-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GQDoqGO8HyNclt/4wDoxEJG7L1J3oZIotbutRYYgh34/sCI37lOYOtMNbHIv9TTo JWa6KcYwBrAuAAA0uB5pNw== 0000004969-98-000013.txt : 19980401 0000004969-98-000013.hdr.sgml : 19980401 ACCESSION NUMBER: 0000004969-98-000013 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: CBOE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN EXPRESS CREDIT CORP CENTRAL INDEX KEY: 0000004969 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 111988350 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06908 FILM NUMBER: 98580094 BUSINESS ADDRESS: STREET 1: ONE CHRISTINA CENTER 301 N WALNUT STREET STREET 2: SUITE 1002 CITY: WILMINGTON STATE: DE ZIP: 19801 BUSINESS PHONE: 3025943350 MAIL ADDRESS: STREET 1: ONE CHRISTINA CENTER 301 N WALNUT STREET STREET 2: SUITE 1002 CITY: WILMINGTON STATE: DE ZIP: 19801 10-K405 1 CREDCO 1997 10-K405 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, 1997 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. 1-6908 AMERICAN EXPRESS CREDIT CORPORATION (Exact name of Registrant as specified in its charter) Delaware 11-1988350 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Christina Center, Wilmington, Delaware 19801 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (302) 594-3350. Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange Title of each class on which registered ----------------------------------------- --------------------- 6 1/8% Senior Debentures due June 15, 2000 New York Stock Exchange 1 1/8% Cash Exchangeable Notes due Chicago Board Options February 19, 2003 Exchange Securities registered pursuant to Section 12 (g) of the Act: None. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND HAS THEREFORE OMITTED CERTAIN ITEMS FROM THIS REPORT IN ACCORDANCE WITH THE REDUCED DISCLOSURE FORMAT PERMITTED UNDER INSTRUCTION I. 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 the 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. X --- American Express Company, through a wholly-owned subsidiary, owns all of the outstanding common stock of the Registrant. Accordingly, there is no market for the Registrant's common stock. At March 30, 1998, 1,504,938 shares were outstanding. Documents incorporated by reference: None. PAGE PART I Item 1. BUSINESS. Introduction American Express Credit Corporation (including its subsidiaries, where appropriate, "Credco") was incorporated in Delaware in 1962 and was acquired by American Express Company ("American Express") in December 1965. On January 1, 1983, Credco became a wholly-owned subsidiary of American Express Travel Related Services Company, Inc. (including its subsidiaries, where appropriate, "TRS"), a wholly-owned subsidiary of American Express. Credco is primarily engaged in the business of purchasing most charge Cardmember receivables arising from the use of the American Express(R) Card, including the American Express(R) Gold Card, Platinum Card(R) and Corporate Card issued in the United States, and in designated currencies outside the United States. Credco also purchases certain revolving credit receivables arising from the use of the Optima(R) Card and interest-bearing extended payment plan Sign & Travel(R) receivables arising from travel service sales and Special Purchase(SM) Accounts receivables which provide for extended payment for certain charges. The American Express Card and the Optima Card are referred to herein as the "Card." American Express Card Business TRS currently issues the Card in 45 currencies (including cards issued by independent operators). The Card, which is issued to individual consumers for their personal account or through a corporate account established by their employer for its business purposes, permits 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 the Card. 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. Except in the case of the Optima Card, a family of revolving credit cards which is marketed in the United States and other countries, the charge Card is primarily designed as a method of payment and not as a means of financing purchases of goods or services and carries no pre-set spending limit. 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 the Optima Card and certain extended payment plans, payment of the full amount billed each month is due from the Cardmember upon receipt of the bill, 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 American Express 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 1 and foreign countries have similar consumer credit protection and disclosure laws. The application of federal and state bankruptcy and debtor relief laws affect Credco to the extent such laws result in any amounts owed being classified as delinquent and/or charged off as uncollectible. These laws and regulations have not had, and are not expected to have, a material adverse effect on the charge Card and consumer lending business, either in the United States or on a worldwide basis. General Nature of Credco's Business Credco purchases certain Cardmember receivables arising from the use of the Card throughout the world pursuant to agreements (the "Receivables Agreements") with TRS. Net income primarily depends on the volume of receivables arising from the use of the Card purchased by Credco, the discount rates applicable thereto, the relationship of total discount to Credco's interest expense and the collectibility of the receivables purchased. The average life and collectibility of accounts receivable generated by the use of the Card are affected by factors such as general economic conditions, overall levels of consumer debt and the number of new Cards issued. Credco purchases Cardmember receivables without recourse. Amounts resulting from unauthorized charges (for example, those made with a lost or stolen Card) are excluded from the definition of "receivables" under the Receivables Agreements and are not eligible for purchase by Credco. If the unauthorized nature of the charge is discovered after purchase by Credco, TRS repurchases the charge from Credco. Credco generally purchases non-interest-bearing charge Cardmember receivables at face amount less a specified discount agreed upon from time to time and interest-bearing revolving credit Cardmember receivables at face amount. The Receivables Agreements generally require that non-interest-bearing receivables be purchased at discount rates which yield to Credco earnings of not less than 1.25 times its fixed charges on an annual basis. The Receivables Agreements also provide that consideration will be given from time to time to revising the discount rate applicable to purchases of new receivables to reflect changes in money market rates or significant changes in the collectibility of receivables. New groups of Cardmember receivables are generally purchased net of reserve balances applicable thereto. Extended payment plan receivables are primarily funded by subsidiaries of TRS other than Credco; however, Credco purchases certain extended payment plan receivables. At both December 31, 1997 and 1996, extended payment plan receivables owned by Credco totaled $1.8 billion representing 9.4 percent and 10.4 percent, respectively, of all interests in receivables owned by Credco. These extended payment plan receivables consist of certain interest- bearing extended payment plan receivables comprised principally of Optima and Sign & Travel accounts arising from travel service sales, Special Purchase Accounts receivables and non-interest-bearing deferred merchandise receivables arising from direct mail merchandise sales by TRS. Credco, through a subsidiary, Credco Receivables Corp. ("CRC"), purchases gross participation interests in the seller's interest in both non-interest-bearing and interest-bearing Cardmember receivables owned by two master trusts formed by TRS as part of its asset securitization programs. The gross participation interests represent undivided interests in the receivables originated by TRS and by American Express Centurion Bank, a subsidiary of TRS. See note 4 in "Notes to Consolidated Financial Statements" appearing herein. The Card issuers, at their expense and as agents for Credco, perform accounting, clerical and other services necessary to bill and collect all Cardmember receivables owned by Credco. The Receivables Agreements provide that, without prior written consent of Credco, the credit standards used to determine whether a Card is to be issued to an applicant may not be materially reduced and that the policy as to the cancellation of Cards for credit reasons may not be materially liberalized. 2 American Express, as the parent of TRS, has agreed with Credco that it will take all necessary steps to assure performance of certain of TRS' obligations under the Receivables Agreement between TRS and Credco. The Receivables Agreements may be terminated at any time by the parties thereto, generally upon little or no notice. Alternatively, such parties may agree to reduce the required 1.25 fixed charge coverage ratio, which could result in lower discount rates and, consequently, lower revenues and net income of Credco. The obligations of Credco are not guaranteed under the Receivables Agreements or otherwise by American Express or the Card issuers. Volume of Business The following table shows the volume of Cardmember receivables purchased by Credco, net of Cardmember receivables sold to affiliates, during each of the years indicated, together with receivables owned by Credco at the end of such years (millions):
Volume of Cardmember Cardmember Receivables Owned Receivables Purchased at December 31, Year Domestic Foreign Total Domestic Foreign Total ---- -------- ------- ----- -------- ------- ----- 1997 $108,573 $37,030 $145,603 $15,581 $4,028 $19,609 1996 100,512 35,299 135,811 13,530 3,829 17,359 1995 91,299 30,638 121,937 13,179 3,260 16,439 1994 83,851 25,639 109,490 11,273 2,747 14,020 1993 80,202 14,635 94,837 10,758 2,210 12,968
The Card business has not experienced significant seasonal fluctuation, although Card billed business tends to be moderately higher in the fourth quarter than in other calendar quarters. TRS' asset securitization programs disclosed above reduced the volume of domestic Cardmember receivables purchased and the amount owned by Credco. The average life of charge Cardmember receivables owned by Credco for each of the five years ending December 31, 1997 (based upon the ratio of the average amount of both billed and unbilled receivables owned by Credco at the end of each month during the years indicated to the volume of Cardmember receivables purchased by Credco, net of Cardmember receivables sold to affiliates) was 43 days. The following table shows the aging of billed, non-interest-bearing charge Cardmember receivables: December 31, 1997 1996 ---------------------------------------------------------------- Current 79.6% 76.7% 30 to 59 days 14.7 17.2 60 to 89 days 2.3 2.6 90 days and over 3.4 3.5 3 Loss Experience Credco generally writes off against its reserve for doubtful accounts the total balance in an account for which any portion remains unpaid 12 months from the date of original billing for non- interest-bearing charge Card receivables and after six contractual payments are past due for interest-bearing revolving credit receivables. Accounts are written off earlier if deemed uncollectible. The following table sets forth Credco's write-offs, net of recoveries, expressed in millions and as a percentage of the volume of Cardmember receivables purchased by Credco, net of Cardmember receivables sold to affiliates, in each of the years indicated:
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Write-offs, net of recoveries $615 $630 $508 $444 $529 % of net Cardmember receivables purchased .42% .46% .42% .41% .57%
Sources of Funds Credco's business is financed by short-term borrowings consisting principally of commercial paper, borrowings under bank lines of credit and issuances of medium and long-term debt, as well as through operations. The weighted average interest costs on an annual basis of all borrowings, after giving effect to commitment fees under lines of credit and the impact of interest rate swaps, during the following years were: Weighted Average Year Interest Cost ---- ------------- 1997 5.66% 1996 5.67 1995 6.30 1994 5.06 1993 4.61 From time to time, American Express and certain of its subsidiaries purchase Credco's commercial paper at prevailing rates, enter into variable rate note agreements at interest rates generally above the 13-week treasury bill rate and provide lines of credit. The largest amount of borrowings from American Express or its subsidiaries at any month end during the five years ended December 31, 1997 was $4.6 billion. At December 31, 1997, the amount borrowed was $2.7 billion. See notes 5 and 6 in "Notes to Consolidated Financial Statements" appearing herein for information about Credco's debt, including Credco's lines of credit from various banks and long-term debt. 4 Foreign Operations See notes 2, 8 and 11 in "Notes to Consolidated Financial Statements" appearing herein for information about Credco's foreign exchange risks and operations in different geographical regions. Employees At December 31, 1997 Credco had 28 employees. Item 2. PROPERTIES. Credco neither owns nor leases any material physical properties. Item 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which Credco or its subsidiaries is a party or of which any of their property is the subject. Credco knows of no such proceedings being contemplated by government authorities or other parties. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Omitted pursuant to General Instruction I(2)(c) to Form 10-K. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. American Express, through a wholly-owned subsidiary, TRS, owns all of the outstanding common stock of Credco. Therefore, there is no market for Credco's common stock. Credco paid dividends of $150 million to TRS in both December, 1997 and 1996. For information about limitations on Credco's ability to pay dividends, see note 7 in "Notes to Consolidated Financial Statements" appearing herein. 5 Item 6. SELECTED FINANCIAL DATA. The following summary of certain consolidated financial information of Credco was derived from audited financial statements for the five years ended December 31, 1997.
(dollars in millions) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Income Statement Data --------------------- Revenues 2,064 2,166 1,988 1,401 1,282 Interest expense 1,125 1,117 1,054 736 599 Provision for doubtful accounts, net of recoveries 584 712 625 443 475 Income tax provision 114 115 105 75 64 Extraordinary charge, net of taxes - - - - 22 Net income 212 215 197 139 115 Balance Sheet Data ------------------ Accounts receivable 19,609 17,359 16,439 14,020 12,968 Reserve for doubtful accounts (633) (638) (624) (498) (542) Total assets 23,053 20,165 20,192 16,868 14,943 Short-term debt 16,582 14,537 14,202 11,525 9,738 Current portion of long-term debt 4 211 409 405 692 Long-term debt 3,264 2,469 2,673 2,282 1,776 Shareholder's equity 1,907 1,845 1,780 1,733 1,662 Cash dividends 150 150 150 100 125
6 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Liquidity and Capital Resources Credco's receivables portfolio consists of charge card receivables and revolving credit receivables purchased without recourse from TRS throughout the world and participation interests purchased without recourse in the seller's interest in both non-interest- bearing and interest-bearing Cardmember receivables owned by two master trusts formed by TRS as part of its asset securitization programs. At December 31, 1997 and 1996, respectively, Credco owned $17.8 billion and $15.6 billion of charge card receivables and participation in charge card receivables, representing 90.6 percent and 89.6 percent of the total receivables owned. Revolving credit receivables, representing 9.4 percent and 10.4 percent of the total receivables owned, was $1.8 billion at both December 31, 1997 and 1996. As part of Credco's business of funding receivables, Credco makes variable rate loans to American Express Centurion Bank ("Centurion Bank") which are secured by Optima receivables owned by Centurion Bank. At December 31, 1997 and 1996, $2.3 billion and $2.0 billion, respectively, of such loans were outstanding. The loan agreements require Centurion Bank to maintain, as collateral, Optima receivables equal to the outstanding loan balance plus an amount equal to three times the receivable reserve applicable to such Optima receivables. Credco's assets are financed through a combination of short-term debt, long-term senior notes, equity capital and retained earnings. Daily funding requirements are met primarily by the sale of commercial paper. Credco has readily sold the volume of commercial paper necessary to meet its funding needs as well as to cover the daily maturities of commercial paper issued. The average amount of commercial paper outstanding was $14.1 billion for 1997 and $14.7 billion for 1996. An alternate source of borrowing consists of committed credit line facilities. The aggregate commitment of these facilities is generally maintained at 50 percent of short-term debt, net of short- term investments and cash equivalents. Total committed credit line facilities at December 31, 1997 and 1996 totaled $7.3 billion and $6.6 billion, respectively. Credco, through its wholly-owned subsidiary, American Express Overseas Credit Corporation Limited ("AEOCC"), had outstanding borrowings of $17.4 million at December 31, 1997 and no outstanding borrowings at December 31, 1996, under these committed lines of credit. In addition, Credco, through AEOCC, had short-term borrowings under uncommitted lines of credit totaling $241 million and $200 million at December 31, 1997 and 1996, respectively. During 1997 and 1996, Credco's average long-term debt outstanding was $2.9 billion. Credco's average long-term debt outstanding was $2.0 billion during 1995. In 1997, Credco filed a registration statement on Form S-3 with the Securities and Exchange Commission to increase the amount of medium- and long-term debt to be available for issuance under shelf registrations. At December 31, 1997, Credco had the ability to issue $2.5 billion of medium and long-term debt securities under shelf registrations filed with the Securities and Exchange Commission. In 1997, Credco issued and sold exclusively outside the United States and to non-U.S. persons, $400 million Floating Rate Notes due 2002 and $400 million 6.5% Fixed Rate Notes due 2002 listed on the Luxembourg Stock Exchange. These notes were issued under the Euro Medium Term Notes program established during 1996 by Credco, TRS, AEOCC and American Express Bank Ltd. (a wholly-owned 7 subsidiary of American Express). In 1997, Centurion Bank was added to this program. The maximum aggregate principal amount of debt instruments outstanding at any one time under the program will not exceed $3 billion. At December 31, 1997 this program had the ability to issue $1.9 billion of debt. Credco paid dividends to TRS of $150 million in both December, 1997 and 1996. In early 1998, Credco purchased interest rate caps to limit the adverse effect of an interest rate increase on substantially all charge Cardmember receivables funding costs. The majority of the caps will mature by the end of 1998. In February 1998, Credco issued $150 million 1 1/8 % Cash Exchangeable Notes due February 19, 2003. Holders of these notes may exchange them for an amount in cash which is linked to the price of the common shares of American Express Company. Credco has entered into hedging agreements designed to fully hedge its obligation under these notes. See note 8 in "Notes to Consolidated Financial Statements" appearing herein for a discussion of Credco's use of derivatives. Results of Operations Credco purchases Cardmember receivables without recourse from TRS. Non-interest-bearing charge Cardmember receivables are purchased at face amount less a specified discount agreed upon from time to time, and interest-bearing revolving credit Cardmember receivables are generally purchased at face amount. Non-interest-bearing receivables are purchased under Receivables Agreements that generally provide that the discount rate shall not be lower than a rate that yields earnings of at least 1.25 times fixed charges on an annual basis. The ratio of earnings to fixed charges was 1.29 in 1997, 1.30 in 1996, and 1.29 in 1995. The Receivables Agreements also provide that consideration will be given from time to time to revising the discount rate applicable to purchases of new receivables to reflect changes in money market interest rates or significant changes in the collectibility of the receivables. Pretax income depends primarily on the volume of Cardmember receivables purchased, the discount rates applicable thereto, the relationship of total discount to Credco's interest expense and the collectibility of receivables purchased. The average life of Cardmember receivables was 43 days for each of the years ended December 31, 1997, 1996 and 1995. Credco's decrease in revenues in 1997 is primarily due to a decrease in discount and interest rates. The overall decrease in interest income in 1997 was attributable to decreased levels of average investments outstanding. Interest expense increased in 1997 primarily reflecting an overall increase in volume. Provision for doubtful accounts in 1997 decreased primarily reflecting lower provision rates. 8
The following is a further analysis of the increase (decrease) in key revenue and expense accounts (millions): --------------------------------------------------------------- 1997 1996 1995 --------------------------------------------------------------- Revenue earned from purchased accounts receivable-changes attributable to: Volume of receivables purchased $ 157 $ 166 $ 149 Discount and interest rates (214) (28) 313 --------------------------------------------------------------- Total $ (57) $ 138 $ 462 --------------------------------------------------------------- Interest income from affiliates- changes attributable to: Volume of average investments outstanding $ 9 $ 5 $ 28 Interest rates 4 (15) 41 --------------------------------------------------------------- Total $ 13 $ (10) $ 69 --------------------------------------------------------------- Interest income from investments- changes attributable to: Volume of average investments outstanding $ (65) $ 71 $ 17 Interest rates 6 (19) 40 --------------------------------------------------------------- Total $ (59) $ 52 $ 57 --------------------------------------------------------------- Interest expense (affiliates)- changes attributable to: Volume of average debt outstanding $ 37 $ 11 $ 15 Interest rates 8 (13) 25 --------------------------------------------------------------- Total $ 45 $ (2) $ 40 --------------------------------------------------------------- Interest expense (other)-changes attributable to: Volume of average debt outstanding $ (31) $ 178 $ 96 Interest rates (6) (113) 182 --------------------------------------------------------------- Total $ (37) $ 65 $ 278 --------------------------------------------------------------- Provision for doubtful accounts- changes attributable to: Volume of receivables purchased $ 65 $ 91 $ 70 Provision rates and volume of recoveries (193) (4) 112 --------------------------------------------------------------- Total $(128) $ 87 $ 182 ---------------------------------------------------------------
The Year 2000 issue is the result of computer programs having been written using two digits rather than four to define a year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than 2000. Credco's internal debt management systems have been reviewed and remediated in light of the Year 2000 issue. As noted above, the Card issuers perform all services necessary to bill and collect all Cardmember receivables owned by Credco. American Express has conducted a comprehensive review of its computer systems and business processes (including systems and processes of the Card issuers) to identify the major systems that could be affected by the Year 2000 issue. Steps are being taken by American Express to resolve any potential problems including modifications to existing software and the purchase of new software. These measures are scheduled to be completed and tested on a timely basis. American Express' goal is to complete internal remediation and testing of each of its critical systems by the end of 1998 and to continue compliance efforts, including the testing of sytems on an integrated basis, through 1999. The costs related to the Year 2000 issue, which are expensed by American Express as incurred, are not expected to have a material impact on Credco's results of operations or financial condition. American Express is evaluating the Year 2000 readiness of merchants, customers and other third parties whose system failures could have an impact on Credco's operations. The potential materiality of any such impact is not known at this time. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Omitted pursuant to General Instruction 1 to Item 305 of Regulation S-K. 9 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 1. Financial Statements. See "Index to Financial Statements" at page F-1 hereof. 2. Supplementary Financial Information. Selected quarterly financial data. See note 12 in "Notes to Consolidated Financial Statements" appearing herein. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Omitted pursuant to General Instruction I(2)(c) to Form 10-K. Item 11. EXECUTIVE COMPENSATION. Omitted pursuant to General Instruction I(2)(c) to Form 10-K. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Omitted pursuant to General Instruction I(2)(c) to Form 10-K. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Omitted pursuant to General Instruction I(2)(c) to Form 10-K. 10 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements: See "Index to Financial Statements" at page F-1 hereof. 2. Financial Statement Schedule: See "Index to Financial Statements" at page F-1 hereof. 3. Exhibits: See "Exhibit Index" hereof. (b) Reports on Form 8-K: 1. Form 8-K, dated February 10, 1998, Item 5, filed in connection with the incorporation by reference of certain financial information of American Express Company into registration statements of the Registrant; Exhibits 15 and 23, respectively, a letter regarding unaudited financial information and consent of independent auditors. 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN EXPRESS CREDIT CORPORATION (Registrant) DATE March 30, 1998 /s/ Vincent P. Lisanke -------------------------------------------------------------- Vincent P. Lisanke President, Chief Executive Officer and Director Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated. DATE March 30, 1998 /s/ Vincent P. Lisanke -------------------------------------------------------------- Vincent P. Lisanke President, Chief Executive Officer and Director (principal executive and principal accounting officer) DATE March 30, 1998 /s/ Richard K. Goeltz -------------------------------------------------------------- Richard K. Goeltz Chairman of the Board and Director (principal financial officer) DATE March 30, 1998 /s/ Jay B. Stevelman -------------------------------------------------------------- Jay B. Stevelman Treasurer and Director 12 AMERICAN EXPRESS CREDIT CORPORATION INDEX TO FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT AUDITORS (Item 14 (a)) Page Number ----------- Financial Statements: Report of independent auditors F - 2 Consolidated statements of income for each of the three years ended December 31, 1997, 1996 and 1995 F - 3 Consolidated balance sheets at December 31, 1997 and 1996 F - 4 Consolidated statements of cash flows for each of the three years ended December 31, 1997, 1996 and 1995 F - 5 Consolidated statements of shareholder's equity for each of the three years ended December 31, 1997, 1996 and 1995 F - 6 Notes to consolidated financial statements F - 7 to F - 15 Schedule: II - Valuation and qualifying accounts for the three years ended December 31, 1997 F - 16 All other schedules are 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 consolidated financial statements or notes thereto. F-1 REPORT OF INDEPENDENT AUDITORS ---------------------------------------------------------------------- The Board of Directors American Express Credit Corporation We have audited the accompanying consolidated balance sheets of American Express Credit Corporation as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements and schedule are the responsibility of American Express Credit Corporation's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Express Credit Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Ernst & Young LLP New York, New York February 5, 1998 F-2
AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED STATEMENTS OF INCOME (millions) ------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 ------------------------------------------------------------- Revenues Revenue earned from purchased accounts receivable $1,756 $1,813 $1,675 Interest income from affiliates 173 160 170 Interest income from investments 130 189 137 Other income 5 4 6 ------------------------------------------------------------- Total 2,064 2,166 1,988 ------------------------------------------------------------- Expenses Interest expense - affiliates 179 134 136 Interest expense - other 946 983 918 Provision for doubtful accounts, net of recoveries of $183, $186 and $176 584 712 625 Other expenses 29 7 7 ------------------------------------------------------------- Total 1,738 1,836 1,686 ------------------------------------------------------------- Income before taxes 326 330 302 Income tax provision 114 115 105 ------------------------------------------------------------- Net income $ 212 $ 215 $ 197 ------------------------------------------------------------- -------------------------------------------------------------
See notes to consolidated financial statements. F-3
AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED BALANCE SHEETS (millions) ------------------------------------------------------------------- December 31, 1997 1996 ------------------------------------------------------------------- Assets Cash and cash equivalents $ 374 $ 267 Investments 218 - Accounts receivable 19,609 17,359 Less: reserve for doubtful accounts 633 638 ------ ------ 18,976 16,721 Loans and deposits with affiliates 3,150 2,850 Deferred charges and other assets 335 327 ------------------------------------------------------------------- Total assets $23,053 $20,165 ------------------------------------------------------------------- ------------------------------------------------------------------- Liabilities and shareholder's equity Short-term debt with affiliates $ 1,770 $ 1,275 Short-term debt - other 14,812 13,262 Current portion of long-term debt 4 211 Long-term debt with affiliate 910 910 Long-term debt - other 2,354 1,559 ------ ------ Total debt 19,850 17,217 Due to affiliates 1,027 858 Accrued interest and other liabilities 152 145 ------------------------------------------------------------------- Total liabilities 21,029 18,220 ------------------------------------------------------------------- Deferred discount revenue 117 100 ------------------------------------------------------------------- Shareholder's equity Common stock-authorized 3,000,000 shares of $.10 par value; issued and outstanding 1,504,938 shares 1 1 Capital surplus 161 161 Retained earnings 1,745 1,683 ------------------------------------------------------------------ Total shareholder's equity 1,907 1,845 ------------------------------------------------------------------ ------------------------------------------------------------------ Total liabilities and shareholder's equity $23,053 $20,165 ------------------------------------------------------------------ ------------------------------------------------------------------
See notes to consolidated financial statements. F-4
AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (millions) - -------------------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------- Cash Flows From Operating Activities: Net Income $ 212 $ 215 $ 197 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts, net of recoveries 584 712 625 Amortization of deferred underwriting fees and bond discount/premium - 1 - Increase (decrease) in deferred discount revenue 17 (16) 21 Decrease (increase) in deferred tax assets 43 (11) (56) Increase in interest receivable and operating assets (12) (6) (5) Increase (decrease) in accrued interest and other liabilities 18 (18) 3 Increase (decrease) in due to affiliates 8 79 (27) - ---------------------------------------------------------------------------- Net cash and cash equivalents provided by operating activities 870 956 758 - ---------------------------------------------------------------------------- Cash Flows From Investing Activities: Increase in accounts receivable (2,694) (3,194) (3,047) Sale of net accounts receivable to an affiliate 219 2,294 - Purchase of participation interest in seller's interest in accounts receivable from an affiliate (728) (2,178) - Sale of participation interest in seller's interest in accounts receivable to an affiliate 95 1,304 - Recoveries of accounts receivable previously written off 183 186 176 Purchase of investments (247) - - Maturity of investments 29 - - Increase in loans and deposits due from affiliates (300) - (200) Increase (decrease) in due to affiliates from purchased receivables 192 (57) 182 - ---------------------------------------------------------------------------- Net cash and cash equivalents used in investing activities (3,251) (1,645) (2,889) - ---------------------------------------------------------------------------- Cash Flows From Financing Activities: Net increase (decrease) in short-term debt with affiliates with maturities less than ninety days 496 188 (40) Net increase (decrease) in short-term debt - other with maturities less than ninety days 3,271 4,469 (5,178) Proceeds from issuance of debt 8,027 9,684 20,039 Redemption of debt (9,156) (14,425) (11,810) Dividends paid to TRS (150) (150) (150) - --------------------------------------------------------------------------- Net cash and cash equivalents provided by (used in) financing activities 2,488 (234) 2,861 - --------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 107 (923) 730 - --------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 267 1,190 460 - --------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 374 $ 267 $ 1,190 - ---------------------------------------------------------------------------
See notes to consolidated financial statements. F-5
AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY Years ended December 31, 1997, 1996 and 1995 (millions) --------------------------------------------- Total Shareholder's Common Capital Retained Equity Stock Surplus Earnings --------------------------------------------- Balances at January 1, 1995 $ 1,733 $ 1 $ 161 $ 1,571 Net income 197 197 Dividends to TRS (150) - - (150) -------- ------ ------- -------- Balances at December 31, 1995 1,780 1 161 1,618 Net income 215 215 Dividends to TRS (150) - - (150) -------- ------ ------- -------- Balances at December 31, 1996 1,845 1 161 1,683 -------- ------ ------- -------- Net income 212 212 Dividends to TRS (150) - - (150) -------- ------ ------ -------- Balances at December 31, 1997 $ 1,907 $ 1 $ 161 $ 1,745 ======= ====== ====== =======
See notes to consolidated financial statements. F-6 AMERICAN EXPRESS CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation American Express Credit Corporation together with its subsidiaries ("Credco") is a wholly-owned subsidiary of American Express Travel Related Services Company, Inc. ("TRS"), which is a wholly-owned subsidiary of American Express Company ("American Express"). American Express Overseas Credit Corporation Limited together with its subsidiaries ("AEOCC") and Credco Receivables Corp. ("CRC") are wholly-owned subsidiaries of Credco. 2. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Credco and all its subsidiaries. All significant intercompany transactions have been eliminated. Use of Estimates and Assumptions Credco's financial statements include amounts determined using estimates and assumptions. For example, estimates and assumptions are used in determining the reserves related to accounts receivable. While these estimates are based on the best judgment of management, actual results could differ from these estimates. Revenue Earned from Purchased Accounts Receivable A portion of discount revenue earned on purchases of non-interest- bearing Cardmember receivables equal to the provision for doubtful accounts is recognized as revenue at the time of purchase; the remaining portion is deferred and recorded as revenue ratably over the period that the receivables are outstanding. Finance charge income on interest-bearing extended payment plan receivables is recognized as it is earned. Credco ceases accruing this income after six contractual payments are past due, or earlier, if deemed uncollectible. Accruals that cease generally are not resumed. Reserve for Doubtful Accounts The reserve for doubtful accounts is based on historical collection experience and evaluation of the current status of existing receivable balances. Credco generally writes off against its reserve for doubtful accounts the total balance in an account for which any portion remains unpaid twelve months from the date of original billing for non-interest-bearing Cardmember receivables and after six contractual payments are past due for interest- bearing Cardmember receivables. Accounts are written off earlier if deemed uncollectible. Investments Management determines the appropriate classification of debt securities at the time of purchase. Credco has the positive intent and ability to hold all of its securities to maturity. Held to maturity securities are stated at amortized cost. F-7 Fair Values of Financial Instruments The fair values of financial instruments are estimates based upon current market conditions and perceived risks at December 31, 1997 and 1996 and require varying degrees of management judgment. The fair values of the financial instruments presented may not be indicative of their future fair values. The fair values of long-term debt and derivative instruments are included in the related footnotes. For all other financial instruments, the carrying amounts in the consolidated balance sheets approximate the fair values. Interest Rate Transactions Credco enters into various interest rate agreements as a means of managing its interest rate exposure. Interest rates charged on consumer lending receivables are linked to a floating base rate and generally reprice monthly. Credco generally enters into interest rate agreements paying a rate that reprices when the base rate of the underlying receivables changes. These interest rate agreements which modify the terms of an underlying debt obligation are accounted for by recording interest expense using the revised interest rate with any fees or other payments amortized as yield adjustments. It is Credco's normal practice not to terminate, sell or dispose of interest rate agreements or the underlying debt to which the agreements are designated prior to maturity. In the event Credco terminates, sells or disposes of an agreement prior to maturity, the gain or loss would be deferred and recognized as an adjustment of yield over the remaining life of the underlying debt. Foreign Currency Foreign currency assets and liabilities are translated into their U.S. dollar equivalents based on rates of exchange prevailing at the end of each year. Revenue and expense accounts are translated at exchange rates prevailing during the year. Credco enters into various foreign exchange contracts as a means of managing foreign exchange exposure. Cash and Cash Equivalents Credco has defined cash and cash equivalents as cash and short-term investments with a maturity of ninety days or less at the time of purchase. At both December 31, 1997 and 1996, included in cash and cash equivalents was $100 million of overnight securities purchased to resell. 3. Investments At December 31, 1997, Credco held $218 million of American Express Master Trust Class B Certificates. These securities are classified as held to maturity and are stated at amortized cost. The fair value of these securities at December 31, 1997 was $224 million. 4. Accounts Receivable At December 31, 1997 and 1996, respectively, Credco owned $17.8 billion and $15.6 billion of charge card receivables and participation in charge card receivables, representing 90.6 percent and 89.6 percent, respectively, of the total receivables owned. In connection with TRS' securitization program for U.S. charge Cardmember receivables, CRC purchases from American Express F-8 Receivables Financing Corporation ("RFC"), a subsidiary of TRS, a participation interest in RFC's seller's interest in the receivables owned by the American Express Master Trust, which was formed in 1992 to securitize U.S. charge Cardmember receivables. In September 1996, the American Express Master Trust issued an additional $1.25 billion of accounts receivable trust certificates to the public. At that time, CRC sold to RFC, at face amount less applicable reserve, $1.3 billion of its gross participation interest. The gross participation interests represent undivided interests in the receivables conveyed to the American Express Master Trust by RFC. At December 31, 1997 and 1996 Credco owned approximately $3.8 billion and $3.4 billion, respectively, of participation interests in receivables owned by the trust, representing 19.6 percent and 19.3 percent, respectively, of its total accounts receivable. At both December 31, 1997 and 1996, Credco owned extended payment plan receivables totaling $1.8 billion, including revolving credit loans purchased directly from American Express Centurion Bank ("Centurion Bank"), a subsidiary of TRS, representing 9.4 percent and 10.4 percent, respectively, of its total interests in accounts receivable. The extended payment plan receivables owned at December 31, 1997 and 1996 include $229 million and $104 million, respectively, of participation interest owned by CRC. This represents a participation interest in the seller's interest in revolving credit receivables that have been conveyed to the American Express Credit Account Master Trust, formed by Centurion Bank during the second quarter of 1996 to securitize revolving credit loans.
5. Short-term Debt At December 31, short-term debt consisted of (millions) : ----------------------------------------------------------------------- 1997 1996 ----------------------------------------------------------------------- Commercial paper $14,438 $12,966 Borrowings from affiliates 1,770 1,275 Borrowings under lines of credit 241 200 Borrowing agreements with bank trust departments and others 133 96 ----------------------------------------------------------------------- Total short-term debt $16,582 $14,537 -----------------------------------------------------------------------
Credco has various facilities available to obtain short-term credit, including the issuance of commercial paper and agreements with banks. Credco had committed credit line facilities totaling $7.3 billion and $6.6 billion at December 31, 1997 and 1996, respectively. Credco pays fees to the financial institutions that provide these credit line facilities. Credco, through AEOCC, had outstanding borrowings of $17.4 million at December 31, 1997 and no outstanding borrowings at December 31, 1996, under these committed lines of credit. The fair value of the unused lines of credit is not significant at December 31, 1997 and 1996. At December 31, 1997 and 1996, Credco, through AEOCC, had short- term borrowings under uncommitted lines of credit totaling $241 million and $200 million, respectively. Credco's annual weighted average short-term interest rate was 5.60 percent, 5.57 percent and 6.16 percent for the years ended December 31, 1997, 1996 and 1995, respectively. These rates include the cost of maintaining credit line facilities for the periods and the impact of interest rate swaps. At December 31, 1997, $1.3 billion of short- term debt outstanding was modified by interest rate swaps, resulting in a year-end weighted average effective interest rate of 5.93%. F-9 Credco paid $940 million, $913 million and $942 million of interest on short-term debt obligations in 1997, 1996 and 1995, respectively.
6. Long-term Debt -------------------------------------------------- -------------------------------- 1997 1996 -------------------------------------------------- -------------------------------- Year-End Year-End Effective December 31, Notional Stated Interest Notional (millions) Amount Rate Rate Maturity Amount Year-End Outstanding of on Debt with of Outstanding of Stated Rate Balance Swaps (a,b) Swaps(b) Swaps Balance Swaps On Debt(b) -------------------------------------------------- -------------------------------- Senior notes due 1999-2005 $1,548 $1,550 6.69% 5.83% 1999- $1,725 $1,650 6.79% 2005 Variable rate debt with American Express due 2004 910 - 5.67% - - 910 - 5.36% Medium-term notes due 2002 400 400 6.50% 5.78% 2002 - - - Medium-term notes due 2002 399 399 5.80% 6.00% 2002 - - - Medium-term notes due 1997 - - - - - 36 - 7.17% Other senior notes due 1999- 2017 2 - 8.00% - - 2 - 7.65% Swiss franc notes due 1998-2003 9 - 3.45% - - 10 - 3.45% Net unamortized bond discount - - - - - (3) - - -------------------------------------------------- -------------------------------- Total long-term debt $3,268 $2,349 $2,680 $1,650 -------------------------------------------------- --------------------------------
(a) For the floating rate debt issuance, the stated rate was based on the rate at December 31, 1997; this rate is not an indication of future interest rates. (b) Weighted average rates were determined where appropriate. The above table includes the current portion of long-term debt of $4 million and $211 million at December 31, 1997 and 1996, respectively. The book value of variable rate long-term debt that reprices within a year approximates fair value. The fair value of other long-term debt is based on quoted market price or discounted cash flow. The aggregate fair value of long-term debt, including the current portion outstanding at December 31, 1997 and 1996, was $3.3 billion and $2.7 billion, respectively. Aggregate annual maturities of long-term debt for the five years ending December 31, 2002 are as follows (millions): 1998 - $4, 1999 - $354, 2000 - $550, 2001 - $550, 2002 - $799. Credco paid $192 million in 1997, $217 million in 1996, and $218 million in 1995 of interest on long-term debt obligations. 7. Restrictions as to Dividends and Limitations on Indebtedness The most restrictive limitation on dividends imposed by the debt instruments issued by Credco is the requirement that Credco maintain a minimum consolidated net worth of $50 million. There are no limitations on the amount of debt that can be issued by Credco. 8. Derivative Instruments Credco uses derivative financial instruments for nontrading purposes to manage its exposure to interest and foreign exchange rates, financial indices and funding costs. There are a number of risks associated with derivatives. Market risk is the possibility that the value of the derivative financial instrument will change. Credco is not exposed to market risk related to derivatives held for nontrading purposes beyond that inherent in cash market transactions. Credco does not enter into F-10 derivative contracts with features that would leverage or multiply its market risk. Credit risk related to derivative and other off- balance sheet financial instruments is the possibility that the counterparty will not fulfill the terms of the contract. It is monitored through established approval procedures, including setting concentration limits by counterparty and country, reviewing credit ratings and requiring collateral where appropriate. A significant portion of Credco's transactions are with counterparties rated A or better by nationally recognized credit rating agencies. Credco also uses master netting agreements, which allow Credco to settle multiple contracts with a single counterparty in one net receipt or payment in the event of counterparty default. At December 31, 1997 and 1996, the aggregate notional amount of Credco's derivative instruments was $7.4 billion ($562 million with affiliates) and $6.4 billion ($233 million with affiliates), respectively. Credit risk approximates the fair value of contracts in a gain position (asset) and totaled $94 million ($3.6 million with affiliates) at December 31, 1997 and $37 million ($2.2 million with an affiliate) at December 31, 1996. The fair value represents the replacement cost and is determined by market values, dealer quotes or pricing models.
The following tables detail information regarding Credco's derivatives (millions): Notional Carrying Value Fair Value December 31, 1997 Amount Asset Liability Asset Liability ----------------- ------ ----- -------- ----- --------- Interest rate products $5,321 $ 66 $ 36 $ 76 $ 40 Forward contracts 2,069 18 16 18 16 ------ ---- ---- ----- ---- Total $7,390 $ 84 $ 52 $ 94 $ 56 ------ ---- ---- ----- ---- Notional Carrying Value Fair Value December 31, 1996 Amount Asset Liability Asset Liability ----------------- ------ ----- --------- ----- --------- Interest rate products $4,386 $ 19 $ 50 $ 25 $ 87 Forward contracts 1,972 14 31 12 30 ------ ---- ---- ----- ---- Total $6,358 $ 33 $ 81 $ 37 $117 ------ ---- ---- ----- ----
Interest Rate Products Credco uses interest rate products to maintain a predetermined mix of fixed and variable rate debt in order to achieve a desired level of interest rate exposure to manage funding costs related to its Cardmember receivables and Cardmember loans. The principal product used is interest rate swaps, which involve the exchange for a specified period of time of fixed or floating rate interest payments based on a notional or contractual amount. In early 1998, Credco purchased interest rate caps to limit the adverse effect of an interest rate increase on substantially all charge Cardmember receivables funding costs. The majority of the caps will mature by the end of 1998. Credco enters into currency swaps to convert U.S. dollar denominated debt into other currencies in order to match foreign denominated receivables with funding of the same currency and to achieve a desired level of interest rate exposure. Currency swap agreements are contracts to exchange currency and interest payments for a specific period of time. Interest rates charged on Credco's revolving credit receivables are linked to a floating rate base and generally reprice each month. Credco generally enters into interest rate swaps paying rates that reprice similarly with changes in the base rate of the underlying loans. F-11 As interest rate products manage interest rate exposure, interest is accrued and reported in accounts receivable and other assets, or accrued interest and other liabilities, and interest expense, as appropriate.
Aggregate annual expirations of interest rate swaps are as follows (notional amount in millions): 1998 - $2,222, 1999 - $506, 2000 - $920, 2001 - $782, 2002 - $891. The following table details information regarding Credco's interest rate products at December 31, 1997 (millions): ------------------------------------------------------------------------- Weighted Average Notional Primary Variable Interest Rate Type Amount Rate Index Fixed Floating ------------------------------------------------------------------------- Floating to fixed $2,457 1 month LIBOR and 5.73% 6.41% 1 month Commercial paper Fixed to floating $2,304 1 month LIBOR and 6.72% 5.96% 1 month Commercial paper Floating to floating $560 1 month LIBOR and - 6.43%/5.96% 3 month LIBOR
Foreign Currency Products Credco uses foreign currency products to manage transactions denominated in foreign currencies. Foreign currency exposures are hedged, where practical and economical, through foreign currency forward contracts. Foreign currency forward contracts involve the purchase or sale of a designated currency at an agreed upon rate for settlement on a specified date. As Credco is exposed to transaction risk with regard to receivables denominated in foreign currencies and since foreign currency forward contracts reduce that exposure, the contracts are accounted for as hedges. These foreign currency forward contracts are marked to the current spot rate with the gain or loss recorded in income to offset the transaction gain or loss resulting from the receivables. The receivable or payable with the counterparty to the foreign currency forward contracts which result from this process are reported in other assets or liabilities, as appropriate. The discount or premium on foreign currency forward contracts is reported in other assets or liabilities, as appropriate, and amortized to interest expense over the terms of the contracts.
The following table summarizes Credco's forward contracts by major currencies as of December 31 (millions): ------------------------------------------------------- 1997 1996 ------------------------------------------------------- Canadian Dollar $486 $334 Pound Sterling 538 578 Australian Dollar 269 307 Hong Kong Dollar 179 199 German Mark 258 218 Other 339 336 ------------------------------------------------------- Total forward contracts $2,069 $1,972 -------------------------------------------------------
Foreign currency forward contracts generally mature within one F-12 year. At December 31, 1997, Credco had no significant unhedged foreign currency exposures. 9. Transactions with Affiliates In 1997, 1996 and 1995, Credco purchased Cardmember receivables without recourse from TRS and certain of its subsidiaries totaling approximately $146 billion, $136 billion and $122 billion, respectively. Agreements for the purchase of non-interest-bearing receivables generally provide that Credco purchase such receivables at a discount rate which yields earnings to Credco equal to at least 1.25 times its fixed charges on an annual basis. The agreements require TRS, at its expense, to perform accounting, clerical and other services necessary to bill and collect all Cardmember receivables owned by Credco. Since settlements under the agreements occur monthly, an amount due from, or payable to, such affiliates may arise at the end of the month. In 1996, as part of TRS' asset securitization program for U.S. charge Cardmember receivables, Credco sold back to TRS approximately $2.2 billion of gross receivables arising under specified U.S. charge Cardmember accounts. TRS sold these receivables, together with the right to receive subsequent receivables arising from such Cardmember accounts, to its subsidiary, RFC. RFC, in turn, conveyed them to the American Express Master Trust (the "Trust"). This resulted in an increase in the gross participation interest in RFC's seller's interest in the securitized receivables owned by CRC, for which CRC paid $2.2 billion. In September 1996, the Trust issued $1.25 billion of receivables trust certificates in two series. At the time of such issuance, CRC sold, at face amount less applicable reserve, $1.3 billion of its gross participation interest in RFC's seller's interest back to RFC.
The extended payment plan receivables owned at December 31, 1997 and 1996 include $229 million and $104 million, respectively, of participation interest owned by CRC. This represents a participation interest in the seller's interest in revolving credit receivables that have been conveyed to the American Express Credit Account Master Trust, formed by Centurion Bank during the second quarter of 1996 to securitize revolving credit loans. Other transactions with American Express and its subsidiaries for the years ended December 31 were as follows (millions): ------------------------------------------------------------------ 1997 1996 1995 ------------------------------------------------------------------ Cash and cash equivalents at December 31 $ 6 $ 2 $ 9 Maximum month-end level of cash and cash equivalents during the year 9 9 12 Secured loans to American Express Centurion Bank at December 31 2,300 2,000 2,000 Other loans and deposits to an affiliate at December 31 850 850 850 Maximum month-end level of loans and deposits to affiliates during the year 3,150 2,850 2,850 Borrowings at December 31 2,680 2,185 1,997 Maximum month-end level of borrowings during the year 4,588 4,024 3,709 Interest income 173 160 170 Other income 5 4 6 Interest expense 179 134 136 ------------------------------------------------------------------
F-13 At December 31, 1997, Credco held $2.3 billion of variable rate secured loans to Centurion Bank and $2.0 billion at both December 31, 1996 and 1995. At December 31, 1997, 1996 and 1995, Credco also held variable rate loans to American Express due in 2004 of $850 million. The loans to Centurion Bank are secured by certain interest-bearing extended payment plan receivables owned by Centurion Bank. Interest income from these variable rate loans was $173 million, $160 million, and $169 million for 1997, 1996 and 1995, respectively. 10. Income Taxes The taxable income of Credco is included in the consolidated U.S. federal income tax return of American Express. Under an agreement with TRS, taxes are recognized on a stand-alone basis. If benefits for all future tax deductions, foreign tax credits and net operating losses cannot be recognized on a stand-alone basis, such benefits are then recognized based upon a share, derived by formula, of those deductions and credits that are recognizable on a TRS consolidated reporting basis.
Deferred income tax assets and liabilities result from the recognition of temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in differences between income for tax purposes and income for financial statement purposes in future years. The current and deferred components of the provision (benefit) for income taxes consist of the following (millions): ---------------------------------------------------------------- 1997 1996 1995 ---------------------------------------------------------------- Current $ 71 $ 126 $ 161 Deferred 43 (11) (56) ---------------------------------------------------------------- Total income tax provision $ 114 $ 115 $ 105 ----------------------------------------------------------------
Credco's net deferred tax assets, which are included in other assets, consisted of the following (millions):
-------------------------------------------- 1997 1996 -------------------------------------------- Deferred tax assets $ 182 $ 218 Deferred tax liabilities (8) (1) -------------------------------------------- Net deferred tax assets $ 174 $ 217 --------------------------------------------
Deferred tax assets for 1997 and 1996 consists primarily of reserve for loan losses of $182 million and $218 million, respectively. Deferred tax liabilities for 1997 and 1996 consists primarily of foreign exchange contracts of $7 million and $1 million, respectively. F-14 At December 31, 1997 and 1996, no valuation allowances were required. A federal tax overpayment of $29 million and of $27 million at December 31, 1997 and 1996, respectively, are included in due to affiliates. Income taxes paid to TRS during 1997, 1996 and 1995 were $73 million, $155 million and $125 million, respectively. The U.S. statutory tax rate and effective tax rate for 1997, 1996 and 1995 was approximately 35 percent. 11. Geographic Segments Credco is principally engaged in the business of purchasing Cardmember receivables arising from the use of the American Express Card in the United States and foreign locations. The following presents information about operations in different geographic areas (millions):
----------------------------------------------------------------- 1997 1996 1995 ----------------------------------------------------------------- Revenues United States $1,723 $1,855 $1,695 International 341 311 293 ----------------------------------------------------------------- Consolidated $2,064 $2,166 $1,988 ----------------------------------------------------------------- Income before taxes United States $ 286 $ 275 $ 244 International 40 55 58 ----------------------------------------------------------------- Consolidated $ 326 $ 330 $ 302 ----------------------------------------------------------------- Identifiable assets United States $19,074 $16,444 $17,027 International 3,979 3,721 3,165 ----------------------------------------------------------------- Consolidated $23,053 $20,165 $20,192 -----------------------------------------------------------------
12. Quarterly Financial Data (Unaudited) Summarized quarterly financial data is as follows (millions): ------------------------------------------------------------------ Quarter Ended 12/31 9/30 6/30 3/31 ------------------------------------------------------------------ 1997 ------------------------------------------------------------------ Revenues $ 535 $ 542 $ 516 $ 471 Income before taxes 68 86 81 91 Net income 44 56 53 59 ------------------------------------------------------------------ 1996 ------------------------------------------------------------------ Revenues $ 523 $ 540 $ 571 $ 532 Income before taxes 82 89 74 85 Net income 54 58 48 55 ------------------------------------------------------------------
F-15
AMERICAN EXPRESS CREDIT CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (millions) 1997 1996 1995 ---- ---- ---- Reserve for doubtful accounts: Balance at beginning of year $ 638 $ 624 $ 498 Additions: Provision for doubtful accounts charged to income (1) 767 898 801 Other credits (2) 53 94 7 Foreign translation (5) 2 2 Deductions: Accounts written off 798 816 684 Other charges (3) 22 164 - ----- ----- ----- Balance at end of year $ 633 $ 638 $ 624 ===== ===== ===== Reserve for doubtful accounts as a percentage of Cardmember receivables owned at year end 3.23% 3.68% 3.79% ===== ===== =====
(1) Before recoveries on accounts previously written off of (millions): 1997-$183, 1996-$186 and 1995-$176. (2) Reserve balances applicable to new groups of Cardmember receivables purchased from TRS and certain of its subsidiaries and participation interests purchased from affiliates. (3) Reserve balances applicable to certain groups of Cardmember receivables and participation interests sold to affiliates. F-16 EXHIBIT INDEX Pursuant to Item 601 of Regulation S-K Exhibit No. Description 3 (a) Registrant's Certificate Incorporated by of Incorporation, as amended reference to Exhibit 3(a) to Registrant's Registration Statement on Form S-1 dated February 25, 1972 (File No. 2-43170). 3 (b) Registrant's By-Laws, Incorporated by amended and restated as of reference to November 24, 1980 Exhibit 3(b) to Registrant's Annual Report on Form 10-K (Commission File No. 1-6908) for the year ended December 31, 1985. 4 (a) Registrant's Debt Incorporated by Securities reference to Indenture dated as of Exhibit 4(s) September 1, 1987 to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (b) Form of Note with optional Incorporated by redemption provisions reference to Exhibit 4(t) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (c) Form of Debenture with Incorporated by optional redemption and reference to sinking fund provisions Exhibit 4(u) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (d) Form of Original Issue Incorporated by Discount Note with reference to optional redemption Exhibit 4 (v) provision to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (e) Form of Zero Coupon Note Incorporated by with optional redemption reference to provisions Exhibit 4 (w) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (f) Form of Variable Rate Note Incorporated by with optional redemption reference to and repayment provisions Exhibit 4 (x) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (g) Form of Extendible Note Incorporated by with optional redemption reference to and repayment provisions Exhibit 4 (y) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (h) Form of Fixed Rate Medium- Incorporated by Term Note reference to Exhibit 4 (z) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (i) Form of Floating Rate Incorporated by Medium-Term Note reference to Exhibit 4 (aa) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (j) Form of Warrant Agreement Incorporated by reference to Exhibit 4 (bb) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (k) Form of Supplemental Incorporated by Indenture reference to Exhibit 4 (cc) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (l) Terms and conditions of Incorporated by debt instruments to be reference to issued outside the U.S. Exhibit 4(l) to Registrant's Annual Report on Form 10-K (Commission File No. 1-6908) for the year ended December 31, 1996. 4 (m) The Registrant hereby agrees to furnish the Commission, upon request, with copies of the instruments defining the rights of holders of each issue of long-term debt of the Registrant for which the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Registrant 10 (a) Receivables Agreement Incorporated by dated as of January 1, reference to 1983 between the Exhibit 10 (b) Registrant and American to Registrant's Express Travel Related Annual Report Services Company, Inc. on Form 10-K (Commission File No. 1-6908) for the year ended December 31, 1987. 10 (b) Secured Loan Agreement Incorporated by dated as of June 30, 1988 reference to between the Registrant and Exhibit 10 (b) American Express Centurion to Registrant's Bank Annual Report on Form 10-K (Commission File No. 1-6908) for the year ended December 31, 1988. 10 (c) Participation Agreement Incorporated by dated as of August 3, 1992 reference to between American Express Exhibit 10(c) Receivables Financing to Registrant's Corporation and Credco Annual Report Receivables Corp. on Form 10-K (Commission File No. 1-6908) for the year ended December 31, 1992. 12.1 Computation in Support of Electronically Ratio of Earnings to Fixed filed herewith. Charges of American Express Credit Corporation 12.2 Computation in Support of Electronically Ratio of Earnings to Fixed filed herewith. Charges of American Express Company 23 Consent of Independent Electronically Auditors filed herewith. 27 Financial Data Schedule Electronically filed herewith. EX-12 2
EXHIBIT 12.1 AMERICAN EXPRESS CREDIT CORPORATION COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES (millions) Year Ended December 31, ----------------------- -------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Earnings: Income before extraordinary charge $ 212 $ 215 $ 197 $ 139 $ 137 Income tax provision 114 115 105 75 64 Interest expense 1,125 1,117 1,054 736 599 ----- ----- ----- ----- ----- Total earnings $1,451 $1,447 $1,356 $ 950 $ 800 ====== ====== ====== ===== ===== Fixed charges - interest expense $1,125 $1,117 $1,054 $ 736 $ 599 ====== ====== ====== ===== ===== Ratio of earnings to fixed charges 1.29 1.30 1.29 1.29 1.34*
Note: Gross rentals on long-term leases were minimal in amount in each of the periods shown. * The ratio of earnings to fixed charges calculated in accordance with the Receivables Agreements after the impact of the extraordinary charge of $34 million (pretax) was 1.28.
EXHIBIT 12.2 AMERICAN EXPRESS COMPANY COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions) Years Ended December 31, ------------------------ -------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Earnings: Pretax income from continuing operations $2,750 $2,664 $2,183 $1,891 $2,326 Interest expense 2,122 2,160 2,343 1,925 1,776 Other adjustments 127 139 95 103 88 ------ ------ ------ ------ ------ Total earnings (a) $4,999 $4,963 $4,621 $3,919 $4,190 ------ ------ ------ ------ ------ Fixed charges: Interest expense $2,122 $2,160 $2,343 $1,925 $1,776 Other adjustments 129 130 135 142 130 ------ ------ ------ ------ ------ Total fixed charges (b) $2,251 $2,290 $2,478 $2,067 $1,906 ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (a/b) 2.22 2.17 1.86 1.90 2.20
Included in interest expense in the above computation is interest expense related to the international banking operations of American Express Company ("American Express") and Travel Related Services' Cardmember lending activities, which is netted against interest and dividends and Cardmember lending net finance charge revenue, respectively, in the Consolidated Statements of Income of American Express Company. For purposes of the "earnings" computation, other adjustments include adding the amortization of capitalized interest, the net loss of affiliates accounted for at equity whose debt is not guaranteed by American Express, the minority interest in the earnings of majority-owned subsidiaries with fixed charges, and the interest component of rental expense and subtracting undistributed net income of affiliates accounted for at equity. For purposes of the "fixed charges" computation, other adjustments include capitalized interest costs and the interest component of rental expense. On May 31, 1994, American Express completed the spin-off of Lehman Brothers through a dividend to American Express common shareholders. Accordingly, Lehman Brothers' results are reported as a discontinued operation and are excluded from the above computation for all periods presented. In March 1993, American Express reduced its ownership in First Data Corporation ("FDC") to approximately 22 percent through a public offering. As a result, beginning in 1993, FDC was reported as an equity investment in the above computation. In the fourth quarter of 1995, American Express' ownership was further reduced to approximately 10 percent as a result of shares issued by FDC in connection with a merger transaction. Accordingly, as of December 31, 1995, American Express' investment in FDC is accounted for as Investments - Available for Sale. EX-23 3 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the registration statements on Form S-3 (Registration Statement Nos. 33- 47497, 33-62797 and 333-38199) of American Express Credit Corporation and in the related prospecti of our report dated February 5, 1998, with respect to the consolidated financial statements and schedule of American Express Credit Corporation included in this Annual Report on Form 10-K for the year ended December 31, 1997. /s/ Ernst & Young LLP New York, New York March 27, 1998 EX-27 4
5 This schedule contains summary financial information extracted from Credco's Condensed Consolidated Balance Sheet at December 31, 1997 and Condensed Consolidated Statement of Income for the twelve months ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 374 218 19,609 633 0 0 0 0 23,053 0 0 0 0 1 1,906 23,053 0 2,064 0 0 29 584 1,125 326 114 212 0 0 0 212 0 0
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