American Express 1998 Annual Report Download

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American Express Company

Table of contents

  • Page 1
    American Express Company

  • Page 2
    ... and credit cards, Travelers Cheques and other stored value products. It also offers financial planning, brokerage services, mutual funds, insurance and other investment products. Through its family of Corporate Card services, American Express helps companies and institutions manage their travel...

  • Page 3
    ...the consolidated financial statements and accompanying notes. 57 CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA Five-year summary of key operating results, assets and liabilities, common share statistics and number of employees. 59 60 THE PLANNING AND POLICY COMMITTEE BOARD OF DIRECTORS

  • Page 4
    ... the following 1998 first quarter items: a $138 million (after-tax) credit loss provision at American Express Bank relating to its Asia/Pacific portfolio, as well as income of $78 million (after-tax) representing gains on the sale of First Data Corporation shares and a preferred dividend based on...

  • Page 5
    ... Continued United States market share gains in charge and credit card volume and in lending balances. This reï¬,ects a number of initiatives, including continued growth in our corporate and small business card activities, increased spending per card and ongoing improvement in our merchant coverage...

  • Page 6

  • Page 7
    ...curtailing travel and entertainment related spending. While the United States economy remained relatively healthy throughout the year, volatile financial markets, particularly in the third and fourth quarters, presented challenges for American Express Financial Advisors. Even so, Financial Advisors...

  • Page 8
    ...a key growth area. In 1998, we added 16 new bank partners, helping them develop innovative products and services that operate on our card network. In total, the business billed on network cards increased by 30 percent over the prior year. T H R E E AV E N U E S F O R G R O W T H In our letter last...

  • Page 9
    ... products to independent financial advisors. We launched a new computer-based service that allows advisors to generate more sophisticated financial plans for their clients. Our 401(k) website now allows participating employees at registered client companies to view their retirement accounts online...

  • Page 10
    ... by American Express Financial Advisors increased 17 percent in 1998, reaching $212 billion. Continued growth despite market volatility demonstrates the value of working with clients as part of a long-term financial planning relationship. We hope that gives you a sense of the overall progress at...

  • Page 11
    ... next two years. In 1998, we took a significant step in this direction with the purchase of Securities America, an independent broker/dealer that serves financial planners and distributes mutual funds, annuities and insurance. This acquisition added approximately 1,100 financial advisors to our...

  • Page 12
    ... progress in establishing a broader foundation for the future. In January 1999, we announced the formation of American Express Financial Advisors in Japan, the world's second largest economy. Elsewhere, American Express Bank launched a family of euro-denominated mutual funds in France and Germany...

  • Page 13
    ... customers. We introduced a number of new proprietary card products in international markets in 1998, including an American Express Gold Card in India, a co-branded card with Cheung Kong real estate holdings in Hong Kong, a Platinum Card in Brazil and a Blue Card, offering a cash rebate on purchases...

  • Page 14
    ... reached 83 percent. Key merchant signings included Woolworth's in Australia, C&A department stores in Germany, Lojas Americanas in Brazil and the Liquor Control Board of Ontario. Suppression - when merchants that accept American Express encourage a customer to use another card or cash - remains...

  • Page 15
    ... Card. We added Return Protection to the American Express Gold and Platinum Cards. This service allows Cardmembers to return purchases to us for up to 90 days, even when a store will not accept them. We increased usage of lending products such as Sign & Travel and the Special Purchase Account...

  • Page 16
    ... several new products in the U.S., including a cash rebate card that offers up to two percent cash back on purchases; a card that offers special services and discounts to members of the National Restaurant Association; and a gift card, which works like an electronic gift certificate, with merchants...

  • Page 17
    ... which extends warranties for major home systems and appliances. During the year, we launched electronic gift cards with Tower Records and Chanel. These products, which work like an electronic gift certificate, are designed to help merchants increase business and customer loyalty. American Express...

  • Page 18
    ... American Express helps companies manage their travel, entertainment and purchasing expenses through a growing family of products. During 1998, we introduced a new Corporate Card in France in conjunction with Air France, Accor and Credit Lyonnais. We expanded our Internet-based travel reservation...

  • Page 19
    ... the year, we added FedEx to the list of merchants offering discounts to our Small Business Cardmembers and launched an Internet site that helps small businesses pay international vendors in local currency. Outside the U.S., we introduced a new Gold Card for small businesses in the United Kingdom...

  • Page 20
    ...the number and range of merchants that accept American Express Cards. In the United States, our merchant network now accommodates more than 94 percent of Cardmembers' general purpose plastic spending. In 1998, we made strong gains in signing supermarkets and retail outlets. Outside the United States...

  • Page 21
    ... those numbers, it is not surprising that Credit Card Management magazine named American Express "Acquirer of the Year." The percentage of total Cardmember plastic spending that can be accommodated by our United States merchant network now exceeds 94 percent. Key signings in the United States during...

  • Page 22
    ...Consumer Card Services to become CEO of OptiMark Technologies. We were sorry to see them go. However, we named Jim Cracchiolo to lead TRS International and Al Kelly to head Consumer Card Services. Both had senior level responsibilities in their groups and our ability to replace departing executives...

  • Page 23
    ...STATEMENTS OF INCOME CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF MANAGEMENT REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL...

  • Page 24
    ... $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...

  • Page 25
    ... 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...

  • Page 26
    ... 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...

  • Page 27
    ...$ Outside the United States Total $ Average Discount Rate* Average Basic Cardmember Spending (dollars)* $ Average Fee per Card (dollars)* $ Travel Sales $ Travel Commissions and Fees/Sales Owned and Managed Charge Card Receivables:** Total Receivables $ 90 Days Past Due as a % of Total Loss Reserves...

  • Page 28
    ... 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...

  • Page 29
    ... Assets $ Managed Assets $ Sales of Selected Products: Mutual Funds $ Annuities $ Investment Certificates $ Life and Other Insurance Products $ Number of Financial Advisors Fees from Financial Plans (thousands) $ Product Sales Generated from Financial Plans as a Percentage of Total Sales 3,181 81...

  • Page 30
    ... December 31, 1998 1997 1996 $ 43 $ 272 $ 247 American Express Bank/Travelers Cheque (AEB/TC) 1998 net income was lower than the prior year primarily reï¬,ecting a $138 million ($213 million pretax) first quarter credit loss provision related to AEB's business in the Asia/Pacific region...

  • Page 31
    ... 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...

  • Page 32
    ...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...

  • Page 33
    ... 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...

  • Page 34
    ...PA N Y Years Ended December 31, (millions, except per share amounts) 1998 1997 1996 Revenues Discount revenue Interest and dividends, net Management and distribution fees Net card fees Travel commissions and fees Other commissions and fees Cardmember lending net finance charge revenue Life and...

  • Page 35
    ... and Shareholders' Equity Customers' deposits Travelers Cheques outstanding Accounts payable Insurance and annuity reserves: Fixed annuities Life and disability policies Investment certificate reserves Short-term debt Long-term debt Separate account liabilities Other liabilities Total liabilities...

  • Page 36
    ... of 3 months or less Issuance of debt Principal payments on debt Issuance of Trust preferred securities Issuance of American Express common shares Repurchase of American Express common shares Dividends paid Net cash provided (used) by financing activities Effect of exchange rate changes on...

  • Page 37
    ... gains Foreign currency translation adjustments Total comprehensive income Repurchase of common shares Exchange of Lehman Brothers Holdings, Inc. preferred shares for American Express common shares Other changes, primarily employee plans Cash dividends declared: Common, $.90 per share Balances at...

  • Page 38
    ... 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. AC...

  • Page 39
    ... Gains Gross Unrealized Losses Fair Value (millions) Cost Cost U.S. Government and agencies obligations State and municipal obligations Corporate debt securities Foreign government bonds and obligations Mortgage-backed securities Equity securities Other Total $ 45 4,282 10,854 972 7,914 481...

  • Page 40
    ...(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 (millions, net of tax) of $400 million for each of eight years ending...

  • Page 41
    ... $ 20,109 Note: American Express Financial Advisors (AEFA) mortgage loans of $3.8 billion in 1998 and 1997 are included in Investment Mortgage Loans and are shown in Note 2. The following table presents changes in Reserves for Credit Losses related to loans: (millions) 1998 1997 Balance, January...

  • Page 42
    ... to pay a ï¬,oating 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...

  • Page 43
    ... in the Consolidated Statements of Income. N OT E 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...

  • Page 44
    ... 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...

  • Page 45
    ...to trading in foreign currency forward and spot contracts and are included in Other Commissions and Fees. I N T E R E S T R AT E P RO D U C T S The Company uses interest rate products, principally swaps, primarily to manage funding costs related to Travel 43 Related Services' (TRS) Charge Card and...

  • Page 46
    ...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 shortand long-term...

  • Page 47
    ... 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...

  • Page 48
    ... 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 ï¬,ow based on the Company's current borrowing rates for...

  • Page 49
    common stock on the date of grant and a maximum term of 10 years. Options generally vest at 331/3 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...

  • Page 50
    ... 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...

  • Page 51
    ... of change in fair value of plan assets (millions) 1998 1997 Fair value of plan assets at October 1, Actual return on plan assets Employer contributions Benefits paid Settlements/Curtailments Foreign currency exchange rate changes Fair value of plan assets at September 30, $ 1,279 2 47...

  • Page 52
    ... remaining service period of active participants. The weighted average assumptions used in the Company's defined benefit plans were: 1998 1997 Discount rates Rates of increase in compensation levels Expected long-term rates of return on assets 6.6% 4.1% 9.3% 7.3% 4.6% 9.1% The Company also...

  • Page 53
    ...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...

  • Page 54
    ... 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: 1998 1997 1996 Numerator: Net income Less: Preferred dividends Numerator...

  • Page 55
    ... 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...

  • Page 56
    ...) 1996 Travel Related Services American Express Financial Advisors American Express Bank/ Travelers Cheque Corporate and Other Adjustments and Eliminations Consolidated Revenues Interest and dividends, net Cardmember lending net finance charge revenue Interest expense Pretax income Income tax...

  • Page 57
    ... 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...

  • Page 58
    ... 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 ï¬,ows for each of the three years in the period ended December 31, 1998. These financial statements are the...

  • Page 59
    ...-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...

  • Page 60
    ...or business spending on its credit and charge cards, gain market share and develop new or enhanced products that capture a greater share of customers' total spending on American Express Cards and other cards issued on its network, and enhance significantly its international operations, (vi) retain...

  • Page 61
    ...Officer American Express Bank; Head Travelers Cheque Group President and Chief Executive Officer American Express Financial Advisors President TRS International C O R P O R AT E E X E C U T I V E S URSULA F. FAIRBAIRN ALLAN Z. LOREN THOMAS SCHICK Executive Vice President Human Resources and...

  • Page 62
    ...Operating Officer American Express Company F. ROS S JO HNS O N Lincoln Center for the Performing Arts Chairman, Chief Executive Officer and President Lucent Technologies, Inc. FRANK P. POPOFF Chairman and Chief Executive Officer RJM Group Chairman of the Board The Dow Chemical Company ADVISORS...

  • Page 63
    ... checking account or financial institution on the payment date. Shareholders interested in enrolling in this service should call ChaseMellon at 1-800-463-5911. STOCK PURCHASE PLAN Sunburst DesignSM AMERICAN EXPRESS Card Design® AMERICAN EXPRESS CORPORATE Card Design® AMERICAN EXPRESS Travelers...