-----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, JwMgKi6WrV95Buhu13I+xwa/cfhbxYQUNPNFT8/e/9+QUnX1rNRA7FUpWuLYF38z LXvMz+dJ5Cm/53AfWzGZ6w== 0000004969-99-000005.txt : 19990402 0000004969-99-000005.hdr.sgml : 19990402 ACCESSION NUMBER: 0000004969-99-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99582515 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 1998 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File No. 1-6908 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 Exchange February 19, 2003 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 31, 1999, 1,504,938 shares were outstanding. Documents incorporated by reference: None 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 receivables, Special Purchase Accounts(SM) receivables which provide for extended payment for certain charges, interest-bearing equipment financing installment loans and non-interest-bearing deferred merchandise receivables arising from direct mail merchandise sales by TRS. 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 banks and other qualified institutions). 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. 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 certain extended payment plans, Charge Cards require payment of the full amount billed each month 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 Optima Card comprises a family of revolving credit cards marketed in the United States and other countries. TRS and its licensees also issue revolving credit cards which do not carry the Optima brand, primarily outside the United States. 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 1 inquiries are handled and specifies certain billing requirements; and the Fair Credit and Charge Card Disclosure Act, which mandates certain disclosures on credit and charge card applications. Federal legislation also regulates abusive debt collection practices. In addition, a number of states and foreign countries have similar consumer credit protection and disclosure laws. The application of federal and state bankruptcy and debtor relief laws affect 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 businesses, 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 December 31, 1998 and 1997, extended payment plan receivables owned by Credco totaled $2.1 billion and $1.8 billion representing 11.1 percent and 9.4 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 receivables, Special Purchase Accounts receivables, interest-bearing equipment financing installment loans and non-interest-bearing deferred merchandise receivables arising from direct mail merchandise sales by TRS. Credco, through a wholly-owned 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 wholly-owned subsidiary of TRS. See note 4 in "Notes to Consolidated Financial Statements" appearing herein. 2 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. 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 - ---- -------- ------- ----- -------- ------- ----- 1998 $116,957 $38,105 $155,062 $15,198 $4,043 $19,241 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
The Card business does not experience 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 have 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, 1998 (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) was 43 days. 3 The following table shows the aging of billed, non-interest-bearing charge Cardmember receivables:
December 31, 1998 1997 ---------------------------------------------------------- Current 79.4% 79.6% 30 to 59 days 15.2 14.7 60 to 89 days 2.4 2.3 90 days and over 3.0 3.4
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 in each of the years indicated:
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Write-offs, net of recoveries $647 $615 $630 $508 $444 % of net Cardmember receivables purchased .42% .42% .46% .42% .41%
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 ---- ------------- 1998 5.66% 1997 5.66 1996 5.67 1995 6.30 1994 5.06
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, 1998 was $5.8 billion. At 4 December 31, 1998, the amount borrowed was $2.2 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. 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, 1998 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, 1998 and 1997. 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, 1998.
(dollars in millions) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Income Statement Data Revenues 2,214 2,064 2,166 1,988 1,401 Interest expense 1,190 1,125 1,117 1,054 736 Provision for doubtful accounts, net of recoveries 632 584 712 625 443 Income tax provision 128 114 115 105 75 Net income 237 212 215 197 139 Balance Sheet Data Accounts receivable 19,241 19,609 17,359 16,439 14,020 Reserve for doubtful accounts (597) (633) (638) (624) (498) Total assets 23,650 23,053 20,165 20,192 16,868 Short-term debt 17,528 16,582 14,537 14,202 11,525 Current portion of long-term debt 353 4 211 409 405 Long-term debt 3,053 3,264 2,469 2,673 2,282 Shareholder's equity 1,994 1,907 1,845 1,780 1,733 Cash dividends 150 150 150 150 100
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. These participation interests are owned by two master trusts formed by TRS as part of its asset securitization programs. At December 31, 1998 and 1997, respectively, Credco owned $17.1 billion and $17.8 billion of Charge Card receivables and participation in Charge Card receivables, representing 88.9 percent and 90.6 percent, respectively, of the total receivables owned. Revolving credit receivables, representing 11.1 percent and 9.4 percent of the total receivables owned, were $2.1 billion and $1.8 billion at December 31, 1998 and 1997, respectively. As part of Credco's business of funding receivables, Credco makes variable rate loans to American Express Centurion Bank ("Centurion Bank"), a wholly-owned subsidiary of TRS, which are secured by Optima receivables owned by Centurion Bank. At both December 31, 1998 and 1997, $2.3 billion 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 $15.2 billion for 1998 and $14.1 billion for 1997. 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. Committed credit line facilities at December 31, 1998 and 1997 totaled $8.2 billion and $7.3 billion, respectively. Credco, through its wholly-owned subsidiary, American Express Overseas Credit Corporation Limited ("AEOCC"), had no outstanding borrowings at December 31, 1998 and $17.4 million at December 31, 1997, under these committed lines of credit. In addition, Credco, through AEOCC, had short-term borrowings under uncommitted lines of credit totaling $68 million and $241 million at December 31, 1998 and 1997, respectively. During 1998, Credco's average long-term debt outstanding was $3.4 billion. Credco's average long-term debt outstanding was $2.9 billion during 1997 and 1996. At December 31, 1998, Credco had approximately $2.4 billion of medium- and long-term debt and warrants available for issuance under shelf registrations filed with the Securities and Exchange Commission. In addition, at December 31, 1998, Credco had the ability to issue $1.9 billion of debt under the Euro Medium-Term Note program established by Credco, TRS, AEOCC, Centurion Bank and American Express Bank, Ltd. (a wholly-owned subsidiary of American Express). In January 1999, under the Euro-Medium Term Note program, TRS issued and sold an additional $500 million 5.625% Fixed Rate Notes. These notes will mature in 2004. Credco paid dividends to TRS of $150 million in both December, 1998 and 1997. 7 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. In May 1998, the American Express Master Trust (the "Trust") issued an additional $1.0 billion of Class A Fixed Rate Accounts Receivable Trust Certificates. At the time of such issuance, Credco Receivables Corp. ("CRC"), a wholly-owned subsidiary of Credco, sold back to American Express Receivables Financing Corporation ("RFC"), a wholly-owned subsidiary of TRS, at face amount less applicable reserve, $1.1 billion of CRC's gross participation in RFC's seller's interest in the receivables owned by the Trust. In September 1998, $300 million Class A Fixed Rate Accounts Receivable Trust Certificates matured from the Charge Card securitization portfolio which increased the participation interests owned by CRC. CRC owns a participation interest in the seller's interest in charge Cardmember receivables that have been conveyed to the Trust. 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 1.31 in 1998, 1.29 in 1997, and 1.30 in 1996. 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, 1998, 1997 and 1996. Credco's increase in revenues in 1998 is primarily due to an increase in the volume of receivables purchased. The increase in interest income in 1998 is due to an increase in the volume of average investments outstanding. Interest expense increased in 1998 due to an increase in the volume of average debt outstanding. Provision for doubtful accounts increased in 1998 reflecting higher volume of receivables purchased. 8
The following is a further analysis of the increase (decrease) in key revenue and expense accounts (millions): ------------------------------------------------------------ 1998 1997 1996 ------------------------------------------------------------ Revenue earned from purchased accounts receivable-changes attributable to: Volume of receivables purchased $ 97 $ 157 $ 166 Discount and interest rates 40 (214) (28) ------------------------------------------------------------ Total $137 $ (57) $ 138 ------------------------------------------------------------ Interest income from affiliates-changes attributable to: Volume of average investments outstanding $ 11 $ 9 $ 5 Interest rates (4) 4 (15) ------------------------------------------------------------ Total $ 7 $ 13 $(10) ------------------------------------------------------------ Interest income from investments-changes attributable to: Volume of average investments outstanding $ 6 $ (65) $ 71 Interest rates 0 6 (19) ------------------------------------------------------------ Total $ 6 $ (59) $ 52 ------------------------------------------------------------ Interest expense (affiliates)-changes attributable to: Volume of average debt outstanding $(14) $ 37 $ 11 Interest rates (1) 8 (13) ------------------------------------------------------------ Total $(15) $ 45 $ (2) ------------------------------------------------------------ Interest expense (other)-changes attributable to: Volume of average debt outstanding $ 79 $ (31) $178 Interest rates 1 (6) (113) ------------------------------------------------------------ Total $ 80 $ (37) $ 65 ------------------------------------------------------------ Provision for doubtful accounts-changes attributable to: Volume of receivables purchased $ 50 $ 65 $ 91 Provision rates and volume of recoveries (2) (193) (4) ------------------------------------------------------------ Total $ 48 $(128) $ 87 ------------------------------------------------------------
Year 2000 The Year 2000 (Y2K) 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 Y2K issue. The Card issuers, which are subsidiaries or affiliates of TRS, at their expense and as agents for Credco, 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 Y2K 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' goals are to complete testing of critical systems by early 1999 and to continue compliance efforts, including but not limited to, the testing of systems on an integrated basis and independent validation of such testing, 9 through 1999.** The costs related to the Y2K issue, which are expensed by American Express as incurred have not had, nor are they expected to have, a material impact on Credco's results of operations or financial condition.** For further discussion of American Express' addressing of the Y2K issue, please see pages 22 and 23 of American Express' 1998 Annual Report to Shareholders, which discussion is incorporated herein by reference and attached hereto as Exhibit 99. Various statements in this Y2K discussion marked with two asterisks (**), are forward-looking statements which are subject to risks and uncertainties. Important factors that could cause results to differ materially from these forward-looking statements include, among other things, the ability of Credco and American Express to successfully identify systems containing two-digit codes, the nature and amount of programming required to fix the affected systems, the costs of labor and consultants related to such efforts, the continued availability of such resources, and the ability of third parties that interface with Credco and American Express to successfully address their Y2K issues. Accounting Development In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective January 1, 2000. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The ultimate effect of the new rule will be measured based on the derivatives in place at adoption and cannot be estimated at this time. Based on Credco's current derivatives position, the effect on Credco's earnings and financial position upon adoption would not be significant. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. American Express management establishes and oversees implementation of Board-approved policies covering its funding, investments and use of derivative financial instruments and monitors aggregate risk exposures on an ongoing basis. The objective is to realize returns commensurate with the level of risk assumed while achieving consistent earnings growth. See note 8 in "Notes to Consolidated Financial Statements" appearing herein for a discussion of Credco's use of derivatives. The following sections include sensitivity analyses of two different tests of market risk and estimate the effects of hypothetical sudden and sustained changes in the applicable market conditions on the ensuing year's earnings, based on year-end positions. The market changes, assumed to occur as of year-end, are a 100 basis point increase in market interest rates and a 10% strengthening of the U.S. dollar versus all other currencies. Computations of the prospective effects of hypothetical interest rate and foreign exchange rate changes are based on numerous assumptions, including relative levels of market interest rates and foreign exchange rates, as well as the levels of assets and liabilities. The hypothetical changes and assumptions will be different from what actually occurs in the future. Furthermore, the computations do not anticipate actions that may be taken by management if the hypothetical market changes actually occur over time. As a result, actual earnings effects in the future will differ from those quantified below. Credco's hedging policies are established, maintained and monitored by a centralized treasury function. Credco generally manages its exposures along product lines. A variety of interest rate and foreign exchange 10 hedging strategies are employed to manage interest rate and foreign currency risks. Credco funds its Charge Card receivables using sources such as long- term debt, medium-term notes, commercial paper and other debt. Interest rate exposure is managed through the issuance of long- and short-term debt and the use of interest rate swaps to achieve a targeted mix of fixed and floating rate funding. During 1998 and 1997, Credco targeted this mix to be approximately 100 percent floating rate. In early 1998, Credco purchased interest rate caps to limit the adverse effect of an interest rate increase on substantially all Charge Card funding costs. The majority of these caps matured during 1998. In 1999, Credco began entering into a series of interest rate swaps to convert a portion of its funding from floating rate to fixed rate. Credco funds its revolving credit receivables using a mix of long- and short-term debt. The interest rates on these revolving credit receivables are generally linked to a floating rate base and typically reprice each month. Credco generally enters into interest rate agreements paying a rate that reprices when the base rate of the underlying receivables changes. The detrimental effect on Credco's pretax earnings of a hypothetical 100 basis point increase in interest rates would be approximately $115 million and $119 million, based on 1998 and 1997 year-end positions, respectively. This effect is primarily due to the variable rate funding of the Charge Card products. Had the series of swaps purchased in early 1999 been in effect at December 31, 1998, the 1998 effect would have been substantially lower. Similarly, had the interest rate caps purchased in early 1998 been in effect at December 31, 1997, the 1997 effect would be reduced by nearly half. Credco's foreign exchange risk arising from cross-currency charges and balance sheet exposures is managed primarily by entering into agreements to buy and sell currencies on a spot or forward basis. Based on the year-end 1998 and 1997 foreign exchange positions, the effect on Credco's earnings of the hypothetical 10% strengthening of the U.S. dollar would be immaterial. 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. 11 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. 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: None. 12 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 31, 1999 /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 31, 1999 /s/ Vincent P. Lisanke ---------------------------------------------------------- Vincent P. Lisanke President, Chief Executive Officer and Director (principal executive and principal accounting officer) DATE March 31, 1999 /s/ Richard K. Goeltz ---------------------------------------------------------- Richard K. Goeltz Chairman of the Board and Director (principal financial officer) DATE March 31, 1999 /s/ Jay B. Stevelman ----------------------------------------------------------- Jay B. Stevelman Treasurer and Director 13 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, 1998, 1997 and 1996 F - 3 Consolidated balance sheets at December 31, 1998 and 1997 F - 4 Consolidated statements of cash flows for each of the three years ended December 31, 1998, 1997 and 1996 F - 5 Consolidated statements of shareholder's equity for each of the three years ended December 31, 1998, 1997 and 1996 F - 6 Notes to consolidated financial statements F - 7 to F - 16 Schedule: II - Valuation and qualifying accounts for the three years ended December 31, 1998 F - 17 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, 1998 and 1997, 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, 1998. 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 the management of American Express Credit Corporation. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, 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 4, 1999 F-2
AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED STATEMENTS OF INCOME (millions) -------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 -------------------------------------------------------------- Revenues Revenue earned from purchased accounts receivable $1,893 $1,756 $1,813 Interest income from affiliates 180 173 160 Interest income from investments 136 130 189 Other income 5 5 4 -------------------------------------------------------------- Total 2,214 2,064 2,166 -------------------------------------------------------------- Expenses Interest expense - affiliates 164 179 134 Interest expense - other 1,026 946 983 Provision for doubtful accounts, net of recoveries of $168, $183 and $186 632 584 712 Other expenses 27 29 7 -------------------------------------------------------------- Total 1,849 1,738 1,836 -------------------------------------------------------------- Income before taxes 365 326 330 Income tax provision 128 114 115 -------------------------------------------------------------- Net income $ 237 $ 212 $ 215 -------------------------------------------------------------- --------------------------------------------------------------
See notes to consolidated financial statements. F-3
AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED BALANCE SHEETS (millions) ------------------------------------------------------------------- December 31, 1998 1997 ------------------------------------------------------------------- Assets Cash and cash equivalents $ 648 $ 374 Investments 353 218 Accounts receivable 19,241 19,609 Less: reserve for doubtful accounts 597 633 ------ ------ 18,644 18,976 Loans and deposits with affiliates 3,353 3,150 Deferred charges and other assets 652 335 -------------------------------------------------------------------- Total assets $23,650 $23,053 -------------------------------------------------------------------- Liabilities and shareholder's equity Short-term debt with affiliates $ 1,261 $ 1,770 Short-term debt - other 16,267 14,812 Current portion of long-term debt 353 4 Long-term debt with affiliates 910 910 Long-term debt - other 2,143 2,354 ------ ------ Total debt 20,934 19,850 Due to affiliates 425 1,027 Accrued interest and other liabilities 182 152 -------------------------------------------------------------------- Total liabilities 21,541 21,029 -------------------------------------------------------------------- -------------------------------------------------------------------- Deferred discount revenue 115 117 -------------------------------------------------------------------- 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 1,832 1,745 Other comprehensive income, net of tax: Net unrealized securities gains - - Foreign currency translation adjustment - - -------------------------------------------------------------------- Total shareholder's equity 1,994 1,907 -------------------------------------------------------------------- Total liabilities and shareholder's equity $23,650 $23,053 --------------------------------------------------------------------
See notes to consolidated financial statements. F-4
AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (millions) - ---------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------- Cash Flows From Operating Activities: Net Income $ 237 $ 212 $ 215 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts, net of recoveries 632 584 712 Amortization of deferred underwriting fees and bond discount/premium 5 - 1 (Decrease) increase in deferred discount revenue (2) 17 (16) (Increase) decrease in deferred tax assets (28) 43 (11) Increase in interest receivable and operating assets (33) (12) (6) Increase (decrease) in accrued interest and other liabilities 42 18 (18) Increase in due to affiliates 52 8 79 - ---------------------------------------------------------------------------- Net cash and cash equivalents provided by operating activities 905 870 956 - ---------------------------------------------------------------------------- Cash Flows From Investing Activities: Increase in accounts receivable (1,261) (2,694) (3,194) 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 (312) (728) (2,178) Sale of participation interest in seller's interest in accounts receivable to an affiliate 1,120 95 1,304 Recoveries of accounts receivable previously written off 168 183 186 Purchase of investments (153) (247) - Maturity of investments 17 29 - Increase in loans and deposits due from affiliates (201) (300) - (Decrease) increase in due to affiliates (949) 192 (57) - ---------------------------------------------------------------------------- Net cash and cash equivalents used in investing activities (1,571) (3,251) (1,645) - ---------------------------------------------------------------------------- Cash Flows From Financing Activities: Net (decrease) increase in short-term debt with affiliates with maturities less than ninety days (510) 496 188 Net increase in short-term debt - other with maturities less than ninety days 795 3,271 4,469 Proceeds from issuance of debt 5,492 8,027 9,684 Redemption of debt (4,687) (9,156) (14,425) Dividends paid to TRS (150) (150) (150) - ---------------------------------------------------------------------------- Net cash and cash equivalents provided by (used in) financing activities 940 2,488 (234) - ---------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 274 107 (923) - ---------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 374 267 1,190 - ---------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 648 $ 374 $ 267 - ----------------------------------------------------------------------------
See notes to consolidated financial statements. F-5
AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY Years ended December 31, 1998, 1997 and 1996 (millions) ----------------------------------------------------- Accumulated Total Other Shareholder's Common Capital Comprehensive Retained Equity Stock Surplus Income Earnings ----------------------------------------------------- Balances at January 1, 1996 $1,780 $ 1 $ 161 $ - $1,618 Comprehensive Income: Net income 215 215 Net unrealized securities gains/losses - - Foreign currency translation adjustments - - ----- Total comprehensive income 215 Dividends to TRS (150) - - - (150) ----- ----- ----- ----- ----- Balances at December 31, 1996 1,845 1 161 - 1,683 Comprehensive Income: Net income 212 212 Net unrealized securities gains/losses - - Foreign currency translation adjustments - - ----- Total comprehensive income 212 Dividends to TRS (150) - - - (150) ----- ----- ----- ----- ----- Balances at December 31, 1997 1,907 1 161 - 1,745 Comprehensive Income: Net income 237 237 Net unrealized securities gains/losses - - Foreign currency translation adjustments - - ----- Total comprehensive income 237 Dividends to TRS (150) - - - (150) ----- ---- ----- ----- ----- Balances at December 31, 1998 $1,994 $ 1 $ 161 $ - $1,832 ===== ===== ===== ===== =====
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. Debt securities are classified as held to maturity when Credco has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. F-7 Available for sale securities are stated at fair value, with the unrealized gains and losses included in shareholder's equity. Fair Values of Financial Instruments The fair values of financial instruments are estimates based upon current market conditions and perceived risks at December 31, 1998 and 1997 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 rate base 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 December 31, 1998 and December 31, 1997, included in cash and cash equivalents was nil and $100 million, respectively, of overnight securities purchased to resell. Accounting Change In 1998, Credco adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". Comprehensive income consists of net income and other comprehensive income; the latter includes unrealized gains and losses on available for sale securities and foreign exchange translation adjustments and is presented in the Consolidated Statements of Shareholder's Equity. The adoption of SFAS No. 130 had no effect on shareholder's equity. Prior year financial statements have been reclassified to conform to the SFAS No. 130 requirements. F-8 3. Investments At December 31, 1998, Credco held $258 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, 1998 was $267 million. Available for sale securities are stated at fair value, with the unrealized gains and losses included in shareholder's equity. At December 31, 1998, Credco held American Express Credit Account Master Trust Class C Certificates which were classified as available for sale. The cost and fair value of these available for sale securities at December 31, 1998 were $95 million. The available for sale classification does not mean that Credco necessarily expects to sell these securities. They are available to meet possible liquidity needs should there be significant changes in market interest rates, customer demands or funding sources and terms. 4. Accounts Receivable At December 31, 1998 and 1997, respectively, Credco owned $17.1 billion and $17.8 billion of Charge Card receivables and participation in Charge Card receivables, representing 88.9 percent and 90.6 percent, respectively, of the total receivables owned. In connection with TRS' securitization program for U.S. charge Cardmember receivables, CRC purchases from American Express Receivables Financing Corporation ("RFC"), a wholly-owned subsidiary of TRS, a participation interest in RFC's seller's interest in the receivables owned by the American Express Master Trust (the "Trust"), which was formed in 1992 to securitize U.S. Charge Cardmember receivables. In May 1998, the Trust issued an additional $1.0 billion of Class A Fixed Rate Accounts Receivable Trust Certificates to the public. At that time, CRC sold to RFC, at face amount less applicable reserve, $1.1 billion of its gross participation interest. The gross participation interests represent undivided interests in the receivables conveyed to the Trust by RFC. At December 31, 1998 and 1997, Credco owned approximately $2.9 billion and $3.8 billion, respectively, of participation interests in receivables owned by the Trust, representing 14.9 percent and 19.6 percent, respectively, of its total accounts receivable. At December 31, 1998 and 1997, Credco owned extended payment plan receivables totaling $2.1 billion and $1.8 billion, respectively, including revolving credit loans purchased directly from American Express Centurion Bank ("Centurion Bank"), a wholly-owned subsidiary of TRS, representing 11.1 percent and 9.4 percent, respectively, of its total interests in accounts receivable. The extended payment plan receivables owned at December 31, 1998 and 1997 include $154 million and $229 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 (the "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): ----------------------------------------------------------------- 1998 1997 ----------------------------------------------------------------- Commercial paper $16,064 $14,438 Borrowings from affiliates 1,261 1,770 Borrowings under lines of credit 68 241 Borrowing agreements with bank trust departments and others 135 133 ----------------------------------------------------------------- Total short-term debt $17,528 $16,582 -----------------------------------------------------------------
F-9 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 $8.2 billion and $7.3 billion at December 31, 1998 and 1997, respectively. Credco pays fees to the financial institutions that provide these credit line facilities. Credco, through AEOCC, had no outstanding borrowings at December 31, 1998 and $17.4 million of outstanding borrowings at December 31, 1997, under these committed lines of credit. The fair value of the unused lines of credit is not significant at December 31, 1998 and 1997. At December 31, 1998 and 1997, Credco, through AEOCC, had short- term borrowings under uncommitted lines of credit totaling $68 million and $241 million, respectively. Credco's annual weighted average short-term interest rate was 5.62 percent, 5.60 percent and 5.57 percent for the years ended December 31, 1998, 1997 and 1996, respectively. These rates include the cost of maintaining credit line facilities for the periods and the impact of interest rate swaps. At December 31, 1998, $450 million of short-term debt outstanding was modified by interest rate swaps, resulting in a year-end weighted average effective interest rate of 5.32 percent. Credco paid $977 million, $940 million and $913 million of interest on short-term debt obligations in 1998, 1997 and 1996, respectively. 6. Long-term Debt
- ---------------------------------------------------------------------- ---------------------------------- 1998 1997 ------------------------------------------------------- ---------------------------------- Year-End Effective December 31, (millions) Year-End Interest Notional Stated Rate Rate with Maturity Notional Year-End Outstanding Amount of on Debt with of Outstanding Amount 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% 5.45% 1999- $1,548 $1,550 6.69% Variable rate 2005 debt with American Express due 2004 910 - 5.11% - - 910 - 5.67% Medium-term fixed rate notes due 2002 400 400 6.50% 5.40% 2002 400 400 6.50% Medium-term variable rate notes due 2002 399 399 5.27% 5.31% 2002 399 399 5.80% Exchangeable notes due 2003 143 150 1.13% 5.14% 2003 - - - Other senior notes due 1999-2017 2 - 7.40% - - 2 - 8.00% Swiss franc notes due 1999-2003 5 - 3.87% - - 9 - 3.45% Net unamortized bond discount (1) - - - - - - - -------------------------------------------------------------------------------------------------------- Total long-term debt $3,406 $2,499 $3,268 $2,349 --------------------------------------------------------------------------------------------------------
(a) For the floating rate debt issuance, the stated rate was based on the rate at December 31, 1998; 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 $353 million and $4 million at December 31, 1998 and 1997, 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, 1998 and 1997, was $3.5 billion and $3.3 billion, respectively. Aggregate annual maturities of long-term debt for the five years ending December 31, 2003 are as follows (millions): 1999 - $353, 2000 - $550, 2001 - $550, 2002 - $799, 2003 - $143. F-10 Credco paid $209 million in 1998, $192 million in 1997, and $217 million in 1996 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 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, 1998 and 1997, the aggregate notional amount of Credco's derivative instruments was $9.5 billion ($360 million with affiliates) and $7.4 billion ($562 million with affiliates), respectively. Credit risk approximates the fair value of contracts in a gain position (asset) and totaled $101 million ($1.7 million with affiliates) at December 31, 1998 and $94 million ($3.6 million with an affiliate) at December 31, 1997. 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, 1998 Amount Asset Liability Asset Liability ----------------- ------ ----- --------- ----- --------- Interest rate products $7,505 $ 68 $ 52 $ 83 $ 83 Forward contracts 2,037 12 3 18 4 ------ ------ ------ ------ ------ Total $9,542 $ 80 $ 55 $ 101 $ 87 ------ ------ ------ ------ ------ 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 ------ ------ ------ ------ ------
F-11 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 matured during 1998. In 1999, Credco began entering into a series of interest rate swaps to convert a portion of its funding from floating rate to fixed rate. 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. 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): 1999 - $1,870, 2000 - $1,119, 2001 - $1,118, 2002 - $1,033, 2003 - $265, 2004 - $100. The following table details information regarding Credco's interest rate products* at December 31, 1998 (millions):
- ------------------------------------------------------------------------------- Notional Primary Variable Weighted Average Interest Rate Type Amount Rate Index Fixed Floating - ------------------------------------------------------------------------------- Floating to fixed $2,698 1 month LIBOR 5.56% 5.34% Fixed to floating $2,407 1 month LIBOR 5.99% 5.02% Floating to floating $ 400 1 month LIBOR and - 5.09%/5.07% 3 month LIBOR
*Excludes $2.0 billion of interest rate caps. 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 F-12 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): ------------------------------------------------------ 1998 1997 ------------------------------------------------------ Canadian Dollar $ 501 $ 486 Pound Sterling 915 538 Australian Dollar 35 269 Hong Kong Dollar 223 179 German Mark 178 258 Other 185 339 ------------------------------------------------------ Total forward contracts $2,037 $2,069 ------------------------------------------------------
Foreign currency forward contracts generally mature within one year. At December 31, 1998, Credco had no significant unhedged foreign currency exposures. 9. Transactions with Affiliates In 1998, 1997 and 1996, Credco purchased Cardmember receivables without recourse from TRS and certain of its subsidiaries totaling approximately $155 billion, $146 billion and $136 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 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. In May 1998, the Trust issued an additional $1.0 billion of Class A Fixed Rate Accounts Receivable Trust Certificates. At the time of such issuance, CRC sold back to RFC at face amount less applicable reserve, $1.1 billion of CRC's gross participation in RFC's seller's interest in the receivables owned by the Trust. In September 1998 and July 1997, $300 million and $500 million, respectively, Class A Fixed Rate Accounts F-13 Receivable Trust Certificates matured from the Charge Card securitization portfolio which increased the participation interests owned by CRC. CRC owns a participation interest in the seller's interest in charge Cardmember receivables that have been conveyed to the Trust. At December 31, 1998 and 1997, Credco owned approximately $2.9 billion and $3.8 billion, respectively, of participation interests in receivables owned by the Trust, representing 14.9 percent and 19.6 percent, respectively, of its total accounts receivable. The extended payment plan receivables owned at December 31, 1998 and 1997 include $154 million and $229 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 Master Trust. Other transactions with American Express and its subsidiaries for the years ended December 31 were as follows (millions):
---------------------------------------------------------------- 1998 1997 1996 ---------------------------------------------------------------- Cash and cash equivalents at December 31 $ 4 $ 6 $ 2 Maximum month-end level of cash and cash equivalents during the year 17 9 9 Secured loans to American Express Centurion Bank at December 31 2,300 2,300 2,000 Other loans and deposits to affiliates at December 31 1,053 850 850 Maximum month-end level of loans and deposits to affiliates during the year 3,353 3,150 2,850 Borrowings at December 31 2,171 2,680 2,185 Maximum month-end level of borrowings during the year 5,819 4,588 4,024 Interest income 180 173 160 Other income 5 5 4 Interest expense 164 179 134 ----------------------------------------------------------------
At both December 31, 1998 and 1997, Credco held $2.3 billion of variable rate secured loans to Centurion Bank and $2.0 billion at December 31, 1996. At December 31, 1998, 1997 and 1996, 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 $180 million, $173 million, and $160 million for 1998, 1997 and 1996, 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 F-14 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):
------------------------------------------------------------- 1998 1997 1996 ------------------------------------------------------------- Current $ 156 $ 71 $ 126 Deferred (28) 43 (11) ------------------------------------------------------------- Total income tax provision $ 128 $ 114 $ 115 -------------------------------------------------------------
Credco's net deferred tax assets, which are included in other assets, consisted of the following (millions):
------------------------------------------- 1998 1997 ------------------------------------------- Deferred tax assets $ 203 $ 182 Deferred tax liabilities (1) (8) ------------------------------------------- Net deferred tax assets $ 202 $ 174 -------------------------------------------
Deferred tax assets for 1998 and 1997 consists primarily of reserve for loan losses of $201 million and $182 million, respectively. Deferred tax liabilities for 1998 and 1997 consists primarily of foreign exchange contracts of $1 million and $7 million, respectively. At December 31, 1998 and 1997, no valuation allowances were required. Included in due to affiliates is the current federal tax payable to TRS of $30 million and a receivable of $29 million at December 31, 1998 and 1997, respectively. Income taxes paid to TRS during 1998, 1997 and 1996 were $95 million, $73 million and $155 million, respectively. The U.S. statutory tax rate and effective tax rate for 1998, 1997 and 1996 was approximately 35 percent. F-15 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):
1998 1997 1996 ------------------------------------------------------------- Revenues United States $1,857 $1,723 $1,855 International 357 341 311 ------------------------------------------------------------- Consolidated $2,214 $2,064 $2,166 ------------------------------------------------------------- Income before taxes United States $ 316 $ 286 $ 275 International 49 40 55 ------------------------------------------------------------- Consolidated $ 365 $ 326 $ 330 ------------------------------------------------------------- 12. Quarterly Financial Data (Unaudited) Summarized quarterly financial data is as follows (millions): ------------------------------------------------------------ Quarter Ended 12/31 9/30 6/30 3/31 ------------------------------------------------------------ 1998 ------------------------------------------------------------ Revenues $548 $545 $581 $540 Income before taxes 98 87 94 86 Net income 63 57 61 56 ------------------------------------------------------------ 1997 ------------------------------------------------------------ Revenues $535 $542 $516 $471 Income before taxes 68 86 81 91 Net income 44 56 53 59 ------------------------------------------------------------
F-16
AMERICAN EXPRESS CREDIT CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (millions) 1998 1997 1996 ---- ---- ---- Reserve for doubtful accounts: Balance at beginning of year $633 $638 $624 Additions: Provision for doubtful accounts charged to income (1) 800 767 898 Other credits (2) 48 53 94 Foreign translation (1) (5) 2 Deductions: Accounts written off 815 798 816 Other charges (3) 68 22 164 ---- ---- ---- Balance at end of year $597 $633 $638 ==== ==== ==== Reserve for doubtful accounts as a percentage of Cardmember receivables owned at year end 3.10% 3.23% 3.68% ===== ===== =====
(1) Before recoveries on accounts previously written off of (millions): 1998-$168, 1997-$183 and 1996-$186. (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-17 EXHIBIT INDEX Pursuant to Item 601 of Regulation S-K Exhibit No. Description 3 (a) Registrant's Certificate of Incorporated by reference to Incorporation, as amended 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 reference to amended and restated as of Exhibit 3 (b) to Registrant's November 24, 1980 Annual Report on Form 10-K (Commission File No. 1-6908) for the year ended December 31, 1985. 4 (a) Registrant's Debt Securities Incorporated by reference to Indenture dated as of Exhibit 4 (s) to Registrant's September 1, 1987 Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (b) Form of Note with optional Incorporated by reference to redemption provisions 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 reference to optional redemption and Exhibit 4 (u) to Registrant's sinking fund provisions Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (d) Form of Original Issue Incorporated by reference to Discount Note with optional Exhibit 4 (v) to Registrant's redemption provision Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (e) Form of Zero Coupon Note Incorporated by reference to with optional redemption Exhibit 4 (w) to Registrant's provisions Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (f) Form of Variable Rate Note Incorporated by reference to with optional redemption Exhibit 4 (x) to Registrant's and repayment provisions Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (g) Form of Extendible Note Incorporated by reference to with optional redemption Exhibit 4 (y) to Registrant's and repayment provisions Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (h) Form of Fixed Rate Medium- Incorporated by reference to Term Note 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 reference to Medium-Term Note 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 Indenture Incorporated by 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 reference to debt instruments to be issued Exhibit 4(l) to Registrant's outside the U.S. Annual Report on Form 10-K (Commission File No. 1-6908) for the year ended December 31, 1997. 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 dated Incorporated by reference to as of January 1, 1983 between Exhibit 10 (b) to Registrant's the Registrant and American Annual Report on Form 10-K Express Travel Related Commission File No. 1-6908) Services Company, Inc. for the year ended December 31, 1987. 10 (b) Secured Loan Agreement dated Incorporated by reference to as of June 30, 1988 between Exhibit 10 (b) to Registrant's the Registrant and American Annual Report on Form 10-K Express Centurion Bank (Commission File No. 1-6908) for the year ended December 31, 1988. 10 (c) Participation Agreement Incorporated by reference to dated as of August 3, 1992 Exhibit 10 (c) to Registrant's between American Express Annual Report on Form 10-K Receivables Financing (Commission File No. 1-6908) Corporation and Credco for the year ended Receivables Corp. 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. 99 Pages 22 through 23 of Electronically American Express Company's filed herewith. 1998 Annual Report to Shareholders, discussing Year 2000 EX-12 2
EXHIBIT 12.1 AMERICAN EXPRESS CREDIT CORPORATION COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES (millions) Years Ended December 31, ----------------------- ---------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Earnings: Net Income $ 237 $ 212 $ 215 $ 197 $139 Income tax provision 128 114 115 105 75 Interest expense 1,190 1,125 1,117 1,054 736 ------ ------ ------ ------ ----- Total earnings $1,555 $1,451 $1,447 $1,356 $950 ====== ====== ====== ====== ===== Fixed charges- interest expense $1,190 $1,125 $1,117 $1,054 $736 ====== ====== ====== ====== ===== Ratio of earnings to fixed charges 1.31 1.29 1.30 1.29 1.29
Note: Gross rentals on long-term leases were minimal in amount in each of the periods shown.
EXHIBIT 12.2 AMERICAN EXPRESS COMPANY COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions) Years Ended December 31, ------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Earnings: Pretax income from continuing operations $2,925 $2,750 $2,664 $2,183 $1,891 Interest expense 2,224 2,122 2,160 2,343 1,925 Other adjustments 124 127 139 95 103 ------ ------ ------ ------ ------ Total earnings(a) $5,273 $4,999 $4,963 $4,621 $3,919 ------ ------ ------ ------ ------ Fixed charges: Interest expense $2,224 $2,122 $2,160 $2,343 $1,925 Other adjustments 129 129 130 135 142 ------ ------ ------ ------ ------ Total fixed charges(b) $2,353 $2,251 $2,290 $2,478 $2,067 ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (a/b) 2.24 2.22 2.17 1.86 1.90
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. In the fourth quarter of 1995, American Express' ownership in First Data Corporation ("FDC") was 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, 333-38199) of American Express Credit Corporation and in the related Prospecti of our report dated February 4, 1999, 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, 1998. /s/ Ernst & Young LLP New York, New York March 26, 1999 EX-99 4 Exhibit 99 PAGES 22 THROUGH 23 OF AMERICAN EXPRESS COMPANY'S 1998 ANNUAL REPORT TO SHAREHOLDERS, DISCUSSING YEAR 2000 YEAR 2000 The Year 2000 (Y2K) issue is the result of computer programs having been written using two digits rather than four to define a year. Some programs may recognize a date using "00" as the year 1900 rather than 2000. This misinterpretation could result in the failure of major systems or miscalculations, which could have a material impact on the Company and its businesses or subsidiaries through business interruption or shutdown, financial loss, reputational damage and legal liability to third parties. The Company began addressing the Y2K issue in 1995 and has established a plan for resolution, which involves the remediation, decommissioning and replacement of relevant systems, including mainframe, mid-range and desktop computers, application software, operating systems, systems software, date back-up archival and retrieval services, telephone and other communications systems, and hardware peripherals and facilities dependent on embedded technology. As a part of our plan, we have generally followed and utilized the specific policies and guidelines established by the Federal Financial Institutions Examination Council, as well as other U.S. and international regulatory agencies. Additionally, we continue to participate in Y2K related industry consortia sponsored by various partners and suppliers. Progress is reviewed regularly with the Company's senior management and Board of Directors. Our Y2K compliance effort related to information technology (IT) systems is divided into two initiatives. The first, which is the much larger initiative, is known internally as "Millenniax," and relates to mainframe and other technological systems maintained by the American Express Technologies organization (AET). The second, known as "Business T," relates to the technological assets that are owned, managed or maintained by the Company's individual business units. Business T also encompasses the remediation of non-IT systems. These initiatives involve a substantial number of employees and external consultants. This multiple sourcing approach is intended to mitigate the risk of becoming dependent on any one vendor or resource. While the vast majority of our systems that require modification are being remediated, in some cases we have chosen to migrate to new applications that are already Y2K compliant. The Company's plans for remediation with respect to Millenniax and Business T include the following program phases: (i) employee awareness and mobilization, (ii) inventory collection and assessment, (iii) impact analysis, (iv) remediation/decommission, (v) testing and (vi) implementation. As part of the first three phases, we have identified the Company's mission-critical systems for purposes of prioritization. The Company's goals are to complete testing of critical systems by early 1999, and to continue compliance efforts, including but not limited to, the testing of systems on an integrated basis and independent validation of such testing, 22 through 1999.* We are currently on schedule to meet these goals. With respect to systems maintained by the Company, the first three phases referred to above have been substantially completed for both Millenniax and Business T. In addition, remediation of critical systems is substantially complete. As of December 31, 1998, for Millenniax, the remediation/decommission, testing and implementation phases for critical and non-critical systems in total are 82%, 75% and 60% complete, respectively. For Business T, such phases are 85%, 70% and 69% complete, respectively. Certain critical systems have already been made Y2K compliant, such as the Worldwide Credit Authorization System, and we have completed testing of the global point of sale infrastructure. As a result, we have begun issuing Year 2000 dated charge and credit cards. Our most commonly used methodology for remediation is the sliding window. Once an application/system has been remediated, we apply specific types of tests, such as stress, regression, unit, future date and baseline to ensure that the remediation process has achieved Y2K compliance while maintaining the fundamental data processing integrity of the particular system. To assist with remediation and testing, we are using various standardized tools obtained from a variety of vendors. The Company's cumulative costs since inception of the Y2K initiatives were $383 million through December 31, 1998 and are estimated to be in the range of $135-$160 million for the remainder through 2000.* These include both remediation costs and costs related to replacements that were or will be required as a result of Y2K. These costs, which are expensed as incurred, relate to both Millenniax and Business T, and have not had, nor are they expected to have, a material adverse impact on the Company's results of operations or financial condition.* Costs related to Millenniax, which represent most of the total Y2K costs of the Company, are managed by and included in the Corporate and Other segment; costs related to Business T are included in the business segments. Y2K costs related to Millenniax represent 14%, 6% and 1% of the AET budget for the years 1998, 1999 and 2000, respectively. The Company has not deferred other critical technology projects or investment spending as a result of Y2K. However, because the Company must continually prioritize the allocation of finite financial and human resources, certain non-critical spending initiatives have been deferred. The Company's major businesses are heavily dependent upon internal computer systems, and all have significant interaction with systems of third parties, both domestically and internationally. The Company is working with key external parties, including merchants, clients, counterparties, vendors, exchanges, utilities, suppliers, agents and regulatory agencies to mitigate the potential risks to us of Y2K. The failure of external parties to resolve their own Y2K issues in a timely manner could result in a material financial risk to the Company. As part of our overall compliance program, the Company is actively communicating with third parties through face-to-face meetings and correspondence, on an ongoing basis, to ascertain their state of readiness. Although numerous third parties have indicated to us in writing that they are addressing their Y2K issues on a timely basis, the readiness of third parties overall varies across the spectrum. Because the Company's Y2K compliance is dependent on key third parties being compliant on a timely basis, there can be no assurances that the Company's efforts alone will resolve all Y2K issues. At this point, the Company is in the process of performing an assessment of reasonably likely Y2K systems failures and related consequences. The Company is also preparing specific Y2K contingency plans for all key American Express business units to mitigate the potential impact of such failures. This effort is a full-scale initiative that includes both internal and external experts under the guidance of a Company-wide steering committee. Our contingency plans, which will be based in part on an assessment of the magnitude and probability of potential risks, will primarily focus on proactive steps to prevent Y2K failures from occurring, or if they should occur, to detect them quickly, minimize their impact and expedite their repair. The Y2K contingency plans will supplement disaster recovery and business continuity plans already in place, and are expected to include measures such as selecting alternative suppliers and channels of distribution, and developing our own technology infrastructure in lieu of those provided by third parties. Development of the Y2K contingency plans is expected to be substantially complete by the end of the first quarter of 1999, and will continue to be refined throughout 1999 as additional information related to our exposures is gathered.* *Statements in this Y2K discussion marked with an asterisk are forward- looking statements which are subject to risks and uncertainties. Important factors that could cause results to differ materially from these forward-looking statements include, among other things, the ability of the Company to successfully identify systems containing two-digit codes, the nature and amount of programming required to fix the affected systems, the costs of labor and consultants related to such efforts, the continued availability of such resources, and the ability of third parties that interface with the Company to successfully address their Y2K issues. 23 EX-27 5
5 This schedule contains summary financial information extracted from Credco's Condensed Consolidated Balance Sheet at December 31, 1998 and Condensed Consolidated Statement of Income for the twelve months ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 648 353 19,241 597 0 0 0 0 23,650 0 20,934 0 0 1 1,993 23,650 0 2,214 0 0 27 632 1,190 365 128 237 0 0 0 237 0 0
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