American Express 2005 Annual Report Download - page 26

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FINANCIAL REVIEW
The financial section of American Express Company’s
(the Company) Annual Report consists of this Financial
Review, the Consolidated Financial Statements and the
related notes that follow. The following discussion is
designed to provide perspective and understanding to
the Company’s consolidated financial condition and
results of operations. Certain key terms are defined in
the Glossary of Selected Terminology at the end of
this discussion.
Executive Overview
American Express Company is a leading global pay-
ments, network and travel company. The Company
offers a broad range of products including charge and
credit cards; stored value products such as Travelers
Cheques and gift cards; travel agency services and travel,
entertainment and purchasing expense management
services; network services and merchant acquisition and
merchant processing for our network partners and pro-
prietary payments businesses; and international bank-
ing products. The Company’s various products are sold
globally to diverse customer groups, including consum-
ers, small businesses, mid-market companies, large cor-
porations and banking institutions. These products are
sold through various channels including direct mail,
on-line applications, targeted sales-forces and direct
response advertising.
The Company generates revenue from a variety of
sources including global payments, such as charge and
credit cards, travel services and stored value products,
including Travelers Cheques. Charge and credit cards
generate revenue for the Company primarily in four dif-
ferent ways:
®Discount revenue, the Company’s largest single
revenue source, which represents fees charged to mer-
chants when cardmembers use their cards to purchase
goods and services on our network,
®Finance charge revenue, which is earned on
outstanding balances related to the cardmember lend-
ing portfolio,
®Card fees, which are earned for annual membership,
and other commissions and fees such as foreign
exchange conversion fees and card-related fees and
assessments, and
®Securitization income, net which reflects the earn-
ings related to cardmember loans financed through
securitization activities. Refer to the Glossary for fur-
ther information.
In addition to funding and operating costs associated
with these activities, other major expense categories are
expenses related to marketing and reward programs that
add new cardmembers and promote cardmember loy-
alty and spending, and provisions for anticipated card-
member credit and fraud losses.
The Company believes that its “spend-centric” business
model (in which it focuses primarily on generating rev-
enues by driving spending on its cards and secondarily
by finance charges and fees) has significant competitive
advantages. For merchants, the higher spending
represents greater value to them in the form of loyal cus-
tomers and higher sales, which gives the Company the
ability to earn a premium discount rate and invest in
greater value-added services for merchants. As a result
of the higher revenues generated from higher spending,
the Company has the flexibility to offer more attractive
rewards and other incentives to cardmembers, which in
turn create an incentive to spend more on their cards.
Discontinued Operations
On September 30, 2005, the Company completed the
spin-off of Ameriprise Financial, Inc. (Ameriprise),
formerly known as American Express Financial
Corporation, the Company’s financial planning and
financial services business, with the distribution of
Ameriprise common stock to the Company’s sharehold-
ers in a tax-free transaction for U.S. federal income tax
purposes. The net assets distributed to shareholders
have been treated as a dividend and charged to retained
earnings. In addition, during the third quarter of 2005,
the Company completed certain dispositions including
the sale of American Express Tax and Business Services,
Inc. (TBS), its tax, accounting and consulting business.
The operating results and assets and liabilities related to
Ameriprise and certain dispositions (including TBS)
prior to disposal have been reflected as discontinued
operations in the Consolidated Financial Statements.
Financial Review
AXP / AR.2005
[24 ]