Business Context and Reporting Period
Company: American Express Company
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 1998
Headquarters: New York, New York
American Express is primarily engaged in providing travel-related services, financial advisory services, and international banking services globally. The company operates through three main segments: Travel Related Services (TRS), American Express Financial Advisors (AEFC), and American Express Bank/Travelers Cheque (AEB). As of December 31, 1998, the company employed approximately 85,000 people.
Key Financial Metrics
Consolidated Performance (Parent Company Only):
The filing incorporates consolidated financial statements by reference. Parent company-only data is available in Schedule I:
- Net Income (Parent): $2,141 million (1998) vs. $1,991 million (1997).
- Equity in Net Income of Subsidiaries: $2,147 million (1998).
- Parent Company Cash Flow: Net cash provided by operating activities was $1,660 million. Net cash used by financing activities was $1,758 million, driven largely by $1,890 million in share repurchases.
American Express Bank Ltd. (AEB) Performance:
AEB reported a net loss for the year due to significant credit provisions in the Asia/Pacific region.
| Metric (in millions) | 1998 | 1997 |
|---|---|---|
| Net Financial Revenues | $620 | $637 |
| Non-Interest Expenses | $756 | $487 |
| Net (Loss) Income | ($84) | $82 |
| Total Assets | $11,576 | $12,868 |
| Loans, Net | $5,404 | $6,062 |
| Reserve for Loan Losses / Total Loans | 3.83% | 2.11% |
Material Changes vs. Prior Period
- AEB Credit Losses: AEB recorded a $138 million after-tax credit loss provision in the first quarter of 1998, primarily related to business in the Asia/Pacific region, specifically Indonesia. This resulted in a net loss for AEB in 1998 compared to a profit in 1997.
- Loan Portfolio Reduction: AEB's total loans outstanding decreased to $5.6 billion in 1998 from $6.2 billion in 1997, reflecting a strategic decision to de-emphasize corporate and correspondent banking.
- TRS Growth: TRS Global Network Services saw a 30% increase in billed business in 1998. TRS established 16 new network arrangements outside the U.S. and increased U.S. merchant coverage to over 94% of Cardmember spending.
- Government Contract Termination: In November 1998, TRS terminated its U.S. Government Card contract, representing approximately 1.6 million cards and $3.5 billion in annual billed business, after reevaluating earnings potential.
- Acquisitions: TRS acquired Travel One (travel agency), CapitaFinance (equipment financing), and Travel Impressions. AEFC acquired Securities America, Inc. (1,100 financial advisors).
Outlook, Risks, and Management Commentary
Management Strategy: TRS is focusing on deepening relationships with core Cardmembers, increasing lending balances, and expanding merchant acceptance to parity with bankcard networks. AEB is shifting focus toward private banking and personal financial services, which showed growth in client holdings (22%) and volumes (23%).
Key Risks and Contingencies:
- Asia/Pacific Economic Conditions: Continued economic downturn in Asia poses risks to credit exposures and currency liquidity. AEB is actively monitoring these exposures.
- Competition: Intense competition exists in card issuing (VISA, MasterCard), financial advisory, and travel services. The filing notes a lawsuit filed by the U.S. Department of Justice against VISA and MasterCard regarding antitrust rules that prevent U.S. banks from issuing American Express cards.
- Regulatory Environment: Increased scrutiny on insurance market conduct, privacy/data protection (EU Directive), and banking capital requirements.
- Year 2000 (Y2K): The company is managing significant costs and risks related to Y2K compliance for its systems and third-party interfaces.
Investor Verification Checklist
- AEB Credit Quality: Verify the adequacy of the $259 million reserve for credit losses at AEB and the trajectory of non-performing loans in the Asia/Pacific region.
- Consolidated Financials: Review the full "Consolidated Five-Year Summary of Selected Financial Data" and "Consolidated Statements of Income" (incorporated by reference from the Annual Report to Shareholders) for total company revenue and profit figures, as the 10-K text primarily details segment and parent-only data.
- Government Contract Impact: Assess the long-term revenue impact of the terminated U.S. Government Card contract ($3.5 billion billed business).
- Y2K Readiness: Confirm the status of Year 2000 remediation efforts and associated costs, as referenced in the Annual Report.
- Legal Proceedings: Monitor the status of class-action lawsuits regarding insurance sales practices (e.g., Benacquisto v. IDS Life) and the tax refund litigation against the U.S. government.