TO OUR FELLOW SHAREHOLDERS:
By and large, 1999 was a very good year. Financial and volume results were outstanding, and we made significant investments to help the business grow in the future. We have many challenges and opportunities to address, but our confidence in the company’s future success is stronger than ever. As we move into 2000, celebrating 150 years in business, we are on very solid financial, strategic and operational ground.
Among the many highlights of the past year are:
- Financial performance that met or exceeded our long-term financial targets of 12 to 15 percent growth in earnings per share, return on equity of 18 to 20 percent and at least an eight percent increase in revenue. In fact, our double-digit increase in revenues last year was the best performance of the decade.
- Growth in cards-in-force in both the United States and internationally, continued success in adding new merchants who accept our cards, and a substantial increase in Cardmember lending balances.
- The introduction of several significant new products — including Blue from American Express, the ultra-premium Centurion Card, Membership B@nking and American Express Brokerage — that set new standards which distinguished American Express from the competition.
- Continued success at American Express Financial Advisors, with strong growth in sales and assets under management, improved investment performance and the launch of new initiatives to help retain and attract additional financial advisors.
- Solid international card and travel related business results, including higher billed business and lending balances, despite economic weakness in many areas of the world.
FINANCIAL RESULTS
Net income for 1999 was $2.48 billion, up 16 percent from $2.14 billion in 1998. On a diluted per-share basis, earnings were $5.42, up 17 percent from $4.63. Net revenues on a managed basis for the year totaled $19.5 billion, up 13 percent from $17. 2 billion. Our return on equity was 25.3 percent.
The year-ago results include a credit loss provision at American Express Bank relating to its Asia/Pacific portfolio and two partially offsetting gains. Excluding those 1998 items, income increased 12 percent from $2.20 billion and diluted earnings per share grew 14 percent from $4.76.
In January, our board of directors voted for a three-for-one split of American Express common shares, subject to shareholder approval of an increase in authorized shares. Shareholders of record as of April 25, 2000 will receive two additional common shares for each share held. The additional shares will be distributed on May 10, 2000. Following the split, the quarterly dividend will be set at $0.08 per share, rounded up from what would have been $0.075. The stock split will result in American Express shares trading in a range more consistent with shares of other major companies.
Our capital position remains strong and we continue to return excess equity to shareholders by repurchasing shares. More than nine million shares were repurchased in 1999, creating substantial value for our shareholders. We have repurchased a total of 106 million shares since the inception of repurchase programs in September 1994.
CONTINUED FOCUS ON GROWTH
Throughout the year, we made strong progress on initiatives that cover many of our businesses, including:
- Implementing a comprehensive Internet strategy to drive business growth.
We clearly defined an Internet strategy focused on four key objectives:
- becoming a leading payment provider for online transactions;
- offering exceptional online customer service;
- becoming a preferred destination site for existing and new customers; and,
- using interactive capabilities to improve dramatically our underlying economics.
We made good progress against each objective in 1999. Nearly 1.6 million Cardmembers are registered with American Express Online Services; this figure has grown at an average rate of nearly 70,000 monthly. This service enables Cardmembers to review and pay their American Express bills electronically, view their Membership Rewards accounts and conduct various other functions quickly and securely online.
We redesigned our Website and launched the initial version of "My American Express," enabling customers to tailor our site to their needs. We also established online hubs to provide integrated financial, travel and entertainment services to our customers.
Additional Internet accomplishments related to specific businesses are detailed later in this letter.
Critical to each of these initiatives, and our interactive strategy overall, is our ability to use the Internet to realize significant cost savings throughout our organization and fund future online investments. This will continue to be a key objective in the coming year.
- Developing a smart card strategy that will help us play a key role in shaping online payments.
We captured a leadership position in this area in 1999 through several important initiatives, including launching Blue from American Express in the United States and the ultra-premium Centurion Card in the United Kingdom, and licensing a set of technical specifications that will most likely become the de facto standard for travel and entertainment applications on smart cards.
- Leveraging our brand and continuing to improve the overall customer experience.
The American Express brand, and all that it stands for, continues to be one of our strongest competitive advantages. We plan to incorporate programs to further strengthen customer service throughout the organization.
- Expanding financial services to consumers around the world.
We leveraged American Express Financial Advisors’ investment management, product and financial planning capabilities, American Express Bank’s geographic presence, and the marketing expertise resident in our card business.
- Continuing to open our card network to banks and other financial institutions.
We made significant progress in expanding our international card network, which now comprises 58 partnership arrangements in more than 60 countries.
Progress in expanding our network business in the United States remains blocked by the anticompetitive bylaws of the bankcard associations. We are encouraged by the United States Department of Justice lawsuit against Visa and MasterCard. A resolution is not imminent, but we believe open competition will ultimately prevail to the benefit of consumers.
Although 1999 was a very good year, it was by no means perfect. We had several disappointments, among them:
- Overall expenses that rose at the same rate as revenues. This arithmetic is sustainable, but not adequate.
- A time-to-market for new products and services that is much better than in the past, but still falls short of our standards.
- A difficult year at American Express Bank.
- Legal actions against American Express Financial Advisors that resulted in an agreement in principle to settle three class-action lawsuits related to the sales of insurance and annuity products. We expect that the settlement will provide for approximately $215 million of benefits to more than two million class participants.
We will give more detail on initiatives and how we are addressing disappointments later in the letter as we discuss the results, accomplishments and challenges in each of our major business areas.
BUSINESS RESULTS
U.S. FINANCIAL SERVICES
For the 15th year in a row, American Express Financial Advisors achieved impressive growth and record financial results. In addition to revenue and net income increases of 17 percent and 14 percent, respectively, several key business indicators showed improvement as well.
Our total sales force increased 10 percent to nearly 11,400. Assets owned, managed or administered increased by nearly 24 percent and totaled $262.5 billion at the end of 1999. Our total number of clients grew by four percent during 1999. Nearly one-third of them are American Express Cardmembers, who have become a major source of new business.
We continued to enhance our three primary distribution channels for financial services. These include: a Retail Channel, consisting of financial advisors and direct services (online, telephone and mail); an Institutional Channel with expanded 401(k) capabilities; and a Third-Party Channel of financial institutions through whom we distribute our products.
Our ability to attract and retain top quality advisors has been among the best in the industry. Still, we believe there is room for improvement.
Starting with a few market groups in 1999, we offered advisors a choice built around different levels of structure, service and compensation. About 35 percent of these advisors chose to be American Express employees; some 65 percent preferred to remain American Express–branded independent contractors with a moderate level of support. As we continue to roll out this strategy of multiple advisor platforms in 2000, advisors will have a third choice: operating as nonbranded independent contractors with a minimum level of support. Securities America, the independent broker/dealer we acquired in 1998, will form the basis of this platform.
The changes in our retail business go well beyond the platform strategy. We relaunched our online brokerage business to serve clients who prefer more autonomy in making financial decisions and executing transactions. American Express Brokerage offers comprehensive brokerage services, including online trading, research and comprehensive planning tools, and access to financial advisors, all at highly competitive prices.
We formed strategic partnerships in 1999 to strengthen our retail channel offerings and now provide clients with access to more than 2,000 mutual funds. In an arrangement with Microsoft, we provide extensive content for the MSN MoneyCentral personal finance Website. In addition to varied financial planning information, the site provides links to Financial Advisors’ home page and our online brokerage site.
The Institutional Channel includes 401(k) and separate account asset management services for corporate, public and union retirement funds. We rolled out enhancements to many 401(k) clients, including the ability to check balances and initiate transfers online. New clients added during the year include Best Buy Co., Inc., The Limited, Corporate Express, Circuit City Stores and Progressive Insurance. We now serve more than 730 institutions.
We also added several large companies to our Investing at Work program, including SmithKline Beecham, Greyhound Lines and St. Jude Medical, Inc. This is an after-tax investment program for employees who want to save for financial goals beyond their company retirement savings plan.
Through the Third-Party Channel, we expanded our network of partners and the range of products we offer to third-party distributors. However, our third-party sales efforts have lagged behind expectations. Our overall mutual fund performance improved relative to the past two years, the key market indexes, and to the competition. Nearly 80 percent of American Express Funds, Variable Annuity and Universal Life Insurance products finished in the first or second quartile of their peer groups for 1999. In addition, all our United States taxable fixed income funds outperformed their peer group benchmarks in 1999. Our United States diversified equity funds ranked sixth among large mutual fund groups.
Challenges for Financial Advisors include improving large cap equity performance for institutional clients and expanding sales of financial plans using our Financial Advisory Service financial planning software. As more advisors become adept at using this new tool, we believe sales will increase. Client acquisition is improving, but must get better. In particular, we are working to further enhance cross selling to Cardmembers.
INTERNATIONAL FINANCIAL SERVICES
Through an expansion of American Express Financial Advisors in Japan, we now sell mutual funds directly to Cardmembers in this major market. We plan to enhance our offering to include financial planning services.
At American Express Bank, our focus continues to be on Private Banking and Personal Financial Services. We expanded both areas in 1999 with Private Banking holdings now totaling $9 billion, up 26 percent from last year.
The Bank launched a number of new products during the year, including mobile phone banking in Hong Kong and Indonesia. We also added an online mortgage service in Hong Kong. We introduced a globally diversified mutual fund family in France, Germany, Italy and the United Kingdom. Direct sales of these offerings, known as the World Express Fund, have been below expectations. In the future, we will put greater emphasis on sales through third parties such as banks and financial advisors.
Our ongoing efforts to shift the Bank’s business mix from corporations to individuals tempered financial results in 1999. We reduced our wholesale loan portfolio and geographic concentration of risk. Lower foreign exchange trading revenues also negatively affected results.
Critical to the Bank’s success is our ability to build deeper relationships with individuals through expanded cross selling of products from other areas of the company. We made good progress in 1999. The number of Cardmembers who have relationships with the Bank and the amount of American Express Financial Advisors’ certificates held by Bank clients both increased during the year. We plan to continue these efforts to reenergize the Bank’s performance.
Our Travelers Cheque Group strengthened its industry leadership in 1999, although total sales were down slightly from year-ago levels. We gained sales from competitors and added four major banks as selling partners. Thanks to a renewed marketing focus, consumer Gift Cheque sales increased by 27 percent.
Although Travelers Cheques do not represent a high-growth business, our leadership in the category and our ability to grow share — combined with a new, focused strategy to increase consumer preference for these products — should continue to make this an attractive business for us.
INTERNATIONAL CARD AND TRAVEL
New product introductions, expansion of our global network through new partnership agreements, and increased merchant coverage strengthened our international card business in 1999. Total cards-in-force and billed business increased by nine percent. In the United Kingdom, we introduced the Centurion Card, an ultra-premium charge card available by invitation only, that offers an array of travel, lifestyle and financial benefits delivered with highly personalized service. The card comes with a smart chip, which enables us to add additional functionality in the future.
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Our focus on the more affluent sectors of the market is not limited to Centurion, though. We have more than doubled our international Platinum Card customer base over the past two years, with launches in eight countries. We further expanded our reach through dozens of new affinity cards, including Certified Practising Accountants (CPAs) in Australia and A.S. Roma, Rome’s soccer team; new distribution agreements, including Dresdner Bank in Germany and BankBoston in Argentina; a cobranded card agreement with Alitalia in Italy; and an agreement to issue a cobranded credit card with Costco in Canada.
Our international credit card business is strong and continues to grow. We launched revolving Gold Cards in Hong Kong, Singapore and Australia and a Blue Card targeted to young consumers in the Netherlands. Cardmember lending balances outside the United States increased 37 percent during the year.
In addition to our proprietary business, we expanded our Global Network Services presence; we now have 58 partnership arrangements in more than 60 countries. We launched 38 new products with our partners during the year, many of them with existing partners as we continued to deepen these relationships.
We continued to expand our merchant network, adding merchants such as Costco in Canada, the Roads and Traffic Authority in Australia, Somerfield supermarkets in the United Kingdom and Bodega Aurrera supermarkets in Mexico. Our merchant network outside the United States now accommodates 86 percent of Cardmembers’ general purpose plastic spending, up from 83 percent a year ago.
However, we still have an issue with suppression — when merchants that accept American Express encourage a customer to use another card or cash — particularly in Europe and Asia. This is a problem shared by all card issuers, but we want to reduce the problem for our Cardmembers.
International travel sales were up, thanks to the 1998 acquisition of Havas Voyages, but competition in business travel remains fierce.
Overall, our strategic progress was good, but weak economic conditions in certain major markets around the world, including a slowdown throughout Europe, dampened results. We continue to aggressively pursue both short-and long-term reengineering initiatives to better align our international operations for growth.
U.S. CONSUMER CARD SERVICES
Our consumer card business in the United States enjoyed an outstanding year in 1999. Billed business grew at double-digit rates, new card acquisition more than doubled, and the number of charge cards increased for the first time in nearly a decade. We also made great progress in our revolving credit business. Managed lending balances grew at double-digit rates as more Cardmembers turned to American Express for their lending needs.
Overall credit quality remains very strong due to prudent lending and strong economic conditions.
We launched Blue from American Express, the first widely marketed credit card in the United States with a smart chip. This card was designed to provide added security and rewards for Cardmembers who shop online. Demand for this product has significantly exceeded expectations, so much so that we had to deal with a backlog of applications.
We also launched the ultra-premium Centurion Card, with a range of services and a market focus similar to its predecessor in the United Kingdom, as well as the Platinum Delta SkyMiles Card, a premium extension of the Delta SkyMiles Card. In addition, we issued a credit card exclusively for Costco members, which offers rebates on spending, and introduced the Fidelity American Express® Gold Card and the Fidelity American Express® Platinum Card, linked directly to the customer’s Fidelity Ultra Service Account®.
Cardmembers are increasingly using their cards for everyday spending at supermarkets, drug stores, gas stations and for paying utility bills, road tolls and federal taxes. To increase card usage, we continued to promote bonus programs in key merchant growth areas. These included successful double-points reward programs at grocery stores, drugstores and at Wal-Mart.
Our new product launches extended beyond cards. We significantly enhanced our Web-based capabilities in 1999 with the launch of Membership B@ nking. Our online bank offers high rates on deposits, rebates on ATM surcharges from other banks, and free checking and online bill payment for customers who maintain minimum balances.
We are using online technology to enhance our service capabilities as well. During the year we introduced Express Approval to provide instant decisions for new account applications on selected products — via the Web and by telephone. We continued to successfully use inbound telephone calls to deepen customer relationships by offering relevant additional products or services. Cardmembers have purchased more than one million new products and services through this channel.
We strengthened our Membership Rewards program with several significant changes. In addition to a new fee structure, cash rewards and the option to buy points, we expanded the program to include two new levels: Membership Rewards Plus, for frequent travelers, and Membership Rewards Options, for those who prefer retail-oriented awards.
American Express Relationship Services continued to enroll Cardmembers in fee-based service programs in 1999. We had a significant increase in enrollments in Airflight and Baggage Insurance — our primary services — as well as in newer services such as VIP Subscriptions, a magazine subscription service, CreditAware, a credit bureau profile service, and Family Shield, an accidental death insurance plan. We continued to expand our student loan business and now have relationships with more than 450 colleges and universities.
In 1999, we signed several leading retail partners for our Electronic Gift Cards, including Barnes & Noble and Eddie Bauer. We also relaunched the "Be My Guest" restaurant gift program.
As part of our Internet strategy, American Express Relationship Services invests in promising Web-based ventures that we believe will add value to our business. In 1999, we made 12 new investments in companies, including Netcentives, a provider of online marketing technology that helps drive customer loyalty; GetThere.com, providing online reservations and reporting for corporate and leisure travel; BigVine, a Web-based business-to-business barter company; and Qpass, which facilitates online purchases of digital content and services such as news articles and music.
During the year we decided to discontinue our Merchandise Services business. Decreasing revenue and unsustainable economics diminished the attractiveness of this business, which will close in the first quarter of 2000.
CORPORATE CARD AND TRAVEL SERVICES
The American Express Corporate Card continues to be the recognized leader for managing business travel and entertainment expenses throughout the world. In 1999, challenging economic conditions in many markets and ongoing downward pressure on profit margins throughout the travel industry created a difficult operating environment. Even so, we continued to grow the business and improved our profitability overall.
We added or expanded Corporate Card relationships with several large companies during the year, including Merck and Co., UBS AG and MCI WorldCom. Additionally, Compaq Computer signed on as a Corporate Card, Corporate Travel and Corporate Purchasing Card client.
We are rapidly establishing a strong presence in business-to-business E-commerce. During the year we launched American Express @Work, our corporate desktop portal that helps business customers manage their Corporate Card and Corporate Purchasing Card programs online. To help business travel customers automate their travel arrangements, we expanded AXI TRAVEL, our corporate online travel booking system, into eight countries outside the United States.
Our partnership with GetThere.com will provide a choice of online travel reservation systems to our customers. We are preparing to roll out a customized version of GetThere.com’s online corporate booking system.
Our leadership position in Corporate Travel helped us expand relationships with several major clients in 1999.
The Corporate Purchasing Card business, which helps companies manage the acquisition of supplies, equipment and services, signed or expanded significant accounts in 1999, including Seagate Technology and Merck and Co.
To expand our capabilities in the growing field of online purchasing, we are developing a business-to-business digital marketplace. We have also partnered with 10 leading E-commerce firms to provide a faster, more efficient way for customers to buy office supplies and related products using the Corporate Purchasing Card. We believe that the expanding use of business-to-business E-commerce solutions has the potential to fuel future growth in online purchasing.
Reductions in business travel spending, as well as another round of airline commission cuts, increased pressure on our travel business once again. To address this ongoing industry challenge, we continued to modify our business model. We are moving from reliance on commission revenues from suppliers to an emphasis on fees from customers. Unbundling the array of travel services we provide and pricing them individually based on their value to customers enables us to justify fees for different services.
SMALL BUSINESS SERVICES
We aggressively continued our drive to be the leading payment provider for small businesses in the United States. We made very good progress during 1999, with double-digit increases in billed business and cards-in-force, and strong increases in average spending on our cards.
During the year, we issued a credit card especially for Costco members who are small business owners. In addition to providing card services, we help meet the financial needs of small businesses through equipment financing and lending. Our small business managed lending portfolio more than doubled during the year and overall credit quality exceeded our expectations.
We also reach small businesses through Internetbased services, including the Small Business Exchange on the American Express Website. In 1999, we announced a sponsorship agreement with Netscape that will help us acquire new customers through the Internet.
During the year, we began to better integrate our Tax and Business Services unit, which provides financial and tax advice to small businesses, into the rest of our operations.
Consumer Travel, which is managed with our Small Business Services unit, experienced strong sales growth in 1999. This growth was fueled in part by recent travel company acquisitions, including Golden Bear Travel Agency, a cruise company, and Travel Impressions, a package tour company.
MERCHANT SERVICES
Strengthening our relationships with merchants who accept American Express Cards is an ongoing focus that helps drive success in a number of our businesses. By offering an expanded roster of services, including Internet-based programs, we help merchants more effectively manage their business. For example, our E-commerce Resource Center provides merchants with tips on how to develop and implement online business strategies.
We added a record number of new merchants in 1999, including the one-millionth merchant signed in the United States by our external sales agents. In the United States, our merchant network now accommodates more than 95 percent of Cardmembers’ general purpose plastic spending.
We continued to expand United States retail coverage and can now accommodate 94 percent of Cardmembers’ general purpose plastic spending at retailers. Today, retail purchases in the United States comprise nearly 50 percent of consumer Cardmembers’ spending on our cards and nearly 40 percent of overall Cardmember spending on our cards. This improvement reflects the benefits of merchant signings, our expanded range of products and our targeted rewards programs.
We signed Costco during the year and by midyear 2000 American Express Cards will be the only general purpose cards accepted at Costco warehouse clubs. Other major signings included Publix Super Markets, H-E-Butt Grocery Co., the remaining Kroger locations and Busch Entertainment. We also added a significant number of new merchants in the business-to-business category.
A key focus this year will be enhancing our merchant processing and servicing systems to handle the continued growth of our merchant network.
In addition to expanding our merchant network, we actively work to drive Cardmember usage. Key campaigns with supermarkets and drugstores during the year featured double Membership Rewards points and helped encourage our Cardmembers to use their cards for everyday spending. Average spending on American Express Cards is nearly four times the amount spent on Visa and MasterCard cards.
Similar efforts to ensure comprehensive merchant coverage and fuel Cardmember spending are underway in the virtual marketplace as well. Today, our cards are accepted at 95 percent of the top 500 E-commerce Websites, which make up the majority of online purchase volume. This coverage is comparable to our presence in the physical world. Online spending on American Express Cards is growing rapidly and is keeping pace with growth in industry-wide Internet spending. Key online signings included eBay, Sothebys.com and 2TheMart.com.
Our Online Fraud Protection program reminds United States Cardmembers that it is safe to use American Express Cards on the Internet since customers are not liable for any unauthorized online purchases.
We expanded our automatic teller machine (ATM) business with the acquisition of three additional ATM networks. We now own nearly 9,000 ATMs, making us the largest off-premise ATM deployer in the United States. We plan to use this significant network to deliver a range of services to Cardmembers and to help build retail sales for merchants.
Merchant satisfaction, which is at its highest level in four years, benefited from new programs initiated in 1999. We improved client servicing, more actively managed accounts and launched online self-servicing, which enables merchants to automatically update their account information. To better integrate new merchants into our network, we established a Welcome Force to meet with new merchants and clearly explain our value proposition and services. Our flat fee rate structure has dramatically improved satisfaction for merchants that generate less than $5,000 in annual American Express charge volume.
As in the international markets, merchant suppression remains an issue. We are actively working to battle this activity through better communication of the American Express value story and by canceling merchants who suppress usage of the American Express Card.
FUTURE CHALLENGES
Our solid success in 1999 does not diminish the many challenges we face. Competition in all of our businesses is intense and new competitors are constantly emerging. Our Internet strategy, which gives us a strong presence in the online world, will continue to evolve. The nimble, can-do attitude characterizing this environment will be infused throughout our entire organization as we break down silos and increase cross-selling opportunities. Emerging Internet applications also give us a chance to reengineer aspects of our business to improve efficiencies and achieve cost savings that can fund future technology advancements.
All in all, we have a solid strategy and a wealth of ideas about how to capitalize on the opportunities that lie ahead. We are actively patenting technologies that should give us a competitive advantage. The true challenge will be to balance our choices and execute wisely.
Our dedicated employees, financial advisors and management are key to effective implementation of our plans. Their competencies and drive have contributed to our success.
We continue to measure how well we, as a company, meet employee needs through an annual Employee Survey. In 1999, nearly 73,000 employees participated in the survey, rating the company even higher overall than in past years. Half of the dimensions we measure showed significant improvement and our results among different racial groups, a particular focus in recent years, improved as well. Additionally, the company is increasingly being recognized by outside constituencies as one of the top corporate employers. We are pleased with this progress, but our quest to create a highly effective work environment will continue.
The wise leadership of our board of directors bolsters the commitment of our organization and management team. Anne L. Armstrong, a valued member of our board for 17 years, will retire this year. We are grateful for her service and we wish her well. Early in 1999, Robert L. Crandall, former chairman and chief executive officer of AMR Corporation and American Airlines, joined our board. We welcome him and already benefit from the depth and range of his experience.
Our board and management recognize that CEO succession planning is a critical part of good corporate governance and key to the company’s future. We began this process several years ago with Ken’s appointment as president and chief operating officer. During 1999, we announced plans to have Ken become CEO at the time of our annual meeting in April 2001.
Two senior colleagues will retire this year: Richard Karl Goeltz, vice chairman and chief financial officer, and Allan Z. Loren, executive vice president and chief information officer. Both have served the company well, and we will miss them.
THE EVOLUTION CONTINUES
In many ways, the history of our company and the evolution of the American Express brand over 150 years have shaped the actions we take today. The founders of American Express probably never envisioned that the company would become one of only a handful of major firms to thrive for the next century, let alone the next 150 years. But when Henry Wells, William Fargo and John Butterfield created American Express in 1850, they were focused on serving customers, expanding the business and winning in the marketplace — a focus that continues today.
The attributes on which American Express was built — trust, security, integrity, quality and customer service — are key competitive advantages that we continue to bring to bear with every product and service we offer.
As we look ahead, the business opportunities are as good, if not better, than those we took advantage of in 1999. The momentum we carry forward will help us meet the ongoing challenges we face as we embark on another great 150 years.
Sincerely,
Harvey Golub
Chairman and Chief Executive Officer
Kenneth I. Chenault
President and Chief Operating Officer
February 28, 2000
