<PAGE>
===============================================================================
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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%
- -------------------------------------------------------------------------- ------------ -----------
</TABLE>
(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
<PAGE>
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):
<TABLE>
<CAPTION>
By Geographical Region (a) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
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)
---------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
====== ===== ====== ====== ====== ====== ====== ======
</TABLE>
(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
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
==== ==== ==== ==== ====
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
========== ========== =========== ========== ==========
</TABLE>
(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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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
===== ====== ====== ===== =====
</TABLE>
26
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS COMPANY
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
(Item 14(a))
Annual
Report to
Shareholders
Form 10-K (Page)
----------- ------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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
--------------- ---------------- ------------------
<S> <C> <C> <C>
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
=============== ================ ==================
</TABLE>
(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
<PAGE>
<TABLE>
<CAPTION>
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
------------------ -------------------
<S> <C> <C>
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
================== ===================
</TABLE>
See Notes to Condensed Financial Information of the Company on page F-6.
F-4
<PAGE>
<TABLE>
<CAPTION>
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
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
2. Long-term debt consists of (millions):
December 31,
----------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
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
=============== ==============
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
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
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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
======= ====== ====== ======= ======= ========
</TABLE>
(a) Before recoveries on accounts previously written-off, which are
credited to income (millions): 1998--$231, 1997--$237 and 1996--$232.
F-7
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
================================================================================
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
================================================================================
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
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
---------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
<TABLE>
<CAPTION>
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
-------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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.
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)
<PAGE>
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)
<PAGE>
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)
<PAGE>
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)
<PAGE>
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
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
(Amounts in millions)
Years Ended December 31, 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
-5- (1998 Annual Report p. 24)
<PAGE>
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)
<PAGE>
<TABLE>
<CAPTION>
SELECTED STATISTICAL INFORMATION
(Amounts in billions, except percentages and where indicated)
Years Ended December 31, 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
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%
</TABLE>
* 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)
<PAGE>
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
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET INFORMATION
(Amounts in billions, except percentages)
December 31, 1998 1997
---------- ---------
<S> <C> <C>
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%
---------- ---------
</TABLE>
* 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)
<PAGE>
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)
<PAGE>
AMERICAN EXPRESS FINANCIAL ADVISORS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
(Amounts in millions)
Years Ended December 31, 1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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)
<PAGE>
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.
<TABLE>
<CAPTION>
SELECTED STATISTICAL INFORMATION
(Amounts in millions, except percentages and where indicated)
Years Ended December 31, 1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
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%
========== ========= =========
</TABLE>
* Includes advisors from the acquisition of Securities America in the first
quarter of 1998.
-11- (1998 Annual Report p. 27)
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET INFORMATION
(Amounts in billions, except percentages)
December 31, 1998 1997
-------- --------
<S> <C> <C>
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%
-------- --------
</TABLE>
* 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
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
(Amounts in millions)
Years Ended December 31, 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
-12- (1998 Annual Report p. 28)
<PAGE>
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.
<TABLE>
<CAPTION>
SELECTED STATISTICAL INFORMATION
(Amounts in billions, except percentages)
Years Ended December 31, 1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
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%
------ ------ ------
</TABLE>
* Includes assets managed by American Express Financial Advisors.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET INFORMATION
(Amounts in billions, except percentages and where indicated)
December 31, 1998 1997
------ ------
<S> <C> <C>
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
======= =======
</TABLE>
** Excluding the effect of SFAS No. 115.
-13- (1998 Annual Report pp. 28-29)
<PAGE>
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)
<PAGE>
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)
<PAGE>
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)
<PAGE>
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)
<PAGE>
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)
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
American Express Company
Years Ended December 31, (millions, except per share amounts) 1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
-19- (1998 Annual Report p. 32)
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
American Express Company
December 31, (millions, except share data) 1998 1997
---- ----
<S> <C> <C>
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
======== =========
</TABLE>
See notes to consolidated financial statements.
-20- (1998 Annual Report p. 33)
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
American Express Company
Years Ended December 31, (millions) 1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
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
======== ======== =========
</TABLE>
See notes to consolidated financial statements.
-21- (1998 Annual Report p. 34)
<PAGE>
<TABLE>
<CAPTION>
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
----- --------- ------ ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
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
------- ------ ----- ------- ----- --------
</TABLE>
See notes to consolidated financial statements.
-22- (1998 Annual Report p. 35)
<PAGE>
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)
<PAGE>
NOTE 2 INVESTMENTS
<TABLE>
<CAPTION>
The following is a summary of investments included in
the Consolidated Balance Sheets at December 31:
(millions) 1998 1997
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
Investments classified as Held to Maturity and Available-
for-Sale at December 31 are distributed by type and
maturity as presented below:
<TABLE>
<CAPTION>
Held to Maturity
-----------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Fair Unrealized Unrealized Fair
(millions) Cost Gains Losses Value Cost Gains Losses Value
-------- ---------- ---------- ----- ---- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ===== ==== ======= ======= ==== ==== =======
</TABLE>
-24- (1998 Annual Report pp. 36-37)
<PAGE>
<TABLE>
<CAPTION>
Available-for-Sale
--------------------------------------------------------------------------
1998 1997
----------------------------------- ----------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Fair Unrealized Unrealized Fair
(millions) Cost Gains Losses Value Cost Gains Losses Value
---- --------- ---------- ------ ---- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ====== ===== ======= ======= ===== ----- -------
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity Available-for-Sale
------------------- ----------------------
Fair Fair
December 31, 1998 (millions) Cost Value Cost Value
------- ------- -------- ------
<S> <C> <C> <C> <C>
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
======= ======== ======== =======
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
---------------------- -----------------------
Held to Available- Held to Available-
(millions) Maturity for-Sale Maturity for-Sale
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Purchases $ 692 $ 9,927 $ 64 $ 7,323
Sales $ 243 $ 1,413 $ 274 $ 1,504
Maturities $ 2,191 $ 5,524 $ 1,513 $ 2,965
======= ======== ======= =======
</TABLE>
-25- (1998 Annual Report pp. 37-38)
<PAGE>
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:
<TABLE>
<CAPTION>
(millions, net of tax) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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)
==== ==== ====
</TABLE>
-26- (1998 Annual Report p. 38)
<PAGE>
<TABLE>
<CAPTION>
NOTE 3 LOANS
Loans at December 31 consisted of:
(millions) 1998 1997
------ ------
<S> <C> <C>
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
======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
The following table presents changes in Reserves for
Credit Losses related to loans:
(millions) 1998 1997
------- ------
<S> <C> <C>
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
======= =======
</TABLE>
-27- (1998 Annual Report p. 39)
<PAGE>
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.
<TABLE>
<CAPTION>
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
----------- --------- --------- ----------- ----------- ----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
====== ====== ====== ======
</TABLE>
(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)
<PAGE>
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.
<TABLE>
<CAPTION>
Common shares activity for each of the last three years ended December 31
was:
(thousands) 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
-29- (1998 Annual Report p. 41)
<PAGE>
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.
<TABLE>
<CAPTION>
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
-------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
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
========= ======= ====== ====== ======
</TABLE>
-30- (1998 Annual Report p. 42)
<PAGE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
Carrying Value Fair Value
Notional -------------- -----------
(millions) Amount Asset Liability Asset Liability
-------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
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
======== ====== ====== ===== =======
</TABLE>
* 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)
<PAGE>
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)
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, (millions) 1998 1997
------- --------
<S> <C> <C>
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
------- --------
</TABLE>
-33- (1998 Annual Report p. 44)
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, (millions) 1998 1997
------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------- ------- -------
<S> <C> <C> <C> <C>
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
-------- ------- ------- -------
</TABLE>
-34- (1998 Annual Report p. 45)
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, (dollars in millions) 1998 1997
------- -------
<S> <C> <C>
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%
======== =======
</TABLE>
(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)
<PAGE>
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:
<TABLE>
<CAPTION>
(millions, except per share amounts) 1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
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
------- ------- -------
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
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
------- -------- --------
</TABLE>
-36- (1998 Annual Report pp. 46-47)
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
(shares in thousands) Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
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
-------- --------- ------- ------ ------- --------
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
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
----------- ---------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$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
</TABLE>
-37- (1998 Annual Report p. 48)
<PAGE>
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:
<TABLE>
<CAPTION>
(millions) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
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)
<PAGE>
<TABLE>
<CAPTION>
Reconciliation of change in benefit obligation
(millions) 1998 1997
------- -------
<S> <C> <C>
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)
====== ======
</TABLE>
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)
<PAGE>
<TABLE>
<CAPTION>
The weighted average assumptions used in the Company's defined benefit
plans were:
1998 1997
---- ----
<S> <C> <C>
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%
---- ----
</TABLE>
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:
<TABLE>
<CAPTION>
(millions) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal $465 $453 $468
State and local 35 46 74
Foreign 284 260 221
---- ---- ----
Total $784 $759 $763
==== ==== ====
</TABLE>
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:
<TABLE>
<CAPTION>
(millions) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $883 $824 $846
Deferred (99) (65) (83)
---- ---- ----
Total $784 $759 $763
==== ==== ====
</TABLE>
-40- (1998 Annual Report pp. 50-51)
<PAGE>
The Company's net deferred tax assets at December 31 were:
<TABLE>
<CAPTION>
(millions) 1998 1997
----- -----
<S> <C> <C>
Deferred tax assets $2,921 $2,767
Deferred tax liabilities 1,680 1,609
------ ------
Net deferred tax assets $1,241 $1,158
====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
(millions) 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
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
======= ====== ======
</TABLE>
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)
<PAGE>
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:
<TABLE>
<CAPTION>
(millions, except per share amounts) 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
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
------ ------ -------
</TABLE>
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)
<PAGE>
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.
<TABLE>
<CAPTION>
American
American Express
Travel Express Bank/ Corporate Adjustments
Related Financial Travelers and and
(millions) Services Advisors Cheque Other Eliminations Consolidated
-------- --------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
------- ------- ------- ------ ------- --------
</TABLE>
-43- (1998 Annual Report p. 53)
<PAGE>
<TABLE>
<CAPTION>
American
American Express
Travel Express Bank/ Corporate Adjustments
Related Financial Travelers and and
(millions) Services Advisors Cheque Other Eliminations Consolidated
-------- --------- --------- --------------------- ------------
1996
- ----
<S> <C> <C> <C> <C> <C> <C>
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
------- -------- --------- -------- --------- ---------
</TABLE>
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.
<TABLE>
<CAPTION>
Adjustments
United Asia/ All and
(millions) States Europe Pacific Other Eliminations Consolidated
------- ------ ------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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)
<PAGE>
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)
<TABLE>
<CAPTION>
(millions, except per share amounts) 1998 1997
----------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------------------------------ ------------------------------
</TABLE>
-45- (1998 Annual Report p. 55)
<PAGE>
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)
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(millions, except per share amounts and where indicated by *)
1998 1997 1996 1995 1994
------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
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
---------------------------------------------------------
</TABLE>
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)
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,092
<SECURITIES> 41,299
<RECEIVABLES> 22,823
<ALLOWANCES> 599
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,704
<DEPRECIATION> 2,067
<TOTAL-ASSETS> 126,933
<CURRENT-LIABILITIES> 0
<BONDS> 29,624
0
0
<COMMON> 270
<OTHER-SE> 9,428
<TOTAL-LIABILITY-AND-EQUITY> 126,933
<SALES> 0
<TOTAL-REVENUES> 19,132
<CGS> 0
<TOTAL-COSTS> 9,523
<OTHER-EXPENSES> 1,815
<LOSS-PROVISION> 3,870
<INTEREST-EXPENSE> 999
<INCOME-PRETAX> 2,925
<INCOME-TAX> 784
<INCOME-CONTINUING> 2,141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,141
<EPS-PRIMARY> 4.71
<EPS-DILUTED> 4.63
</TABLE>
