ------- ------- ------ Total Net Revenues 13,237 12,214 11,357 ======= ======= ====== Expenses: Marketing and Promotion 1,130 1,027 957 Provision for Losses and Claims: Charge Card 701 858 743 Lending 922 817 635 Other 56 57 73 ------- ------- ------ Total 1,679 1,732 1,451 Charge Card Interest Expense 809 743 688 Net Discount Expense 665 597 554 Human Resources 3,544 3,076 2,907 Other Operating Expenses 3,346 3,254 3,190 ------- ------- ------- Total Expenses 11,173 10,429 9,747 ======= ====== ======= Pretax Income 2,064 1,785 1,610 Income Tax Provision 700 621 559 ------- ------- ------- Operating Income 1,364 1,164 1,051 Restructuring Charge (net of tax) - - 125 ------- ------- ------- Net Income $ 1,364 $ 1,164 $ 926 ======= ======= =======
-5- (1998 Annual Report p. 24) Travel Related Services (TRS) reported earnings of $1.36 billion in 1998, a 17 percent increase from $1.16 billion in 1997. 1996 earnings were $1.05 billion, excluding a $125 million ($196 million pretax) restructuring charge. TRS' net revenues rose 8 percent in both 1998 and 1997 compared with the previous year. In both years, TRS' net revenues benefited from growth in worldwide billed business and Cardmember loans outstanding, as well as wider interest margins. 1998 results also reflect higher travel commissions and fees, primarily from acquisitions during the year. In both 1998 and 1997, growth in billed business resulted from higher spending per Basic Cardmember and growth in average cards outstanding. Greater spending per Basic Cardmember resulted from several factors, including the benefits of rewards programs and expanded merchant coverage. In 1998, substantial growth in cards in force outside the United States was offset by the cancellation of 1.6 million U.S. Government cards late in the fourth quarter, as a result of the Company's decision to withdraw from the U.S. Government Card business. The international increase includes growth in proprietary products, as well as the addition of a substantial number of new network cards over the past year. The growth in worldwide cards in force in 1997 was primarily attributable to new credit card product launches and a broader product portfolio. Discount revenue rose 8 percent in 1998 and 13 percent in 1997 as a result of higher billed business in the United States and internationally. The 1998 increase was particularly noteworthy because of the economic turmoil in many international markets, slower growth in the U.S. card industry and general tightening by corporations of travel and entertainment expenses in the latter half of the year. Net card fees decreased in both years due to declines in consumer charge cards and the effect of TRS' strategy of building its lending portfolio through the issuance of low- and no-fee credit cards. Travel commissions and fees improved in 1998 as a result of travel acquisitions during the year, which increased revenues and expenses but did not have a material effect on net income. Both 1998 and 1997 reflect increased sales volumes, offset in part by the continued efforts by airlines to reduce distribution costs and by corporate travel and entertainment expense containment efforts. The increase in other revenues in 1998 and 1997 reflects higher card assessments and fees; 1998 also includes the effect of acquisitions. Lending net finance charge revenue was reduced by $1 billion loan securitizations in the second quarter of 1998, the third quarter of 1997 and the second quarter of 1996. See TRS' Liquidity and Capital Resources discussion. Excluding the effect of securitizations, lending net finance charge revenue rose 18 percent and 24 percent in 1998 and 1997, respectively. The increase in both 1998 and 1997 is due to higher worldwide lending balances and a widening of interest margins in the U.S. portfolio resulting from a smaller portion of the portfolio being subject to lower introductory interest rates. -6- (1998 Annual Report pp. 24-25)
SELECTED STATISTICAL INFORMATION (Amounts in billions, except percentages and where indicated) Years Ended December 31, 1998 1997 1996 --------- --------- --------- Total Cards in Force (millions): United States 27.8 29.6 29.2 Outside the United States 14.9 13.1 12.3 ----------- ---------- --------- Total 42.7 42.7 41.5 =========== ========== ========= Basic Cards in Force (millions): United States 21.7 23.3 22.5 Outside the United States 11.5 10.0 9.6 ----------- ---------- --------- Total 33.2 33.3 32.1 =========== ========= ========= Card Billed Business: United States $ 165.6 $ 150.5 $ 131.0 Outside the United States 61.9 58.7 53.3 ----------- ---------- --------- Total $ 227.5 $ 209.2 $ 184.3 =========== ========== ========= Average Discount Rate* 2.73% 2.73% 2.75% Average Basic Cardmember Spending (dollars)* $ 6,885 $ 6,473 $ 6,074 Average Fee per Card (dollars)* $ 38 $ 39 $ 42 Travel Sales $ 19.9 $ 17.4 $ 15.8 Travel Commissions and Fees/Sales 8.3% 8.6% 9.0% Owned and Managed Charge Card Receivables:** Total Receivables $ 24.0 $ 23.5 $ 22.5 90 Days Past Due as a % of Total 2.7% 3.1% 3.2% Loss Reserves (millions) $ 897 $ 951 $ 923 % of Receivables 3.7% 4.0% 4.1% % of 90 Days Past Due 138% 132% 128% Net Loss Ratio 0.46% 0.50% 0.51% Owned and Managed U.S. Cardmember Lending:** Total Loans $ 16.7 $ 14.6 $ 12.7 Past Due Loans as a % of Total: 30-89 Days 2.2% 2.4% 2.4% 90+ Days 0.9% 1.1% 0.9% Loss Reserves (millions): Beginning Balance $ 589 $ 488 $ 443 Provision 961 867 607 Net Charge-Offs/Other (931) (766) (562) ----------- ---------- ---------- Ending Balance $ 619 $ 589 $ 488 =========== ========== ========== % of Loans 3.7% 4.0% 3.8% % of Past Due 120% 116% 117% Average Loans $ 15.0 $ 13.3 $ 10.8 Net Write-Off Rate 6.4% 6.0% 5.2% Net Interest Yield 9.5% 9.1% 8.8%
* Computed excluding cards issued by strategic alliance partners and independent operators as well as business billed on those cards. ** Owned and managed Cardmember receivables and loans include securitized assets not reflected in the Consolidated Balance Sheets. -7- (1998 Annual Report p. 25) The growth in marketing and promotion expense in both 1998 and 1997 reflected higher media and merchant-related advertising costs. In 1998, the worldwide Charge Card provision declined due to improved loss rates; this provision rose in 1997, primarily as a result of volume growth. The worldwide lending provision increased in both years as a result of portfolio growth; the increase also included greater bankruptcy losses in 1998 and higher delinquencies in 1997. The growth in the lending provision was partly offset by the securitizations of U.S. Cardmember loans in both years. Charge Card interest expense rose in 1998 and 1997 as a result of higher volumes, partly offset by lower borrowing rates. The growth in human resources expense primarily reflected increased business volumes and higher systems programmers' costs for technology projects and merit increases in both years; additionally, the growth in 1998 reflects higher employee levels, in part due to acquisitions during the year. Other operating expenses rose in 1998 and 1997 due to Cardmember loyalty programs, business growth and investment spending. TRS' asset securitization programs increased fee revenue by $293 million, $195 million and $157 million in 1998, 1997 and 1996, respectively. The Charge Card securitization program resulted in net discount expense of $665 million, $597 million and $554 million in 1998, 1997 and 1996, respectively. The program also reduced the Charge Card provision by $293 million, $247 million and $246 million in 1998, 1997 and 1996, respectively, and Charge Card interest expense by $231 million, $230 million and $183 million in 1998, 1997 and 1996, respectively. The revolving credit securitization program also reduced lending net finance charge revenue by $306 million, $167 million and $75 million and the lending provision by $171 million, $120 million and $43 million, in 1998, 1997 and 1996, respectively. These securitizations had no material effect on net income for any year presented. LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION (Amounts in billions, except percentages) December 31, 1998 1997 ---------- --------- Accounts Receivable, net $ 21.3 $ 20.5 U.S. Cardmember Loans $ 13.7 $ 12.6 Total Assets $ 44.7 $ 40.7 Short-term Debt $ 22.9 $ 20.9 Long-term Debt $ 5.1 $ 6.0 Total Liabilities $ 39.8 $ 36.1 Total Shareholder's Equity $ 4.9 $ 4.6 Return on Average Equity* 27.8% 25.1% Return on Average Assets* 3.3% 3.0% ---------- ---------
* Excluding the effect of SFAS No. 115. The American Express Credit Account Master Trust (the Trust) securitized $1 billion of loans in June 1998 and $1 billion in August 1997, through the public issuance of two classes of investor certificates and a privately placed collateral interest in the assets of the Trust. The securitized assets consist of loans arising in a portfolio of designated Optima Card, Optima Line of Credit and Sign & Travel revolving credit accounts owned by American Express Centurion Bank (Centurion Bank), a wholly-owned subsidiary of TRS. At December 31, 1998 and 1997, TRS had securitized a total of $3 billion and $2 billion of loans, respectively, which are not on the Consolidated Balance Sheets. -8- (1998 Annual Report p. 26) In addition, the American Express Master Trust (the Master Trust) securitizes charge card receivables generated under designated American Express Card, Gold Card and Platinum Card consumer accounts through the issuance of trust certificates. In May 1998, the Master Trust issued an additional $1 billion of Class A Fixed Rate Accounts Receivable Trust Certificates. In September 1998, $300 million Class A Fixed Rate Accounts Receivable Trust Certificates matured from the Charge Card securitization portfolio. At December 31, 1998 and 1997, TRS had securitized $3.95 billion and $3.25 billion, respectively, of receivables, which are not on the Consolidated Balance Sheets. In February 1998, American Express Credit Corporation (Credco), a wholly-owned subsidiary of TRS, issued $150 million 1.125% Cash Exchangeable Notes due February 2003. These notes are exchangeable for an amount in cash which is linked to the price of the common stock of the Company. Credco has entered into hedging agreements designed to fully hedge its obligations under these Notes. In 1997, Credco issued and sold, exclusively outside the United States and to non-U.S. persons, $400 million Floating Rate Notes and an additional $400 million of 6.5% Fixed Rate Notes. These notes are listed on the Luxembourg Stock Exchange, and will mature in 2002. At December 31, 1998, Credco had approximately $2.4 billion of medium and long-term debt and warrants available for issuance under shelf registrations filed with the Securities and Exchange Commission. TRS, primarily through Credco, maintained commercial paper outstanding of approximately $16.1 billion at an average interest rate of 5.3% and approximately $14.5 billion at an average interest rate of 6.0% at December 31, 1998 and 1997, respectively. Unused lines of credit of approximately $8.2 billion, which expire in increments from 1999 through 2002, were available at December 31, 1998 to support a portion of TRS' commercial paper borrowings. Borrowings under bank lines of credit totaled $1.6 billion and $1.7 billion at December 31, 1998 and 1997, respectively. In January 1999, TRS issued and sold, exclusively outside the United States and to non-U.S. persons, $500 million 5.625% Fixed Rate Notes. These notes are listed on the Luxembourg Stock Exchange, and will mature in 2004. -9- (1998 Annual Report p. 26) AMERICAN EXPRESS FINANCIAL ADVISORS RESULTS OF OPERATIONS
STATEMENTS OF INCOME (Amounts in millions) Years Ended December 31, 1998 1997 1996 ------- -------- -------- Revenues: Investment Income $ 2,437 $ 2,339 $ 2,267 Management and Distribution Fees 1,851 1,486 1,205 Other Revenues 807 774 638 -------- -------- -------- Total Revenues 5,095 4,599 4,110 ======== ======== ======== Expenses: Provision for Losses and Benefits: Annuities 1,150 1,214 1,208 Insurance 489 452 420 Investment Certificates 275 200 197 -------- -------- -------- Total 1,914 1,866 1,825 ======== ======== ======== Human Resources 1,441 1,229 1,034 Other Operating Expenses 548 482 366 -------- -------- -------- Total Expenses 3,903 3,577 3,225 ======== ======== ======== Pretax Income 1,192 1,022 885 Income Tax Provision 374 315 291 -------- -------- -------- Net Income $ 818 $ 707 $ 594 ======== ======== ========
American Express Financial Advisors (AEFA) reported increases in revenues of 11 percent and 12 percent, and earnings of 16 percent and 19 percent for 1998 and 1997, respectively. Revenues and earnings in both years benefited primarily from higher fees due to growth in managed assets and record mutual fund sales. Revenues net of related provisions for fixed annuities, insurance and investment certificate products, which are essentially spread businesses, rose 16 percent and 20 percent for 1998 and 1997, respectively. The improvement in investment income reflected higher average investments of 3 percent and 4 percent in 1998 and 1997, respectively. Management and distribution fees rose 25 percent and 23 percent in 1998 and 1997, respectively; the growth in both years was due to greater management fee revenue from higher managed and separate account assets. These assets increased due to strong market appreciation and positive net sales in both years. Distribution fees also improved in both years reflecting strong mutual fund sales. Other revenues rose in both years from increased life insurance contract charges and premiums and higher financial planning fees. -10- (1998 Annual Report p. 27) In 1998, the provision for losses and benefits for fixed annuities declined due to lower business in force and accrual rates and the provision for insurance increased from higher accrual rates and in force levels. Provisions for annuities and insurance grew in 1997 due to greater business in force, partially offset by lower accrual rates. In 1998, the provision for investment certificates rose reflecting higher in force levels. This increase also reflects growth in the provision for the stock market certificate product, which is hedged by index options and resulted in a corresponding increase in investment income, with minimal impact on net income. Human resources expense rose in both years, reflecting rising financial advisors' compensation from growth in sales and asset levels and a greater number of employees to support business expansion. The increase in other operating expenses in both years primarily resulted from higher data processing, technology and advertising expenditures. 1997 also included increased occupancy and equipment costs. The effective tax rate in 1998 and 1997 includes tax credits from affordable housing investments.
SELECTED STATISTICAL INFORMATION (Amounts in millions, except percentages and where indicated) Years Ended December 31, 1998 1997 1996 --------- -------- -------- Revenues, Net of Provisions $ 3,181 $ 2,732 $ 2,285 Life Insurance in Force (billions) $ 81.1 $ 74.5 $ 67.3 Deferred Annuities in Force (billions) $ 42.8 $ 41.7 $ 37.5 Assets Owned, Managed or Administered (billions): Assets managed for institutions $ 45.9 $ 40.8 $ 37.3 Assets owned, managed or administered for individuals: Owned Assets: Separate Account Assets 27.3 23.2 18.5 Other Owned Assets 37.3 36.6 34.2 --------- -------- -------- Total Owned Assets 64.6 59.8 52.7 ========= ======== ======== Managed Assets 87.9 72.8 59.4 Administered Assets 14.0 8.4 4.2 --------- -------- -------- Total $ 212.4 $ 181.8 $ 153.6 ========= ======== ======== Market Appreciation (Depreciation) During the Period: Owned Assets: Separate Account Assets $ 3,547 $ 3,170 $ 1,937 Other Owned Assets $ (110) $ 262 $ (232) Managed Assets $ 13,787 $ 11,735 $ 9,063 Sales of Selected Products: Mutual Funds $ 20,766 $ 17,179 $ 14,331 Annuities $ 2,559 $ 3,473 $ 4,311 Investment Certificates $ 1,976 $ 1,194 $ 736 Life and Other Insurance Products $ 389 $ 421 $ 449 Number of Financial Advisors 10,350* 8,776 8,340 Fees from Financial Plans (thousands) $ 72,366 $ 60,809 $ 48,072 Product Sales Generated from Financial Plans as a Percentage of Total Sales 65.4% 65.7% 64.0% ========== ========= =========
* Includes advisors from the acquisition of Securities America in the first quarter of 1998. -11- (1998 Annual Report p. 27) LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION (Amounts in billions, except percentages) December 31, 1998 1997 -------- -------- Investments $ 30.9 $ 30.7 Separate Account Assets $ 27.3 $ 23.2 Total Assets $ 64.6 $ 59.8 Client Contract Reserves $ 30.3 $ 30.2 Total Liabilities $ 60.6 $ 56.1 Total Shareholder's Equity $ 4.1 $ 3.7 Return on Average Equity* 22.5% 21.8% -------- --------
* Excluding the effect of SFAS No. 115. AEFA's total assets and liabilities rose primarily due to growth in separate account assets as a result of market appreciation and positive net sales for both years. Investments comprised primarily corporate bonds and mortgage-backed securities, including $3.4 billion and $3.0 billion in below investment grade debt securities, in addition to $3.8 billion in mortgage loans at December 31, 1998 and 1997. Investments are principally funded by sales of insurance and annuities and by reinvested income. Maturities of these investments are matched, for the most part, with the expected future payments of insurance and annuity obligations. Separate account assets, primarily investments carried at market value, are for the exclusive benefit of variable annuity and variable life insurance contract holders. AEFA earns investment management and administration fees from the related accounts. AMERICAN EXPRESS BANK/TRAVELERS CHEQUE RESULTS OF OPERATIONS
STATEMENTS OF INCOME (Amounts in millions) Years Ended December 31, 1998 1997 1996 ------ ------ ------ Net Revenues: Interest Income $ 854 $ 897 $ 845 Interest Expense 564 579 537 ------ ------ ------ Net Interest Income 290 318 308 Travelers Cheque Investment Income 330 331 349 Foreign Exchange Income 145 101 72 Commissions, Fees and Other Revenues 237 374 337 ------ ----- ------ Total Net Revenues 1,002 1,124 1,066 ====== ====== ======= Expenses: Human Resources 322 306 289 Other Operating Expenses 537 517 511 Provision for Losses 272 52 52 ------ ------ ------ Total Expenses 1,131 875 852 ====== ====== ====== Pretax (Loss)/Income (129) 249 214 Income Tax Benefit (172) (23) (33) Net Income $ 43 $ 272 $ 247 ====== ====== ======
-12- (1998 Annual Report p. 28) American Express Bank/Travelers Cheque (AEB/TC) 1998 net income was lower than the prior year primarily reflecting a $138 million ($213 million pretax) first quarter credit loss provision related to AEB's business in the Asia/Pacific region, particularly Indonesia. The results for 1997 included approximately $62 million ($96 million pretax) of increased recognition of recoveries on abandoned property related to the Travelers Cheque business. These recoveries are included in Commissions, Fees and Other Revenues. The economic downturn in Asia contributed to reduced net interest income and lower commissions, fees and other revenues in 1998. In particular, net interest income was down in 1998 due to lower corporate banking revenues, primarily reflecting a lower overall loan portfolio and an increase in nonperforming loans in Indonesia. These declines were partially negated by growth in AEB's two businesses oriented to individuals, Private Banking and Personal Financial Services, which resulted from greater deposits and loans. In 1997, net interest income grew compared with the prior year due to higher average balances in loans and trading securities. Foreign exchange income rose significantly in 1998 and 1997, reflecting strong trading results, primarily in the Asia/Pacific region.
SELECTED STATISTICAL INFORMATION (Amounts in billions, except percentages) Years Ended December 31, 1998 1997 1996 ----- ------ ------ American Express Bank: Assets Managed/Administered* $ 6.2 $ 5.0 $ 4.8 Assets of Non-Consolidated Joint Ventures $ 2.6 $ 2.4 $ 1.3 Travelers Cheque: Sales $ 24.0 $ 25.0 $ 26.0 Average Outstandings $ 6.0 $ 5.9 $ 6.0 Average Investments $ 5.8 $ 5.6 $ 5.6 Tax Equivalent Yield 9.0% 9.2% 9.4% ------ ------ ------
* Includes assets managed by American Express Financial Advisors. LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION (Amounts in billions, except percentages and where indicated) December 31, 1998 1997 ------ ------ Travelers Cheque Investments $ 6.3 $ 5.9 Total Loans $ 5.6 $ 6.2 Total Nonperforming Loans (millions) $ 180 $ 47 Other Nonperforming Assets (millions) $ 63 $ 11 Reserve for Credit Losses (millions)* $ 259 $ 137 Loan Loss Reserve as a Percentage of Total Loans 3.8% 2.1% Total Assets $ 18.5 $ 19.6 Deposits $ 8.3 $ 8.5 Travelers Cheques Outstanding $ 5.8 $ 5.6 Total Liabilities $ 17.3 $ 18.4 Total Shareholder's Equity (millions) $1,197 $1,248 Return on Average Assets** 0.23% 1.40% Return on Average Common Equity** 4.9% 28.7% Risk-Based Capital Ratios: Tier I 9.8% 8.8% Total 12.6% 12.3% Leverage Ratio 5.5% 5.3% ------- ------ * Allocation (millions) Loans $ 214 $ 131 Other Assets, primarily derivatives 43 6 Other Liabilities 2 - ------- ------ Total Credit Loss Reserves $ 259 $ 137 ======= =======
** Excluding the effect of SFAS No. 115. -13- (1998 Annual Report pp. 28-29) AEB had approximately $5.6 billion outstanding in worldwide loans at December 31, 1998, down from $6.2 billion at December 31, 1997. The decline from the prior year was largely in the Asia/Pacific region; corporate and correspondent banking loans fell by $0.8 billion, however consumer and private banking loans rose by $0.3 billion. Other banking activities, such as securities, unrealized gains on foreign exchange and derivatives contracts, various contingencies and market placements, added approximately $7.6 billion to AEB's credit exposures at December 31, 1998 (compared with $8.1 billion at December 31, 1997). The decline in these other exposures from December 31, 1997 mainly reflects lower exposures in the Asia/Pacific region. The 1998 reserve for credit losses reflects an increase due to a $213 million provision, which was partially offset by write-offs related to the Asia/Pacific region, particularly Indonesia. Besides the decrease in total loans, AEB/TC total assets declined mainly due to lower unrealized gains on foreign exchange and derivative contracts, primarily in Asia. The Company has taken steps to ensure that AEB remains well capitalized, as defined by regulatory guidelines. In April 1998, the Company purchased $225 million of deferred tax assets from AEB, thereby reducing non-qualifying assets and increasing regulatory capital. The Company expects to be able to utilize these deferred tax assets over time within its consolidated tax return and, therefore, realize full value. CORPORATE AND OTHER Corporate and Other reported net expenses of $84 million and $152 million in 1998 and 1997, respectively, and income of $134 million in 1996. 1998 results include income of $78 million after-tax ($106 million pretax) comprising a $39 million after-tax ($60 million pretax) gain from sales of common stock of First Data Corporation and a $39 million after-tax ($46 million pretax) preferred stock dividend based on earnings from Lehman Brothers. The 1996 amount includes a $300 million after-tax ($480 million pretax) gain on the exchange of the Company's DECS and a $13 million after-tax ($20 million pretax) charge primarily related to the early retirement of debt. Excluding the above items, Corporate and Other had net expenses of $162 million in 1998 and $153 million in 1996. Results for all three years include a benefit due to an earnings payout from Travelers Inc. (Travelers), related to the 1993 sale of the Shearson Lehman Brothers Division (the 1993 sale). 1998 also reflects a benefit from the sale of securities and adjustment of valuation allowances related to certain corporate assets. 1996 results include the Company's share of a participation in Travelers' revenue, in accordance with the 1993 sale. The above items were offset by business building initiatives and Y2K costs related to Millenniax in all three years. -14- (1998 Annual Report p. 29) CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES The Company believes allocating capital to businesses with a return on risk-adjusted equity in excess of its cost of equity and sustained earnings growth in its core business will continue to build shareholder value. The Company's philosophy is to retain enough earnings to help achieve its goals of earnings per share growth in the 12 to 15 percent range. As further described in Note 6 to the Consolidated Financial Statements, the Company has undertaken a systematic share repurchase program to offset new share issuances. To the extent retained earnings exceed investment opportunities, the Company has returned excess capital to shareholders. FINANCING ACTIVITIES The Company has procedures to transfer immediately short-term funds within the Company to meet liquidity needs. These internal transfer mechanisms are subject to and comply with various contractual and regulatory constraints. The parent company generally meets its short-term funding needs through an intercompany dividend policy and by the issuance of commercial paper. The Board of Directors has authorized a parent company commercial paper program that is supported by a $1.3 billion multi-purpose credit facility that expires in increments from 1999 through 2002. No borrowings have been made under this credit facility. There was no parent company commercial paper outstanding during 1998 or 1997. Total parent company long-term debt outstanding was $1.1 billion at December 31, 1998 and 1997. At December 31, 1998 and 1997, the parent company had $2,050 million and $550 million, respectively, of debt or equity securities available for issuance under shelf registrations filed with the Securities and Exchange Commission. In addition, TRS, Centurion Bank, Credco, American Express Overseas Credit Corporation Limited and AEB have established programs for the issuance, outside the United States, of debt instruments to be listed on the Luxembourg Stock Exchange. The maximum aggregate principal amount of debt instruments outstanding at any one time under the program will not exceed $3 billion. At December 31, 1998 and 1997, $1.1 billion of debt has been issued under this program. In January 1999, an additional $500 million of debt was issued under this program. In July 1998, American Express Company Capital Trust I, a wholly-owned subsidiary of the Company, established as a Delaware statutory business trust (the Trust), completed a public offering of 20 million shares (carrying value of $500 million) of 7.0% Cumulative Quarterly Income Preferred Shares Series I (liquidation preference of $25 per share). Proceeds of the issue, which represent the sole assets of the Trust, were invested in Junior Subordinated Debentures (the Debentures) issued by the Company, due 2028. The Company used the proceeds from the Debentures for general corporate purposes. See Note 5 to the Consolidated Financial Statements for further information. RISK MANAGEMENT Management establishes and oversees implementation of Board-approved policies covering the Company's funding, investments and use of derivative financial instruments and monitors aggregate risk exposures on an ongoing basis. The Company's objective is to realize returns commensurate with the level of risk assumed while achieving consistent earnings growth. Individual business segments are responsible for managing their respective exposures within the context of Board-approved policies. See Note 7 to the Consolidated Financial Statements for a discussion of the Company's use of derivatives. -15- (1998 Annual Report pp. 29-30) The following sections include sensitivity analyses of three different tests of market risk and estimate the effects of hypothetical sudden and sustained changes in the applicable market conditions on the ensuing year's earnings, based on year-end positions. The market changes, assumed to occur as of year end, are a 100 basis point increase in market interest rates, a 10% strengthening of the U.S. dollar versus all other currencies, and a 10% decline in the value of equity securities under management at AEFA. Computations of the prospective effects of hypothetical interest rate, foreign exchange rate and equity market changes are based on numerous assumptions, including relative levels of market interest rates, foreign exchange rates and equity prices, as well as the levels of assets and liabilities. The hypothetical changes and assumptions will be different from what actually occurs in the future. Furthermore, the computations do not anticipate actions that may be taken by management if the hypothetical market changes actually occur over time. As a result, actual earnings effects in the future will differ from those quantified below. TRS' hedging policies are established, maintained and monitored by a central treasury function. TRS generally manages its exposures along product lines. A variety of interest rate and foreign exchange hedging strategies are employed to manage interest rate and foreign currency risks. For Charge Card products, TRS funds its Cardmember receivables using both on-balance sheet sources, such as long-term debt, medium-term notes, commercial paper and other debt, and an asset securitization program. Such funding is predominantly obtained by Credco and its subsidiaries. Interest rate exposure is managed through the issuance of long- and short-term debt and the use of interest rate swaps to achieve a targeted mix of fixed and floating rate funding. During 1998 and 1997, TRS targeted this mix to be approximately 100 percent floating rate. In early 1998, TRS purchased interest rate caps to limit the adverse effect of an interest rate increase on substantially all Charge Card funding costs. The majority of these caps matured during 1998. In 1999, TRS is entering into a series of interest rate swaps to convert a majority of its funding from floating rate to fixed rate. It is anticipated that this process will be completed by the end of the first quarter of 1999. For its lending products, TRS funds its Cardmember loans using a mixture of long- and short-term debt, and an asset securitization program, primarily through Centurion Bank. The interest rates on TRS' lending products are generally linked to a floating rate base and typically reprice each month. Centurion Bank generally swaps its fixed-term debt, paying rates that reprice similarly with changes in the base rate of the underlying loans. The detrimental effect on TRS pretax earnings of a hypothetical 100 basis point increase in interest rates would be approximately $170 million and $169 million, based on 1998 and 1997 year-end positions, respectively. This effect is primarily due to the variable rate funding of the Charge Card products. Had the series of swaps purchased in early 1999 been in effect at December 31, 1998, the 1998 effect would have been substantially lower. Similarly, had the interest rate caps purchased in early 1998 been in effect at December 31, 1997, the 1997 effect would be reduced by nearly half. -16- (1998 Annual Report p. 30) TRS' foreign exchange risk arising from crosscurrency charges and balance sheet exposures is managed primarily by entering into agreements to buy and sell currencies on a spot or forward basis. In the latter part of 1998 and 1997, foreign currency forward contracts were both sold ($569 million and $562 million, respectively) and purchased ($34 million and $92 million, respectively) to manage a majority of anticipated cash flows in major overseas markets for the subsequent year. Based on the year-end 1998 and 1997 foreign exchange positions, but excluding the forward contracts managing the anticipated overseas cash flows for the subsequent year, the effect on TRS' earnings of the hypothetical 10% strengthening of the U.S. dollar would be immaterial. With respect to the forward contracts related to anticipated cash flows for the subsequent year, the 10% strengthening would create a hypothetical pretax gain of $54 million and $41 million related to the 1998 and 1997 year-end positions, respectively. Such gains, if any, would mitigate the negative impact that a strengthening U.S. dollar would have on overseas earnings for the subsequent year. AEFA's owned investment securities are, for the most part, held by its life insurance and investment certificate subsidiaries, which primarily invest in long-term and intermediate-term fixed income securities to provide their clients with a competitive rate of return on their investments while minimizing risk. Investment in fixed income securities provides AEFA with a dependable and targeted margin between the interest rate earned on investments and the interest rate credited to clients' accounts. AEFA does not invest in securities to generate trading profits for its own account. AEFA's life insurance and investment certificate subsidiaries' investment committees meet regularly to review models projecting different interest rate scenarios and their impact on the profitability of each subsidiary. The committees' objective is to structure their investment security portfolios based upon the type and behavior of the products in the liability portfolios, to achieve targeted levels of profitability and meet contractual obligations. Rates credited to customers' accounts are generally reset at shorter intervals than the maturity of underlying investments. Therefore, AEFA's margins may be impacted by changes in the general level of interest rates. Part of the committees' strategies include the purchase of derivatives, such as interest rate caps, swaps and floors, for hedging purposes. AEFA's fees earned on the management of fixed income securities in variable annuities and mutual funds are generally based on the value of the portfolios. To manage the level of 1999 fee income, AEFA has entered into a series of swaps designed to mitigate the negative effect on fees that would result from an increase in interest rates. The negative effect on AEFA's pretax earnings of a 100 basis point increase in interest rates, which assumes repricings and customer behavior based on the application of proprietary models to the book of business at December 31, 1998 and 1997, would be approximately $55 million and $40 million for 1998 and 1997, respectively. AEFA's fees earned on the management of equity securities in variable annuities and mutual funds are generally based on the value of the portfolios. To manage the level of fee income in the subsequent year, AEFA has entered into a series of stock index option transactions designed to mitigate, for a substantial portion of the portfolios, the negative effect on fees that would result from a decline in the equity markets. The negative effect on AEFA's pretax earnings of the 10% decline in equity markets discussed above would be approximately $72 million and $20 million based on assets under management and the index options as of December 31, 1998 and 1997, respectively. AEB/TC employs a variety of on- and off-balance sheet financial instruments in managing its exposure to fluctuations in interest and currency rates. Derivative instruments consist principally of foreign exchange spot and forward contracts, interest rate swaps, foreign currency options and forward rate agreements. Generally, they are used to manage specific on-balance sheet interest rate and foreign exchange exposures related to deposits and long-term debt, equity, loans and securities holdings. The negative effect of the 100 basis point increase in interest rates on AEB/TC's pretax earnings would be negligible as of December 31, 1998 and 1997. The impact on earnings of the 10% strengthening of the U.S. dollar described above would be negligible and, with respect to translation exposure of foreign operations, would result in a $14 million pretax charge against equity as of December 31, 1998 and 1997. -17- (1998 Annual Report pp. 30-31) AEB utilizes foreign exchange and interest rate products to meet the needs of its customers. Customer positions are usually, but not always, offset. They are evaluated in terms of AEB's overall interest rate or foreign exchange exposure. AEB also takes limited proprietary positions. Potential daily exposure from trading activities is calculated using a Value at Risk methodology. This model employs a parametric technique using a correlation matrix based on historical data. The Value at Risk measure uses a 99% confidence interval to estimate potential trading losses over a one day period. During 1998 and at December 31, 1997, the Value at Risk for AEB was less than $3 million. Asset/liability and market risk management at AEB are supervised by the Asset and Liability Committee. This committee comprises senior business managers and the Chairman of AEB. The committee meets monthly and monitors (a) liquidity, (b) capital levels, (c) market risk and (d) investment portfolios. The committee evaluates current market conditions and determines AEB's tactics within risk limits approved by AEB's Board of Directors. AEB's treasury, risk management and global trading management issue policies and control procedures and delegate risk limits throughout AEB's regional trading centers. AEB's overall credit policies are approved by the Finance and Credit Policy Committee of AEB's Board of Directors. Credit lines are based on a tiered approval ladder, with levels of authority delegated to each country, geographic area, AEB's senior management, and AEB's Board of Directors. Approval authorities are based on factors such as type of borrower, nature of transaction, collateral, and overall risk rating. AEB controls the credit risk arising from derivative transactions through the same procedures. The Credit Audit department reviews all significant exposures periodically. Risk of all foreign exchange and derivative transactions is reviewed by AEB on a regular basis. -18- (1998 Annual Report p. 31)
CONSOLIDATED STATEMENTS OF INCOME American Express Company Years Ended December 31, (millions, except per share amounts) 1998 1997 1996 ------ ------- ------- Revenues Discount revenue $ 6,115 $ 5,666 $ 5,024 Interest and dividends, net 3,277 3,175 3,289 Management and distribution fees 1,851 1,486 1,205 Net card fees 1,587 1,604 1,668 Travel commissions and fees 1,647 1,489 1,422 Other commissions and fees 1,657 1,475 1,261 Cardmember lending net finance charge revenue 1,354 1,244 1,068 Life and other insurance premiums 469 424 395 Other 1,175 1,197 1,048 ------- ------- -------- Total 19,132 17,760 16,380 ======= ======= ======== Expenses Human resources 5,380 4,700 4,325 Provisions for losses and benefits: Annuities and investment certificates 1,425 1,414 1,405 Life insurance, international banking and other 822 567 544 Charge card 701 858 743 Cardmember lending 922 817 635 Interest 999 924 1,116 Occupancy and equipment 1,250 1,139 1,126 Marketing and promotion 1,228 1,118 1,071 Professional services 1,191 1,028 951 Communications 474 450 445 Other 1,815 1,995 1,355 ------- ------- -------- Total 16,207 15,010 13,716 ======= ======= ======== Pretax income 2,925 2,750 2,664 Income tax provision 784 759 763 ------- ------- -------- Net income $ 2,141 $ 1,991 $ 1,901 ======= ======= ======== Earnings per Common Share Basic $ 4.71 $ 4.29 $ 4.02 Diluted $ 4.63 $ 4.15 $ 3.89 ------- ------- -------- Average common shares outstanding for earnings per common share: Basic 454 464 472 Diluted 463 479 488
See notes to consolidated financial statements. -19- (1998 Annual Report p. 32)
CONSOLIDATED BALANCE SHEETS American Express Company December 31, (millions, except share data) 1998 1997 ---- ---- Assets Cash and cash equivalents $ 4,092 $ 4,179 Accounts receivable and accrued interest: Cardmember receivables, less reserves: 1998, $524; 1997, $640 19,176 19,275 Other receivables, less reserves: 1998, $75; 1997, $72 3,048 2,499 Investments 41,299 39,648 Loans: Cardmember lending, less reserves: 1998, $593; 1997, $576 14,721 13,183 International banking, less reserves: 1998, $214; 1997, $131 5,404 6,062 Other, net 929 864 Separate account assets 27,349 23,215 Deferred acquisition costs 2,990 2,894 Land, buildings and equipment - at cost, less accumulated depreciation: 1998, $2,067; 1997, $1,838 1,637 1,533 Other assets 6,288 6,651 --------- --------- Total assets $ 126,933 $ 120,003 ========= ========= Liabilities and Shareholders' Equity Customers' deposits $ 10,398 $ 9,444 Travelers Cheques outstanding 5,823 5,634 Accounts payable 5,373 4,876 Insurance and annuity reserves: Fixed annuities 21,172 22,112 Life and disability policies 4,261 4,053 Investment certificate reserves 4,854 4,149 Short-term debt 22,605 20,570 Long-term debt 7,019 7,873 Separate account liabilities 27,349 23,215 Other liabilities 7,881 8,503 -------- ------- Total liabilities $ 116,735 $ 110,429 ======== ======= Guaranteed preferred beneficial interests in the Company's junior subordinated deferrable interest debentures 500 - Shareholders' Equity Common shares, $.60 par value, authorized 1.2 billion shares; issued and outstanding 450.5 million shares in 1998 and 466.4 million shares in 1997 270 280 Capital surplus 4,809 4,624 Retained earnings 4,148 4,188 Other comprehensive income, net of tax: Net unrealized securities gains 583 579 Foreign currency translation adjustments (112) (97) -------- --------- Accumulated other comprehensive income 471 482 -------- --------- Total shareholders' equity $ 9,698 $ 9,574 ======== ========= Total liabilities and shareholders' equity $126,933 $ 120,003 ======== =========
See notes to consolidated financial statements. -20- (1998 Annual Report p. 33)
CONSOLIDATED STATEMENTS OF CASH FLOWS American Express Company Years Ended December 31, (millions) 1998 1997 1996 -------- -------- --------- Cash Flows from Operating Activities Net income $ 2,141 $ 1,991 $ 1,901 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for losses and benefits 2,491 2,307 2,009 Depreciation, amortization, deferred taxes and other (212) 187 266 Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: Accounts receivable and accrued interest (665) (227) 290 Other assets 92 334 567 Accounts payable and other liabilities 131 517 (297) Increase (decrease) in Travelers Cheques outstanding 253 (111) 141 Increase in insurance reserves 182 172 224 FDC gain - - (162) -------- -------- --------- Net cash provided by operating activities 4,413 5,170 4,939 ======== ======== ========= Cash Flows from Investing Activities Sale of investments 1,656 1,778 4,634 Maturity and redemption of investments 7,331 4,827 6,573 Purchase of investments (10,176) (7,898) (10,896) Net increase in Cardmember receivables (1,510) (2,575) (2,770) Cardmember loans/receivables sold to Trust, net 1,683 516 2,242 Proceeds from repayment of loans 24,791 25,591 22,696 Issuance of loans (27,587) (29,304) (27,277) Purchase of land, buildings and equipment (391) (343) (438) Sale of land, buildings and equipment 26 164 238 (Acquisitions) dispositions, net of cash acquired/sold (471) 23 (4) -------- -------- --------- Net cash used by investing activities (4,648) (7,221) (5,002) ======== ======== ========= Cash Flows from Financing Activities Net increase (decrease) in customers' deposits 1,039 733 (133) Sale of annuities and investment certificates 5,337 5,888 5,411 Redemption of annuities and investment certificates (5,690) (4,965) (5,508) Net increase in debt with maturities of 3 months or less 1,239 3,823 4,885 Issuance of debt 7,373 11,439 13,578 Principal payments on debt (7,426) (11,604) (17,384) Issuance of Trust preferred securities 500 - - Issuance of American Express common shares 137 168 176 Repurchase of American Express common shares (1,890) (1,259) (1,041) Dividends paid (414) (423) (436) -------- -------- --------- Net cash provided (used) by financing activities 205 3,800 (452) Effect of exchange rate changes on cash (57) (247) (8) -------- -------- --------- Net (decrease) increase in cash and cash equivalents (87) 1,502 (523) Cash and cash equivalents at beginning of year 4,179 2,677 3,200 -------- -------- --------- Cash and cash equivalents at end of year $ 4,092 $ 4,179 $ 2,677 ======== ======== =========
See notes to consolidated financial statements. -21- (1998 Annual Report p. 34)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY American Express Company Accumulated Other Preferred Common Capital Comprehensive Retained Three Years Ended December 31, 1998 (millions) Total Shares Shares Surplus Income Earnings ----- --------- ------ ------- ------------- -------- Balances at December 31, 1995 $ 8,220 $ 200 $ 290 $ 3,781 $ 790 $ 3,159 ------- ------ ----- ------- ----- -------- Comprehensive income: Net income 1,901 1,901 Change in net unrealized securities gains (489) (489) Foreign currency translation adjustments (4) (4) ------- Total comprehensive income 1,408 Repurchase of common shares (1,041) (13) (177) (851) Net put options activity 124 124 Conversion of preferred shares into common - (200) 3 197 Other changes, primarily employee plans 252 4 266 (18) Cash dividends declared: Preferred (6) (6) Common, $.90 per share (429) (429) ------- ------ ----- ------- ----- -------- Balances at December 31, 1996 8,528 - 284 4,191 297 3,756 ------- ------ ----- ------- ----- -------- Comprehensive income: Net income 1,991 1,991 Change in net unrealized securities gains 193 193 Foreign currency translation adjustments (8) (8) ------- Total comprehensive income 2,176 Repurchase of common shares (1,259) (10) (153) (1,096) Exchange of Lehman Brothers Holdings, Inc. preferred shares for American Express common shares 337 3 334 Other changes, primarily employee plans 213 3 252 (42) Cash dividends declared: Common, $.90 per share (421) (421) ------- ------ ----- ------- ----- -------- Balances at December 31, 1997 9,574 - 280 4,624 482 4,188 ------- ------ ----- ------- ----- -------- Comprehensive income: Net income 2,141 2,141 Change in net unrealized securities gains 4 4 Foreign currency translation adjustments (15) (15) ------- Total comprehensive income 2,130 Repurchase of common shares (1,890) (12) (196) (1,682) Other changes, primarily employee plans 294 2 381 (89) Cash dividends declared: Common, $.90 per share (410) (410) ------- ------ ----- ------- ----- -------- Balances at December 31, 1998 $ 9,698 $ - $ 270 $ 4,809 $ 471 $ 4,148 ------- ------ ----- ------- ----- --------
See notes to consolidated financial statements. -22- (1998 Annual Report p. 35) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying Consolidated Financial Statements include the accounts of American Express Company and its subsidiaries (the Company). All significant intercompany transactions are eliminated. Some amounts are based on estimates and assumptions, e.g., reserves for Cardmember Receivables and Loans; Deferred Acquisition Costs; and Insurance and Annuity Reserves. These reflect the best judgment of management and actual results could differ. Certain amounts from prior years have been reclassified to conform to the current presentation. REVENUES Cardmember Lending Net Finance Charge Revenue is presented net of interest expense of $653 million, $604 million and $507 million for the years ended December 31, 1998, 1997 and 1996, respectively. Interest and Dividends is presented net of interest expense related primarily to the Company's international banking activities of $572 million, $588 million and $536 million for the years ended December 31, 1998, 1997 and 1996, respectively. MARKETING AND PROMOTION The Company expenses advertising costs in the year in which the advertising first takes place. CASH AND CASH EQUIVALENTS The Company has defined cash equivalents to include time deposits with original maturities of 90 days or less, excluding those that are restricted by law or regulation. SEPARATE ACCOUNT ASSETS AND LIABILITIES Separate account assets and liabilities are funds held for the exclusive benefit of variable annuity and variable life insurance contract holders. The Company receives investment management fees, mortality and expense assurance fees, minimum death benefit guarantee fees and cost of insurance charges from the related accounts. ACCOUNTING CHANGES In 1998, the Company adopted statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income consists of net income and other comprehensive income; the latter includes unrealized gains and losses on available-for-sale securities and foreign exchange translation adjustments and is presented in the Consolidated Statements of Shareholders' Equity. The adoption of SFAS No. 130 had no effect on shareholders' equity. Prior year financial statements have been reclassified to conform to the SFAS No. 130 requirements. -23- (1998 Annual Report p. 36) NOTE 2 INVESTMENTS
The following is a summary of investments included in the Consolidated Balance Sheets at December 31: (millions) 1998 1997 ------- ------- Held to Maturity, at amortized cost $10,526 $11,871 Available-for-Sale, at fair value 26,764 23,727 Investment mortgage loans (fair value: 1998, $4,089; 1997, $4,026) 3,840 3,831 Trading 169 219 ------- ------- Total $41,299 $39,648 ======= =======
Investments classified as Held to Maturity and Available- for-Sale at December 31 are distributed by type and maturity as presented below:
Held to Maturity ----------------------------------------------------------------------------------- 1998 1997 ---------------------------------------- ---------------------------------------- Gross Gross Gross Gross Unrealized Unrealized Fair Unrealized Unrealized Fair (millions) Cost Gains Losses Value Cost Gains Losses Value -------- ---------- ---------- ----- ---- ---------- ---------- ----- U.S. Government and agencies obligations $ 60 $ 5 - $ 65 $ 53 $ 3 - $ 56 State and municipal obligations 1,087 81 - 1,168 1,224 75 - 1,299 Corporate debt securities 7,099 500 $ 28 7,571 8,226 452 $ 8 8,670 Foreign government bonds and obligations 107 20 - 127 118 11 - 129 Mortgage-backed securities 1,614 31 - 1,645 1,992 27 8 2,011 Other 559 9 - 568 258 7 1 264 -------- ----- ---- ------- ------- ---- ---- ------- Total $ 10,526 $ 646 $ 28 $11,144 $11,871 $575 $ 17 $12,429 ======== ===== ==== ======= ======= ==== ==== =======
-24- (1998 Annual Report pp. 36-37)
Available-for-Sale -------------------------------------------------------------------------- 1998 1997 ----------------------------------- ---------------------------------- Gross Gross Gross Gross Unrealized Unrealized Fair Unrealized Unrealized Fair (millions) Cost Gains Losses Value Cost Gains Losses Value ---- --------- ---------- ------ ---- ---------- ---------- ------ U.S. Government and agencies obligations $ 45 $ 3 - $ 48 $ 46 $ 1 - $ 47 State and municipal obligations 4,282 343 - 4,625 4,273 311 - 4,584 Corporate debt securities 10,854 362 $ 223 10,993 7,667 266 $ 37 7,896 Foreign government bonds and obligations 972 41 4 1,009 956 27 6 977 Mortgage-backed securities 7,914 188 5 8,097 9,027 200 7 9,220 Equity securities 481 168 4 645 467 159 3 623 Other 1,347 1 1 1,347 380 - - 380 -------- ------ ----- ------- ------- ----- ----- ------- Total $ 25,895 $1,106 $ 237 $26,764 $22,816 $964 $ 53 $23,727 ======== ====== ===== ======= ======= ===== ----- -------
Held to Maturity Available-for-Sale ------------------- ---------------------- Fair Fair December 31, 1998 (millions) Cost Value Cost Value ------- ------- -------- ------ Due within 1 year $ 870 $ 877 $ 1,878 $ 1,893 Due after 1 year through 5 years 4,179 4,424 3,952 4,090 Due after 5 years through 10 years 2,646 2,850 6,459 6,649 Due after 10 years 1,217 1,348 5,211 5,390 ------- ------- -------- ------- 8,912 9,499 17,500 18,022 Mortgage-backed securities 1,614 1,645 7,914 8,097 Equity securities - - 481 645 ------- -------- -------- ------- Total $10,526 $11,144 $25,895 $26,764 ======= ======== ======== =======
Mortgage-backed securities primarily include GNMA, FNMA and FHLMC securities at December 31, 1998 and 1997. The table below includes purchases, sales and maturities of investments classified as Held to Maturity and Available-for-Sale for the years ended December 31:
1998 1997 ---------------------- ----------------------- Held to Available- Held to Available- (millions) Maturity for-Sale Maturity for-Sale --------- --------- --------- ----------- Purchases $ 692 $ 9,927 $ 64 $ 7,323 Sales $ 243 $ 1,413 $ 274 $ 1,504 Maturities $ 2,191 $ 5,524 $ 1,513 $ 2,965 ======= ======== ======= =======
-25- (1998 Annual Report pp. 37-38) Investments classified as Held to Maturity were sold during 1998 and 1997 due to credit deterioration. Gross realized gains and losses on sales were negligible. The change in the Net Unrealized Securities Gains component of Shareholders' Equity was an increase of $4 million, an increase of $193 million and a decrease of $489 million for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in 1997 was due to a decrease in the general level of interest rates. The decrease in 1996 primarily reflected the exchange of the Company's Debt Exchangeable for Common Stock (DECS) for shares of First Data Corporation (FDC) held by the Company, which resulted in the realization of a $300 million after-tax gain. An increase in the general level of interest rates also contributed to the decline in 1996. Gross realized gains and (losses) on sales of securities classified as Available-for-Sale, using the specific identification method, were $130 million and ($42 million), $67 million and ($10 million) and $65 million and ($25 million) for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in net unrealized gains on Trading securities, which is included in income, was $3 million, $24 million and $28 million for the years ended December 31, 1998, 1997 and 1996, respectively. In connection with the spin-off of Lehman Brothers Holdings Inc. (Lehman) in 1994, the Company acquired 928 shares and Nippon Life Insurance Company (Nippon Life) acquired 72 shares of Lehman's redeemable voting preferred stock for a nominal dollar amount. This security entitles its holders to receive an aggregate annual dividend of 50 percent of Lehman's net income in excess of $400 million for each of eight years ending in May 2002, with a maximum of $50 million in any one year. Prior to 1997, the Company received no dividends in connection with the earnout. In 1998 and 1997, the Company received a dividend of $46 million and $7 million on these shares, respectively. In addition, the Company and Nippon Life are entitled to receive 92.8 percent and 7.2 percent, respectively, of certain contingent revenue and earnings-related payouts from Travelers Inc. (Travelers), which were assigned by Lehman to the Company and Nippon Life in connection with the spin-off transaction. The Travelers revenue-related payout was for three years and ended in 1996. The Company received $46 million in 1996. The earnings-related payout, which is 10 percent of after-tax profits of Smith Barney, a subsidiary of Travelers, in excess of $250 million per year, was for five years and ended in 1998. The amounts recognized in relation to this payout were approximately the same in each of the three years ended December 31, 1998, 1997 and 1996. The change in net unrealized securities gains recognized in Other Comprehensive Income includes two components: (1) unrealized gains (losses) that arose during the period from changes in market value of securities that were held during the period (Holding gains (losses)), and (2) gains or losses that were previously unrealized, but have been recognized in current period Net Income due to sales of Available-for-Sale securities (Reclassification for realized gains). This reclassification has no effect on total Comprehensive Income or Shareholders' Equity. The following table presents these components of other comprehensive income:
(millions, net of tax) 1998 1997 1996 ---- ---- ---- Holding gains (losses) $61 $230 $(463) Reclassification for realized gains (57) (37) (26) ---- ---- ---- Increase (decrease) in net unrealized securities gains recognized in other comprehensive income $ 4 $193 $(489) ==== ==== ====
-26- (1998 Annual Report p. 38)
NOTE 3 LOANS Loans at December 31 consisted of: (millions) 1998 1997 ------ ------ Cardmember and Consumer Loans $ 16,765 $ 14,981 Commercial Loans: Commercial and industrial 2,265 2,793 Mortgage and real estate 516 490 Loans to banks and other institutions 1,649 1,966 Other, principally policyholders' loans 671 586 ------ ------- 21,866 20,816 Less: Reserves for credit losses 812 707 ------ ------- Total $ 21,054 $ 20,109 ======== ========
Note: American Express Financial Advisors (AEFA) mortgage loans of $3.8 billion in 1998 and 1997 are included in Investment Mortgage Loans and are shown in Note 2.
The following table presents changes in Reserves for Credit Losses related to loans: (millions) 1998 1997 ------- ------ Balance, January 1 $ 707 $ 601 Provision for credit losses 1,165 837 Write-offs (1,134) (890) Recoveries of amounts previously written-off 74 159 ------- ------- Balance, December 31 $ 812 $ 707 ======= =======
-27- (1998 Annual Report p. 39) NOTE 4 SHORT- AND LONG-TERM DEBT AND BORROWING AGREEMENTS SHORT-TERM DEBT At December 31, 1998 and 1997, the Company's total short-term debt outstanding was $22.6 billion and $20.6 billion, respectively, with weighted average interest rates of 5.68% and 6.12%, respectively. At December 31, 1998 and 1997, $0.5 billion and $1.6 billion, respectively, of short-term debt outstanding was covered by interest rate swaps. The year-end weighted average effective interest rates were 5.68% and 6.17% for 1998 and 1997, respectively. The Company generally paid floating rates of interest under the terms of interest rate swaps. Unused lines of credit to support commercial paper borrowing were approximately $8.2 billion at December 31, 1998.
LONG-TERM DEBT December 31, (dollars in millions) 1998 1997 --------------------------------------------------------- ------------------------------------------------------- Year-End Year-End Year-End Effective Year-End Effective Notional Stated Interest Notional Stated Interest Outstanding Amount of Rate on Rate with Maturity of Outstanding Amount of Rate on Rate with Maturity of Balance Swaps Debt (a,b) Swaps (a,b) Swaps Balance Swaps Debt (a,b) Swaps (a,b) Swaps ----------- --------- --------- ----------- ----------- ----------- --------- ---------- ----------- ---------- Notes due June 23, 2004 $ 499 - 6.75% - - $ 499 - 6.75% - - Notes due August 12, 2002 400 $ 400 6.50% 5.40% 2002 400 $400 6.50% 5.78% 2002 Notes due June 15, 2000 300 300 6.125% 5.34% 2000 300 300 6.125% 5.70% 2000 Notes due November 15, 2001 299 299 6.125% 5.54% 2001 299 299 6.125% 5.98% 2001 Notes due August 15, 2001 299 - 8.50% - - 299 - 8.50% - - Floating Rate Notes due May 1, 2002 399 399 5.27% 5.31% 2002 399 399 5.80% 6.00% 2002 Floating Rate Notes due December 18, 2001 300 - 5.35% - - 300 - 6.03% - - Other Fixed Senior Notes 1999- 1998- due 1998-2022 1,631 1,315 7.10% 6.39% 2012 1,509 1,200 7.59% 6.71% 2005 Other Floating Senior Notes 1999- 1998- due 1998-2002 2,170 150 5.52% 5.55% 2000 3,106 320 5.94% 5.98% 1999 Other Floating Rate Notes due 1999-2004 486 150 6.34% 6.53% 2004 506 150 6.52% 6.70% 2004 Other Fixed Rate Notes due 1998-2006 236 34 4.95% 4.98% 2006 256 31 4.38% 4.40% 2006 ------ ------ ------ ------ ----- ------ ------- ----- ------- ----- Total $7,019 $3,047 $7,873 $3,099 ====== ====== ====== ======
(a) For floating rate debt issuances, the stated and effective interest rates were based on the respective rates at December 31, 1998 and 1997; these rates are not an indication of future interest rates. (b) Weighted average rates were determined where appropriate. The above interest rate swaps generally require the Company to pay a floating rate, with a predominant index of LIBOR (London Interbank Offered Rate). The Company paid interest (net of amounts capitalized) of $2.6 billion, $2.5 billion and $2.4 billion in 1998, 1997 and 1996, respectively. Aggregate annual maturities of long-term debt for the five years ending December 31, 2003 are as follows (millions): 1999, $2,126; 2000, $1,316; 2001, $1,464; 2002, $915; and 2003, $145. -28- (1998 Annual Report pp. 39-40) NOTE 5 CUMULATIVE QUARTERLY INCOME PREFERRED SHARES On July 16, 1998, American Express Company Capital Trust I, a wholly-owned subsidiary of the Company, established as a Delaware statutory business trust (the Trust), completed a public offering of 20 million shares (carrying value of $500 million) of 7.0% Cumulative Quarterly Income Preferred Shares Series I (QUIPS) (liquidation preference of $25 per share). Proceeds of the issue were invested in Junior Subordinated Debentures (the Debentures) issued by the Company due 2028 which represent the sole assets of the Trust. The QUIPS are subject to mandatory redemption upon repayment of the Debentures at maturity or their earlier redemption. The Company has the option to redeem the Debentures, in whole or in part, at any time on or after July 16, 2003, which will result in the redemption of a corresponding amount of QUIPS. The Company has unconditionally guaranteed all distributions required to be made by the Trust, but only to the extent the Trust has funds legally available for such distributions. The only source of funds for the Trust is the Company's interest payments on the Debentures. The Company has the right to defer such interest payments up to 20 consecutive quarters; as a consequence, quarterly dividend payments on the QUIPS can be deferred by the Trust during any such interest payment period. If the Company defers any interest payments, the Company may not, among other things, pay any dividends on its capital stock until all interest in arrears is paid to the Trust. Distributions on the QUIPS are reported as Interest Expense in the Consolidated Statements of Income. NOTE 6 COMMON AND PREFERRED SHARES COMMON SHARES In September 1998, the Company's Board of Directors authorized the Company to repurchase up to 40 million common shares over the next two to three years, subject to market conditions. In 1998, all repurchases were made under previous authorizations. The Company has repurchased approximately 97 million shares since 1994. These plans are designed to allow the Company to purchase shares systematically, both to offset the issuance of new shares as part of employee compensation plans and to reduce shares outstanding. Of the common shares authorized but unissued at December 31, 1998, 67 million shares were reserved for issuance for employee stock, employee benefit and dividend reinvestment plans, as well as debentures. In 1987, Nippon Life purchased 13 million shares of Lehman 5% Series A Preferred Stock for $508 million. In 1990, the Company gave Nippon Life the right to exchange these shares (subsequently exchanged by Lehman for Series B shares) into 6.24 million common shares of the Company at any time through December 1999 at an exchange price of $81.46. In 1996, Nippon Life informed the Company that it had reduced its holding of such preferred shares by approximately 30 percent but maintained the exchange rights related to the shares sold. In 1997, Nippon Life exchanged all of its remaining holdings of these preferred shares for approximately 4.4 million common shares of the Company. In January 1998, the Company purchased all of Nippon Life's remaining exchange rights.
Common shares activity for each of the last three years ended December 31 was: (thousands) 1998 1997 1996 ------ ------ ------ Shares outstanding at beginning of year 466,417 472,859 483,108 Repurchases of common shares (19,400) (17,010) (22,200) Conversion of Convertible Exchangeable Preferred shares - - 4,706 Exchange of Lehman preferred shares for American Express common shares - 4,399 - Other, primarily employee plans 3,451 6,169 7,245 ------- ------- ------- Shares outstanding at end of year 450,468 466,417 472,859 ======= ======= =======
-29- (1998 Annual Report p. 41) PREFERRED SHARES In January 1990, the Company sold four million of the Company's $3.875 Convertible Exchangeable Preferred shares (Convertible Preferred shares) to Nippon Life for $200 million. In May 1996, after receiving a redemption notice from the Company, Nippon Life converted all of the Convertible Preferred shares into 4,705,882 of the Company's common shares. The Board of Directors is authorized to permit the Company to issue up to 20 million preferred shares without further shareholder approval. NOTE 7 DERIVATIVE AND OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The Company uses derivative financial instruments for nontrading purposes to manage its exposure to interest and foreign exchange rates, financial indices and its funding costs. In addition, American Express Bank (AEB) enters into derivative contracts both to meet the needs of its clients and, to a limited extent, for proprietary trading purposes. There are a number of risks associated with derivatives. Market risk is the possibility that the value of the derivative financial instrument will change. The Company is not exposed to market risk related to derivatives held for nontrading purposes beyond that inherent in cash market transactions. AEB is generally not subject to market risk when it enters into a contract with a client, as it usually enters into an offsetting contract or uses the position to offset an existing exposure. AEB takes proprietary positions within approved limits. These positions are monitored daily at the local and headquarters levels against Value at Risk (VAR) limits. The Company does not enter into derivative contracts with features that would leverage or multiply its market risk. Credit risk related to derivatives and other off-balance sheet financial instruments is the possibility that the counterparty will not fulfill the terms of the contract. It is monitored through established approval procedures, including setting concentration limits by counterparty and country, reviewing credit ratings and requiring collateral where appropriate. For its trading activities with clients, AEB requires collateral when it is not willing to assume credit exposure to counterparties for either contract mark-to-market or delivery risk. A significant portion of the Company's transactions are with counterparties rated A or better by nationally recognized credit rating agencies. The Company also uses master netting agreements which allow the Company to settle multiple contracts with a single counterparty in one net receipt or payment in the event of counterparty default. Credit risk approximates the fair value of contracts in a gain position (asset) and totaled $0.8 billion and $1.4 billion at December 31, 1998 and 1997, respectively. The fair value represents the replacement cost and is determined by market values, dealer quotes or pricing models.
The following tables detail information regarding the Company's derivatives at December 31: NONTRADING 1998 ------------------------------------------------------- Carrying Value Fair Value Notional ---------------- ----------------- (millions) Amount Asset Liability Asset Liability -------- ----- --------- ----- --------- Interest Rate Products: Interest rate swaps $ 13,548 $ 81 $ 72 $ 234 $ 174 Interest rate caps and floors purchased 7,025 17 - 21 1 Forward rate agreements 384 - - - - -------- ------- ------ ------ ------ Total Interest Rate Products 20,957 98 72 255 175 ======== ======= ====== ====== ====== Foreign currency forward and spot contracts 5,965 49 52 59 54 Other Products 2,339 147 65 137 92 --------- ------- ------ ------ ------ Total $ 29,261 $ 294 $ 189 $ 451 $ 321 ========= ======= ====== ====== ======
-30- (1998 Annual Report p. 42)
1997 ------------------------------------------------------- Carrying Value Fair Value Notional -------------- ----------- (millions) Amount Asset Liability Asset Liability -------- ----- --------- ----- --------- Interest Rate Products: Interest rate swaps $ 12,573 $ 95 $ 49 $ 154 $ 102 Interest rate caps and floors purchased 6,100 27 - 20 - Forward rate agreements 763 - - - - -------- ------ ------ ------ ----- Total Interest Rate Products 19,436 122 49 174 102 ======== ====== ====== ====== ===== Foreign currency forward and spot contracts 11,289 80 39 220 203 Other Products 1,876 86 44 87 52 -------- ----- ----- ----- ----- Total $ 32,601 $ 288 $ 132 $ 481 $ 357 ======== ====== ===== ===== ===== TRADING 1998 ---------------------------------------------------------- Carrying/Fair Value Average Fair Value Notional ------------------- ------------------ (millions) Amount Asset Liability Asset Liability -------- ------ --------- ----- ---------- Interest Rate Products: Interest rate swaps $ 1,266 $ 59 $ 51 $ 80 $ 63 Financial futures sold 949 - 1 - - Other 186 1 6 4 9 -------- ------ ------ ------ ------- Total Interest Rate Products 2,401 60 58 84 72 ======== ====== ====== ====== ======= Foreign Currency Products:* Forward and spot contracts 16,308 274 232 407 340 Foreign currency options written 1,630 - 53 - 56 Foreign currency options purchased 1,642 51 - 55 - -------- ------ ------ ------ ------- Total Foreign Currency Products 19,580 325 285 462 396 ======== ====== ====== ====== ======= Total $ 21,981 $ 385 $ 343 $ 546 $ 468 ======== ====== ====== ====== ======= 1997 ---------------------------------------------------------- Carrying/Fair Value Average Fair Value Notional ------------------- ------------------ (millions) Amount Asset Liability Asset Liability -------- ------ --------- ----- ---------- Interest Rate Products: Interest rate swaps $ 2,165 $ 72 $ 63 $ 37 $ 33 Other 588 4 10 1 2 -------- ------ ------- ------ ------- Total Interest Rate Products 2,753 76 73 38 35 ======== ====== ======= ====== ======= Foreign Currency Products:* Forward and spot contracts 13,120 827 714 333 247 Foreign currency options written 2,755 - 50 - 36 Foreign currency options purchased 2,586 51 - 36 - -------- ------ ------- ------ ------- Total Foreign Currency Products 18,461 878 764 369 283 ======== ====== ======= ====== ======= Total $21,214 $ 954 $ 837 $ 407 $ 318 ======== ====== ====== ===== =======
* These are predominantly contracts with clients and the related hedges of those client contracts. The Company's net trading foreign currency exposure was approximately $63 million and $38 million at December 31, 1998 and 1997, respectively. -31- (1998 Annual Report p. 43) The average aggregate fair values of derivative financial instruments held for trading purposes were computed based on monthly information. Net derivative trading gains of $137 million and $103 million for 1998 and 1997, respectively, were primarily due to trading in foreign currency forward and spot contracts and are included in Other Commissions and Fees. INTEREST RATE PRODUCTS The Company uses interest rate products, principally swaps, primarily to manage funding costs related to Travel Related Services' (TRS) Charge Card and Cardmember lending businesses. For its Charge Card products, TRS uses interest rate swaps to achieve a targeted mix of fixed and floating rate funding. For its Cardmember loans, which are linked to a floating rate base and generally reprice each month, TRS generally enters into interest rate swaps paying rates that reprice similarly with changes in the base rate of the underlying loans. AEB uses interest rate products to manage its portfolio of loans, deposits and, to a lesser extent, securities holdings. The termination dates of nontrading interest rate swaps are generally matched with the maturity dates of the underlying assets and liabilities. For interest rate swaps that are used for nontrading purposes and meet the criteria for hedge accounting, interest is accrued and reported in Other Receivables and Interest and Dividends or Accounts Payable and Interest Expense, as appropriate. Products used for trading purposes are reported at fair value in Other Assets or Other Liabilities, as appropriate, with unrealized gains and losses recognized currently in Other Revenues. AEFA uses interest rate caps, swaps and floors to protect the margin between the interest rates earned on investments and the interest rates credited to holders of investment certificates and fixed annuities. Interest rate caps, swaps and floors generally mature within five years. The costs of interest rate caps and floors are reported in Other Assets and amortized into Interest and Dividends on a straight-line basis over the term of the contract; benefits are recognized in income when earned. In 1998, AEFA also began using interest rate swaps to manage the level of 1999 fee income earned on the management of fixed income securities in variable annuities and mutual funds. These swaps are used for nontrading purposes and meet the criteria for hedge accounting. Interest is accrued and reported in Other Receivables or Accounts Payable, as appropriate, and Management and Distribution Fees. See Note 4 for further information regarding the Company's use of interest rate products related to short-and long-term debt obligations. FOREIGN CURRENCY PRODUCTS The Company uses foreign currency products primarily to hedge net investments in foreign operations and to manage transactions denominated in foreign currencies. In addition, AEB enters into derivative contracts both to meet the needs of its clients and, to a limited extent, for trading purposes, including taking proprietary positions. -32- (1998 Annual Report pp. 43-44) Foreign currency exposures are hedged, where practical and economical, through foreign currency contracts. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. Foreign currency forward contracts generally mature within one year, whereas foreign currency spot contracts generally settle within two days. For foreign currency products used to hedge net investments in foreign operations, unrealized gains and losses as well as related premiums and discounts are reported in Shareholders' Equity. For foreign currency contracts related to transactions denominated in foreign currencies, unrealized gains and losses are reported in Other Assets and Other Commissions and Fees or Other Liabilities and Other Expenses, as appropriate. Related premiums and discounts are reported in Other Assets or Other Liabilities, as appropriate, and amortized into Interest Expense and Other Expenses over the term of the contract. Foreign currency products used for trading purposes are reported at fair value in Other Assets or Other Liabilities, as appropriate, with unrealized gains and losses recognized currently in Other Commissions and Fees. The Company also uses foreign currency forward contracts to hedge its firm commitments. In addition, for selected major overseas markets, the Company uses foreign currency forward contracts to hedge future income, generally for periods not exceeding one year; unrealized gains and losses are recognized currently in income. In the latter part of 1998 and 1997, foreign currency forward contracts were both sold ($569 million and $562 million, respectively) and purchased ($34 million and $92 million, respectively) to manage a majority of anticipated future cash flows in major overseas markets. The impact of these activities was not material. OTHER PRODUCTS Included in Other Products are purchased and written index options used by AEFA to hedge against adverse changes in the U.S. equities markets, which affect revenues earned on assets under management. Index options are carried at market value and included in Other Assets or Other Liabilities, as appropriate. Gains and losses on these options are deferred until the related revenues are earned. At December 31, 1998 and 1997, the notional value of these options was $1.2 billion and $1.0 billion, respectively. OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The Company's other off-balance sheet financial instruments principally relate to extending credit to satisfy the needs of its clients. The contractual amount of these instruments represents the maximum accounting loss the Company would record assuming the contract amount is fully utilized, the counterparty defaults and collateral held is worthless. Management does not expect any material adverse impact to the Company's financial position to result from these contracts.
December 31, (millions) 1998 1997 ------- -------- Unused Credit Available to Cardmembers $44,626 $37,668 Loan Commitments and Other Lines of Credit $ 1,197 $ 1,053 Standby Letters of Credit and Guarantees $ 1,270 $ 1,301 Commercial and Other Letters of Credit $ 400 $ 618 ------- --------
-33- (1998 Annual Report p. 44) The Company is committed to extend credit to certain Cardmembers as part of established lending product agreements. Many of these are not expected to be drawn; therefore, total unused credit available to Cardmembers does not represent future cash requirements. The Company's Charge Card products have no preset spending limit and are not reflected in unused credit available to Cardmembers. The Company may require collateral to support its loan commitments based on the creditworthiness of the borrower. Standby letters of credit and guarantees primarily represent conditional commitments to insure the performance of the Company's customers to third parties. These commitments generally expire within one year. The Company issues commercial and other letters of credit to facilitate the short-term trade-related needs of its clients, which typically mature within six months. At December 31, 1998 and 1997, the Company held $829 million and $744 million, respectively, of collateral supporting standby letters of credit and guarantees and $215 million and $276 million, respectively, of collateral supporting commercial and other letters of credit. Other financial institutions have committed to extend lines of credit to the Company of $10.3 billion and $9.7 billion at December 31, 1998 and 1997, respectively. NOTE 8 FAIR VALUES OF FINANCIAL INSTRUMENTS The following table discloses fair value information for most on- and off-balance sheet financial instruments. Certain financial instruments, such as life insurance obligations, employee benefit obligations and investments accounted for under the equity method are excluded. The fair values of financial instruments are estimates based upon market conditions and perceived risks at December 31, 1998 and 1997 and require management judgment. These figures may not be indicative of their future fair values.
December 31, (millions) 1998 1997 ------------------- -------------------- Carrying Fair Carrying Fair Value Value Value Value -------- ------- ------- ------- FINANCIAL ASSETS Assets for which carrying values approximate fair values $ 55,434 $55,434 $51,037 $51,037 Investments $ 41,299 $42,166 $39,648 $40,401 Loans $ 21,258 $21,029 $20,269 $20,206 Derivative financial instruments, net $ 147 $ 172 $ 273 $ 241 -------- ------- ------- ------- FINANCIAL LIABILITIES Liabilities for which carrying values approximate fair values $ 48,404 $48,404 $44,383 $44,383 Fixed annuity reserves $ 19,855 $19,145 $20,731 $19,882 Investment certificate reserves $ 4,821 $ 4,830 $ 4,112 $ 3,979 Long-term debt $ 7,019 $ 7,222 $ 7,873 $ 7,903 Separate account liabilities $ 25,005 $24,179 $21,489 $20,708 -------- ------- ------- -------
-34- (1998 Annual Report p. 45) The carrying and fair values of other off-balance sheet financial instruments are not material as of December 31, 1998 and 1997. See Notes 2 and 7 for carrying and fair value information regarding investments and derivative financial instruments. The following methods were used to estimate the fair values of financial assets and financial liabilities: FINANCIAL ASSETS Assets for which Carrying Values Approximate Fair Values: The carrying values of Cash and Cash Equivalents, Accounts Receivable and Accrued Interest, Separate Account Assets and applicable Other Assets approximate their fair values. Loans: For variable rate loans that reprice within a year where there has been no significant change in counterparties' creditworthiness, fair values are based on carrying values. The fair values of all other loans, except for loans 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 revised estimates of future cash flows discounted at rates commensurate with the risk inherent in the revised cash flow projections, or for collateral dependent loans, on collateral values. FINANCIAL LIABILITIES Liabilities for which Carrying Values Approximate Fair Values: The carrying values of Customers' Deposits, Travelers Cheques Outstanding, Accounts Payable, Short-Term Debt and applicable Other Liabilities approximate their fair values. Fixed Annuity Reserves: Fair values of annuities in deferral status are estimated as the accumulated value less applicable surrender charges and loans. For annuities in payout status, fair value is estimated using discounted cash flow, based on current interest rates. The fair value of these reserves excludes life insurance-related elements of $1.3 billion in 1998 and 1997. Investment Certificate Reserves: For variable rate investment certificates that reprice within a year, fair values approximate carrying values. For other investment certificates, fair value is estimated using discounted cash flow analysis, based on current interest rates. The valuations are reduced by the amount of applicable surrender charges and related loans. Long-Term Debt: For variable rate long-term debt that reprices within a year, fair values approximate carrying values. For other long-term debt, fair value is estimated using either quoted market prices or discounted cash flow based on the Company's current borrowing rates for similar types of borrowing. Separate Account Liabilities: Fair values of these liabilities, after excluding life insurance-related elements of $2.3 billion and $1.7 billion in 1998 and 1997, respectively, are estimated as the accumulated value less applicable surrender charges. NOTE 9 SIGNIFICANT CREDIT CONCENTRATIONS A credit concentration may exist if customers are involved in similar industries. The Company's customers operate in diverse economic sectors. Therefore, management does not expect any material adverse consequences to the Company's financial position to result from credit concentrations. Certain distinctions between categories require management judgment.
December 31, (dollars in millions) 1998 1997 ------- ------- Financial institutions(a) $ 13,755 $ 13,074 Individuals(b) 82,762 74,708 U.S. Government and agencies(c) 15,836 16,706 All other 25,433 25,343 -------- -------- Total $137,786 $129,831 ======== ======== Composition: On-balance sheet 65% 69% Off-balance sheet 35 31 -------- ------- Total 100% 100% ======== =======
(a) Financial institutions primarily include banks, broker-dealers, insurance companies and savings and loan associations. (b) Charge Card products have no preset spending limit; therefore, the quantified credit amount includes only Cardmember receivables recorded on the Consolidated Balance Sheets. (c) U.S. Government and agencies represent the U.S. Government and its agencies, states and municipalities, and quasi-government agencies. -35- (1998 Annual Report pp. 45-46) NOTE 10 STOCK PLANS Under the 1998 Incentive Compensation Plan and previously under the 1989 Long-Term Incentive Plan (the Plans), awards may be granted to officers and other key employees and other key individuals who perform services for the Company and its participating subsidiaries. These awards may be in the form of stock options, stock appreciation rights, restricted stock, performance grants and other awards deemed by the Compensation and Benefits Committee of the Board of Directors to be consistent with the purposes of the Plans. The Company also has options outstanding pursuant to a Directors' Stock Option Plan. Under these plans, there were a total of 53.1 million, 25.9 million and 32.1 million common shares available for grant at December 31, 1998, 1997 and 1996, respectively. Each option has an exercise price at least equal to the market price of the Company's common stock on the date of grant and a maximum term of 10 years. Options generally vest at 33 1/3 percent per year. The Company also sponsors the American Express Incentive Savings Plan, under which purchases of the Company's common shares are made by or on behalf of participating employees. In 1998, the Compensation and Benefits Committee adopted a restoration stock option program applicable to existing and future stock option awards. This program provides that employees who exercise options that have been outstanding at least five years by surrendering previously owned shares as payment will automatically receive a new (restoration) stock option with an exercise price equal to the market price on the date of exercise. The size of the restoration option is equal to the number of shares surrendered plus any shares surrendered or withheld to satisfy the employees' income tax requirements. The term of the restoration option, which is exercisable six months after grant, is equal to the remaining life of the original option. Senior officers must be in compliance with their stock ownership guidelines to exercise restoration options. The Company granted 0.1 million, 1.4 million and 1.4 million restricted stock awards with a weighted average grant date value of $88.97, $67.08 and $46.14 per share for 1998, 1997 and 1996, respectively. Restrictions generally expire four years from date of grant. The compensation cost that has been charged against income for the Company's restricted stock awards was $36 million, $48 million and $39 million for 1998, 1997 and 1996, respectively. The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its employee stock options. Therefore, no compensation cost has been recognized related to stock options. If the Company had elected to account for its stock options under the fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per common share would have been reduced to the pro forma amounts indicated below:
(millions, except per share amounts) 1998 1997 1996 ------- ------- -------- Net income: As reported $ 2,141 $ 1,991 $ 1,901 Pro forma $ 2,060 $ 1,948 $ 1,877 Basic EPS: As reported $ 4.71 $ 4.29 $ 4.02 Pro forma $ 4.53 $ 4.20 $ 3.96 Diluted EPS: As reported $ 4.63 $ 4.15 $ 3.89 Pro forma $ 4.45 $ 4.07 $ 3.84 ------- ------- -------
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 1998, 1997 and 1996, respectively:
1998 1997 1996 ------ ------- ------- Dividend yield 2.0% 2.6% 3.1% Expected volatility 23% 20% 23% Risk-free interest rate 5.5% 6.2% 5.9% Expected life of stock option 5 years 5 years 7 years ------- -------- --------
-36- (1998 Annual Report pp. 46-47) The dividend yield reflects the assumption that the current dividend payout will continue with no anticipated increases. The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The weighted average fair value per option was $21.70, $14.76 and $11.43 for options granted during 1998, 1997 and 1996, respectively. A summary of the status of the Company's stock option plans as of December 31 and changes during each of the years then ended is presented below:
1998 1997 1996 ---------------------- ---------------------- ---------------------- (shares in thousands) Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding at beginning of year 20,041 $ 44.32 21,116 $32.60 23,479 $ 27.41 Granted 11,494 $ 88.53 6,295 $66.74 5,778 $ 46.02 Exercised (4,410) $ 35.16 (6,566) $27.65 (7,104) $ 25.64 Forfeited/Expired (1,572) $ 65.87 (804) $48.12 (1,037) $ 38.49 -------- --------- ------- ------ ------- -------- Outstanding at end of year 25,553 $ 64.46 20,041 $44.32 21,116 $ 32.60 -------- --------- ------- ------ ------- -------- Options exercisable at end of year 9,718 $ 40.11 9,124 $30.58 10,641 $ 26.05 -------- --------- ------- ------ ------- --------
The following table summarizes information about the stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable --------------------------------------------- -------------------------- (shares in thousands) Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ----------- ---------------- -------------- ----------- --------------- $19.40 - $39.99 5,745 4.9 $ 28.65 5,745 $ 28.65 $40.00 - $49.99 3,686 7.1 $ 45.90 2,208 $ 45.88 $50.00 - $79.99 5,185 8.1 $ 66.61 1,575 $ 66.38 $80.00 - $113.97 10,937 8.9 $ 88.51 190 $101.71 ------- ----- --------- ------ -------- $19.40 - $113.97 25,553 7.6 $ 64.46 9,718 $ 40.11
-37- (1998 Annual Report p. 48) NOTE 11 RETIREMENT PLANS PENSION PLANS In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revises employers' disclosures about pension and other postretirement benefit plans. The following disclosures reflect the requirements of the new rule. The Company sponsors the American Express Retirement Plan (the Plan), a noncontributory defined benefit plan, under which the cost of retirement benefits for eligible employees in the United States is measured by length of service, compensation and other factors and is currently being funded through a trust. In addition, the Company sponsors an unfunded, nonqualified supplemental plan. Funding of retirement costs for the Plan complies with the applicable minimum funding requirements specified by the Employee Retirement Income Security Act of 1974, as amended. Employees' accrued benefits are based on nominal account balances which are maintained for each individual and are credited with additions equal to a percentage, based on age plus service, of base pay, certain commissions and bonuses, overtime and shift differential, each pay period. Employees' balances are also credited annually with a fixed rate of interest based on the daily average of published five-year Treasury Note yields. Lump sum payout at termination or retirement is available. Most employees outside the United States are covered by local retirement plans, some of which are funded, or receive payments at the time of retirement or termination under applicable labor laws or agreements. Benefits under these local plans are generally expensed and are not funded. Plan assets consist principally of equities and fixed income securities. Net pension cost consisted of the following components:
(millions) 1998 1997 1996 ---- ---- ---- Service cost $88 $76 $77 Interest cost 90 82 77 Expected return on plan assets (91) (86) (78) Amortization of: Prior service cost (9) (9) (9) Transition obligation 1 1 2 Reversion gain (4) (4) (4) Recognized net actuarial loss 3 - 4 Settlement/Curtailment gain (15) (11) (12) ----- ----- ----- Net periodic pension benefit cost $63 $49 $57 ===== ===== =====
The funded status of the Company's pension plans is based on valuations as of September 30. The following tables provide a reconciliation of the changes in the plans' benefit obligation and fair value of assets: -38- (1998 Annual Report pp. 48-49)
Reconciliation of change in benefit obligation (millions) 1998 1997 ------- ------- Benefit obligation at October 1, $ 1,199 $ 1,040 Service cost 88 76 Interest cost 90 82 Benefits paid (43) (39) Actuarial loss 156 103 Settlements/Curtailments (81) (40) Foreign currency exchange rate changes 4 (23) ------- ------- Benefit obligation at September 30, $ 1,413 $ 1,199 ======= ======== Reconciliation of change in fair value of plan assets (millions) 1998 1997 ------- ------- Fair value of plan assets at October 1, $ 1,279 $ 1,103 Actual return on plan assets 2 228 Employer contributions 47 39 Benefits paid (43) (39) Settlements/Curtailments (71) (41) Foreign currency exchange rate changes 2 (11) ------ ------- Fair value of plan assets at September 30, $ 1,216 $ 1,279 ======= ======== The following table reconciles the plans' funded status to the amounts recognized on the Consolidated Balance Sheets: Funded status (millions) 1998 1997 ----- ----- Funded status at September 30, $(197) $ 80 Unrecognized net actuarial loss (gain) 38 (198) Unrecognized prior service cost (67) (75) Unrecognized net transition obligation 4 5 Fourth quarter contributions (net of benefit payments) 20 9 ----- ----- Net amount recognized at December 31, $(202) $(179) ====== ====== The following table provides the amounts recognized on the Consolidated Balance Sheets as of December 31: (millions) 1998 1997 ----- ----- Accrued benefit liability $(294) $(242) Prepaid benefit cost 78 53 Intangible asset 14 10 ----- ----- Net amount recognized at December 31, $(202) $(179) ====== ======
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $540 million, $477 million and $286 million, respectively, as of December 31, 1998, and $186 million, $153 million and $8 million, respectively, as of December 31, 1997. The prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants. -39- (1998 Annual Report pp. 49-50)
The weighted average assumptions used in the Company's defined benefit plans were: 1998 1997 ---- ---- Discount rates 6.6% 7.3% Rates of increase in compensation levels 4.1% 4.6% Expected long-term rates of return on assets 9.3% 9.1% ---- ----
The Company also has a defined contribution retirement plan, principally involving a profit sharing plan and a 401(k) savings plan, covering most employees in the United States. The defined contribution plan expense was $106 million, $101 million and $98 million in 1998, 1997 and 1996, respectively. OTHER POSTRETIREMENT BENEFITS The Company sponsors postretirement benefit plans that provide health care, life insurance and other postretirement benefits to retired U.S. employees. Net periodic postretirement benefit expenses were $17 million, $15 million and $18 million in 1998, 1997 and 1996, respectively. The liabilities recognized on the Consolidated Balance Sheets for the Company's defined postretirement benefit plans (other than pension plans) at December 31, 1998 and 1997 were $204 million. NOTE 12 INCOME TAXES The provisions for income taxes were:
(millions) 1998 1997 1996 ---- ---- ---- Federal $465 $453 $468 State and local 35 46 74 Foreign 284 260 221 ---- ---- ---- Total $784 $759 $763 ==== ==== ====
Accumulated net earnings of certain foreign subsidiaries, which totaled $1.2 billion at December 31, 1998, are intended to be permanently reinvested outside the United States. Accordingly, federal taxes, which would have aggregated $249 million, have not been provided on those earnings. The current and deferred components of the provision for income taxes were:
(millions) 1998 1997 1996 ---- ---- ---- Current $883 $824 $846 Deferred (99) (65) (83) ---- ---- ---- Total $784 $759 $763 ==== ==== ====
-40- (1998 Annual Report pp. 50-51) The Company's net deferred tax assets at December 31 were:
(millions) 1998 1997 ----- ----- Deferred tax assets $2,921 $2,767 Deferred tax liabilities 1,680 1,609 ------ ------ Net deferred tax assets $1,241 $1,158 ====== ======
Deferred tax assets primarily reflect: reserves not yet deducted for tax purposes of $1.8 billion for both years and deferred Cardmember fees of $225 million and $238 million at December 31, 1998 and 1997, respectively. Deferred tax liabilities for 1998 and 1997 mainly comprise deferred acquisition costs of $853 million and $826 million, respectively; liabilities related to SFAS No. 115 of $320 million and $318 million, respectively; and accelerated depreciation of $158 million and $150 million, respectively. The principal reasons that the aggregate income tax provision is different from that computed by using the U.S. statutory rate of 35 percent are:
(millions) 1998 1997 1996 ----- ----- ----- Combined tax at U.S. statutory rate $1,024 $ 962 $ 933 Changes in taxes resulting from: Tax-exempt interest income (122) (132) (153) Tax-exempt element of dividend income (38) (22) (22) Foreign income taxed at rates other than U.S. statutory rate (44) (13) (35) State and local income taxes 23 29 47 All other (59) (65) (7) ------ ------ ------ Income tax provision $ 784 $ 759 $ 763 ======= ====== ======
Net income taxes paid by the Company during 1998, 1997 and 1996 were $977 million, $878 million and $548 million, respectively, and include estimated tax payments and cash settlements relating to prior tax years. The items composing comprehensive income in the Consolidated Statements of Shareholders' Equity are presented net of income tax provision (benefit). The changes in net unrealized securities gains are presented net of tax provision (benefit) of $2 million, $104 million and ($263 million) for 1998, 1997 and 1996, respectively. Foreign currency translation adjustments are presented net of tax (benefits) of ($8 million), ($4 million) and ($2 million) for 1998, 1997 and 1996, respectively. -41- (1998 Annual Report p. 51) NOTE 13 EARNINGS PER COMMON SHARE SFAS No. 128, "Earnings per Share," requires the presentation of basic and diluted earnings per common share (EPS) in the income statement. Under these requirements, basic EPS is computed using the average actual shares outstanding during the period. Diluted EPS is basic EPS adjusted for the dilutive effect of stock options, restricted stock awards (RSAs) and other securities that may be converted into common shares. The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations:
(millions, except per share amounts) 1998 1997 1996 ------ ------ ------ Numerator: Net income $2,141 $1,991 $1,901 Less: Preferred dividends - - 5 ------ ------ ------ Numerator for basic EPS $2,141 $1,991 $1,896 ====== ====== ====== Effect of dilutive securities: 7.75% Convertible Preferred Shares - - 5 ------ ------ ------ Numerator for diluted EPS $2,141 $1,991 $1,901 ====== ====== ====== Denominator: Denominator for basic EPS- weighted-average shares 454.4 464.2 472.2 Effect of dilutive securities: Stock Options and RSAs 8.3 8.8 8.2 5% Exchangeable Lehman Brothers Holdings, Inc. Preferred Shares (see Note 6) - 6.1 6.2 7.75% Convertible Preferred Shares - - 1.6 Other 0.1 0.1 0.1 ------ ------ ------- Potentially dilutive common shares 8.4 15.0 16.1 ------ ------ ------- Denominator for diluted EPS 462.8 479.2 488.3 ====== ====== ======= Basic EPS $ 4.71 $ 4.29 $ 4.02 ------ ------ ------- Diluted EPS $ 4.63 $ 4.15 $ 3.89 ------ ------ -------
NOTE 14 RESTRUCTURING CHARGE In the fourth quarter of 1996, the Company recorded a $138 million charge ($216 million pretax) primarily for restructuring costs related to a series of reengineering initiatives that were implemented in 1997. Of the total charge, $125 million ($196 million pretax) related to TRS, approximately two-thirds of which applied to international businesses. Most of the remaining $13 million ($20 million pretax) was due to the early retirement of debt at the Corporate level. The pretax charge was included in Other Expenses in the Consolidated Statements of Income. The TRS restructuring charge included $109 million pretax in severance costs and $87 million pretax to close certain leased facilities, to consolidate or outsource certain operations and to write-down certain assets. As of December 31, 1997, the Company had substantially completed all restructuring activities. -42- (1998 Annual Report p. 52) NOTE 15 INDUSTRY SEGMENTS AND GEOGRAPHIC OPERATIONS INDUSTRY SEGMENTS In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." As a result, the Travelers Cheque operations, which were previously included in the TRS segment, have been reported in the same segment as AEB since January 1, 1998, consistent with our management structure. The Company is principally engaged in providing travel related, financial advisory and international banking services throughout the world. TRS' products and services include, among others, Charge Cards, consumer lending products, and corporate and consumer travel services. American Express Financial Advisors' services and products include financial planning and advice, investment advisory services and a variety of products, including insurance and annuities, investment certificates and mutual funds. American Express Bank/Travelers Cheque (AEB/TC) products and services include Travelers Cheques and providing correspondent, corporate and private banking, consumer financial services and global trading. The Company operates on a global basis, although the principal market for financial advisory services is the United States. The following table presents certain information regarding these industry segments at December 31, 1998, 1997 and 1996 and for each of the years then ended.
American American Express Travel Express Bank/ Corporate Adjustments Related Financial Travelers and and (millions) Services Advisors Cheque Other Eliminations Consolidated -------- --------- --------- --------- ------------ ------------ 1998 - ---- Revenues $13,237 $ 5,095 $ 1,002 $ 112 $ (314) $ 19,132 Interest and dividends, net 283 2,437 620 103 (166) 3,277 Cardmember lending net finance charge revenue 1,354 - - - - 1,354 Interest expense 959 21 28 149 (158) 999 Pretax income (loss) 2,064 1,192 (129) (202) - 2,925 Income tax provision (benefit) 700 374 (172) (118) - 784 ------- ------- ------- ------ ------- -------- Net income (loss) 1,364 818 43 (84) - 2,141 ------- ------- ------- ------ ------- -------- Assets $44,682 $64,637 $18,496 $3,606 $(4,488) $126,933 ------- ------- ------- ------ ------- -------- 1997 - ---- Revenues $12,214 $ 4,599 $ 1,124 $ 123 $ (300) $ 17,760 Interest and dividends, net 295 2,339 649 101 (209) 3,175 Cardmember lending net finance charge revenue 1,244 - - - - 1,244 Interest expense 921 18 33 129 (177) 924 Pretax income (loss) 1,785 1,022 249 (306) - 2,750 Income tax provision (benefit) 621 315 (23) (154) - 759 ------- ------- ------- ------ ------- -------- Net income (loss) 1,164 707 272 (152) - 1,991 ------- ------- ------- ------ ------- -------- Assets $40,700 $59,828 $19,573 $3,374 $(3,472) $120,003 ------- ------- ------- ------ ------- --------
-43- (1998 Annual Report p. 53)
American American Express Travel Express Bank/ Corporate Adjustments Related Financial Travelers and and (millions) Services Advisors Cheque Other Eliminations Consolidated -------- --------- --------- --------------------- ------------ 1996 - ---- Revenues $11,357 $ 4,110 $ 1,066 $ 129 $ (282) $ 16,380 Interest and dividends, net 438 2,267 657 112 (185) 3,289 Cardmember lending net finance charge revenue 1,068 - - - - 1,068 Interest expense 1,037 19 33 180 (153) 1,116 Pretax income 1,414 885 214 151 - 2,664 Income tax provision (benefit) 488 291 (33) 17 - 763 ------- -------- -------- -------- -------- --------- Net income 926 594 247 134 - 1,901 ------- -------- -------- -------- -------- --------- Assets $36,414 $ 52,670 $ 18,870 $ 3,158 $ (2,600) $108,512 ------- -------- --------- -------- --------- ---------
Income tax provision (benefit) is calculated on a separate return basis; however, benefits from operating losses, loss carrybacks and tax credits (principally foreign tax credits) recognizable for the Company's consolidated reporting purposes are allocated based upon the tax sharing agreement among members of the American Express Company consolidated U.S. tax group. Assets are those that are used or generated exclusively by each industry segment. The adjustments and eliminations required to determine the consolidated amounts shown above consist principally of the elimination of intersegment amounts. GEOGRAPHIC OPERATIONS The following table presents the Company's revenues and pretax income (loss) in different geographic regions.
Adjustments United Asia/ All and (millions) States Europe Pacific Other Eliminations Consolidated ------- ------ ------- ----- ------------ ------------ 1998 - ---- Revenues $14,535 $2,476 $1,332 $1,444 $ (655) $19,132 Pretax income (loss) $ 2,520 $ 340 $ (59) $ 124 - $ 2,925 1997 - ---- Revenues $13,449 $2,209 $1,378 $1,277 $ (553) $17,760 Pretax income $ 2,111 $ 219 $ 256 $ 164 - $ 2,750 1996 - ---- Revenues $12,107 $2,123 $1,355 $1,129 $ (334) $16,380 Pretax income $ 2,083 $ 210 $ 257 $ 114 - $ 2,664
Most services of the Company are provided on an integrated worldwide basis. Therefore, it is not practical to separate precisely the U.S. and international services. Accordingly, the data in the above table are, in part, based upon internal allocations, which necessarily involve management judgments. -44- (1998 Annual Report p. 54) NOTE 16 LEASE COMMITMENTS AND OTHER CONTINGENT LIABILITIES The Company leases certain office facilities and operating equipment under noncancellable and cancellable agreements. Total rental expense amounted to $388 million, $384 million and $397 million in 1998, 1997 and 1996, respectively. At December 31, 1998, the minimum aggregate rental commitment under all noncancellable leases (net of subleases) was (millions): 1999, $290; 2000, $236; 2001, $201; 2002, $153; 2003, $113 and thereafter, $1,216. The Company is not a party to any pending legal proceedings that, in the opinion of management, would have a material adverse effect on the Company's financial position. NOTE 17 TRANSFER OF FUNDS FROM SUBSIDIARIES The Securities and Exchange Commission requires the disclosure of certain restrictions on the flow of funds to a parent Company from its subsidiaries in the form of loans, advances or dividends. Restrictions on the transfer of funds exist under debt agreements and regulatory requirements of certain of the Company's subsidiaries. These restrictions have not had any effect on the Company's shareholder dividend policy and management does not anticipate any effect in the future. At December 31, 1998, the aggregate amount of net assets of subsidiaries that may be transferred to the parent Company was approximately $6.8 billion. Should specific additional needs arise, procedures exist to permit immediate transfer of short-term funds between the Company and its subsidiaries, while complying with the various contractual and regulatory constraints on the internal transfer of funds. NOTE 18 QUARTERLY FINANCIAL DATA (UNAUDITED)
(millions, except per share amounts) 1998 1997 ----------------------------- ------------------------------ Quarter Ended 12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31 Revenues $5,062 $4,787 $4,761 $4,521 $4,674 $4,500 $4,422 $4,164 Pretax income 713 799 800 614 690 718 702 640 Net income 530 574 578 460 493 524 520 454 Earnings per common share: Basic 1.18 1.27 1.27 1.00 1.07 1.13 1.12 .97 Diluted 1.16 1.25 1.24 .98 1.04 1.10 1.08 .94 Cash dividends declared per common share .225 .225 .225 .225 .225 .225 .225 .225 Common share prices: High 109.06 118.63 114.00 98.13 91.50 85.25 79.75 70.00 Low 67.00 68.00 91.88 78.38 72.00 73.69 57.50 53.63 ------------------------------ ------------------------------
-45- (1998 Annual Report p. 55) REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS THE SHAREHOLDERS AND BOARD OF DIRECTORS OF AMERICAN EXPRESS COMPANY We have audited the accompanying consolidated balance sheets of American Express Company as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the management of American Express Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Express Company at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP New York, New York February 4, 1999 -46- (1998 Annual Report p. 56)
CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (millions, except per share amounts and where indicated by *) 1998 1997 1996 1995 1994 ------- -------- -------- ------- ------ OPERATING RESULTS Revenues $ 19,132 $ 17,760 $ 16,380 $15,921 $ 14,342 Percent increase* 8% 8% 3% 11% 8% Expenses 16,207 15,010 13,716 13,738 12,451 Income from continuing operations: As reported 2,141 1,991 1,901 1,564 1,380 Adjusted(a) 2,201 1,991 1,739 1,564 1,380 Net income 2,141 1,991 1,901 1,564 1,413 Return on average shareholders' equity(b)* 24.0% 23.5% 22.8% 22.0% 20.3% ------------------------------------------------------- BALANCE SHEET Cash and cash equivalents $ 4,092 $ 4,179 $ 2,677 $ 3,200 $ 3,433 Accounts receivable and accrued interest, net 22,224 21,774 20,491 19,914 17,147 Investments 41,299 39,648 38,339 42,561 40,108 Loans, net 21,054 20,109 18,518 16,091 14,722 Total assets 126,933 120,003 108,512 107,405 97,006 Customers' deposits 10,398 9,444 9,555 9,889 10,013 Travelers Cheques outstanding 5,823 5,634 5,838 5,697 5,271 Insurance and annuity reserves 25,433 26,165 25,674 25,157 24,849 Short-term debt 22,605 20,570 18,402 17,654 14,810 Long-term debt 7,019 7,873 6,552 7,570 7,162 Shareholders' equity 9,698 9,574 8,528 8,220 6,433 --------------------------------------------------------- COMMON SHARE STATISTICS Earnings per share from continuing operations: Basic $ 4.71 $ 4.29 $ 4.02 $ 3.19 $ 2.74 Basic adjusted(a) $ 4.84 $ 4.29 $ 3.67 $ 3.19 $ 2.74 Diluted $ 4.63 $ 4.15 $ 3.89 $ 3.10 $ 2.69 Diluted adjusted(a) $ 4.76 $ 4.15 $ 3.56 $ 3.10 $ 2.69 Percent increase (decrease)*: Basic* 10% 7% 26% 16% (16%) Basic adjusted(a)* 13% 17% 15% 16% 17% Diluted* 12% 7% 25% 15% (15%) Diluted adjusted(a)* 15% 17% 15% 15% 16% Earnings per share: Basic $ 4.71 $ 4.29 $ 4.02 $ 3.19 $ 2.81 Diluted $ 4.63 $ 4.15 $ 3.89 $ 3.10 $ 2.75 Cash dividends declared per share: Actual $ .90 $ .90 $ .90 $ .90 $ .925 Pro forma $ .90 $ .90 $ .90 $ .90 $ .90 Book value per share: Actual $ 21.53 $ 20.53 $ 18.04 $ 16.60 $ 12.57 Pro forma(b) $ 20.24 $ 19.29 $ 17.22 $ 14.79 $ 13.35 Market price per share: High $ 118.63 $ 91.50 $ 60.38 $ 45.13 $ 32.00 Low $ 67.00 $ 53.63 $ 38.63 $ 29.00 $ 23.17 Close $ 102.50 $ 89.25 $ 56.50 $ 41.38 $ 29.50 Average common shares outstanding for earnings per share: Basic 454 464 472 485 492 Diluted 463 479 488 499 512 Shares outstanding at year end 450 466 473 483 496 Number of shareholders of record* 51,597 53,576 55,803 57,010 60,520 OTHER STATISTICS Number of employees at year end: United States* 50,266 44,691 43,688 41,700 43,421 Outside United States* 34,466 28,929 28,611 28,647 28,991 --------------------------------------------------------- Total* 84,732 73,620 72,299 70,347 72,412 ---------------------------------------------------------
Note: Historical common share prices for 1994 have been adjusted to reflect the Lehman spin-off at a ratio based on the trading prices of the Company's common shares and shares of Lehman common stock on May 31, 1994. Pro forma cash dividends declared have also been adjusted to reflect the Lehman spin-off. (a) 1998 is adjusted to exclude the following first quarter items: $138 million credit loss provision at American Express Bank relating to its Asia/Pacific portfolio, as well as income of $78 million representing gains on the sale of First Data Corporation shares and a preferred dividend based on Lehman Brothers' earnings. 1996 is adjusted to exclude a $300 million gain on the exchange of the Company's DECS and a $138 million restructuring charge. (b) Return on average shareholders' equity is based on adjusted income from continuing operations in 1996 and excludes the effect of SFAS No. 115. In addition, book value per share excludes the effect of SFAS No. 115. -47- (1998 Annual Report p. 57) EX-21 4 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Unless otherwise indicated, all of the voting securities of these subsidiaries are directly or indirectly owned by the registrant. Where the name of the subsidiary is indented, the voting securities of such subsidiary are owned directly by the company under which its name is indented. Certain subsidiaries have been omitted which, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as defined in Rule 1-02(w) of Regulation S-X. Jurisdiction Name of Subsidiary of Incorporation I. American Express Travel Related Services Company, Inc. and its Subsidiaries American Express Travel Related New York Services Company, Inc. Amex Canada, Inc. Canada 1001675 Ontario, Inc. Canada 1001674 Ontario, Inc. Canada Rexport, Inc. Canada Amex Bank of Canada Canada Sourcing Innovation, Inc. Canada American Express Company (Mexico) S.A. de C.V. Mexico American Express Centurion Bank Utah American Express Centurion Services Corporation Delaware American Express Credit Corporation Delaware American Express Overseas Credit Jersey, Corporation Limited Channel Islands AEOCC Management Company, Ltd. Jersey, Channel Islands American Express Overseas Credit Netherlands Corporation N.V. Antilles Credco Receivables Corp. Delaware American Express Receivables Financing Corp. Delaware American Express Receivables Financing Corp. II Delaware American Express Tax and Business Services, Inc. Minnesota American Express Tax and Business Services of New York, Inc. Minnesota American Express do Brasil Tempo & Cia, Inc. Delaware Amex do Brazil Empreedimentos e Participacoes Ltda. Brazil American Express do Brasil Servicos Brazil Internacionais, Ltda. (90% owned) American Express do Brazil Tempo & Cia Brazil American Express do Brasil S.A. Turismo Brazil American Express Limited Delaware American Express Argentina, S.A. Argentina American Express (Malaysia) Sdn. Bhd. Malaysia American Express (Thai) Co. Ltd. Thailand TRS Card International Inc. (75% owned) Delaware American Express de Espana, S.A. Spain American Express Viajes, S.A. Spain 1 Amex Asesores de Seguros, S.A. Spain American Express International (B) SDN.BHD. Brunei Amex Travel Advisors, Limited Hong Kong South Pacific Credit Card Ltd. New Zealand Centurion Finance, Ltd. New Zealand American Express International, Inc. Delaware American Express Hungary KFT Hungary American Express Company A/S Norway American Express Locazioni Finanziarie, S.r.1. Italy Amex Broker Assicurativo S.r.l. Italy American Express Int'l A.E. (Greece) Greece American Express Int'l (Taiwan), Inc. Taiwan American Express of Egypt, Ltd. Delaware American Express Carte France, S.A. France AllCard Service GmbH Germany American Express Bureau de Change S.A. Greece American Express Exposure Management, Ltd. Jersey, Channel Islands American Express Travel Poland Sp.Zo.O Poland Sociedad Internacional de Servicios Panama de Panama, S.A. American Express Voyages Tourisme France Havas Voyages American Express France Amex Sumigin Service Company, Ltd. (40% owned) Japan American Express International Services Limited Russia American Express Card Services Limited (95% owned) Russia Amex Marketing Japan Ltd. Delaware American Express (India) Pvt. Ltd. India P.T. American Express Travel Indonesia Indonesia (80% owned) American Express spol. s.r.o. Czech Republic Nippon Card Business Co., Ltd. (25% owned) Japan Schenker Rhenus Reisen Germany American Express Holdings AB Sweden American Express Reisebyra A/B Sweden Nyman & Schultz AB Sweden Nyman & Schultz Grupp och Konferens AB Sweden Resespecialisterna Syd AB Sweden Book Hotel AB Sweden Forsakringsaktiebolaget Viator Sweden First Card AB Sweden Profil Rejser A/S (50% owned) Denmark Resespecialisterna Enkoping AB (26% owned) Sweden Scandinavian Express AB Sweden Stockholm Central Hotel AB Sweden Nyman & Schultz Forretningsreiser A/S Norway Nyman & Schultz Erhvevvsrejser ApS Denmark Amex Insurance Marketing, Inc. Taiwan American Express Publishing Corp. New York Southwest Media Corporation Texas Societe Francaise du Cheque de Voyage, S.A. France (34% owned) Travellers Cheque Associates, Ltd. (54% owned) England & Wales American Express Service Corporation Delaware Bansamex S.A. (50% owned) Spain Amex (Middle East) E.C. (50% owned) Bahrain Amex (Saudi Arabia Ltd.) (50% owned) Bahrain American Express Europe Limited Delaware 2 American Express Services Europe Limited England & Wales and Delaware American Express Insurance Services, Ltd. England & Wales American Express TRS, Inc. Florida Cardmember Financial Services, Ltd. Jersey, Channel Islands Integrated Travel Systems, Inc. Texas Epsilon Data Management, Inc. (19.9% owned) Delaware Amex General Insurance Agency Taiwan American Express Bank (Mexico), S.A. Mexico American Express Student Funding, Inc. Delaware Educational Funding Company LCC (64% owned) California American Express Educational Assurance Company Arizona American Express Incentive Services, Inc. Delaware American Express Incentive Services, Missouri LLC (50% owned) American Express International (NZ), Inc. Delaware American Express Realty Management Co. Delaware Cavendish Holdings, Inc. Delaware Rockford Industries, Inc. Delaware American Express CapitaFinance L.L.C. Arizona Golden Bear Travel, Inc. Delaware American Express Travel One, Inc. Delaware Empress Travel, Ltd. Delaware Travel Impressions, Ltd. Delaware American Express ATM Holdings, Inc. Delaware Americash, Inc. Delaware Americash L.L.C. Delaware Shamrock ATM Inc. Delaware II. American Express Financial Corporation and its Subsidiaries American Express Financial Corporation Delaware American Express Financial Advisors Inc. Delaware American Express Financial Advisors Japan Inc. Delaware IDS Real Estate Services, Inc. Delaware American Express Trust Company Minnesota IDS Life Insurance Company Minnesota American Partners Life Insurance Company Arizona IDS Life Insurance Company of New York New York American Enterprise Life Insurance Company Indiana American Centurion Life Assurance Company New York American Express Corporation Delaware IDS Certificate Company Delaware Investors Syndicate Development Corporation Nevada IDS Insurance Agency of Alabama Inc. Alabama IDS Insurance Agency of Arkansas Inc. Arkansas IDS Insurance Agency of Massachusetts Inc. Massachusetts IDS Insurance Agency of Mississippi Inc. Mississippi IDS Insurance Agency of New Mexico Inc. New Mexico IDS Insurance Agency of North Carolina Inc. North Carolina IDS Insurance Agency of Ohio Inc. Ohio 3 IDS Insurance Agency of Texas Inc. Texas IDS Insurance Agency of Utah Inc. Utah IDS Insurance Agency of Wyoming Inc. Wyoming American Express Insurance Agency of Nevada Inc. Nevada American Express Asset Management Group Inc. Minnesota Advisory Capital Strategies Group Inc. Minnesota American Express Asset Management International Japan (Japan) Ltd. IDS Capital Holdings Inc. Minnesota American Express Asset Management International Inc. Delaware American Express Asset Management Ltd. England & Wales IDS Management Corporation Minnesota IDS Partnership Services Corporation Minnesota IDS Cable Corporation Minnesota IDS Futures Corporation Minnesota IDS Realty Corporation Minnesota IDS Cable II Corporation Minnesota IDS Property Casualty Insurance Company Wisconsin American Express Minnesota Foundation Minnesota IDS Sales Support Inc. Minnesota IDS Plan Services of California, Inc. Minnesota American Enterprise Investment Services Inc. Minnesota American Express Insurance Agency of Arizona, Inc. Arizona American Express Insurance Agency of Idaho, Inc. Idaho American Express Property Casualty Insurance Kentucky Agency of Kentucky, Inc. American Express Client Service Corporation Minnesota Public Employee Payment Company Minnesota American Express Property Casualty Insurance Maryland Agency of Maryland Inc. American Express Property Casualty Insurance Mississippi Agency of Mississippi Inc. American Express Property Casualty Insurance Pennsylvania Agency of Pennsylvania Inc. American Express Insurance Agency of Oregon, Inc. Oregon Securities American Financial Corporation Nebraska Financial Dynamics, Inc. Nebraska Securities America, Inc. Delaware Securities Advisors, Inc. Nebraska Realty Assets, Inc. Nebraska III. American Express Banking Corp. and its Subsidiaries American Express Banking Corp. New York American Express Bank Ltd. Connecticut Amex Holdings, Inc. Delaware American Express Bank GmbH Germany AEB - International Portfolios Management Company Luxembourg Egyptian American Bank (41% owned) Egypt Delta AEB Brokerage SAE (60% owned) Egypt Amtrade Holdings, Inc. Delaware American Express Bank (Switzerland) S.A. Switzerland Cristal Trust Services S.A.-Geneva Switzerland International Trade Services Pte Ltd. Singapore Amex International Trust (Guernsey) Limited Guernsey, Channel Islands 4 Etoral Finance, Inc. Panama Sociedad Del Desarrollo Mercantil Ltda. Chile Remor and Associates Inc. Panama American Express Bank Asset Management Jersey, (Jersey) Ltd. Channel Islands American Express Bank (Luxembourg) S.A. Luxembourg AEB WorldFolio Capital Preservation Luxembourg Management Co. S.A. American Express Bank (Uruguay) S.A. Uruguay Amex International Trust (Cayman) Ltd. Cayman Islands OLP Investments Ltd. Cayman Islands Rilanex Participations N.V. Netherlands Antilles American Express Worldfolio Management Company Luxembourg American Express Bank (France) S.A. France Amex Gestion S.A. France American Express Bank International United States Argentamex S.A. Argentina AEB (UK) PLC England & Wales Amex Nominees (S) Pte Ltd. Singapore Amex Bank Nominee Hong Kong Limited Hong Kong First International Investment Bank Ltd. Pakistan (20% owned) American Express (Poland) Ltd. Delaware American Express Bank Asset Management (Cayman) Ltd. Cayman Islands Inveramex Chile Ltda. Chile Amex Immobiliaria Ltda. Chile American Express Bank S.A. Argentina AEB Global Asset Management, Inc. New York AEB/FFS Management Company (50% owned) Luxembourg and Jersey, Cayman Islands AEB Global Trading Investments, Ltd. British Virgin Islands Amex NLG Holdings L.L.C. Delaware American Express International Deposit Company Cayman Islands Bankpar Participacoes Ltda. Brazil Banco Inter American Express S.A. (50% owned) Brazil Inter American Express Arrendamento Mercantil, S.A. (95% owned) Brazil Inter American Express Consultoria E Servicos Ltda. Brazil MS Representacoes E Participacoes Ltda. Brazil MS Trading S.A. Brazil Inter American Express Overseas Ltd. Brazil Inter American Express Bank Ltd. Brazil Imagra Imobiliaria E Agricola S.A. Brazil IV. Other Subsidiaries of the Registrant Acuma Financial Services Ltd. Delaware Acuma Ltd. Delaware Ainwick Corporation Texas American Express Asset Management Holdings, Inc. Delaware Amexco Insurance Company Vermont Amexco Risk Financing Holding Company Delaware AMEX Assurance Company Illinois 5 National Express Company, Inc. New York The Balcor Company Holdings, Inc. Delaware The Balcor Company Delaware Balcor Securities Company Illinois Balcor Institutional Realty Advisors, Inc. Illinois Balcor Management Services, Inc. Illinois International Capital Corporation Delaware Intercapital Comercio e Participacoes Ltda. Brazil Conepar Compania Nordestina de Brazil Participacoes S.A. (37% owned) Convertible Holding Ltd. Cayman Islands CTH Common Holdings Ltd. Cayman Islands CTH Preferred Holdings Ltd. Cayman Islands Complejos Turisticos Huatulco, Mexico S.A. de C.V. (84% of preferred stock) Acamex Holdings, Inc. Cayman Islands Etisa Holdings Ltd. Cayman Islands Empresas Turisticas Integradas, Mexico S.A. de C.V. (98% owned) Floriano Representacoes Ltda. Brazil International Capital Corp. (Ltd.) Cayman Cayman Islands Rexport, Inc. Delaware Drillamex, Inc. Delaware UMPAWAUG I Corporation Delaware UMPAWAUG II Corporation Delaware UMPAWAUG III Corporation Delaware UMPAWAUG IV Corporation Delaware Daedalus Leasing Corp. New York Dash 200 + Ltd. (50% owned) Cayman Islands Nora Leasing, Inc. New York Gemini Leasing Ltd. Cayman Islands MME Leasing Corp. New York Far East Leasing Ltd. Cayman Islands 6 EX-27 5
5 This schedule contains summary financial information extracted from the Company's Consolidated Balance Sheet at December 31, 1998 and Consolidated Statement of Income for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 4,092 41,299 22,823 599 0 0 3,704 2,067 126,933 0 29,624 0 0 270 9,428 126,933 0 19,132 0 9,523 1,815 3,870 999 2,925 784 2,141 0 0 0 2,141 4.71 4.63
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