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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to ________
Commission File No. 1-7657
American Express Company
(Exact name of registrant as specified in its charter)
New York 13-4922250
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
World Financial Center
200 Vesey Street
New York, New York 10285
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 640-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
___________________ ___________________
Common Shares (par value $.60 per Share) New York Stock Exchange
Boston Stock Exchange
Chicago Stock Exchange
Pacific Exchange
7.00% Cumulative Quarterly Income New York Stock Exchange
Preferred Securities, Series I of American
Express Company Capital Trust I (and the
guarantee of American Express Company
with respect thereto)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
___ ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _
Common shares of the registrant outstanding at March 4, 1999 were 450,
324,448. The aggregate market value, as of March 4, 1999, of voting shares held
by non-affiliates of the registrant was approximately $50.1 billion.
Documents Incorporated By Reference
___________________________________
Parts I, II and IV: Portions of Registrant's 1998 Annual Report to Shareholders.
Part III: Portions of Registrant's Proxy Statement dated March 11, 1999.
TABLE OF CONTENTS
Form 10-K
Item Number
Part I Page
------ ----
1. Business
Travel Related Services . . . . . . . . . . . . . . . . . . . . . 1
American Express Financial Advisors . . . . . . . . . . . . . . . 12
American Express Bank/Travelers Cheque . . . . . . . . . . . . . 20
Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . 31
Foreign Operations . . . . . . . . . . . . . . . . . . . . . . . . 31
Important Factors Regarding Forward-Looking Statements . . . . 32
Segment Information and Classes of Similar Services . . . . . . 35
Executive Officers of the Company . . . . . . . . . . . . . . . 35
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 39
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 40
Part II
-------
5. Market for Company's Common Equity and Related Stockholder Matters . 40
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . 40
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . 40
7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . 40
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . 41
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 41
Part III
--------
10. Directors and Executive Officers of the Company . . . . . . . . . . . .41
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . .41
12. Security Ownership of Certain Beneficial Owners and Management . . . . .41
13. Certain Relationships and Related Transactions . . . . . . . . . . . .41
Part IV
-------
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . .41
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Index to Financial Statements . . . . . . . . . . . . . . . . . . . F-1
Consent of Independent Auditors . . . . . . . . . . . . . . . . . . . F-2
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
PART I
------
ITEM 1. BUSINESS
American Express Company (including its subsidiaries, unless the
context indicates otherwise, the "Company") was founded in 1850 as a joint stock
association and was incorporated under the laws of the State of New York in
1965. The Company is primarily engaged in the business of providing travel
related services, financial advisory services and international banking services
throughout the world.*
TRAVEL RELATED SERVICES
-----------------------
American Express Travel Related Services Company, Inc. (including its
subsidiaries, unless the context indicates otherwise, "TRS") provides a variety
of products and services, including, among others, global network services, the
American Express(R) Card, the Optima(R) Card and other consumer and corporate
lending products, stored value products, business expense management products
and services, corporate and consumer travel products and services, tax
preparation and business planning services, magazine publishing, and merchant
transaction processing, point of sale and back office products and services. TRS
offers products and services in approximately 160 countries. In certain
countries, partly owned affiliates and unaffiliated entities offer some of these
products and services under licenses from TRS.
TRS' business as a whole has not experienced significant seasonal
fluctuation, although Card billed business tends to be moderately higher in the
fourth quarter than in other quarters.
TRS places significant importance on its trademarks and service marks
and diligently protects its intellectual property rights around the world.
GLOBAL NETWORK SERVICES
-----------------------
TRS operates a global general purpose credit and charge card network
which performs functions essential to the acceptance by merchants of cards
issued by network issuers. These functions include, for example, brand
advertising, new product development and telecommunications and other
technologies, including systems to authorize and settle card transactions. Cards
bearing the American Express logo ("Cards") are issued by qualified institutions
and are accepted at all merchant locations worldwide that accept the American
Express Card.
__________________
*Various forward-looking statements are made in this 10-K Annual Report, which
generally include the words "believe," "expect," "anticipate," "optimistic,"
"intend," "aim," "will," and similar expressions. Certain factors that may cause
actual results to differ materially from these forward-looking statements,
including the Company's goals referred to herein, are discussed on pages 32-34.
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TRS is the largest issuer of Cards on the American Express global
network; however, there are currently 43 arrangements in place with banks and
other qualified institutions around the world providing for Card issuance by
those entities. Some of these arrangements have been in place for more than 20
years; the vast majority have been established since 1995. In May 1996, the
Company invited banks and other qualified institutions in the United States to
begin issuing Cards on the American Express network. In 1997, the Company
established a separate internal organization, Global Network Services, to manage
its network business, bringing increased focus and resources to this area.
During 1998, TRS established 16 new network arrangements outside the United
States, adding to the 27 network arrangements already in place (see TRS
International below). In addition, Global Network Services showed strong volume
growth in 1998 with a 30% increase in billed business.
To date, the only U.S. issuers on the American Express network are TRS
and National Westminster Bank, Plc (a United Kingdom financial institution with
no other card issuing activities in the United States). This is the result of
rules and policies of VISA USA, Inc. and MasterCard International, Incorporated
("MasterCard") in the United States calling for expulsion of members who issue
American Express-branded cards. No banks have been willing to forfeit membership
in VISA USA, Inc. and/or MasterCard to issue cards on the American Express
network. In a lawsuit filed on October 7, 1998 against VISA USA, Inc. and VISA
International Corp. (collectively, "VISA") and MasterCard, the U.S. Department
of Justice alleged that these rules and policies violate the U.S. antitrust
laws.
As a network, TRS encounters intense worldwide competition from card
systems like VISA, MasterCard, Diners Club, the Discover/NOVUS Network of Morgan
Stanley Dean Witter & Co. (U.S. only) and JCB. The principal competitive factors
that affect the network business are (i) the number of cards in force and extent
of spending done with these cards; (ii) the quantity and quality of
establishments that will accept the cards; (iii) the success of targeted
marketing and promotional campaigns; (iv) reputation and brand recognition; (v)
the ability to develop and implement innovative systems and technologies; and
(vi) the ability to develop and implement innovative types of card products and
merchant support services.
CONSUMER CARD SERVICES
----------------------
TRS and its licensees offer individual consumers charge cards such as
the American Express(R) Card, the American Express(R) Gold Card and the Platinum
Card(R), revolving credit cards such as the Optima(R) Card and the American
Express(R) Credit Card, among others, and a variety of cards sponsored by and
co-branded with other corporations and institutions. Cards are currently issued
in 45 currencies (including cards issued by banks and other qualified
institutions) and permit Cardmembers to charge purchases of goods or services in
the United States and in most countries around the world at establishments that
have agreed to accept them, and to access cash through automated teller machines
at approximately 227,000 locations worldwide.
Charge Cards, which are marketed in the United States and many other
countries and carry no pre-set spending limit, are primarily designed as a
method of payment and not as a
2
means of financing purchases of goods or services. Charges are approved based on
a variety of factors including a Cardmember's account history, credit record and
personal resources. Except in the case of extended payment plans (such as Sign &
Travel(R) and the Special Purchase Account(SM), Charge Cards require payment by
the Cardmember of the full amount billed each month, and no finance charges are
assessed. Charge Card accounts that are past due are subject, in most cases, to
a delinquency assessment and, if not brought to current status, subject to
cancellation.
The Optima Card comprises a family of revolving credit cards marketed
in the United States and other countries. TRS makes available to customers a
variety of Optima Cards with different payment terms, grace periods and rate
structures. TRS and its licensees also issue revolving credit cards which do not
carry the Optima brand, primarily outside the United States. TRS intends to
issue more of these non-Optima revolving credit products in the U.S., which will
carry the American Express brand.
American Express Centurion Bank ("Centurion Bank"), a wholly-owned
subsidiary of TRS, issues the Optima Card in the United States and owns most of
the receivables arising from the use of these Cards. In addition, Centurion Bank
has outstanding lines of credit in association with certain Charge Cards and
offers unsecured loans to Cardmembers in connection with their Sign & Travel
Account and Special Purchase Account. The Sign & Travel program gives qualified
United States Cardmembers the option of extended payments for airline, cruise
and certain travel charges that are purchased with the Charge Card. The Special
Purchase Account offers qualified United States Cardmembers the option of
extending payment for certain charges on the Charge Card in excess of a
specified amount. In several markets outside the United States, other
subsidiaries of TRS engage in consumer lending activities, subject to local
regulations.
Centurion Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to $100,000 per depositor. Centurion Bank is a
Utah-chartered industrial loan company regulated, supervised and regularly
examined by the Utah Department of Financial Institutions and the FDIC.
TRS Cardmembers generally are charged an annual fee, which varies based
on the type of card, the number of cards for each account, the currency in which
the card is denominated and the country of residence of the Cardmember. Many
Optima Cards are offered with no annual fee. Each Cardmember must meet standards
and criteria for creditworthiness which are applied through a variety of means
both at the time of initial solicitation or application and on an ongoing basis
during the Card relationship. The Company uses sophisticated credit models and
techniques in its risk management operations.
Cardmembers have access to a variety of special services and programs,
depending on the type of Card they have, including: Membership Rewards(R),
Global Assist(R) Hotline, Buyer's Assurance Plan, Car Rental Loss and Damage
Insurance Plan, Travel Accident Insurance, Purchase Protection Plan, and Return
Protection. Gold Card Cardmembers in the
3
United States have access to certain additional services, including a Year End
Summary of Charges Report. The Platinum Card, offered to certain Cardmembers in
the United States and certain other countries, provides access to additional and
enhanced travel, financial, insurance, personal assistance and other services.
Under the Express Cash program, enrolled Cardmembers can obtain cash or American
Express(R) Travelers Cheques 24 hours a day from automated teller machines
worldwide. Personal, Gold and Platinum Cardmembers receive the Customer
Relationship Statement, which is used to communicate special offers for products
and services of both merchants and the Company.
American Express Credit Corporation, a wholly-owned subsidiary of TRS,
along with its subsidiaries ("Credco"), purchase most Charge Card receivables
arising from the use of cards issued in the United States and in designated
currencies outside the United States. Credco finances the purchase of
receivables principally through the issuance of commercial paper and the sale of
medium- and long-term notes. Centurion Bank finances its revolving credit
receivables through the sale of short- and medium-term notes and certificates.
TRS and Centurion Bank also fund receivables through asset securitization
programs. The cost of funding Cardmember receivables is a major expense of Card
operations.
The Charge Card and consumer lending businesses are subject to
extensive regulation in the United States under a number of federal laws and
regulations, including the Equal Credit Opportunity Act, which generally
prohibits discrimination in the granting and handling of credit; the Fair Credit
Reporting Act, which, among other things, regulates use by creditors of consumer
credit reports and credit prescreening practices and requires certain
disclosures when an application for credit is rejected; the Truth in Lending
Act, which, among other things, requires extensive disclosure of the terms upon
which credit is granted; the Fair Credit Billing Act, which, among other things,
regulates the manner in which billing inquiries are handled and specifies
certain billing requirements; and the Fair Credit and Charge Card Disclosure
Act, which mandates certain disclosures on credit and charge card applications.
Federal legislation also regulates abusive debt collection practices. In
addition, a number of states and foreign countries have similar consumer credit
protection and disclosure laws. The application of federal and state bankruptcy
and debtor relief laws affect the Company to the extent such laws result in
amounts owed being classified as delinquent and/or charged off as uncollectible.
The laws and regulations discussed above have not had, and are not expected to
have, a material adverse effect on the Charge Card and consumer lending
businesses either in the United States or on a worldwide basis. Centurion Bank
is subject to a variety of state and federal laws and regulations applicable to
FDIC-insured, state-chartered financial institutions. Changes in such laws and
regulations or judicial interpretation thereof could impact the manner in which
Centurion Bank conducts its business.
In 1998, TRS continued to focus on deepening its relationships with
core Cardmembers and gaining a greater share of the plastic spending of its
customers. It introduced existing Cardmembers to other card products, including
upgrades to Gold and Platinum Cards, increased usage of lending products such as
Sign & Travel and the Special Purchase Account, and provided incentives to
increase everyday spending by Cardmembers in categories such as
4
gasoline and groceries. TRS also selectively expanded the size of credit lines
and encouraged Cardmembers to transfer outstanding balances from other card
issuers. As a result, TRS significantly increased lending balances and continued
to capture a greater share of the credit card lending market. In 1998, TRS also
launched several new card products. It introduced a card which offers special
services and discounts to National Restaurant Association members, and began
issuing the American Express(R) Cash Rebate Card, which gives Cardmembers up to
two percent cash back on their purchases. TRS also had strong growth in Platinum
Cards. TRS is continuing to make a significant investment in its card processing
system and infrastructure to allow faster introduction and greater customization
of products.
Over the past few years, TRS has expanded its Membership Rewards
program (formerly the Membership Miles(R) travel rewards program) to include a
broader range of travel rewards and retail merchandise and gourmet gifts.
Membership Rewards is an important part of TRS' strategy to increase Cardmember
spending and loyalty. Membership Rewards is one of the industry's most popular
rewards programs with over seven-and-one-half million enrollees worldwide.
Enrollees now represent a significant portion of Cardmember spending. TRS makes
payments to merchants pursuant to contractual arrangements when Cardmembers
redeem their Membership Rewards points and establishes reserves in connection
with estimated future redemptions. Due to higher charge volumes and reward
redemption rates, the cost of Membership Rewards has increased over the past
several years and continues to grow. In 1997 and 1998, TRS took certain steps to
contain the overall costs of the program, and plans to continue to consider and,
as appropriate, introduce changes to the program to both maintain its value to
Cardmembers and operate it more efficiently.
TRS encounters substantial and increasingly intense competition
worldwide with respect to the Card issuing business. As a Card issuer, TRS is
faced with competition from other financial institutions (such as Citigroup,
First USA/Bank One, MBNA, Chase Manhattan, Bank of America and Barclays Bank)
that are members of VISA and/or MasterCard and that issue general purpose cards,
primarily under revolving credit plans, on one or both of those systems, and
from Morgan Stanley Dean Witter & Co., the issuer of the Discover(R) Card. TRS
also encounters some very limited competition from businesses that issue their
own cards or otherwise extend credit to their customers, such as retailers and
airline associations, although these cards are not generally substitutes for
TRS' Cards due to their limited acceptance.
Numerous United States banks issuing credit cards under revolving
credit plans charge annual fees in addition to interest charges where permitted
by state law. However, the issuer of the Discover Card on the Discover/NOVUS
Network, as well as many issuers of VISA cards and MasterCard cards, generally
charge no annual fees.
Competing card issuers offer a variety of products and services to
attract cardholders including premium cards with enhanced services or lines of
credit, airline frequent flyer program mileage credits and other reward or
rebate programs, "teaser" promotional rates for both card acquisition and
balance transfers, and co-branded arrangements with partners that
5
offer benefits to cardholders. Recently mergers and consolidations among banking
and financial services companies and credit card portfolio acquisitions by major
issuers have resulted in some issuers becoming larger, with greater resources,
economies of scale and potential brand recognition to compete, and a smaller
number of dominant issuers has emerged. There has also been an increased use of
debit cards for point of sale purchases as many banks have replaced ATM cards
with general purpose debit cards bearing either the VISA or MasterCard logo.
The principal competitive factors that affect the Card issuing business
are (i) the quality of the services and products, including rewards programs,
provided to Cardmembers; (ii) the number, spending characteristics and credit
performance of Cardmembers; (iii) the quantity and quality of the establishments
that will accept a card; (iv) the cost of cards to Cardmembers; (v) the terms of
payment available to Cardmembers; (vi) the number and quality of other payment
instruments available to Cardmembers; (vii) the nature and quality of expense
management data capture and reporting capability; (viii) the success of targeted
marketing and promotional campaigns; (ix) reputation and brand recognition; and
(x) the ability of issuers to implement operational and cost efficiencies.
MERCHANT SERVICES
-----------------
Over the past several years, TRS' Establishment Services Group has
focused on expanding the TRS network of merchants and increasing merchant
acceptance, both through internal personnel and third party sales agents. In
1998, TRS increased its merchant coverage in various industries, including
supermarkets, retailers, furniture stores, government agencies and charitable
organizations. The total number of new merchants signed in the U.S. in 1998
increased 16 percent from the prior year. The merchant network in the United
States can now accommodate over 94 percent of American Express Cardmembers'
general purpose plastic spending, up slightly from last year. TRS' objective is
to achieve merchant coverage that is at parity with bankcard networks. In the
United States, TRS acquires merchants through three sales channels: a
proprietary sales force, third party sales agents and telemarketing.
As a merchant processor, TRS accepts and processes from each
participating establishment the charges arising from Cardmember purchases at a
discount that varies with the type of participating establishment, the charge
volume, the timing and method of payment to the establishment, the method of
submission of charges and, in certain instances, the average charge amount and
the amount of information provided. As a result of TRS' attractive Cardmember
base with loyal, high-spending Personal and Corporate cardmembers, TRS is
generally able to charge higher discount rates to participating establishments
than its competitors. While many establishments understand this pricing in
relation to the value provided, TRS has encountered complaints from some
establishments, as well as suppression of the Card's use, and continues to
devote significant resources to respond to these issues.
TRS focuses on understanding and addressing key factors that influence
merchant satisfaction, on executing programs that increase card usage at
merchants and on strengthening its relationships with merchants through an
expanded roster of services that help them meet
6
their business goals. These include software and internet based services that
assist with back office reconciliation and that help to secure online
transactions. In 1998, TRS expanded its ATM business in the United States with
the acquisition of nearly 3,000 terminals, making TRS the ninth largest operator
of ATMs in the U.S. TRS plans to use these ATMs to deliver a range of services
to Cardmembers and to help build retail sales for merchants.
On a global basis, the American Express network manages the acquiring
relationship with merchants, as well as the issuing side of the business. This
"closed loop", which distinguishes the American Express network from the
bankcard networks, provides a rich source of information at both ends of the
Card transaction and enables TRS to provide targeted marketing opportunities for
merchants and special offers to Cardmembers. In 1998, TRS expanded the
CustomExtras program, which is used to make special offers of merchant products
and services to Cardmembers in their billing statements, and enables merchants
to tailor offers to their best customers.
CORPORATE SERVICES, SMALL BUSINESS SERVICES AND TRAVEL
------------------------------------------------------
TRS, through its Corporate Services Group and Small Business Services
Group, is the leading provider to large and small businesses of expense
management systems and travel services.
The Corporate Services Group ("CSG") provides Corporate Charge Card
expense management services to large and mid-sized companies for travel and
entertainment spending. Companies are offered these services through the
American Express Corporate Card, which is a charge card issued to individuals
through a corporate account established by their employer for business purposes.
CSG integrates the Corporate Card and business travel services in the
United States and certain foreign countries to meet the competition for the
business traveler and to provide client companies with a customized approach to
managing their travel and entertainment budgets. Clients are provided an
information package to plan, account for and control travel and entertainment
expenses.
The Corporate Services business continued to grow in 1998. However, the
economic slowdown outside the U.S. dampened corporate spending and travel. In
addition, the ongoing trend of commission rate reductions from airlines resulted
in decreased business travel revenue and price increases for travelers and
corporations. Competitors also continue to increase their focus on the Corporate
Card business. For a discussion of competition relating to the Card issuing
business, see pages 5 and 6.
In 1998, TRS decided not to pursue further bidding on the United States
Government Card contract after reevaluating the earnings potential of this
business. As a result, in November 1998, TRS' Card contract with the U.S.
government terminated. The Government account represented approximately 1.6
million Cards outstanding and approximately $3.5 billion in annual billed
business.
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In 1998, CSG continued to develop electronic solutions to assist
companies in managing costs by leveraging technologies. TRS enhanced American
Express Interactive, or AXI(R), an interactive business travel product jointly
developed with Microsoft Corporation, which now has nearly 250,000 registered
users. TRS also launched, along with Concur Technologies, a service that allows
customers to file an expense report online by combining Corporate Card charges
with travel information, thereby permitting business travelers to obtain
reimbursement more quickly.
TRS also offers products to enhance client company management of
non-travel and entertainment business expenses through the Corporate Purchasing
Card. This product assists large companies in managing indirect spending
including traditional purchasing administration expenses. Employees can use the
Purchasing Card to order directly from manufacturers and suppliers, rather than
using the traditional system of requisitions, purchase orders and invoices and
retail store purchasing. TRS pays the suppliers and submits a single monthly
billing statement to the company.
TRS, through its Small Business Services Group, is also a leading
provider of financial and travel services to small businesses (i.e., less than
100 employees and/or sales of $10 million or less). TRS continued to achieve
substantial growth in the Small Business Services Group in 1998. TRS serves the
needs of small businesses with a portfolio of charge and credit card products.
In addition, TRS offers its customers a Privileged Rates program which includes
specifically negotiated rates on services such as car rental, gasoline, hotel
and office services. TRS also maintains a website, the American Express Small
Business Exchange, through which it provides small business owners with relevant
information, expert advice and customer servicing applications.
A key strategy for TRS is the creation of products to meet better the
credit needs of small business owners. Equipment financing is a key lending
category for small business owners. In 1998, TRS expanded this business by
acquiring 100% ownership of the equipment financing company, CapitaFinance, in
which TRS previously had a 50% interest. In February 1999, TRS also purchased
Rockford Industries, a firm that provides point-of-purchase equipment financing.
In 1998, TRS also introduced an International Payments site on the
internet, which provides a convenient and cost-effective way for small
businesses in the U.S. to pay international vendors in more than 40 foreign
currencies, 24 hours a day, seven days a week. TRS also entered into a marketing
arrangement with, and purchased a minority investment in, Administaff Inc.,
which offers American Express' small business clients human resource services on
an outsourced basis.
American Express Tax and Business Services ("TBS") is a part of the
Small Business Services Group. TBS provides a wide range of services including
tax preparation and compliance; preparation of non-attest financial statements;
business continuation and transition
8
planning; business valuation; loan consultation and preparation; business plan
development; money management assistance; bookkeeping and payroll consultation
services; cash flow planning; and other business consulting services. TBS has
offices in approximately 60 locations in 18 states, and continued to acquire
accounting firms in 1998.
TRS provides a wide variety of travel services to customers traveling
for business and personal purposes and is the leading business travel provider
worldwide. Travel services include trip planning, reservations, ticketing and
other incidental services. In addition, for business travel accounts, TRS
provides corporate travel policy consultation and management information systems
as well as group and incentive travel services. TRS receives commissions and
fees for travel bookings and arrangements from airlines, hotels, car rental
companies and other travel suppliers, service fees for certain transactions such
as re-ticketing, courier services and complex itineraries and management and
transaction fees from certain business travel accounts. In 1998, TRS continued
its strategy of bolstering its travel industry presence to improve its ability
to negotiate with key suppliers and reduce profit margin pressure. During the
year it acquired Travel One, the ninth largest travel agency in the U.S., with a
large number of middle-sized business travel clients. In 1998, TRS also further
strengthened its roster of Business Travel clients and also focused on deepening
its partnerships with major airlines and hotel companies through, among other
initiatives, the launching of co-branded cards and programs offering special
amenities to travelers.
TRS' retail travel network of more than 1,700 owned and representative
offices is important in supporting the American Express brand and providing
customer service throughout the world. TRS continually evaluates this structure
to determine the best way to leverage the strength of the travel network. At the
same time, TRS is developing ways to better serve the travel consumer, including
1-800-type services, and internet-based products and services. During 1998, TRS
acquired Travel Impressions, a developer and marketer of vacation packages, and
Empress Travel, a retail travel agency franchiser. In March 1999, TRS acquired
Golden Bear Travel Agency, a travel agency specializing in cruises.
TRS faces vigorous competition from more than 30,000 travel agents as
well as direct sales by airlines and travel suppliers in the United States and
abroad. This competition is mainly based on price, service, convenience and
proximity to the customer and has increased due to several factors in recent
years, including the acquisition of independent agencies by larger travel
companies. Travel agency groups and consortia also have increased in size,
enabling participating independent agencies to be more competitive in providing
travel services to regional and national business travel clients and in other
activities. In addition, many companies have established in-house business
travel departments.
Airlines have continued efforts to reduce their distribution expenses,
including travel agency commissions, through techniques such as caps on
commission fees and decreases in base commission rates. This has caused some
independent agencies to go out of business. In response, TRS has accelerated its
efforts to rely less on commissions by establishing more service fee-based
client relationships. Consolidation of travel agencies is likely to continue as
agencies seek to better serve national and multinational business travel clients
and negotiate
9
more effectively with the airlines with respect to computer reservation systems
and compensation and pricing arrangements. It is also expected that travel
agencies will continue to look for expense reduction opportunities. Customers
may increasingly seek alternative channels to make travel arrangements, such as
on-line vendors or "ticketless" airline services that require booking directly
with the airlines.
TRS INTERNATIONAL
-----------------
The TRS International group is focusing on expanding its proprietary
card business and network alliances in key markets, expanding the network of
merchants that accept American Express Cards, leveraging opportunities for
growth in Corporate Card, Corporate Travel and in other areas of Corporate
Services and re-engineering its business to improve key processes and reduce
costs.
In 1998, TRS continued to bolster its proprietary business through the
launch of more than 30 new proprietary and co-branded charge and revolving
credit cards in a number of markets outside the United States. These included a
Small Business Card in the U.K.; Blue Cards, which are revolving credit cards
targeted to young consumers, in the U.K., Germany, Canada and Singapore;
Platinum Cards in Argentina, Taiwan, Malaysia, Brazil and Singapore; co-branded
cards with Aeromexico in Mexico, Thai Airways and the Dusit Group in Thailand
and Air France, Accor and Credit Lyonnais in France; and a co-branded Travel
Rewards Card in Thailand.
TRS International also continued to pursue alliances through joint
ventures or with qualified institutions that issue cards with an American
Express logo. These cards are accepted worldwide on the American Express
merchant network. In 1998, TRS established 16 new network arrangements,
launching cards with Banco Popular in Puerto Rico, AMP Banking in Australia and
Komercni Banka in the Czech Republic, among others. TRS also formed joint
ventures with Generale Bank in Belgium/Luxembourg and Credit Suisse in
Switzerland. As of December 31, 1998, TRS had established 43 network
arrangements in over 53 countries. TRS expects to continue establishing similar
types of arrangements outside the United States while at the same time deepening
its relationships with existing partners.
TRS International also strengthened its corporate travel business in
1998. It increased its ownership in Havas Voyages SA, the largest travel agency
in France, from a minority to a wholly-owned interest, and established a joint
venture with BBL Travel in Belgium and Luxembourg. These acquisitions bolster
TRS' position in the global travel business, provide a platform for Corporate
Card sales and further increase the importance of TRS' customer base with key
travel suppliers. This is important in the current travel agency business, both
internationally and domestically, with ongoing pressure to reduce commissions by
major airlines and other suppliers.
Significant re-engineering initiatives by TRS International during 1998
include a franchise agreement in Germany whereby Otto Reiseburo GmbH, a member
of the Otto Versand Group, will operate 25 American Express retail travel
offices and co-brand a number
10
of their own offices, thereby expanding the American Express travel office
network in Germany on a cost-effective basis. TRS also launched a campaign
similar to the successful program it used in the U.S. in order to address
suppression issues in key international markets.
In 1998, spending billed on TRS' International Cards and corporate and
personal travel softened in certain markets outside the U.S. due in part to
difficult economic conditions during the year.
TRS International also provides foreign exchange services to consumers
in American Express Travel Offices, dedicated bureaus, airports and other
outlets, and cross-border money transfer services for small business, banking
and travel customers.
OTHER PRODUCTS AND SERVICES
---------------------------
American Express Relationship Services ("AERS") sells products and
services which address some of the information, access, security, financial and
telecommunications needs of American Express customers. Services offered for a
fee to Cardmembers include travel, health and credit insurance products, credit
card registry, credit bureau monitoring and telecommunication services. In 1998,
AERS launched three fee-for-service programs, including Charge Card credit
protection, discounts on home repair and improvement services, and extended
warranties for major home systems and appliances. AERS also offers merchandise
directly to Cardmembers, who may elect to pay in installments with no finance
charges and also markets educational loans to students and parents.
AERS is also developing new stored value products. In 1998, AERS
introduced the Electronic Gift Card, a magnetic stripe stored value card that
replaces retail gift certificates.
AERS is also responsible for three enterprise-wide utilities, including
interactive, smart cards and customer information management. The group is
seeking to develop the Company's enterprise-wide interactive strategy with a
focus on providing internet and interactive capabilities to meet customers'
needs. This is expected to be an increasingly important part of the Company's
business in the future. Over the last several years, TRS has made a number of
minority investments in internet firms, which typically also include a marketing
arrangement with such companies. In 1998, AERS invested in Ticketmaster
Online-CitySearch, Inc., which supplies online information guides and event
ticketing for consumers and merchants; Concur Technologies, which provides
employee desktop solutions including travel and expense management; SaveSmart,
which offers personalized online offers from participating merchants; and
@Back-up, which offers computer back-up service over the internet.
AERS is also developing global strategies for smart cards and customer
information management. Smart cards are cards with computer chips that can store
and process data without the need for a direct telecommunications link with the
card issuer. During the year TRS invested in Proton World International, a
leading developer and licensor of smart card electronic purse technology, and
became a licensee of the Multos(TM) smart card operating
11
system. AERS will continue to focus on the fast-changing electronic commerce,
smart card and information management arenas and seek to craft solid strategies
for the Company.
Currently through the Company's website, consumer and small business
Cardmembers can access account information, pay their American Express Card
bills and apply for certain Card products. Cardmembers may also utilize the
Quicken(R) software offered by Intuit(R), Inc. and Microsoft(R) Money software
offered by Microsoft Corporation, to view their American Express Card account
information. Through the Company's website customers can also invest in
securities, check their 401(k) account, book travel reservations, apply for an
educational loan, plus many other services; merchants also can apply to accept
the card and reconcile their accounts. The Company anticipates further
developments in this area in 1999.
TRS also publishes lifestyle magazines such as Travel & Leisure(R),
Travel & Leisure(R) Golf, Food & Wine(R), travel resources such as
SkyGuide(R), Departures(TM), and business resources such as the American Express
Appointment Book and Your Company(R) magazine.
AMERICAN EXPRESS FINANCIAL ADVISORS
-----------------------------------
American Express Financial Corporation ("AEFC") provides a variety of
financial products and services to help individuals, businesses and institutions
establish and achieve their financial goals. AEFC's products and services
include financial planning and advice, insurance and annuities, a variety of
investment products, including investment certificates, mutual funds and limited
partnerships, investment advisory services, trust and employee plan
administration services, personal auto and homeowner's insurance and retail
securities brokerage services. At December 31, 1998, American Express Financial
Advisors Inc. ("AXP Advisors"), AEFC's principal marketing subsidiary,
maintained a nationwide financial planning field force of 10,350 persons, which
includes approximately 1,100 advisors from the acquisition of Securities
America, Inc. in 1998.
DISTRIBUTION OF PRODUCTS AND SERVICES
-------------------------------------
AXP Advisors has three primary financial service distribution channels:
retail, consisting of financial advisors and direct access (online, telephone
and fax), institutional and third party.
AXP Advisors' primary distribution channel is its corps of financial
advisors. Through this channel, AXP Advisors offers financial planning and
investment advisory services (for which it charges a fee) to individuals and
business owners which address six basic areas of financial planning: financial
position, protection, investment, income tax, retirement and estate planning, as
well as asset allocation. AXP Advisors' financial advisors provide clients with
recommendations from the more than 100 products distributed by subsidiaries and
affiliates of AEFC as well as products of approved third parties.
12
First-year financial advisors are compensated primarily by salary;
veteran financial advisors receive compensation based largely on sales and
assets maintained from sales. The compensation system is structured to encourage
advisor retention and product persistency, while adding stability to the
financial advisor's income. In attracting and retaining members of the field
force, AXP Advisors competes with financial planning firms, insurance companies,
securities broker-dealers and other financial institutions. During 1998, AXP
Advisors continued a major initiative to improve advisor retention and client
satisfaction. It implemented on a nationwide basis Advisor Link(TM), which is an
integrated desktop financial planning, client management and communication
software package which helps advisors generate more sophisticated, easy-to-read
financial plans more quickly.
The use of a dedicated field force may entail higher initial costs than
other forms of marketing, such as direct-response or independent agency
distribution. However, AXP Advisors believes that its ability to provide
broad-based integrated services on a relationship basis is a competitive
advantage. At the same time, AXP Advisors recognizes that it needs to continue
its efforts to increase the size of its dedicated field force due to its main
competitors' larger sales forces and more developed alternative distribution
channels.
Consistent with the Company's goal of promoting cross-selling across
all of its units, AXP Advisors has increased its sales to customers from other
American Express businesses. In 1998, American Express Cardmembers accounted for
over 30 percent of all new clients of AXP Advisors' financial advisors, and
substantial investment certificate sales were made to American Express Bank Ltd.
foreign customers. Further cross-selling will be sought through AXP Advisors'
recently established office in Japan, which plans to offer financial products
and services to TRS' Cardmembers in Japan (as well as to non-Cardmembers).
To enhance its ability to retain advisors, AXP Advisors is working on
plans to add choices to how advisors fit into the organization, with various
levels of service, compensation and branding. This includes providing options to
the current American Express-branded advisor network, which will differ in the
level of service and payout rate offered. Advisors will be able to choose a
salaried employee advisor network with a high level of service and a lower
payout rate; a branded advisor network in which advisors get a higher payout
rate and can purchase the service they prefer; or an unbranded independent
broker/dealer network with a minimal level of service and higher payout. AXP
Advisors took a step toward implementing this plan when it acquired in March
1998 Securities America, Inc., an independent broker-dealer servicing
approximately 1,100 financial advisors and a distributor of mutual funds,
annuities and insurance products.
During 1998 the American Express Financial Direct unit ("Financial
Direct"), the Company's other financial services retail distribution channel,
was moved into the AXP Advisors' organization to more closely align Financial
Direct with AXP Advisors' product manufacturing capabilities and to provide
Financial Direct's clients with alternative methods to access investment
products, such as meeting with a financial advisor. To date, results for
Financial Direct as a stand alone business have been below the Company's
expectations and below scale. AXP Advisors ultimately plans to combine the
capabilities of the financial
13
advisors and Financial Direct to provide clients multiple ways to interact with
AXP Advisors. The feasibility and impact of this integrated retail business are
being tested in a pilot which began its first phase in the fourth quarter of
1998.
Financial Direct uses direct marketing and on-line services to help
prospects and clients select appropriate products and services. Products
developed by AXP Advisors as well as other businesses of the Company and
selected outside vendors are offered through Financial Direct. These products
are distributed by American Express Service Corporation and other affiliates,
and include payment, credit, insurance and investment products such as no load
mutual funds from 12 leading fund families (including the Strategist Funds from
American Express referred to below); money market funds; certificates of
deposit; annuities; and brokerage services (over the internet or through
telephone or mail). The Financial Direct product line also offers Investment
Rewards, which are points based upon the value of new deposits after opening an
Investment Management Account that may be redeemed for airline travel and other
rewards.
During the year, AXP Advisors expanded its institutional business,
which includes 401(k) services and separate account asset management services
for corporate, public and union retirement funds. It now serves more than 600
institutions.
In addition to the retail and institutional distribution channels, AXP
Advisors has a third-party channel, which distributes financial planning
services and investment, insurance and annuity products through alliances with
financial institutions, such as banks and thrift institutions.
The move to multiple distribution channels has implications for how AXP
Advisors services its clients. In order to provide clients with a more
integrated service, it will be necessary to build the capability to recognize
and service the client's entire relationship with the institution regardless of
which channel or channels they have used. This will require, among other things,
investment in both technology infrastructure and the service organization. In
addition, the distribution of proprietary products outside of the traditional
advisor channel will require, among other things, that the organization modify
its product systems so they can interface according to industry standards with
distributors outside of AXP Advisors.
AXP Advisors does business as a broker-dealer and investment advisor in
all 50 states, the District of Columbia and Puerto Rico. AEFC and AXP Advisors
are registered as broker-dealers and investment advisors regulated by the
Securities and Exchange Commission ("SEC") and are members of the National
Association of Securities Dealers, Inc. ("NASD"). AXP Advisors' financial
advisors must obtain all required state and NASD licenses.
AXP Advisors has experienced, and believes it will continue to
encounter, increased regulatory oversight of the securities and commodities
industries at all levels. Among other powers, the SEC, self-regulatory
organizations and state securities commissions may conduct administrative
proceedings, which may result in censure, fine, the issuance of cease-and-desist
orders or suspension or expulsion of a broker-dealer or an investment advisor
and its officers or employees.
14
Competition in the financial services industry focuses primarily on
cost, investment performance, yield, convenience, service, reliability, safety,
distribution systems, reputation and brand recognition. Competition in this
industry is very intense. AEFC competes with a variety of financial institutions
such as banks, securities brokers, mutual funds and insurance companies. Some of
these institutions are larger and more global than AEFC, and the current trend
towards consolidation and globalization in the financial services industry may
increase the number of these stronger competitors. Many of these financial
institutions also have products and services that increasingly cross over the
traditional lines that previously differentiated one type of institution from
another, thereby heightening competition in many of AEFC's markets. The ability
of certain financial institutions to offer, and the dramatically increased usage
by investors of, on-line investment and information services has also affected
the competitive landscape over the past couple of years. Reflecting the
competitive environment, certain financial institutions have continued to seek
to hire AXP Advisors' financial advisors.
AEFC's business does not as a whole experience significant seasonal
fluctuations.
INSURANCE AND ANNUITIES
-----------------------
AEFC's insurance business is carried on primarily by IDS Life Insurance
Company ("IDS Life"), a stock life insurance company organized under the laws of
the State of Minnesota. IDS Life is a wholly-owned subsidiary of AEFC and serves
all states except New York. IDS Life is the fourteenth largest life insurance
company in the United States, with consolidated assets at December 31, 1998 of
$56.6 billion. IDS Life Insurance Company of New York is a wholly-owned
subsidiary of IDS Life and serves New York State residents. IDS Life also owns
American Enterprise Life Insurance Company ("American Enterprise Life"), which
issues fixed and variable dollar annuity contracts for sale through banks,
thrift institutions and stock brokerages. American Centurion Life Assurance
Company ("American Centurion Life") is an IDS Life subsidiary that offers fixed
and variable annuities to American Express Cardmembers and others in New York,
as well as fixed and variable annuities for sale through banks, thrift
institutions and stock brokerages in New York. IDS Life owns American Partners
Life Insurance Company ("American Partners Life"), which offers fixed and
variable annuity contracts to American Express Cardmembers and others who reside
in states other than New York.
IDS Life's products include whole life, universal life (fixed and
variable), single premium life and term products (including waiver of premium
and accidental death benefits), disability income and long-term care insurance.
IDS Life is one of the nation's largest issuers of single premium and flexible
premium deferred annuities on both a fixed and variable dollar basis. Immediate
annuities are offered as well. IDS Life markets variable annuity contracts
designed for retirement plans.
IDS Life's fixed deferred annuities guarantee a relatively low annual
interest rate during the accumulation period (the time before annuity payments
begin). However, the
15
company has the option of paying a higher rate set at its discretion. In
addition, persons owning one type of annuity may have their interest calculated
based on any upward movement in a broad-based stock market index. IDS Life also
offers a variable annuity, the "Flexible Portfolio Annuity," in which the
purchaser may choose between mutual funds, with portfolios of common stocks,
bonds, managed assets and/or short-term securities, and IDS Life's "general
account" as the underlying investment vehicle. Over the past five years, IDS
Life's variable annuity sales have had an increasing impact on total annuity
sales.
IDS Life, American Enterprise Life and American Partners Life are
subject to comprehensive regulation by the Minnesota Department of Commerce
(Insurance Division), the Indiana Department of Insurance, and the Arizona
Department of Insurance, respectively. American Centurion Life and IDS Life
Insurance Company of New York are regulated by the New York State Department of
Insurance. The laws of the other states in which these companies do business
also regulate such matters as the licensing of sales personnel and, in some
cases, the marketing and contents of insurance policies and annuity contracts.
The purpose of such regulation and supervision is primarily to protect the
interests of policyholders. Regulatory scrutiny of market conduct practices of
insurance companies, including sales, marketing and replacements of fixed and
variable life insurance and annuities, has increased significantly in recent
years and is impacting the manner in which companies approach various
operational issues, including compliance efforts. There has also been an
increase in the number of private lawsuits alleging violations of laws in
connection with insurance and annuity market conduct (see Legal Proceedings on
page 39). Virtually all states mandate participation in insurance guaranty
associations, which assess insurance companies in order to fund claims of
policyholders of insolvent insurance companies. On the federal level, there is
periodic interest in enacting new regulations relating to various aspects of the
insurance industry including taxation of variable annuities and life insurance
policies, accounting procedures, as well as the treatment of persons differently
because of sex, with respect to terms, conditions, rates or benefits of an
insurance contract. New federal regulation in any of these areas could
potentially have an adverse effect upon AEFC's insurance subsidiaries.
As a distributor of variable annuity and life insurance contracts, IDS
Life is registered as a broker-dealer and is a member of the NASD. As investment
manager of various investment companies, IDS Life is registered as an investment
advisor under applicable federal requirements.
IDS Property Casualty Insurance Company ("IDS Property Casualty")
provides personal auto and homeowner's coverage to clients in 35 states and the
District of Columbia. This insurance is also underwritten by AMEX Assurance
Company, a subsidiary of the American Express Company, and reinsured by IDS
Property Casualty. IDS Property Casualty is regulated by the Commissioner of
Insurance for Wisconsin. AMEX Assurance Company, which also provides certain
American Express Card related insurance products, is regulated by the
Commissioner of Insurance for Illinois.
The insurance and annuity business is highly competitive, and IDS
Life's competitors consist of both stock and mutual insurance companies.
Competitive factors applicable to the
16
insurance business include the interest rates credited to its products, the
charges deducted from the cash values of such products, the financial strength
of the organization and the services provided to policyholders.
INVESTMENT CERTIFICATES
-----------------------
IDS Certificate Company ("IDSC"), a wholly-owned subsidiary of AEFC,
issues face-amount investment certificates. IDSC is registered as an investment
company under the Investment Company Act of 1940. IDSC currently offers nine
types of face-amount certificates. Owners of IDSC certificates are entitled to
receive, at maturity, a stated amount of money equal to the aggregate
investments in the certificate plus interest at rates declared from time to time
by IDSC. In addition, persons owning two types of certificates may have their
interest calculated in whole or in part based on any upward movement in a
broad-based stock market index. The certificates issued by IDSC are not insured
by any government agency. AEFC acts as investment manager for IDSC. IDSC's
certificates are sold primarily by AXP Advisors' field force. Certificates are
also marketed by American Express Bank Ltd. to its foreign customers.
IDSC is the largest issuer of face-amount certificates in the United
States. At December 31, 1998, it had approximately $3.8 billion in assets.
IDSC's certificates compete with many other investments offered by banks,
savings and loan associations, credit unions, mutual funds, insurance companies
and similar financial institutions, which may be viewed by potential customers
as offering a comparable or superior combination of safety and return on
investment.
MUTUAL FUNDS
------------
AXP Advisors offers a variety of mutual funds, for which it acts as
principal underwriter (distributor of shares). AEFC acts as investment manager
and performs various administrative services. The "IDS(R) MUTUAL FUND GROUP"
consists of 38 retail mutual funds, with varied investment objectives, and
includes, for example, money market, tax-exempt, bond and stock funds. The IDS
MUTUAL FUND GROUP, with combined net assets at December 31, 1998 of $84.8
billion, was the fourteenth largest mutual fund organization in the United
States and, excluding money market funds, was the eighth largest. The uneven
performance in the global financial markets in 1998 impacted the results of many
of the funds in the IDS MUTUAL FUND GROUP, and investment results for the year
were mixed overall.
For most funds, shares are sold in three classes. Class A shares are
sold at net asset value plus any applicable sales charge. The maximum sales
charge is five percent of the offering price with reduced sales charges for
larger purchases. Class B shares are sold with a rear load. The maximum sales
charge is five percent declining to no charge for shares held over six years.
Class Y shares are sold to institutional clients with no load. Fifteen of the
IDS funds are structured as feeder funds investing in the Preferred Master Trust
Group, a group of fifteen master funds, advised by AEFC. A second family of
fifteen funds, the no-load
17
Strategist Funds, distributed by American Express Service Corporation, also
invests in the Preferred Master Trust Group. This structure provides for
potential development of additional channels of distribution.
In addition to full-commission and discount brokerage firms,
competitors include other financial institutions, such as banks and insurance
companies. Recent growth trends in the market, including the increasing sales of
mutual funds to retail investors, have expanded the number of competitors in the
industry. Some competitors are larger, more diversified and offer a greater
number of products, and may have an advantage in their ability to attract and
retain customers on the basis of one-stop shopping. The competitive factors
affecting the sale of mutual funds include sales charges ("loads") paid,
administrative expenses, services received, investment performance, the variety
of products and services offered and the convenience to the investor. The funds
compete with other investment products, including funds that have no sales
charge (known as "no load" funds), funds distributed through independent
brokerage firms and those distributed by other "exclusive" sales forces.
AXP Advisors, through a subsidiary that has been registered as a
broker/dealer in Japan, plans to begin offering mutual funds to individual
Japanese investors in March 1999.
OTHER PRODUCTS AND SERVICES
---------------------------
American Express Asset Management Group Inc. ("AEAMG"), a subsidiary of
AEFC, is an SEC registered investment advisor that provides investment
management services for pension, profit sharing, employee savings and endowment
funds of large- and medium-sized businesses and other institutions
("institutional clients"). AEAMG through its Portfolio Management Group also
offers discretionary investment management services to wealthy individuals and
small institutions with account sizes between $1 million and $10 million. AEAMG
also owns a majority interest in Kenwood Capital Management LLC, which provides
investment management services to investment companies, corporations, trusts,
estates, charitable organizations and tax qualified pension and profit sharing
plans. It employs an active investment strategy that is based on a disciplined
approach to stock selection and portfolio risk management, and seeks to achieve
consistent excess returns relative to passive index benchmarks for small- and
mid-cap segments of the U.S. Equity Market.
Advisory Capital Strategies Group, Inc., a subsidiary of AEAMG, is
registered with the Commodity Futures Trading Commission as a Commodity Pool
Operator and Commodity Trading Advisor and provides investment management
services to certain private investment vehicles organized offshore. It owns the
majority interest in Advisory Capital Partners LLC ("ACP"), which is registered
with the Commodity Futures Trading Commission as a Commodity Pool Operator. ACP
acts as general partner to two partnerships seeking superior capital
appreciation, which are offered privately to qualified eligible participants and
which employ various investment strategies, including among other things, the
use of leverage, short selling of securities and investment in options, futures
and other derivative instruments.
18
AEAMG also serves as a sub-advisor to American Express Asset Management
Ltd. in providing investment advice with respect to the U.S. Equity Fund
Portfolio for the American Express Asset Management Pooled Funds, which is an
open-end unit trust under Canadian tax law. AEAMG also provides investment
management services as collateral manager for various special purpose entities
that issue their own securities which are collateralized by a pool of assets,
e.g., collateralized bond obligations.
At December 31, 1998, AEAMG managed securities portfolios totaling
$20.1 billion for 404 accounts.
International or global investment management is offered to United
States-based institutional clients by American Express Asset Management
International Inc. ("AEAMI"), a United States company with offices in Hong Kong,
London and Singapore, and to non-United States based institutional clients by
American Express Asset Management Ltd. ("AEAML"), a U.K. company with offices in
Hong Kong, London and Singapore. International institutional investment
management services are also provided, currently on a sub-advisor basis, for the
clients of AEAMI and AEAML by American Express Asset Management International
(Japan) Ltd., which has offices in Tokyo and which also plans to offer
investment management services to Japanese institutional investors. At December
31, 1998, AEAMI managed securities portfolios totaling $8.1 billion for 23
accounts; and AEAML managed securities portfolios totaling $1.9 billion for 25
accounts. AEAMI and AEAML are wholly-owned subsidiaries of AEFC.
The institutional investment management business is highly competitive and
AEAMG and its affiliates must compete against a substantial number of larger
firms in seeking to acquire and maintain assets under management. Competitive
factors in this business include fees, investment performance and client
service.
AXP Advisors also offers investment management services for wealthy
individuals and small institutions. IDS Wealth Management Service offers a wrap
program marketed to wealthy individuals through AXP Advisors' financial advisors
and marketing employees and third-party referrals. American Express Strategic
Portfolio Services offers a mutual fund wrap program to wealthy individuals. IDS
Wealth Management Service, American Express Strategic Portfolio Services and
Portfolio Management Group are operating divisions of AXP Advisors.
American Express Trust Company ("AETC") provides trustee, custodial,
record keeping and investment management services for pension, profit sharing,
401(k) and other qualified and non-qualified employee benefit plans. AETC is
trustee of over 390 benefit plans which represent approximately $22.1 billion in
assets and 860,000 participants. AETC has assets under custody in excess of
$120.2 billion and provides non-trusteed, investment management of assets in
excess of $1.9 billion. AETC is regulated by the Minnesota Department of
Commerce (Banking Division). AETC, through its personal trust division, also
offers trust services to individuals and organizations. To facilitate expansion
of the personal trust business, AEFC filed an application with the Office of
Thrift Supervision to operate a federal savings bank.
19
AXP Advisors distributes real estate investment trusts sponsored by
other companies. AXP Advisors also distributes from time to time managed futures
limited partnerships in which an AEFC subsidiary is a co-general partner.
In 1998, AEFC continued to expand its securities brokerage services.
American Enterprise Investment Services Inc., a wholly-owned subsidiary of AEFC,
provides securities execution and clearance services for approximately 282,750
retail and institutional clients of AXP Advisors and American Express Service
Corporation. American Enterprise Investment Services, Inc. holds over $9.7
billion in assets for clients. American Enterprise Investment Services, Inc. is
registered as a broker-dealer with the SEC, is a member of the NASD and the
Chicago Stock Exchange and is registered with appropriate states.
In 1998 AEFC and American Express Bank Ltd. organized a jointly owned
subsidiary. American Express International Deposit Company ("AEIDC"), in the
Cayman Islands to accept deposits from foreign clients of American Express Bank
Ltd. AEIDC is not regulated as a bank in the Cayman Islands.
AMERICAN EXPRESS BANK/TRAVELERS CHEQUE
--------------------------------------
In the third quarter of 1997, management of the Company's Travelers
Cheque unit was moved from TRS' Stored Value Group to the Chief Executive
Officer of American Express Bank Ltd., the head of the Company's international
banking business. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 131, since the first quarter of 1998, the Company's Travelers
Cheque operations has been reported in the same operating segment as American
Express Bank Ltd. The financial and other information reported in the following
section under American Express Bank relates only to such bank's business, and
the information under the caption Travelers Cheque includes only information
related to the Travelers Cheque business.
AMERICAN EXPRESS BANK
---------------------
The Company's wholly-owned indirect subsidiary, American Express Bank
Ltd. (together with its subsidiaries, where appropriate, "AEB"), offers products
that meet the financial service needs of four client groups: corporations,
financial institutions, wealthy individuals and retail customers. AEB does not
directly or indirectly do business in the United States except as an incident to
its activities outside the United States. Accordingly, the following discussion
relating to AEB generally does not distinguish between United States and
non-United States based activities.
AEB's five primary business lines are corporate banking and finance,
correspondent banking, private banking, personal financial services and global
trading. Corporate banking and finance is provided to corporations principally
in emerging markets and includes trade finance and working capital loans.
Correspondent banking serves leading local banks primarily in emerging markets
and includes transaction payments and a wide range of trade
20
finance products such as letters of credit and payment guarantees, collections,
check clearing and bankers acceptances. Private banking focuses on wealthy
individuals by providing such customers with investment management, trust and
estate planning, deposit instruments and secured lending. Personal financial
services provides consumer products in direct response to specific financial
needs of retail customers and includes interest-bearing deposits, unsecured
lines of credit, installment loans, money market funds, mortgage loans, and
mutual fund and life insurance products. Through global trading, AEB provides
treasury and capital market products and services, including foreign exchange,
foreign exchange options, derivatives and trading, with a focus on emerging
markets.
In 1998, AEB had a difficult year overall, primarily due to losses in
its corporate banking business. In the first quarter, AEB established a $138
million (after-tax) credit loss provision related to the Bank's Asia/Pacific
business, particularly Indonesia. At year-end, loans outstanding worldwide were
approximately $5.6 billion, down from $6.2 billion at December 31, 1997, which
decrease resulted in part from its decision to de-emphasize corporate and
correspondent banking.
AEB made progress in 1998 in private banking and personal financial
services, which businesses are expected to be the long-term focus for AEB, due
in part to the fact that marketing to their individual client bases is more
consistent with the overall cross-selling strategy of the Company. During the
year, AEB developed a family of euro-denominated mutual funds which was launched
in France and Germany in January 1999, and introduced personal mortgages in
Greece and auto loans in India. The Private Bank showed significant growth, with
client holdings increasing 22 percent, and client volumes in Personal Financial
Services increased 23 percent. AEB's global trading unit also benefited from
volatility in the financial and foreign exchange markets.
AEB has also continued to work more closely with other parts of the
Company. AXP Advisors has contracted with AEB to manage most of AEB's Worldfolio
and Epic mutual funds. AEB has contracted with IDSC to market IDSC's investment
certificates, and has set up a joint venture with AEFC in the Cayman Islands to
accept deposits. In 1998, AEB increased client holdings in these deposits by
more than $1 billion. TRS makes Platinum Cards available to AEB's private
banking clients. In addition, AEB offers credit products such as installment
loans and revolving lines of credit to both Cardmembers and non-Cardmembers in
France, Germany, Greece, Hong Kong, Singapore and Taiwan. AEB also markets a
wide range of investment and savings products to TRS Cardmembers and select
non-Cardmembers in France, Germany, Hong Kong, Indonesia, Singapore and Taiwan.
In 1994, AEB entered into a 10-year contract with Electronic Data
Systems Corporation ("EDS") for the outsourcing of AEB's global systems support
and development and data processing functions. Under the contract, EDS is to
maintain and operate AEB's existing technology systems and to develop certain
other systems. The major focus of EDS in 1998 was the remediation of AEB's
computer systems for Year 2000 compliance.
21
AEB has a global network with offices in 38 countries. Its worldwide
headquarters is located in New York City. It maintains international banking
agencies in New York City and Miami, Florida. Its wholly-owned Edge Act
subsidiary, American Express Bank International ("AEBI"), is headquartered in
Miami, Florida and has branches in New York City and Miami. In 1998, AEB
established a facility office in San Francisco, California.
AEB's business does not, as a whole, experience significant seasonal
fluctuations.
SELECTED FINANCIAL INFORMATION REGARDING AEB
--------------------------------------------
AEB's prior years' financial information has been restated to reflect
the transfer in 1994 of certain international consumer financial services
businesses from TRS.
AEB provides banking services to the Company and its subsidiaries. AEB
is only one of many international and local banks used by the Company and its
other subsidiaries, which constitute only a few of AEB's many customers.
AEB's 1998 total assets of $11.6 billion decreased from $12.8 billion
in 1997. Liquid assets, consisting of cash and deposits with banks, trading
account assets and investments, were $4.9 billion at December 31, 1998 and $4.4
billion at December 31, 1997.
22
The following table sets forth a summary of financial data for AEB at
and for each of the three years in the period ended December 31, 1998 (dollars
in millions):
1998 1997 1996
---- ---- ----
Net financial revenues $620 $637 $591
Non-interest expenses 756 487 463
Net (loss) income (84) 82 68
- -------------------------------------------------------------------------- ------------ -----------
Cash and deposits with banks 2,303 2,150 1,709
Investments 2,553 2,265 2,835
Loans, net 5,404 6,062 5,760
Total assets 11,576 12,868 12,350
- -------------------------------------------------------------------------- ------------ -----------
Customers' deposits 8,288 8,547 8,653
Shareholder's equity 743 830 799
- -------------------------------------------------------------------------- ------------ -----------
Return on average assets (a) (0.70)% 0.64% 0.57%
Return on average common equity (a) (13.31)% 10.83% 9.22%
- -------------------------------------------------------------------------- ------------ -----------
Reserve for loan losses/total loans 3.83% 2.11% 1.99%
Total loans/deposits from customers 67.80% 72.45% 67.92%
Average common equity/average assets (a) 5.16% 5.61% 5.82%
Risk-based capital ratios:
Tier 1 9.8% 8.8% 8.8%
Total 12.6% 12.3% 12.5%
Leverage ratio 5.5% 5.3% 5.6%
- -------------------------------------------------------------------------- ------------ -----------
Average interest rates earned: (b)
Loans (c) 8.56% 8.59% 8.48%
Investments (d) 7.62% 8.22% 8.57%
Deposits with banks 6.21% 7.07% 7.52%
- -------------------------------------------------------------------------- ------------ -----------
Total interest-earning assets (d) 7.90% 8.18% 8.25%
- -------------------------------------------------------------------------- ------------ -----------
Average interest rates paid: (b)
Deposits from customers 5.79% 6.04% 6.28%
Borrowed funds, including long-term debt 6.17% 6.98% 6.66%
- -------------------------------------------------------------------------- ------------ -----------
Total interest-bearing liabilities 5.84% 6.16% 6.33%
- -------------------------------------------------------------------------- ------------ -----------
Net interest income/total average interest-earning assets (d) 2.72% 2.91% 3.03%
- -------------------------------------------------------------------------- ------------ -----------
(a) Calculated excluding the effect of SFAS No. 115.
(b) Based upon average balances and related interest income and expense,
including the effect of interest rate products where appropriate and
transactions with related parties.
(c) Interest rates have been calculated based upon average total loans,
including those on non-performing status.
(d) On a tax equivalent basis.
23
The following tables set forth the composition of AEB's loan portfolio
at year end for each of the five years in the period ended December 31, 1998
(millions):
By Geographical Region (a) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Asia/Pacific $2,143 $2,789 $2,543 $2,151 $2,144
Europe 1,021 1,055 821 876 903
Indian Subcontinent 517 629 833 970 721
Latin America 1,107 1,082 916 617 589
North America 210 51 67 76 81
Middle East 544 482 580 614 345
Africa 77 105 117 124 207
------ ------ ------ ------ ------
Total $5,619 $6,193 $5,877 $5,428 $4,990
====== ====== ====== ====== ======
1998
----------------------------------
Due After 1 Due
Due Year After 5
Within 1 Through 5 Years
By Type and Maturity Year Years (b) 1998 1997 1996 1995 1994
(b) (d) (d) (d) (d)
---------------------------------- ---- ---- ---- ---- ----
Consumer and private
banking loans:
Loans secured by
real estate $ 7 $ - $ 206 $ 213 $ 146 $ 37 $ 40 $ -
Installment, revolving
credit and other 1,322 98 9 1,429 1,231 1,090 1,167 1,181
------ ----- ------ ------ ------ ------ ------ ------
1,329 98 215 1,642 1,377 1,127 1,207 1,181
------ ----- ------ ------ ------ ------ ------ ------
Commercial loans:
Loans secured by
real estate 226 73 3 302 347 386 461 592
Loans to businesses (c) 1,680 264 53 1,997 2,479 2,415 2,364 2,088
Loans to banks and other
financial institutions 1,420 169 6 1,595 1,926 1,860 1,240 915
Loans to governments and
official institutions 40 3 3 46 41 64 60 81
Equipment Financing - - - - - 1 43 79
All other loans 32 5 - 37 23 24 53 54
------ ----- ------ ------ ------ ------ ------ ------
3,398 514 65 3,977 4,816 4,750 4,221 3,809
------ ----- ------ ------ ------ ------ ------ ------
Total $4,727 $612 $280 $5,619 $6,193 $5,877 $5,428 $4,990
====== ===== ====== ====== ====== ====== ====== ======
(a) Based primarily on the domicile of the borrower.
(b) Loans due after 1 year at fixed (predetermined) interest rates totaled $82
million, while those at floating (adjustable) interest rates totaled $810
million.
(c) Business loans, which accounted for approximately 36 percent of the
portfolio as of December 31, 1998, were distributed over 26 commercial and
industrial categories.
(d) Prior year amounts have been restated to conform to the current year's
presentation.
24
The following table sets forth AEB's non-performing loans at year end
for each of the five years in the period ended December 31, 1998 (millions):
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Consumer loans $ 1 $ 1 $ 1 $ 3 $-
Real estate loans--commercial 9 9 5 1 4
Loans to businesses 151 34 29 20 12
Loans to banks and other financial institutions 19 3 - 8 -
Loans to governments and official institutions - - - 1 1
Equipment financing - - - 1 3
---- ---- ---- ---- ----
Total $180 $47 $35 $34 $20
==== ==== ==== ==== ====
AEB defines an impaired loan as any loan (other than certain consumer
loans) on which the accrual of interest is discontinued because the contractual
payment of principal or interest has become 90 days past due or if, in
management's opinion, the borrower is unlikely to meet its contractual
obligations (i.e., non-performing loans).
The following is a summary of loans considered to be impaired under
SFAS No. 114 and the related interest income:
December 31,
-----------------
(in millions) 1998 1997
---- ----
Recorded investment in impaired loans
not requiring an allowance (a) $ 3 $ 5
Recorded investment in impaired loans
requiring an allowance $177 $ 42
---- -----
Total recorded investment in impaired loans $180 $ 47
==== =====
Credit reserves for impaired loans $ 95 $ 19
===== =====
December 31,
--------------------------------
(in millions) 1998 1997 1996
---- ---- ----
Average recorded investment in impaired loans $176 $ 58 $ 35
Interest income recognized on a cash basis 2 3 1
(a) These loans do not require a reserve for credit losses since the values of
the impaired loans equal or exceed the recorded investments in the loans.
In addition to the above, AEB had other non-performing assets totaling
$63 million at December 31, 1998, $11 million at December 31, 1997 and $36
million at December 31, 1996. The 1998 balance primarily represents matured
foreign exchange and derivative contracts, while the 1997 and 1996 amounts
represent balances transferred from non-performing loans as a result of
foreclosures. The decrease from 1996 to 1997 primarily reflected the sale of a
foreclosed property.
25
The following table sets forth a summary of the credit loss experience
of AEB at and for each of the five years in the period ended December 31, 1998
(dollars in millions):
1998 1997 1996 1995 1994
---------- ---------- ----------- ---------- ----------
Reserve for credit losses -
January 1, $137 $117 $111 $109 $126
Provision for credit losses (a) 238 20 23 7 8
Translation and other (b) (4) (2) (1) - -
---------- ---------- ----------- ---------- ----------
Subtotal 371 135 133 116 134
---------- ---------- ----------- ---------- ----------
Writeoffs:
Consumer loans 19 13 13 9 19
Real estate loans-commercial 3 - 2 - 1
Loans to businesses (c) 72 17 7 3 21
Loans to banks and other
financial institutions 2 - 1 1 3
Loans to governments and
official institutions - - - 1 -
Foreign exchange and
derivative contracts (d) 28 - - - -
Equipment financing - - - 1 -
Recoveries:
Consumer loans - (11) (3) (1) (10)
Loans to businesses (5) (3) (2) (5) (4)
Loans to banks and other
financial institutions - - (1) (3) (3)
Loans to governments and
official institutions (e) - (18) (1) - -
Equipment financing - - - (1) (2)
All other loans (7) - - - -
---------- ---------- ----------- ---------- ----------
Net write-offs (recoveries) 112 (2) 16 5 25
---------- ---------- ----------- ---------- ----------
Reserve for credit losses
December 31, (f) $259 $137 $117 $111 $109
========== ========== =========== ========== ==========
(a) The increase in 1998 was mainly due to first quarter credit loss provision
related to business in the Asia/Pacific region, particularly Indonesia. The
increase in 1996 was primarily due to loan growth, slightly higher consumer
and commercial write-offs and lower commercial banking recoveries.
(b) Prior year amounts have been restated to conform to the current year's
presentation in accordance with the American Institute of Certified Public
Accountants and Savings Institutions Audit and Accounting Guide.
(c) The increase in 1998 was primarily due to write-offs in the Asia/Pacific
region, primarily Indonesia.
(d) The increase in 1998 was due to write-offs of Indonesian foreign exchange
and derivative contracts.
(e) The increase in 1997 was mainly due to a loan recovery from Peru.
(f) Allocation:
Loans $214 $131 $117 $111 $109
Other assets, primarily derivatives 43 6 - - -
Other liabilities 2 - - - -
----- ------ ------ ----- -----
Total reserve for credit losses $259 $137 $117 $111 $109
===== ====== ====== ===== =====
26
Interest income is recognized on the accrual basis. Loans other than
certain consumer loans are placed on non-performing status when payments of
principal or interest are 90 days past due or if, in management's opinion, the
borrower is unlikely to meet its contractual obligations. When loans are placed
on non-performing status, all previously accrued but unpaid interest is reversed
against current interest income. Cash receipts of interest on non-performing
loans are recognized either as interest income or as a reduction of principal,
based upon management's judgment as to the ultimate collectibility of principal.
A non-performing loan may be returned to performing status when all contractual
amounts due are reasonably assured of repayment within a reasonable period and
the borrower shows sustained repayment performance, or when the loan has become
well secured and is in the process of collection. Consumer loans principally
consist of lines of credit and installment loans. These loans are written off
against the reserve for credit losses upon reaching specified contractual
delinquency stages, or earlier in the event of the borrower's personal
bankruptcy or if the loan is otherwise deemed uncollectible. Interest income on
these loans generally accrues until the loan is written off.
AEB separately maintains and provides for reserves relating to credit
losses for loans, derivatives and other credit-related commitments. The reserve
is established by charging a provision for credit losses against income. The
amount charged to income is based upon several factors, including historical
credit loss experience in relation to outstanding credits, a continuous
assessment of the collectibility of each credit, and management evaluation of
exposures in each applicable country as related to current and anticipated
economic and political conditions. Management's assessment of the adequacy of
the reserve is inherently subjective, as significant estimates are required.
Amounts deemed uncollectible are charged against the reserve, and subsequent
recoveries, if any, are credited to the reserve.
The reserve for credit losses related to loans is reported as a
reduction of loans. The reserve related to derivatives is reported as a
reduction of trading assets and the reserve related to other credit-related
commitments is reported in other liabilities.
RISKS
-----
The global nature of AEB's business activities are such that
concentrations of credit to particular industries and geographic regions are not
unusual. At December 31, 1998, AEB had significant investments in certain on-
and off-balance sheet financial instruments, which were primarily represented
by deposits with banks, securities, loans, forward contracts, contractual
amounts of letters of credit (standby and commercial) and guarantees. The
counterparties to these financial instruments were primarily unrelated to AEB,
and principally consisted of banks and other financial institutions and various
commercial and industrial enterprises operating geographically within the
Asia/Pacific region, Europe, North America, Latin America and the Indian
Subcontinent. AEB continuously monitors its credit concentrations and actively
manages to reduce the associated risk.
27
Beginning in 1997 and continuing throughout 1998 certain countries in
Asia began experiencing economic pressures that created liquidity constraints
associated with public and private sector debt service. At December 31, 1998,
AEB had exposures throughout the Asia/Pacific region, including in Hong Kong,
Singapore, Taiwan, Indonesia and Korea, among other countries. AEB had
approximately $2.1 billion outstanding in loans in the entire Asia/Pacific
region at year-end. In addition to these loans, there are other banking
activities, such as forward contracts, various contingencies and market
placements, which added another approximately $1.1 billion to the credit
exposures in the region at year-end. In the first quarter of 1998, AEB
established a $213 million ($138 million after-tax) credit loss provision
related to AEB's business in the Asia/Pacific region, particularly Indonesia.
AEB is carefully monitoring its credit exposures as well as actions
being taken by government entities to address and resolve currency and liquidity
issues. The continuing economic downturn in Asia is contributing to
destabilizing effects upon the currency, liquidity and capital markets of other
countries outside the Asia/Pacific region, particularly in Latin America. To the
extent these events affect such countries where AEB has credit exposure or
market presence, AEB is closely following such events and actively manages the
associated risks as the situation warrants.
AEB's earnings are sensitive to fluctuations in interest rates, as it
is not always possible to match precisely the maturities of interest-related
assets and liabilities. However, strict limits have been established for both
country and total bank mismatching. On occasion, AEB may decide to mismatch in
anticipation of a change in future interest rates in accordance with these
guidelines. Term loans extended by AEB include both floating interest rate and
fixed interest rate loans.
For a discussion relating to AEB's use of derivative financial
instruments, see pages 30 through 31 under the caption "Risk Management," and
Note 7 on pages 42 through 45, of the Company's 1998 Annual Report to
Shareholders, which portions of such report are incorporated herein by
reference.
COMPETITION
-----------
The banking services of AEB are subject to vigorous competition in all
markets in which AEB operates. Competitors include local and international banks
whose assets often exceed those of AEB, other financial institutions (including
certain other subsidiaries of the Company) and, in certain cases, governmental
agencies. In some countries, AEB may be one of the more substantial financial
institutions offering banking services; in no country, however, is AEB dominant.
REGULATION
----------
AEB is a wholly-owned direct subsidiary of American Express Banking
Corp. ("AEBC"). AEBC is a New York investment company organized under Article
XII of the New York Banking Law and is a wholly-owned direct subsidiary of the
Company. AEBC,
28
AEB and AEB's global network of offices and subsidiaries are subject to the
consolidated supervision and examination of the New York State Banking
Department ("NYSBD") pursuant to New York Banking Law. AEBC does not directly
engage in banking activities.
AEB's branches, representative offices and subsidiaries are licensed
and regulated in the jurisdictions in which they do business and are subject to
the same local requirements as other competitors. Within the United States,
AEB's New York agency is supervised and regularly examined by the NYSBD. In
addition, the Florida Department of Banking and Finance supervises and examines
AEB's Miami agency, the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") regulates, supervises and examines AEBI and the
California Department of Financial Institutions supervises and examines AEB's
San Francisco facility office. AEB Global Asset Management Inc., a wholly-owned
subsidiary of AEB that provides investment advisory services to private banking
clients, is registered with the SEC as an investment advisor.
Since AEB does not do business in the United States except as an
incident to its activities outside the United States, the Company's affiliation
with AEB neither causes the Company to be subject to the provisions of the Bank
Holding Company Act of 1956, as amended, nor requires it to register as a bank
holding company under the Federal Reserve Board's Regulation Y. AEB is not a
member of the Federal Reserve System, is not subject to supervision by the FDIC,
and is not subject to any of the restrictions imposed by the Competitive
Equality Banking Act of 1987 other than anti-tie-in rules with respect to
transactions involving products and services of certain of its affiliates.
AEB is required to comply with the Federal Reserve Board's risk-based
capital guidelines and complementary leverage constraint applicable to
state-chartered banks that are members of the Federal Reserve System. Pursuant
to the FDIC Improvement Act of 1991, the Federal Reserve Board, among other
federal banking agencies, adopted regulations defining levels of capital
adequacy. Under these regulations, a bank is deemed to be well capitalized if it
maintains a Tier 1 risk-based capital ratio of at least 6.0 percent, a total
risk-based capital ratio of at least 10.0 percent, and a leverage ratio of at
least 5.0 percent. Based on AEB's total risk-based capital and leverage ratios,
which are set forth on page 23, AEB is considered to be well capitalized at
December 31, 1998.
The Company has taken steps to ensure that AEB remains well
capitalized, as defined by regulatory guidelines. In April 1998, the Company
purchased $225 million of deferred tax assets from AEB, thereby reducing AEB's
nonqualifying assets and increasing its regulatory capital.
TRAVELERS CHEQUE
----------------
The Company, through its Travelers Cheque unit, is a leading issuer of
travelers cheques. The Company is also expanding the scope of its Money Order
and Official Check products in the U.S., and renewing its focus on the
TravelFunds Direct(SM) product, which provides direct delivery of foreign bank
notes and Travelers Cheques in selected markets.
29
The American Express(R) Travelers Cheque ("Travelers Cheque" or
"Cheque") is sold as a safe and convenient alternative to currency. The
Travelers Cheque, a negotiable instrument, has no expiration date and is payable
by the issuer in the currency of issuance when presented for the purchase of
goods and services or for redemption. Travelers Cheques are issued in eleven
currencies both directly by the Company and through joint venture companies in
which the Company generally holds an equity interest. In 1998, the Travelers
Cheque unit announced the issuance of a euro- denominated Travelers Cheque which
commenced in early 1999.
American Express Travelers Cheques are sold through a broad network of
outlets worldwide, including travel offices of the Company, its affiliates and
representatives, travel agents, commercial banks, savings banks, savings and
loan associations, credit unions and other financial, travel and commercial
businesses. The Company generally compensates selling agents for their sale of
Travelers Cheques.
The proceeds from sales of Travelers Cheques issued by the Company are
invested predominantly in highly-rated debt securities consisting primarily of
intermediate- and long-term state and municipal obligations. The investment of
these proceeds is regulated by various state laws.
Although the Company believes it is the leading issuer of travelers
checks, its growth in sales of this product has been declining over the past few
years. Consumers have a choice of many forms of competitive payment instruments,
including other brands of travelers checks, cash, credit and debit cards and
national and international automated teller machine networks. The Company
expects increasing developments in stored value cards, smart cards and other
electronic forms of payment, and plans to offer a range of new stored value and
other products in the future to compete in this area. The principal competitive
factors affecting the travelers check industry are (i) the availability to the
consumer of other forms of payment; (ii) the amount of the fee charged to the
consumer; (iii) the acceptability of the checks throughout the world as an
alternative to currency; (iv) the compensation paid to, and frequency of
settlement by, selling agents; (v) the accessibility of travelers check sales
and refunds; (vi) the success of marketing and promotional campaigns; and (vii)
the ability to service satisfactorily the check purchaser if the checks are lost
or stolen. Other competitive factors affecting stored value products generally
include (a) the quality and rate of introduction of stored value products of
competitors; (b) the rate of consumer and merchant acceptance of new products;
(c) the rate of deployment of card and payment systems worldwide; (d) the global
interoperability of card and payment systems; (e) the relative ability of an
issuer to control fraud; and (f) the development of governmental regulations
relating to stored value products.
Travelers Cheque sales and Travelers Cheques outstanding tend to be
greatest each year in the summer months, peaking in the third quarter.
30
CORPORATE AND OTHER
-------------------
The Balcor Company Holdings, Inc., an indirect, wholly-owned subsidiary
of the Company, and its subsidiaries, formerly operating as a diversified real
estate investment and management company, discontinued new commercial real
estate activities in 1990 and began to liquidate its portfolio of real estate
loans and properties. The liquidation was completed in 1998. Balcor and its
subsidiaries still serve as general partners in numerous public limited
partnerships that have not yet been liquidated.
The Company uses information about its customers to develop products
and services and to provide personal service. Regulatory activity in the areas
of privacy and data protection is growing worldwide and is generally being
driven by the growth of technology and concomitant concerns about the
potentially rapid and widespread dissemination of information, and the
implementation of the European Union Data Protection Directive, which imposes
restrictions on the collection, use and processing of personal data. The
European Directive became effective in October 1998 and involves potential
sanctions for violations which include the possible disruption in the flow of
personal data from Europe and in the use of such data. The Company will continue
its efforts to vigilantly safeguard the data entrusted to it in accordance with
applicable law and its internal data protection policies, while seeking to
properly collect and use data to achieve its business objectives.
For a discussion of the Company's status relating to the Year 2000
issue, see pages 22 and 23 of the Company's 1998 Annual Report to Shareholders,
which discussion is incorporated herein by reference.
FOREIGN OPERATIONS
------------------
The Company derives a significant portion of its revenues from the use
of the Card, Travelers Cheques and travel services in countries outside the
United States and continues to broaden the use of these products and services
outside the United States. Political and economic conditions in these countries,
including the availability of foreign exchange for the payment by the local card
issuer of obligations arising out of local Cardmembers' spending outside such
country, for the payment of card bills by Cardmembers who are billed in other
than their local currency and for the remittance of the proceeds of Travelers
Cheque sales, can have an effect on the Company's revenues. Substantial and
sudden devaluation of local Cardmembers' currency can also affect their ability
to make payments to the local issuer of the card on account of spending outside
the local country. The major portion of AEB's banking revenues is from business
conducted in countries outside the United States. Some of the risks attendant to
those operations include currency fluctuations and changes in political,
economic and legal environments in each such country.
As a result of its foreign operations, the Company is exposed to the
possibility that, because of foreign exchange rate fluctuations, assets and
liabilities denominated in currencies other than the United States dollar may be
realized in amounts greater or lesser than the United States dollar amounts at
which they are currently recorded in the Company's Consolidated
31
Financial Statements. Examples of transactions in which this may occur include
the purchase by Cardmembers of goods and services in a currency other than the
currency in which they are billed; the sale in one currency of a Travelers
Cheque denominated in a second currency; foreign exchange positions held by AEB
as a consequence of its client-related foreign exchange trading operations; and,
in most instances, investments in foreign operations. These risks, unless
properly monitored and managed, could have an adverse effect on the Company's
operations.
The Company's policy in this area is generally to monitor closely all
foreign exchange positions and to minimize foreign exchange gains and losses,
for example, by offsetting foreign currency assets with foreign currency
liabilities, as in the case of foreign currency loans and receivables, which are
financed in the same currency. An additional technique used to manage exposures
is the spot and forward purchase or sale of foreign currencies as a hedge of net
exposures in those currencies as, for example, in the case of the Cardmember and
Travelers Cheque transactions described above. Additionally, Cardmembers may be
charged in United States dollars for their spending outside their local country.
The Company's investments in foreign operations are hedged by forward exchange
contracts or by identifiable transactions, where appropriate.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
------------------------------------------------------
Various forward-looking statements have been made in this Form 10-K
Annual Report. Forward-looking statements may also be made in the Company's
other reports filed under the Securities Exchange Act of 1934, in its press
releases and in other documents. In addition, from time to time, the Company
through its management may make oral forward-looking statements. Forward-looking
statements are subject to risks and uncertainties, including those identified
below, which could cause actual results to differ materially from such
statements. The words "believe", "expect", "anticipate", "optimistic", "intend",
"aim", "will" or similar expressions are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are
made. The Company undertakes no obligation to update publicly or revise any
forward-looking statements. Important factors that could cause actual results to
differ materially from the Company's forward-looking statements, including the
Company's financial and other goals, include, but are not limited to, the
following:
o The Company's inability to extend the value of the American
Express brand, which historically has been associated with the
card and travel businesses (e.g., perception of trust, security
and quality service), to a broad range of financial products and
services in the financial services industry. This could depend in
part on the Company's ability to manage the potential conflicts
inherent in its growing multi-channel delivery systems.
o The Company's inability to succeed in its ongoing reengineering
efforts and in achieving best-in-class economics, while also
maintaining high service levels.
32
o The Company's inability to successfully create, and increase
distribution channels for, financial, travel, card and other
products and services.
o The Company's inability to participate in payment and other
systems material to its businesses on a fair and competitive
basis.
o The Company's inability to successfully invest in, and compete at
the leading edge of, technology developments across all
businesses, e.g., transaction processing, data management,
customer interactions and communications, travel reservations
systems, stored value products, multi-application smart cards and
risk management systems.
o The Company's inability to adequately address its Y2K issues,
successfully identify its systems containing two digit codes, the
nature and amount of programming required to fix the affected
systems and the costs of labor and consultants related to such
effort, continue to have access to such resources and ensure that
third parties that interface with the Company successfully address
their Y2K issues.
o The Company's inability to successfully modify its computer
software and business systems to ensure proper and timely
accommodation of the European single currency in its business and
operations.
o The Company's inability to successfully develop and implement
enterprise-wide interactive strategies.
o TRS' inability to expand its overall revenues, which depends in
part on its ability to increase consumer and/or business spending
and borrowing on its credit and charge Cards, gain market share
and develop new or enhanced products that capture greater share of
customers' total spending on Cards issued on its network.
o TRS' inability to enhance significantly its international
operations, which will depend in part on its ability to reduce
expenses for re-investment in the international business, expand
the proprietary and third party-issued Card businesses.
o TRS' inability to increase its network of merchants.
o TRS' inability to retain Cardmembers in consumer lending products
after low introductory rate periods have expired.
o TRS' inability to sustain premium discount rates or increase
merchant coverage, both of which will depend in part on its
ability to maintain a
33
customer base that appeals to merchants and to develop deeper
merchant relationships through creation of new products and
services.
o The inability of TRS and AEB to manage credit risk related to
consumer debt, business loans and other credit exposures, both in
the United States and abroad, including unseasoned balances in
TRS' lending portfolios, all of which could be affected by general
political and economic conditions, including interest rates and
consumer credit trends, the rate of bankruptcies and movements in
currency valuations.
o The inability of AXP Advisors to maintain a growing field force
and to improve the performance of its mutual funds.
o A short-term financial market crash, or a longer term financial
market decline or stagnation, which could impact the sale of
investment products at AXP Advisors and the market value of AXP
Advisors' managed assets, resulting in lower management and
distribution fees.
o The impact of changing interest rates, which could affect AXP
Advisors' spreads between revenues from owned investments and
benefits credited to clients fixed income accounts, TRS' borrowing
costs and TRS' and AEB's return on lending products.
o Changes in laws or government regulations that either restrict the
businesses of the Company, or allow a wider range of institutions
to compete in such businesses, e.g., banks being allowed to sell
products competing with AXP Advisors, non-banking institutions
selling bank products in competition with AEB, changes in tax laws
affecting the Company's businesses, regulatory activity in the
areas of customer privacy and data protection. See also pages 3,
4, 14, 16, 19, 20 and 28 through 31 of this 10-K Report for a
discussion of various regulations affecting the Company.
o Global developments that could affect the Company's operations
abroad, such as political or economic instability in key markets
of the Company's businesses or restrictions on convertibility of
certain currencies. See also pages 9 through 11, 27, 28, 31 and 32
of this 10-K Report for a discussion of risks relating to foreign
operations.
o Competitive pressures in all of the Company's major businesses,
including those competitive issues referred to on pages 2, 5
through 7, 9, 10, 12, 13, 15 through 19, 28 and 30 in this 10-K
Report.
o Unforeseen litigation or compliance costs.
34
SEGMENT INFORMATION AND CLASSES OF SIMILAR SERVICES
---------------------------------------------------
Information with respect to the Company's segments, geographical
operations and classes of similar services is set forth in Note 15 to the
Consolidated Financial Statements of the Company, which appears on pages 53
through 54 of the Company's 1998 Annual Report to Shareholders, which Note is
incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
---------------------------------
All of the executive officers of the Company as of March 24, 1999, none
of whom has any family relationship with any other and none of whom became an
officer pursuant to any arrangement or understanding with any other person, are
listed below. Each of such officers was elected to serve until the next annual
election of officers or until his or her successor is elected and qualified.
Each officer's age is indicated by the number in parentheses next to his or her
name.
HARVEY GOLUB - Chairman and Chief Executive Officer; Chairman, TRS
Mr. Golub (60) has been Chief Executive Officer of the Company since
February 1993, Chairman of the Company since August 1993 and Chairman, TRS since
November 1991. Prior to February 1997 he had been Chief Executive Officer of TRS
since November 1991.
KENNETH I. CHENAULT - President and Chief Operating Officer;
President and Chief Executive Officer, TRS
Mr. Chenault (47) has been President and Chief Operating Officer of the
Company and President and Chief Executive Officer of TRS since February 1997.
Prior to February 1997 he had been Vice Chairman of the Company since January
1995. Prior to May 1995, he had also been President, U.S.A. of TRS since August
1993.
RICHARD KARL GOELTZ - Vice Chairman and Chief Financial Officer
Mr. Goeltz (56) has been Vice Chairman and Chief Financial Officer of
the Company since September 1996. Prior thereto, he had been Group Chief
Financial Officer and a member of the Board of Directors of NatWest Group.
JONATHAN S. LINEN - Vice Chairman
Mr. Linen (55) has been Vice Chairman of the Company since August 1993.
35
STEVEN W. ALESIO - President, Small Business Services, TRS
Mr. Alesio (44) has been President, Small Business Services, TRS since
February 1996. Prior thereto, he had been Executive Vice President, Corporate
Card, TRS since November 1993.
ANNE M. BUSQUET - President, American Express Relationship Services, TRS
Mrs. Busquet (49) has been President, American Express Relationship
Services, TRS since October 1995. Prior thereto, she had been Executive Vice
President, Consumer Card Group since November 1993.
JAMES M. CRACCHIOLO - President, International, TRS
Mr. Cracchiolo (40) has been President, International, TRS since May
1998. Prior thereto he had been President, Global Network Services, TRS since
February 1996. Prior thereto he had been Senior Vice President, Quality,
Reengineering and Business Strategy, TRS since August 1993.
URSULA F. FAIRBAIRN - Executive Vice President, Human Resources and Quality
Mrs. Fairbairn (56) has been Executive Vice President, Human Resources
and Quality of the Company since December 1996. Prior thereto, she had been
Senior Vice President, Human Resources of Union Pacific Corporation.
EDWARD P. GILLIGAN - President, Corporate Services, TRS
Mr. Gilligan (39) has been President, Corporate Services, TRS since
February 1996. Prior thereto, he had been Executive Vice President, Travel
Management Services, TRS since June 1995. Prior thereto, he had been Senior Vice
President and General Manager, Eastern Region of Travel Management Services,
TRS.
JOHN D. HAYES - Executive Vice President, Global Advertising
Mr. Hayes (44) has been Executive Vice President, Global Advertising
since May 1995. Prior thereto, he had been President of Lowe & Partners/SMS.
36
DAVID C. HOUSE - President, Establishment Services Worldwide, TRS
Mr. House (49) has been President, Establishment Services Worldwide,
TRS since October 1995. Prior thereto, he had been Senior Vice President of
Sales and Field Marketing for the United States Establishment Services Group
since January 1993.
DAVID R. HUBERS - President and Chief Executive Officer,
American Express Financial Corporation
Mr. Hubers (56) has been President and Chief Executive Officer of
American Express Financial Corporation since August 1993.
ALFRED F. KELLY, JR. - President, Consumer Card Services Group, TRS
Mr. Kelly (40) has been President, Consumer Card Services Group, TRS
since October 1998. Prior thereto he had been Executive Vice President and
General Manager of Consumer Marketing, TRS since February 1997. Prior thereto he
had been Executive Vice President of Customer Loyalty, TRS since September 1995.
Prior thereto he had been Senior Vice President, Customer Information Services,
TRS.
ALLAN Z. LOREN - Executive Vice President and Chief Information Officer
Mr. Loren (60) has been Executive Vice President and Chief Information
Officer of the Company since May 1994. Prior thereto, he had been President and
Chief Executive Officer of Galileo International.
LOUISE M. PARENT - Executive Vice President and General Counsel
Ms. Parent (48) has been Executive Vice President and General Counsel
of the Company since May 1993.
THOMAS SCHICK - Executive Vice President, Corporate Affairs
and Communications
Mr. Schick (52) has been Executive Vice President, Corporate Affairs
and Communications of the Company since March 1993.
37
JOHN A. WARD, III - Chairman and Chief Executive Officer,
American Express Bank Ltd.;
President, Travelers Cheque Group
Mr. Ward (52) has been Chairman and Chief Executive Officer, American
Express Bank Ltd. since January 1996. Since August 1997 he has also been
President of Travelers Cheque Group. Prior thereto, he had been Executive Vice
President of Chase Manhattan Bank since September 1993 and Chief Executive
Officer of Chase BankCard Services since July 1993.
EMPLOYEES
---------
The Company had approximately 85,000 employees on December 31, 1998.
ITEM 2. PROPERTIES
The Company's headquarters is in a 51-story, 2.2 million square foot
building located in lower Manhattan, which also serves as the headquarters for
TRS and AEB. This building, which is on land leased from the Battery Park City
Authority for a term expiring in 2069, is one of five office buildings in a
complex known as the World Financial Center. Lehman Brothers Holdings Inc. is
also headquartered at, and owns 52% of, the building.
Other principal locations of TRS include: the American Express Service
Centers in Fort Lauderdale, Florida; Phoenix, Arizona; Greensboro, North
Carolina and Salt Lake City, Utah; the American Express Canada, Inc.
headquarters in Markham, Ontario, Canada, all of which are owned by the Company
or its subsidiaries. AEFC's principal locations are its headquarters, the IDS
Tower, a portion of which the company leases until 2002, and its Operations
Center, which the company owns; both are in Minneapolis, Minnesota. AXP Advisors
also owns Oak Ridge Conference Center, a training facility and conference
center, in Chaska, Minnesota.
AEFC has entered into a contract with a developer to construct a
30-story office tower in Minneapolis which should be ready for initial occupancy
in February 2000. The new tower will become AEFC's headquarters. AEFC's lease
term is for 20 years with several options to extend the term.
AEFC is also building a new Client Service Center in downtown
Minneapolis. Construction should start July 1999 and the building should be
ready for occupancy in June 2002.
Generally, the Company and its subsidiaries lease the premises they
occupy in other locations. Facilities owned or occupied by the Company and its
subsidiaries are believed to be adequate for the purposes for which they are
used and are well maintained.
38
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in a number of legal and
arbitration proceedings concerning matters arising in connection with the
conduct of their respective business activities. The Company believes it has
meritorious defenses to each of these actions and intends to defend them
vigorously. The Company believes that it is not a party to, nor are any of its
properties the subject of, any pending legal or arbitration proceedings which
would have a material adverse effect on the Company's consolidated financial
condition, although it is possible that the outcome of any such proceedings
could have a material impact on the Company's net income in any particular
period. Certain legal proceedings involving the Company are set forth below.
On December 13, 1996, an action entitled LESA BENACQUISTO AND DANIEL
BENACQUISTO V. IDS LIFE INSURANCE COMPANY ("IDS Life") AND AMERICAN EXPRESS
FINANCIAL CORPORATION was commenced in Minnesota state court. The action is
brought by individuals who replaced an existing IDS Life insurance policy with a
new IDS Life policy. The plaintiffs purport to represent a class consisting of
all persons who replaced existing IDS Life policies with new IDS Life policies
from and after January 1, 1985.
The complaint puts at issue various alleged sales practices and
misrepresentations, alleged breaches of fiduciary duties and alleged violations
of consumer fraud statutes. Plaintiffs seek damages in an unspecified amount and
also seek to establish a claims resolution facility for the determination of
individual issues. IDS Life and AEFC filed an answer to the complaint on
February 18, 1997, denying the allegations. A second action, entitled ARNOLD
MORK, ISABELLA MORK, RONALD MELCHERT AND SUSAN MELCHERT V. IDS LIFE INSURANCE
COMPANY AND AMERICAN EXPRESS FINANCIAL CORPORATION was commenced in the same
court on March 21, 1997. In addition to claims that are included in the
Benacquisto lawsuit, the second action includes an allegation of improper
replacement of an existing IDS Life annuity contract. It seeks similar relief to
the initial lawsuit.
On October 13, 1998, an action entitled RICHARD W. AND ELIZABETH J.
THORESEN V. AMERICAN EXPRESS FINANCIAL CORPORATION, AMERICAN CENTURION LIFE
ASSURANCE COMPANY, AMERICAN ENTERPRISE LIFE INSURANCE COMPANY, AMERICAN PARTNERS
LIFE INSURANCE COMPANY, IDS LIFE INSURANCE COMPANY AND IDS LIFE INSURANCE
COMPANY OF NEW YORK was also commenced in Minnesota state court. The action was
brought by individuals who purchased an annuity in a qualified plan. They allege
that the sale of annuities in tax-deferred contributory retirement investment
plans (e.g., IRAs) is never appropriate. The plaintiffs purport to represent a
class consisting of all persons who made similar purchases. The plaintiffs seek
damages in an unspecified amount, including restitution of allegedly lost
investment earnings and restoration of contract values.
The Company commenced an action, AMERICAN EXPRESS COMPANY V. THE UNITED
STATES, on September 16, 1997 in the United States Court of Federal Claims
seeking a refund from the United States of Federal income taxes paid (plus
related interest) for the year 1987. The Company contends that the Internal
Revenue Service abused its discretion by denying the
39
Company's request to include annual fees from Cardmembers in taxable income
ratably over the twelve-month period to which the fees relate rather than in
full at the time they are billed. The defendant filed an answer on January 16,
1998, and pre-trial discovery proceedings are now underway. If the Company's
position is sustained, it would receive interest on $198,649,152 of taxes paid
for 1987 that should have been deferred to a subsequent period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 1998.
PART II
-------
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The principal market for the Company's Common Shares is The New York
Stock Exchange. Its Common Shares are also listed on the Boston, Chicago,
Pacific, London, Swiss, Dusseldorf, Frankfurt, Paris and Brussels Stock
Exchanges. The Company had 51,597 common shareholders of record at December 31,
1998. For price and dividend information with respect to such Common Shares, see
Note 18 to the Consolidated Financial Statements on page 55 of the Company's
1998 Annual Report to Shareholders, which Note is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Consolidated Five-Year Summary of Selected Financial Data"
appearing on page 57 of the Company's 1998 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information set forth under the heading "Financial Review"
appearing on pages 22 through 31 of the Company's 1998 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information set forth under the heading "Risk Management" appearing
on pages 30 through 31 of the Company's 1998 Annual Report to Shareholders is
incorporated herein by reference.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The "Consolidated Financial Statements", the "Notes to Consolidated
Financial Statements" and the "Report of Ernst & Young LLP Independent Auditors"
appearing on pages 32 through 56 of the Company's 1998 Annual Report to
Shareholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
--------
ITEMS 10, 11, 12 and 13. DIRECTORS AND EXECUTIVE OFFICERS OF
THE COMPANY; EXECUTIVE
COMPENSATION; SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
The Company filed with the SEC, within 120 days after the close of its
last fiscal year, a definitive proxy statement dated March 11, 1999 pursuant to
Regulation 14A, which involves the election of directors. The following portions
of such proxy statement are incorporated herein by reference: pages 2 through 4
under the heading "The Shares Voting," pages 5 through 7 under the headings
"Security Ownership of Directors and Executive Officers" and "Security Ownership
of Named Executives" (excluding the paragraph under the heading "Share Ownership
Guidelines for Directors" appearing on pages 6 and 7), pages 11 through 13 under
the heading "Directors' Fees and Other Compensation," pages 13 beginning at
"Election of Directors" through 34 ending at "Selection of Auditors" (excluding
the portions under the headings, "Board Compensation Committee Report on
Executive Compensation" appearing on pages 16 through 21 and "Performance Graph"
appearing on page 28). In addition, the Company has provided, under the caption
"Executive Officers of the Company" at pages 35 through 38 above, the
information regarding executive officers called for by Item 401(b) of Regulation
S-K.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements:
---------------------
See Index to Financial Statements on page F-1 hereof.
41
2. Financial Statement Schedules:
------------------------------
See Index to Financial Statements on page F-1 hereof.
3. Exhibits:
---------
See Exhibit Index on pages E-1 through E-5 hereof.
(b) Reports on Form 8-K:
Form 8-K, dated October 26, 1998, Item 5, reporting the Company's
earnings for the quarter ended September 30, 1998.
Form 8-K, dated January 25, 1999, Item 5, reporting the Company's
earnings for the quarter and year ended December 31, 1998.
Form 8-K, dated February 3, 1999, Item 5, reporting certain
information from speeches presented by Harvey Golub, the Company's
Chairman and Chief Executive Officer and James M. Cracchiolo,
President, International TRS, to the financial community on February
3, 1999.
Form 8-K, dated February 22, 1999, Item 5, reporting the election of
Robert L. Crandall to the Board of Directors of the Company.
42
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN EXPRESS COMPANY
March 29, 1999 By /s/ Richard Karl Goeltz
--------------------------
Richard Karl Goeltz
Vice Chairman and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the date indicated.
By /s/ Robert L. Crandall
----------------------------
Robert L. Crandall
Director
By /s/ Harvey Golub By /s/ Charles W. Duncan, Jr.
---------------------------- ----------------------------
Harvey Golub Charles W. Duncan, Jr.
Chairman, Chief Executive Director
Officer and Director
By /s/ Kenneth I. Chenault By /s/ Beverly Sills Greenough
---------------------------- ----------------------------
Kenneth I. Chenault Beverly Sills Greenough
President, Chief Operating Director
Officer and Director
By /s/ Richard Karl Goeltz By /s/ F. Ross Johnson
---------------------------- ----------------------------
Richard Karl Goeltz F. Ross Johnson
Vice Chairman and Director
Chief Financial Officer
By /s/ Daniel T. Henry By /s/ Vernon E. Jordan, Jr.
---------------------------- ----------------------------
Daniel T. Henry Vernon E. Jordan, Jr.
Senior Vice President Director
and Comptroller
By /s/ Daniel F. Akerson By /s/ Jan Leschly
---------------------------- ----------------------------
Daniel F. Akerson Jan Leschly
Director Director
By /s/ Anne L. Armstrong By /s/ Drew Lewis
---------------------------- ----------------------------
Anne L. Armstrong Drew Lewis
Director Director
By /s/ Edwin L. Artzt By /s/ Richard A. McGinn
---------------------------- ----------------------------
Edwin L. Artzt Richard A. McGinn
Director Director
By /s/ William G. Bowen By /s/ Frank P. Popoff
---------------------------- ----------------------------
William G. Bowen Frank P. Popoff
Director Director
March 29, 1999
43
AMERICAN EXPRESS COMPANY
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
(Item 14(a))
Annual
Report to
Shareholders
Form 10-K (Page)
----------- ------------
American Express Company and Subsidiaries:
Data incorporated by reference from attached
1998 Annual Report to Shareholders:
Report of independent auditors . . . . . . . . . . . . . . . 56
Consolidated statements of income for the three
years ended December 31, 1998 . . . . . . . . . . . . . 32
Consolidated balance sheets at December 31, 1998
and 1997. . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated statements of cash flows for the
three years ended December 31, 1998 . . . . . . . . . . 34
Consolidated statements of shareholders' equity for the
three years ended December 31, 1998 . . . . . . . . . . 35
Notes to consolidated financial statements . . . . . . . . . 36-55
Consent of independent auditors . . . . . . . . . . . . . . .. F-2
Schedules:
I - Condensed financial information of the Company . . . . . F-3-6
II - Valuation and qualifying accounts for the three years
ended December 31, 1998 . . . . . . . . . . . . . . . . . F-7
All other schedules for American Express Company and subsidiaries have
been omitted since the required information is not present or not present in
amounts sufficient to require submission of the schedule, or because the
information required is included in the respective financial statements or notes
thereto.
The consolidated financial statements of American Express Company
(including the report of independent auditors) listed in the above index, which
are included in the Annual Report to Shareholders for the year ended December
31, 1998, are hereby incorporated by reference. With the exception of the pages
listed in the above index, unless otherwise incorporated by reference elsewhere
in this Annual Report on Form 10-K, the 1998 Annual Report to Shareholders is
not to be deemed filed as part of this report.
F-1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on
Form 10-K of American Express Company of our report dated February 4, 1999
(hereinafter referred to as our Report), included in the 1998 Annual Report to
Shareholders of American Express Company.
Our audits included the financial statement schedules of American
Express Company listed in Item 14(a). These schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 2-46918, No. 2-59230, No. 2-64285, No. 2-73954, No.
2-89680, No. 33-01771, No. 33-02980, No. 33-28721, No. 33-33552, No. 33-36422,
No. 33-48629, No. 33-62124, No. 33-65008, No. 33-53801, No. 333-12683, No.
333-41779, No. 333-52699 and No. 333-73111; Form S-3 No. 2-89469, No. 33-43268,
No. 33-50997, No. 333-32525, No. 333-45445, No. 333-47085 and No. 333-55761) and
in the related Prospecti of our Report with respect to the consolidated
financial statements and schedules of American Express Company included and
incorporated by reference in this Annual Report on Form 10-K for the year ended
December 31, 1998.
/s/ Ernst & Young LLP
New York, New York
March 26, 1999
F-2
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED STATEMENTS OF INCOME
(Parent Company Only)
(millions)
Years Ended December 31,
---------------------------------------------------------
1998 1997 1996
--------------- ---------------- ------------------
Revenues $ 260 $ 236 $ 245
--------------- ---------------- ------------------
Expenses:
Interest 293 224 261
Human resources 80 68 71
Other (A) - 314 (310)
--------------- ---------------- ------------------
Total 373 606 22
--------------- ---------------- ------------------
Pretax (loss) income (113) (370) 223
Income tax (benefit) provision (107) (193) 43
--------------- ---------------- ------------------
Net (loss) income before equity in net income
of subsidiaries and affiliates (6) (177) 180
Equity in net income of subsidiaries
and affiliates 2,147 2,168 1,721
--------------- ---------------- ------------------
Net income $2,141 $1,991 $1,901
=============== ================ ==================
(A) 1998 includes pretax income of $106 million ($78 million after-tax)
comprising a $60 million ($39 million after-tax) gain from sales of common
stock of First Data Corporation and $46 million ($39 million after-tax)
preferred stock dividend based on earnings from Lehman Brothers. 1996
includes a pretax gain of $480 million ($300 million after-tax) on the
exchange of DECS (Debt Exchangeable for Common Stock) for FDC common
stock.
See Notes to Condensed Financial Information of the Company on page F-6.
F-3
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED BALANCE SHEETS
(Parent Company Only)
(millions, except share amounts)
ASSETS
December 31,
-------------------------------------------
1998 1997
------------------ -------------------
Cash and cash equivalents $ 6 $ 13
Equity in net assets of subsidiaries and affiliates 10,127 9,731
Accounts receivable and accrued interest, less reserves 13 13
Land, buildings and equipment--at cost, less
accumulated depreciation: 1998, $65; 1997, $61 69 67
Due from subsidiaries (net) 1,060 1,285
Other assets 779 666
------------------ -------------------
Total assets $12,054 $11,775
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities $ 756 $ 1,122
Long-term debt 1,085 1,079
Intercompany debentures 515 -
------------------ -------------------
Total liabilities 2,356 2,201
Shareholders' equity:
Common shares, $.60 par value, authorized
1.2 billion shares; issued and
outstanding 450.5 million shares
in 1998 and 466.4 million shares
in 1997 270 280
Capital surplus 4,809 4,624
Retained earnings 4,148 4,188
Other comprehensive income, net of tax:
Net unrealized securities gains 583 579
Foreign currency translation adjustments (112) (97)
------------------ -------------------
Accumulated other comprehensive income 471 482
------------------ -------------------
Total shareholders' equity 9,698 9,574
------------------ -------------------
Total liabilities and shareholders' equity $12,054 $11,775
================== ===================
See Notes to Condensed Financial Information of the Company on page F-6.
F-4
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY
STATEMENTS OF CASH FLOWS
(Parent Company Only)
(millions)
Years Ended December 31,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net income $2,141 $1,991 $1,901
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in net income of subsidiaries and
affiliates (2,147) (2,168) (1,721)
Dividends received from subsidiaries and
affiliates 1,666 1,489 1,426
(FDC Gain)/Restructuring - - (287)
----------- ----------- -----------
Net cash provided by operating activities 1,660 1,312 1,319
----------- ----------- -----------
Net cash provided (used) by investing activities 91 51 124
----------- ----------- -----------
Cash flows from financing activities:
Issuance of American Express common shares 137 168 176
Repurchase of American Express common
shares (1,890) (1,259) (1,041)
Dividends paid (414) (423) (436)
Net increase (decrease) in debt 6 411 (427)
Issuance of intercompany debentures 515 - -
Other (112) (278) 297
----------- ----------- -----------
Net cash used by financing activities (1,758) (1,381) (1,431)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (7) (18) 12
----------- ----------- -----------
Cash and cash equivalents at beginning of year 13 31 19
----------- ----------- -----------
Cash and cash equivalents at end of year $ 6 $ 13 $ 31
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized) in 1998, 1997, and 1996 was
$81 million, $88 million and $216 million, respectively. Net cash received for
income taxes was $145 million for 1998; net cash paid for income taxes was $98
million for 1997; net cash received for income taxes was $296 million for 1996.
F-5
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY
NOTES TO CONDENSED FINANCIAL INFORMATION OF THE COMPANY
(Parent Company Only)
1. Principles of Consolidation
The accompanying financial statements include the accounts of American
Express Company and on an equity basis its subsidiaries and affiliates.
These financial statements should be read in conjunction with the
consolidated financial statements of the Company. Certain prior year's
amounts have been reclassified to conform to the current year's
presentation.
2. Long-term debt consists of (millions):
December 31,
----------------------------------
1998 1997
--------------- --------------
6 3/4% Senior Debentures due June 23, 2004 $499 $ 499
8 1/2% Notes due August 15, 2001 299 299
8 5/8% Senior Debentures due 2022 122 122
Floating Medium-Term Note due December 31, 2000 88 88
WFC Series Z Zero Coupon Notes due December 12, 2000 52 46
Other Fixed and Floating rate notes maturing 1999-2001 25 25
--------------- --------------
$1,085 $1,079
=============== ==============
Aggregate annual maturities of long-term debt for the five years ending
December 31, 2003 are as follows (millions): 1999, $8; 2000, $163; 2001,
$305; 2002, $0; 2003, $0.
3. Intercompany debentures consist solely of Junior Subordinated Debentures
issued to American Express Company Capital Trust I, a wholly-owned
subsidiary of the Company. See Note 5 to the Consolidated Financial
Statements on page 41 of the Company's 1998 Annual Report to Shareholders,
which Note is incorporated herein by reference.
F-6
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1998
(millions)
Reserve for credit losses, Reserve for doubtful
loans and discounts accounts receivable
------------------------------------- ---------------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Balance at beginning of
period $707 $601 $602 $712 $722 $829
Additions:
Charges to income 1,165 837 658 948 (a) 1,153 (a) 1,081 (a)
Recoveries of amounts
previously written-off 74 159 136 - - -
Deductions:
Charges for which
reserves were provided (1,134) (890) (795) (1,061) (1,163) (1,188)
------- ------ ------ ------- ------- --------
Balance at end of period $812 $707 $601 $599 $712 $722
======= ====== ====== ======= ======= ========
(a) Before recoveries on accounts previously written-off, which are
credited to income (millions): 1998--$231, 1997--$237 and 1996--$232.
F-7
EXHIBIT INDEX
-------------
The following exhibits are filed as part of this Annual Report or, where
indicated, were heretofore filed and are hereby incorporated by reference
(*indicates exhibits electronically filed here with.) Exhibits numbered 10.1
through 10.14 and 10.23 through 10.32 are management contracts or compensatory
plans or arrangements.
3.1 Company's Restated Certificate of Incorporation (incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-3, dated July 31, 1997 (Commission File No. 333-32525)).
3.2 Company's By-Laws, as amended through February 23, 1998
(incorporated by reference to Exhibit 3.2 of the Company's Annual
Report on Form 10-K (Commission File No. 1-7657) for the fiscal
year ended December 31, 1997).
4 The instruments defining the rights of holders of long-term debt
securities of the Company and its subsidiaries are omitted
pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K.
The Company hereby agrees to furnish copies of these instruments
to the SEC upon request.
10.1 American Express Company 1989 Long-Term Incentive Plan, as amended
and restated (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q (Commission File No.
1-7657) for the quarter ended March 31, 1996).
10.2 American Express Company 1998 Incentive Compensation Plan
(incorporated by reference to Exhibit 4.4 of the Company's
Registration Statement on Form S-8, dated May 15, 1998 (Commission
File No. 333-52699)).
10.3 American Express Company Deferred Compensation Plan for Directors,
as amended effective July 28, 1997 (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 1-7657) for the quarter ended June 30, 1997).
10.4 Description of American Express Pay for Performance Deferral
Program (incorporated by reference to Exhibit 10.5 of the
Company's Annual Report on Form 10-K (Commission File No. 1-7657)
for the fiscal year ended December 31, 1994).
10.5 American Express Company 1983 Stock Purchase Assistance Plan, as
amended (incorporated by reference to Exhibit 10.6 of the Company's
Annual Report on Form 10-K (Commission File No. 1-7657) for the
fiscal year ended December 31, 1988).
E-1
10.6 American Express Company Retirement Plan for Non-Employee
Directors, as amended (incorporated by reference to Exhibit 10.12
of the Company's Annual Report on Form 10-K (Commission File No.
1-7657) for the fiscal year ended December 31, 1988).
10.7 Certificate of Amendment of the American Express Company Retirement
Plan for Non-Employee Directors dated March 21, 1996 (incorporated
by reference to Exhibit 10.11 of the Company's Annual Report on
Form 10-K (Commission File No. 1-7657) for the fiscal year ended
December 31, 1995).
10.8 American Express Key Executive Life Insurance Plan, as amended
(incorporated by reference to Exhibit 10.12 of the Company's Annual
Report on Form 10-K (Commission File No. 1-7657) for the fiscal
year ended December 31, 1991).
10.9 American Express Key Employee Charitable Award Program for
Education (incorporated by reference to Exhibit 10.13 of the
Company's Annual Report on Form 10-K (Commission File No. 1-7657)
for the fiscal year ended December 31, 1990).
10.10 American Express Directors' Charitable Award Program (incorporated
by reference to Exhibit 10.14 of the Company's Annual Report on
Form 10-K (Commission File No. 1-7657) for the fiscal year ended
December 31, 1990).
10.11 Description of separate pension arrangement and loan agreement
between the Company and Harvey Golub (incorporated by reference to
Exhibit 10.17 of Company's Annual Report on Form 10-K (Commission
File No. 1-7657) for the fiscal year ended December 31, 1988).
10.12 Shearson Lehman Brothers Capital Partners I Amended and Restated
Agreement of Limited Partnership (incorporated by reference to
Exhibit 10.18 of Company's Annual Report on Form 10-K (Commission
File No. 1-7657) for the fiscal year ended December 31, 1988).
10.13 Shearson Lehman Hutton Capital Partners II, L.P. Amended and
Restated Agreement of Limited Partnership (incorporated by
reference to Exhibit 10.19 of Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31,
1988).
10.14 American Express Company Salary/Bonus Deferral Plan (incorporated
by reference to Exhibit 10.20 of Company's Annual Report on Form
10-K (Commission File No. 1-7657) for the fiscal year ended
December 31, 1988).
E-2
10.15 Restated and Amended Agreement of Tenants-In-Common, dated May 27,
1994, by and among the Company, American Express Bank Ltd.,
American Express Travel Related Services Company, Inc., Lehman
Brothers Inc., Lehman Government Securities, Inc. and Lehman
Commercial Paper Incorporated (incorporated by reference to Exhibit
10.1 of Lehman Brothers Holdings Inc.'s Transition Report on Form
10-K (Commission File No. 1-9466) for the transition period from
January 1, 1994 to November 30, 1994).
10.16 Tax Allocation Agreement, dated May 27, 1994, between Lehman
Brothers Holdings Inc. and the Company (incorporated by reference
to Exhibit 10.2 of Lehman Brothers Holdings Inc.'s Transition
Report on Form 10-K (Commission File No. 1-9466) for the transition
period from January 1, 1994 to November 30, 1994).
10.17 Intercompany Agreement, dated May 27, 1994, between the Company and
Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit
10.3 of Lehman Brothers Holdings Inc.'s Transition Report on Form
10-K 1994 (Commission File No. 1-9466) for the transition period
from January 1, 1994 to November 30, 1994).
10.18 Purchase and Exchange Agreement, dated April 28, 1994, between
Lehman Brothers Holdings Inc. and the Company (incorporated by
reference to Exhibit 10.29 of Lehman Brothers Holdings Inc.'s
Transition Report on Form 10-K (Commission File No. 1-9466) for the
transition period from January 1, 1994 to November 30, 1994).
10.19 Registration Rights Agreement, dated as of May 27, 1994, between
the Company and Lehman Brothers Holdings Inc. (incorporated by
reference to Exhibit 10.30 of Lehman Brothers Holdings Inc.'s
Transition Report on Form 10-K (Commission File No. 1-9466) for the
transition period from January 1, 1994 to November 30, 1994).
10.20 Option Agreement, dated May 27, 1994, by and among the Company,
American Express Bank Ltd., American Express Travel Related
Services Company, Inc., Lehman Brothers Holdings Inc., Lehman
Brothers Inc., Lehman Government Securities, Inc. and Lehman
Commercial Paper Incorporated (incorporated by reference to Exhibit
10.31 of Lehman Brothers Holdings Inc.'s Transition Report on Form
10-K (Commission File No. 1-9466) for the transition period from
January 1, 1994 to November 30, 1994).
10.21 Letter Agreement, dated January 30, 1998, between the Company and
Nippon Life Insurance Company (incorporated by reference to Exhibit
10.24 of the Company's Annual Report on Form 10-K (Commission File
No. 1-7657) for the fiscal year ended December 31, 1997).
E-3
10.22 Asset Purchase Agreement dated as of March 12, 1993 between Smith
Barney, Harris Upham & Co. Incorporated, Primerica Corporation and
Shearson Lehman Brothers Inc. (incorporated by reference to Exhibit
10.16 of Shearson Lehman Brothers Holdings Inc.'s Annual Report on
Form 10-K (Commission File No. 1-9466) for the fiscal year ended
December 31, 1992).
10.23 American Express Company 1993 Directors' Stock Option Plan
(incorporated by reference to Exhibit 28.2 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended March 31, 1993).
10.24 American Express Senior Executive Severance Plan (incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form
10-Q (Commission File No. 1-7657) for the quarter ended June 30,
1994).
10.25 Amendment of American Express Senior Executive Severance Plan
(incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended September 30, 1994).
10.26 Amendment of American Express Company Key Executive Life Insurance
Plan (incorporated by reference to Exhibit 10.3 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended September 30, 1994).
10.27 Amendment of American Express Company Salary/Bonus Deferral Plan
(incorporated by reference to Exhibit 10.4 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended September 30, 1994).
10.28 Amendment of Long-Term Incentive Awards under the American Express
Company 1979 and 1989 Long-Term Incentive Plans (incorporated by
reference to Exhibit 10.6 of the Company's Quarterly Report on
Form 10-Q (Commission File No. 1-7657) for the quarter ended
September 30, 1994).
10.29 Amendments of (i) Long-Term Incentive Awards under the American
Express Company 1979 and 1989 Long-Term Incentive Plans, (ii) the
American Express Senior Executive Severance Plan, (iii) the
American Express Supplemental Retirement Plan, (iv) the American
Express Salary/Bonus Deferral Plan, (v) the American Express Key
Executive Life Insurance Plan and (vi) the IDS Current Service
Deferred Compensation Plan (incorporated by reference to Exhibit
10.37 of the Company's Annual Report on Form 10-K (Commission File
No. 1-7657) for the fiscal year ended December 31, 1997).
E-4
10.30 IDS Current Service Deferred Compensation Plan (incorporated by
reference to Exhibit 10.42 of the Company's Annual Report on Form
10-K (Commission File No. 1-7657) for the fiscal year ended
December 31, 1994).
10.31 Amended and Restated American Express Supplemental Retirement Plan
(incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended March 31, 1995).
10.32 American Express Directors' Stock Plan (incorporated by reference
to Exhibit 4.4 of the Company's Registration Statement on Form S-8,
dated December 9, 1997 (Commission File No. 333-41779)).
10.33 Agreement dated February 27, 1995 between the Company and Berkshire
Hathaway Inc. (incorporated by reference to Exhibit 10.43 of the
Company's Annual Report on Form 10-K (Commission File No. 1-7657)
for the fiscal year ended December 31, 1994).
10.34 Agreement dated July 20, 1995 between the Company and Berkshire
Hathaway Inc. and its subsidiaries (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 1-7657) for the quarter ended September 30,
1995).
*12.1 Computation in Support of Ratio of Earnings to Fixed Charges.
*12.2 Computation in Support of Ratio of Earnings to Fixed Charges and
Preferred Share Dividends.
*13 Portions of the Company's 1998 Annual Report to Shareholders that
are incorporated herein by reference.
*21 Subsidiaries of the Company.
*23 Consent of Ernst & Young LLP (contained on page F-2 of this Annual
Report on Form 10-K).
*27 Financial Data Schedule.
E-5
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File No. 1-7657
------------------------
American Express Company
(Exact name of Company as specified in charter)
E X H I B I T S
================================================================================
EXHIBIT INDEX
-------------
The following exhibits are filed as part of this Annual Report or, where
indicated, were heretofore filed and are hereby incorporated by reference
(*indicates exhibits electronically filed herewith.) Exhibits numbered 10.1
through 10.14 and 10.23 through 10.32 are management contracts or compensatory
plans or arrangements.
3.1 Company's Restated Certificate of Incorporation (incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-3, dated July 31, 1997 (Commission File No. 333-32525)).
3.2 Company's By-Laws, as amended through February 23, 1998
(incorporated by reference to Exhibit 3.2 of the Company's Annual
Report on Form 10-K (Commission File No. 1-7657) for the fiscal
year ended December 31, 1997).
4 The instruments defining the rights of holders of long-term debt
securities of the Company and its subsidiaries are omitted
pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K.
The Company hereby agrees to furnish copies of these instruments
to the SEC upon request.
10.1 American Express Company 1989 Long-Term Incentive Plan, as amended
and restated (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q (Commission File No.
1-7657) for the quarter ended March 31, 1996).
10.2 American Express Company 1998 Incentive Compensation Plan
(incorporated by reference to Exhibit 4.4 of the Company's
Registration Statement on Form S-8, dated May 15, 1998 (Commission
File No. 333-52699)).
10.3 American Express Company Deferred Compensation Plan for Directors,
as amended effective July 28, 1997 (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 1-7657) for the quarter ended June 30, 1997).
10.4 Description of American Express Pay for Performance Deferral
Program (incorporated by reference to Exhibit 10.5 of the
Company's Annual Report on Form 10-K (Commission File No. 1-7657)
for the fiscal year ended December 31, 1994).
10.5 American Express Company 1983 Stock Purchase Assistance Plan, as
amended (incorporated by reference to Exhibit 10.6 of the Company's
Annual Report on Form 10-K (Commission File No. 1-7657) for the
fiscal year ended December 31, 1988).
E-1
10.6 American Express Company Retirement Plan for Non-Employee
Directors, as amended (incorporated by reference to Exhibit 10.12
of the Company's Annual Report on Form 10-K (Commission File No.
1-7657) for the fiscal year ended December 31, 1988).
10.7 Certificate of Amendment of the American Express Company Retirement
Plan for Non-Employee Directors dated March 21, 1996 (incorporated
by reference to Exhibit 10.11 of the Company's Annual Report on
Form 10-K (Commission File No. 1-7657) for the fiscal year ended
December 31, 1995).
10.8 American Express Key Executive Life Insurance Plan, as amended
(incorporated by reference to Exhibit 10.12 of the Company's Annual
Report on Form 10-K (Commission File No. 1-7657) for the fiscal
year ended December 31, 1991).
10.9 American Express Key Employee Charitable Award Program for
Education (incorporated by reference to Exhibit 10.13 of the
Company's Annual Report on Form 10-K (Commission File No. 1-7657)
for the fiscal year ended December 31, 1990).
10.10 American Express Directors' Charitable Award Program (incorporated
by reference to Exhibit 10.14 of the Company's Annual Report on
Form 10-K (Commission File No. 1-7657) for the fiscal year ended
December 31, 1990).
10.11 Description of separate pension arrangement and loan agreement
between the Company and Harvey Golub (incorporated by reference to
Exhibit 10.17 of Company's Annual Report on Form 10-K (Commission
File No. 1-7657) for the fiscal year ended December 31, 1988).
10.12 Shearson Lehman Brothers Capital Partners I Amended and Restated
Agreement of Limited Partnership (incorporated by reference to
Exhibit 10.18 of Company's Annual Report on Form 10-K (Commission
File No. 1-7657) for the fiscal year ended December 31, 1988).
10.13 Shearson Lehman Hutton Capital Partners II, L.P. Amended and
Restated Agreement of Limited Partnership (incorporated by
reference to Exhibit 10.19 of Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31,
1988).
10.14 American Express Company Salary/Bonus Deferral Plan (incorporated
by reference to Exhibit 10.20 of Company's Annual Report on Form
10-K (Commission File No. 1-7657) for the fiscal year ended
December 31, 1988).
E-2
10.15 Restated and Amended Agreement of Tenants-In-Common, dated May 27,
1994, by and among the Company, American Express Bank Ltd.,
American Express Travel Related Services Company, Inc., Lehman
Brothers Inc., Lehman Government Securities, Inc. and Lehman
Commercial Paper Incorporated (incorporated by reference to Exhibit
10.1 of Lehman Brothers Holdings Inc.'s Transition Report on Form
10-K (Commission File No. 1-9466) for the transition period from
January 1, 1994 to November 30, 1994).
10.16 Tax Allocation Agreement, dated May 27, 1994, between Lehman
Brothers Holdings Inc. and the Company (incorporated by reference
to Exhibit 10.2 of Lehman Brothers Holdings Inc.'s Transition
Report on Form 10-K (Commission File No. 1-9466) for the transition
period from January 1, 1994 to November 30, 1994).
10.17 Intercompany Agreement, dated May 27, 1994, between the Company and
Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit
10.3 of Lehman Brothers Holdings Inc.'s Transition Report on Form
10-K 1994 (Commission File No. 1-9466) for the transition period
from January 1, 1994 to November 30, 1994).
10.18 Purchase and Exchange Agreement, dated April 28, 1994, between
Lehman Brothers Holdings Inc. and the Company (incorporated by
reference to Exhibit 10.29 of Lehman Brothers Holdings Inc.'s
Transition Report on Form 10-K (Commission File No. 1-9466) for the
transition period from January 1, 1994 to November 30, 1994).
10.19 Registration Rights Agreement, dated as of May 27, 1994, between
the Company and Lehman Brothers Holdings Inc. (incorporated by
reference to Exhibit 10.30 of Lehman Brothers Holdings Inc.'s
Transition Report on Form 10-K (Commission File No. 1-9466) for the
transition period from January 1, 1994 to November 30, 1994).
10.20 Option Agreement, dated May 27, 1994, by and among the Company,
American Express Bank Ltd., American Express Travel Related
Services Company, Inc., Lehman Brothers Holdings Inc., Lehman
Brothers Inc., Lehman Government Securities, Inc. and Lehman
Commercial Paper Incorporated (incorporated by reference to Exhibit
10.31 of Lehman Brothers Holdings Inc.'s Transition Report on Form
10-K (Commission File No. 1-9466) for the transition period from
January 1, 1994 to November 30, 1994).
10.21 Letter Agreement, dated January 30, 1998, between the Company and
Nippon Life Insurance Company (incorporated by reference to Exhibit
10.24 of the Company's Annual Report on Form 10-K (Commission File
No. 1-7657) for the fiscal year ended December 31, 1997).
E-3
10.22 Asset Purchase Agreement dated as of March 12, 1993 between Smith
Barney, Harris Upham & Co. Incorporated, Primerica Corporation and
Shearson Lehman Brothers Inc. (incorporated by reference to Exhibit
10.16 of Shearson Lehman Brothers Holdings Inc.'s Annual Report on
Form 10-K (Commission File No. 1-9466) for the fiscal year ended
December 31, 1992).
10.23 American Express Company 1993 Directors' Stock Option Plan
(incorporated by reference to Exhibit 28.2 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended March 31, 1993).
10.24 American Express Senior Executive Severance Plan (incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form
10-Q (Commission File No. 1-7657) for the quarter ended June 30,
1994).
10.25 Amendment of American Express Senior Executive Severance Plan
(incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended September 30, 1994).
10.26 Amendment of American Express Company Key Executive Life Insurance
Plan (incorporated by reference to Exhibit 10.3 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended September 30, 1994).
10.27 Amendment of American Express Company Salary/Bonus Deferral Plan
(incorporated by reference to Exhibit 10.4 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended September 30, 1994).
10.28 Amendment of Long-Term Incentive Awards under the American Express
Company 1979 and 1989 Long-Term Incentive Plans (incorporated by
reference to Exhibit 10.6 of the Company's Quarterly Report on
Form 10-Q (Commission File No. 1-7657) for the quarter ended
September 30, 1994).
10.29 Amendments of (i) Long-Term Incentive Awards under the American
Express Company 1979 and 1989 Long-Term Incentive Plans, (ii) the
American Express Senior Executive Severance Plan, (iii) the
American Express Supplemental Retirement Plan, (iv) the American
Express Salary/Bonus Deferral Plan, (v) the American Express Key
Executive Life Insurance Plan and (vi) the IDS Current Service
Deferred Compensation Plan (incorporated by reference to Exhibit
10.37 of the Company's Annual Report on Form 10-K (Commission File
No. 1-7657) for the fiscal year ended December 31, 1997).
E-4
10.30 IDS Current Service Deferred Compensation Plan (incorporated by
reference to Exhibit 10.42 of the Company's Annual Report on Form
10-K (Commission File No. 1-7657) for the fiscal year ended
December 31, 1994).
10.31 Amended and Restated American Express Supplemental Retirement Plan
(incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended March 31, 1995).
10.32 American Express Directors' Stock Plan (incorporated by reference
to Exhibit 4.4 of the Company's Registration Statement on Form S-8,
dated December 9, 1997 (Commission File No. 333-41779)).
10.33 Agreement dated February 27, 1995 between the Company and Berkshire
Hathaway Inc. (incorporated by reference to Exhibit 10.43 of the
Company's Annual Report on Form 10-K (Commission File No. 1-7657)
for the fiscal year ended December 31, 1994).
10.34 Agreement dated July 20, 1995 between the Company and Berkshire
Hathaway Inc. and its subsidiaries (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 1-7657) for the quarter ended September 30,
1995).
*12.1 Computation in Support of Ratio of Earnings to Fixed Charges.
*12.2 Computation in Support of Ratio of Earnings to Fixed Charges and
Preferred Share Dividends.
*13 Portions of the Company's 1998 Annual Report to Shareholders that
are incorporated herein by reference.
*21 Subsidiaries of the Company.
*23 Consent of Ernst & Young LLP (contained on page F-2 of this Annual
Report on Form 10-K).
*27 Financial Data Schedule.
E-5