10-K405 1 a32342.txt AMEX CREDIT CORPORATION FORM 10-K 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, 2001 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 Centre, 301 North Walnut Street 19801-2919 Suite 1002, Wilmington, Delaware (Zip Code) (Address of principal executive offices)
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 ---------------------------------------- ------------------- Step-Up Senior Notes due August 10, 2005 New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND HAS THEREFORE OMITTED CERTAIN ITEMS FROM THIS REPORT IN ACCORDANCE WITH THE REDUCED DISCLOSURE FORMAT PERMITTED UNDER INSTRUCTION I. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- American Express Company, through a wholly-owned subsidiary, owns all of the outstanding common stock of the Registrant. Accordingly, there is no market for the Registrant's common stock. At March 29, 2002, 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 American Express credit cards (whether branded the "Optima'r' Card" or otherwise), interest-bearing receivables from extended payment plans such as Sign & Travel'r' and Extended Payment Option (which provide for extended payment for certain charges) and interest-bearing equipment financing installment loans and leases. The American Express Card and American Express credit cards are collectively referred to herein as the "Card." American Express Card Business TRS currently issues the Card in 43 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. As a merchant processor, TRS accepts and processes from each participating establishment the charges arising from Cardmember purchases at a discount that varies with the type of participating establishment, the charge volume, the timing and method of payment to the establishment, the method of submission of charges and, in certain instances, the average charge amount and the amount of information provided. 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. Charge cards require payment by the Cardmember of the full amount billed each month, and no finance charges are assessed. Charge card accounts that are past due are subject, in most cases, to a delinquency assessment and, if not brought to current status, subject to cancellation. The American Express credit card comprises a family of revolving credit cards marketed in the United States and other countries. These cards have a range of different payment terms, grace periods and rate and fee structures. The American Express Card and consumer lending businesses are subject to extensive regulation in the United States under a number of federal laws and regulations, including the Equal Credit Opportunity Act, which generally prohibits discrimination in the granting and handling of credit; the Fair Credit Reporting Act, which, among other things, regulates use by creditors of consumer credit reports and credit prescreening practices and requires certain disclosures when an application for credit is rejected; the Truth in Lending Act, which, among other things, requires extensive disclosure of the terms upon which credit is granted; the Fair Credit Billing Act, which, among other things, regulates the manner in which billing inquiries are handled and specifies certain billing requirements; and the Fair Credit and Charge Card Disclosure Act, which mandates certain disclosures on credit and charge card applications. In addition, certain federal privacy-related laws and regulations govern the collection and use of customer information by financial institutions. 1 Federal legislation also regulates abusive debt collection practices. In addition, a number of states and foreign countries have similar consumer credit protection, disclosure and privacy-related laws. The application of federal and state bankruptcy and debtor relief laws affect Credco to the extent that such laws result in amounts owed by Cardmembers being classified as delinquent and/or charged off as uncollectible. 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 and certain of its subsidiaries that issue the Card ("Card Issuers"). 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, the Card Issuer 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 a discount rate which yields to Credco earnings of at least 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 interest rates or significant changes in the collectibility of the receivables. New groups of Cardmember receivables are generally purchased net of reserve balances applicable thereto. Extended payment plan receivables and leases are primarily funded by subsidiaries of TRS other than Credco, although, certain extended payment plan receivables are purchased by Credco. At December 31, 2001 and 2000, extended payment plan receivables owned by Credco totaled $3.9 billion and $2.1 billion, representing 17.0 percent and 8.7 percent, respectively, of all interests in receivables owned by Credco. These receivables consist of certain interest-bearing extended payment plan receivables comprised principally of American Express credit card, Sign & Travel and Extended Payment Option receivables, lines of credit to American Express Bank customers and interest-bearing equipment financing installment loans and leases. 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 ("Centurion Bank"), a wholly-owned subsidiary of TRS. See Note 4 in Notes to Consolidated Financial Statements appearing herein. The Card Issuers, at their expense and as agents for Credco, perform accounting, clerical and other services necessary to bill and collect all Cardmember receivables owned by Credco. The Receivables Agreements provide that, without the 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 TRS obligations under the Receivables Agreements between TRS and Credco. The 2 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 for 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, excluding 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 Gross Cardmember Cardmember Receivables Owned Receivables Purchased at December 31, Year Domestic Foreign Total Domestic Foreign Total ---- -------- ------- ----- -------- ------- ----- 2001 $158,939 $45,132 $204,071 $17,406 $5,642 $23,048 2000 161,281 44,820 206,101 19,545 5,165 24,710 1999 131,849 41,822 173,671 18,358 4,967 23,325 1998 116,957 38,105 155,062 15,096 4,030 19,126 1997 108,573 37,030 145,603 15,475 4,017 19,492
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 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 Cardmember receivables owned by Credco for each of the five years ended December 31 (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) were:
Average Life of Cardmember Year Receivables (in days) ---- --------------------- 2001 41 2000 41 1999 42 1998 43 1997 43
The following table shows the aging of billed, non-interest-bearing charge Cardmember receivables:
December 31, 2001 2000 ------------------------------------------------------- Current 86.8% 84.3% 30 to 59 days 7.9 10.9 60 to 89 days 1.7 2.1 90 days and over 3.6 2.7
3 Loss Experience Credco generally writes off against its reserve for doubtful accounts the total balance in an account for which any portion remains unpaid twelve 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:
2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Write-offs, net of recoveries $867 $654 $616 $647 $615 % of net Cardmember receivables purchased .42% .32% .35% .42% .42%
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 cost 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 ---- ------------- 2001 5.98% 2000 6.04 1999 5.16 1998 5.66 1997 5.66
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, 2001 was $6.4 billion. At December 31, 2001, the amount borrowed was $3.1 billion. See Notes 5 and 6 in Notes to Consolidated Financial Statements appearing herein for information about Credco's debt, including Credco's lines of credit from various banks and long-term debt. Foreign Operations See Notes 2, 8 and 11 in Notes to Consolidated Financial Statements appearing herein for information about Credco's foreign exchange risks and operations in different geographical regions. Employees At December 31, 2001, Credco had 27 employees. 4 Item 2. PROPERTIES. Credco neither owns nor leases any material physical properties. Item 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which Credco or its subsidiaries is a party or of which any of their property is the subject. Credco knows of no such proceedings being contemplated by government authorities or other parties. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Omitted pursuant to General Instruction I(2)(c) to Form 10-K. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. American Express, through a wholly-owned subsidiary, TRS, owns all of the outstanding common stock of Credco. Therefore, there is no market for Credco's common stock. For information about limitations on Credco's ability to pay dividends, see Note 7 in Notes to Consolidated Financial Statements appearing herein. 5 Item 6. SELECTED FINANCIAL DATA. The following summary of certain consolidated financial information of Credco was derived from audited financial statements for the five years ended December 31:
($ in millions) 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Income Statement Data Revenues 2,842 2,601 2,168 2,214 2,064 Interest expense 1,458 1,459 1,130 1,190 1,125 Provision for doubtful accounts, net of recoveries 937 689 672 632 584 Income tax provision 140 150 120 128 114 Net income 277 286 223 237 212 Balance Sheet Data Accounts receivable 23,048 24,710 23,325 19,126 19,492 Reserve for credit losses (847) (739) (684) (597) (633) Total assets 26,542 28,326 26,726 23,535 22,936 Short-term debt 20,584 22,972 20,231 17,528 16,582 Current portion of long-term debt 800 550 550 353 4 Long-term debt 1,030 1,811 2,575 3,053 3,264 Shareholder's equity 2,200 2,152 2,061 1,994 1,907 Cash dividends -- 200 150 150 150
6 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Certain Critical Accounting Policies In December 2001, the Securities and Exchange Commission issued a financial reporting release, FR-60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies." In this connection, the following information has been provided about certain critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant extent, the use of estimates, assumptions and the application of management's judgment. These policies relate to reserves for Cardmember credit losses and the recognition of impairment within the investment portfolio. o Provision for credit losses related to Cardmember loans and receivables is one of the largest operating expenses of Credco. Reserves for these credit losses are primarily based upon statistically driven models derived from historical experience, as well as management judgment as to the economic and business environment. In determining the reserves, management evaluates both internal credit metrics, such as migration analysis, write-off rates, recovery rates and net write-off coverage, as well as external economic data, such as unemployment, bankruptcy filings and consumer confidence, among other indicators that may impact the portfolios. To the extent historical credit experience is not indicative of future performance or other assumptions used by management do not prevail, loss experience could differ significantly, resulting in either higher or lower future provision for losses, as applicable. o Generally, investment securities are carried at fair value on the balance sheet. Gains and losses are recognized in the results of operations upon disposition of the securities. In addition, losses are also recognized when management determines that a decline in value is not temporary, which requires judgment regarding the amount and timing of recovery. Typically, Credco defines an event of impairment for debt securities as issuer default or bankruptcy. Fair value is generally based on quoted market prices. Liquidity and Capital Resources Credco's portfolio consists of Charge Card receivables and loans purchased without recourse from Card Issuers 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, 2001 and 2000, respectively, Credco owned $19.1 billion and $22.6 billion of Charge Card receivables and participation in Charge Card receivables, representing 83.0 percent and 91.3 percent, respectively, of the total receivables owned. Revolving credit receivables, representing 17.0 percent and 8.7 percent of the total receivables owned, were $3.9 billion and $2.1 billion at December 31, 2001 and 2000, respectively. 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 $18.6 billion for 2001 and $18.5 billion for 2000. 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, 2001 and 2000 totaled $10.4 billion and $9.7 billion, respectively. In addition, Credco, through its wholly-owned subsidiary, American Express 7 Overseas Credit Corporation Limited ("AEOCC"), had short-term borrowings under uncommitted lines of credit totaling $68 million and $84 million at December 31, 2001 and 2000, respectively. The availability of credit lines is subject to Credco's maintenance of a 1.25 ratio of combined earnings and fixed charges to fixed charges. For the year ended December 31, 2001, this ratio was 1.29. Additionally, Credco's credit ratings are critical to maintaining its short-term funding sources and containing related interest costs. Rating agencies review factors such as capital adequacy with a view towards maintaining certain levels of capital, liquidity, business volumes, asset quality and economic market trends, among others, in assessing American Express' and its subsidiaries' appropriate ratings. Subsequent to the terrorist attacks of September 11th, American Express' A+ and its subsidiaries' (including Credco's) credit ratings were affirmed by Standard & Poor's and Fitch, two credit rating agencies. At the same time, however, each agency revised its respective rating outlook on American Express and its subsidiaries from stable to negative in light of the ensuing weak climate for business and consumer travel and spending and weaker capital markets. In their statements, the rating agencies indicated that while American Express has significant financial resources to address short-term business volume disruptions, if business volumes remained depressed for an extended period, its credit ratings would be under pressure. During 2001, 2000 and 1999, Credco's average long-term debt outstanding was $2.2 billion, $2.7 billion and $3.1 billion, respectively. At December 31, 2001, 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 ("SEC"). At March 25, 2002, Credco had $8 billion of debt securities and warrants available for issuance under such shelf registrations. In addition, Credco, TRS, AEOCC, Centurion Bank and American Express Bank Ltd. (a wholly-owned indirect subsidiary of American Express) have established programs for the issuance, outside the United States, of debt instruments to be listed on the Luxembourg Stock Exchange. The maximum aggregate principal amount of debt instruments outstanding at any one time under the program will not exceed $6.0 billion. At December 31, 2001, this program had the ability to issue $4.7 billion of debt. Credco paid dividends of $200 million to TRS in December 2000. No dividends were paid to TRS in 2001. In 2000, Credco called $150 million 1.125% Cash Exchangeable Notes due 2003. These notes were exchangeable for an amount in cash which was linked to the price of the common shares of American Express. Credco had entered into agreements to fully hedge its obligations. Accordingly, the related hedging agreements were called at the same time. In early 2002, Credco issued an aggregate of $2.0 billion of medium-term notes at fixed and floating rates with maturities of one to three years. As of March 25, 2002, Credco had $8 billion of debt securities and warrants to purchase debt securities available for issuance under a shelf registration statement filed with the SEC. In 2001, the American Express Credit Account Master Trust (the "Master Trust") securitized $4.3 billion of loans through the public issuances of two classes of investor certificates and privately placed collateral interests in the assets of the Master Trust. At the time of these issuances, CRC sold $32.5 million of gross seller's interest ($31.7 million, net of reserves) to American Express Receivables Financing Corporation II ("RFCII"), a wholly-owned subsidiary of TRS. In addition, CRC purchased, as an investment, $406 million of Class C Certificates issued by the Master Trust collateralized by the revolving credit receivables held by the Master Trust. In February 2002, the Master Trust securitized an additional $920 million of loans. At the time of this issuance, CRC sold $3.1 million of gross seller's interest ($3.0 million, net of reserves) to RFCII. In addition, at the time of this issuance, CRC purchased, as an investment, $87.4 million of Class C Certificates collateralized by the revolving credit receivables held by the Master Trust. 8 In 2001, the American Express Master Trust (the "Trust") securitized $750 million of Charge Card receivables. At the time of this issuance, CRC sold $829 million of seller's interest ($793 million, net of reserves) to American Express Receivables Financing Corporation ("RFC"). In addition, at the time of the issuance, CRC purchased, as an investment, $60.8 million in Class B Certificates collateralized by the receivables held by the Trust. Additionally, in 2001, $300 million Class A Fixed Rate Account Receivable Trust Certificates and $300 million Class A Floating Rate Accounts Receivable Trust Certificates matured from the Charge Card securitization portfolio which increased the participation interest owned by CRC. CRC owns a participation interest in the seller's interest in charge Cardmember receivables that have been conveyed to the Trust. In addition, $41.7 million of Class B Certificates owned by CRC matured in 2001. In January 2002, the Trust securitized an additional $750 million of Charge Card receivables. At the time of this issuance, CRC sold $829 million of seller's interest ($797 million, net of reserves) to RFC. In addition, at the time of the issuance, CRC purchased, as an investment, $60.8 million in Class B Certificates collateralized by the receivables held by 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 1.29, 1.30 and 1.30 in 2001, 2000 and 1999, respectively. The ratio of earnings to fixed charges for American Express, the parent of TRS, for the years ended December 31, 2001, 2000 and 1999 was 1.52, 2.25 and 2.48, respectively. 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 41 days for the years ended December 31, 2001 and 2000, and 42 days for the year ended December 31, 1999. Credco's increase in revenues during 2001 is primarily attributable to higher discount rates. Interest income in 2001 decreased as a result of lower interest rates. Interest expense is essentially unchanged from the prior year. Provision for doubtful accounts increased in 2001 reflecting an increase in provision rates. 9 The following is a further analysis of the increase (decrease) in key revenue and expense accounts (millions):
2001 2000 1999 ---------------------------------------------------------------------------------------------------- Revenue earned from purchased accounts receivable-changes attributable to: Volume of receivables purchased $ (39) $ 364 $ 230 Discount and interest rates 340 50 (222) ----------------------------------------------------------------------------------------------------- Total $ 301 $ 414 $ 8 ----------------------------------------------------------------------------------------------------- Interest income from affiliates-changes attributable to: Volume of average investments outstanding $ 21 $ (43) $ (54) Interest rates (42) 26 (6) ----------------------------------------------------------------------------------------------------- Total $ (21) $ (17) $ (60) ----------------------------------------------------------------------------------------------------- Interest income from investments-changes attributable to: Volume of average investments outstanding $ 15 $ 2 $ 13 Interest rates (58) 33 (6) ----------------------------------------------------------------------------------------------------- Total $ (43) $ 35 $ 7 ----------------------------------------------------------------------------------------------------- Interest expense affiliates-changes attributable to: Volume of average debt outstanding $ 36 $ 32 $ (9) Interest rates (95) 42 (10) ----------------------------------------------------------------------------------------------------- Total $ (59) $ 74 $ (19) ----------------------------------------------------------------------------------------------------- Interest expense other-changes attributable to: Volume of average debt outstanding $ (20) $ 84 $ 59 Interest rates 78 171 (100) ----------------------------------------------------------------------------------------------------- Total $ 58 $ 255 $ (41) ----------------------------------------------------------------------------------------------------- Provision for doubtful accounts-changes attributable to: Volume of receivables purchased $ (8) $ 157 $ 95 Provision rates and volume of recoveries 256 (140) (55) ----------------------------------------------------------------------------------------------------- Total $ 248 $ 17 $ 40 -----------------------------------------------------------------------------------------------------
10 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Credco's objective is to monitor and control risk exposures to earn returns commensurate with the level of risk assumed. American Express management establishes and oversees implementation of Board-approved policies covering its funding, investments and use of derivative financial instruments. American Express' treasury department, along with various asset and liability committees in the businesses, is responsible for managing financial market risk exposures within the context of Board-approved policies. See Note 8 in Notes to Consolidated Financial Statements appearing herein for a discussion of Credco's use of derivatives. In the second half of 2001, American Express established the Corporate Risk Management Committee ("CRMC") to supplement the risk management capabilities resident within its business segments by routinely reviewing key market, credit and other risk concentrations across American Express and recommending corrective action where appropriate. The CRMC promotes a rigorous understanding of risks across American Express and supports senior management in making risk-return decisions. Credco management believes a decline in its long-term credit rating by two levels could result in its having to significantly reduce its commercial paper and other short-term borrowings and replacing them, in part, by taking down existing credit lines. Remaining borrowing requirements would be addressed through other means such as additional securitizations. This would result in higher interest expense on Credco's commercial paper and other debt, as well as higher fees related to unused lines of credit. American Express believes a two level downgrade is unlikely due to its capital position and growth prospects. The following sections include sensitivity analyses of two different types 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 percent 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 incorporate actions that management could take if the hypothetical market changes actually occur. As a result, actual earnings consequences will differ from those quantified below. Credco's hedging policies are established, maintained and monitored by the American Express treasury department. Credco generally manages its exposures along product lines. A variety of interest rate and foreign exchange hedging strategies are employed to manage interest rate and foreign currency risks. Credco funds its Charge Card receivables and Cardmember loans using on-balance sheet funding sources such as long- and short-term debt, medium-term notes and commercial paper and other debt. For Credco's Charge Card and fixed rate lending receivables, interest rate exposure is managed through the issuance of long- and short-term debt and the use of interest rate swaps and, to a lesser extent, caps. During 2001, Credco continued its strategy by augmenting its portfolio of interest rate swaps that convert a majority of its domestic funding from floating rate to fixed rate. Credco regularly reviews its strategy and may modify it. For the majority of Credco's Cardmember loans, which are linked to a floating rate base and generally reprice each month, Credco uses floating rate funding. The detrimental effect on Credco's pretax earnings of a hypothetical 100 basis point increase in interest rates would be approximately $40 million and $79 million, based on 2001 and 2000 year-end positions, respectively. This effect is primarily a function of the extent of variable rate funding of Charge Card and fixed rate lending products, to the degree that interest rate exposure is not managed by derivative financial instruments. With respect to the managed portion of that interest rate exposure, a substantial amount of the $226 million of Credco's net after-tax unrealized losses recorded in other comprehensive income on the consolidated balance sheet at December 31, 2001 represents the fair value of the related derivative financial 11 instruments. These losses will be recognized in earnings during the terms of those derivative contracts at the same time that Credco realizes the benefits of lower market rates of interest on its funding of Charge Card and fixed rate lending products. 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 2001 and 2000 foreign exchange positions, the effect on Credco's earnings of the hypothetical 10 percent strengthening of the U.S. dollar would be immaterial. At December 31, 2001 Credco owned $31 million net, of U.S. Dollar denominated receivables that it had purchased from the TRS Argentine Card company. At year end, the Argentine government mandated the conversion of dollar denominated assets into pesos and simultaneously devalued the peso. This development has created a foreign exchange transaction exposure that previously did not exist with respect to Credco's receivables portfolio. The devaluation has been given effect in the financial statements as of December 31, 2001 by recording a loss of $11 million pretax ($7 million after tax) in the Consolidated Statements of Income. Credco is taking steps to manage this risk to the extent practicable and efficient. Forward-looking Statements Various forward-looking statements have been made in this Form 10-K Annual Report. Forward-looking statements may also be made in Credco's other reports filed with the SEC and in other documents. In addition, from time to time, Credco through its management may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties, including those identified below, which could cause actual results to differ materially from such statements. The words "believe", "expect", "anticipate", "optimistic", "intend", "plan", "aim", "will", "should", "could" and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Credco undertakes no obligation to update publicly or revise any forward-looking statements. Factors that could cause actual results to differ materially from Credco's forward-looking statements include but are not limited to: o credit trends and the rate of bankruptcies, which can affect spending on card products and debt payments by individual and corporate customers; o fluctuations in foreign currency exchange rates; o negative changes in Credco's credit ratings, which could result in decreased liquidity and higher borrowing costs; and o the effect of fluctuating interest rates, which could affect Credco's borrowing costs. 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. 12 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. 13 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: Form 8-K dated December 21, 2001, Item 7, filing Credco's Form of Agency Agreement, dated as of December 21, 2001, between Credco and the Agents named therein and the forms of Permanent Global Notes. Form 8-K dated January 11, 2002, Item 5, reporting a press release issued by American Express including information about the current business status of TRS, the parent of Credco. Form 8-K dated March 19, 2002, Item 5, reporting Credco's expected net income for the year ended December 31, 2001 and other financial data. 14 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 29, 2002 By /s/Walker C. Tompkins, Jr. ------------------------------- Walker C. Tompkins, Jr. President and Chief Executive Officer 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 29, 2002 By /s/Walker C. Tompkins, Jr. ------------------------------------ Walker C. Tompkins, Jr. President, Chief Executive Officer and Director DATE: March 29, 2002 /s/Erich Komdat ------------------------------------ Erich Komdat Vice President and Chief Accounting Officer DATE: March 29, 2002 /s/Kim D. Rosenberg ------------------------------------ Kim D. Rosenberg Chairman of the Board and Director (Principal Financial Officer) DATE: March 29, 2002 /s/Jay B. Stevelman ------------------------------------ Jay B. Stevelman Vice President and Director 15 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, 2001, 2000 and 1999 F-3 Consolidated balance sheets at December 31, 2001 and 2000 F-4 Consolidated statements of cash flows for each of the three years ended December 31, 2001, 2000 and 1999 F-5 Consolidated statements of shareholder's equity for each of the three years ended December 31, 2001, 2000 and 1999 F-6 Notes to consolidated financial statements F-7 to F-15 Schedule: II - Valuation and qualifying accounts for each of the three years ended December 31, 2001, 2000 and 1999 F-16
All other schedules are omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto. F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors American Express Credit Corporation We have audited the accompanying consolidated balance sheets of American Express Credit Corporation as of December 31, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. 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 January 28, 2002 F-2 AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, (Millions) 2001 2000 1999 ------------------------------------------------------------------------------------------------------- Revenues Revenue earned from purchased accounts receivable $2,616 $2,315 $1,901 Interest income from investments 135 178 143 Interest income from affiliates 82 103 120 Other 9 5 4 ------------------------------------------------------------------------------------------------------- Total 2,842 2,601 2,168 ------------------------------------------------------------------------------------------------------- Expenses Interest expense - other 1,298 1,240 985 Provision for doubtful accounts, net of recoveries of $193, $178 and $172 937 689 672 Interest expense - affiliates 160 219 145 Other 30 17 23 ------------------------------------------------------------------------------------------------------- Total 2,425 2,165 1,825 ------------------------------------------------------------------------------------------------------- Pretax income 417 436 343 Income tax provision 140 150 120 ------------------------------------------------------------------------------------------------------- Net income $ 277 $ 286 $ 223 -------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-3 AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, (Millions, except share data) 2001 2000 ------------------------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 408 $ 1,008 Investments 1,428 1,266 Accounts receivable, less credit reserves: 2001, $847; 2000, $739 22,201 23,971 Loans and deposits with affiliates 1,907 1,742 Deferred charges and other assets 598 339 ------------------------------------------------------------------------------------------------------ Total assets $26,542 $28,326 ------------------------------------------------------------------------------------------------------ Liabilities and shareholder's equity Short-term debt - other $18,370 $20,687 Short-term debt with affiliates 2,214 2,285 Current portion of long-term debt 800 550 Long-term debt with affiliate 910 910 Long-term debt - other 120 901 ------- ------- Total debt 22,414 25,333 Due to affiliates 1,425 726 Accrued interest and other liabilities 503 115 ------------------------------------------------------------------------------------------------------ Total liabilities 24,342 26,174 ------------------------------------------------------------------------------------------------------ Shareholder's equity Common stock-authorized 3 million shares of $.10 par value; issued and outstanding 1.5 million shares 1 1 Capital surplus 161 161 Retained earnings 2,268 1,991 Other comprehensive loss, net of tax: Net unrealized securities losses (4) (1) Net unrealized derivatives losses (226) - ------------------------------------------------------------------------------------------------------ Accumulated other comprehensive loss (230) (1) ------------------------------------------------------------------------------------------------------ Total shareholder's equity 2,200 2,152 ------------------------------------------------------------------------------------------------------ Total liabilities and shareholder's equity $26,542 $28,326 ------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-4 AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (Millions) 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net Income $ 277 $ 286 $ 223 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses and benefits 937 689 672 Amortization and other (4) 1 1 Changes in operating assets and liabilities: Deferred tax assets (183) (27) (17) Interest receivable and other operating assets 61 385 (20) Due to affiliates 316 (29) (15) Accrued interest and other liabilities 112 (169) 83 --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,516 1,136 927 --------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Accounts receivable 177 (1,971) (4,976) Recoveries of accounts receivable previously written off 193 178 172 Purchase of participation interest in seller's interest in accounts receivable from an affiliate (1,062) (778) (959) Sale of participation interest in seller's interest in accounts receivable to an affiliate 825 181 247 Sale of net accounts receivable to an affiliate 700 153 586 Purchase of investments (467) (370) (641) Maturity of investments 54 55 36 Sale of investments 249 4 2 Loans and deposits due from affiliates (165) (281) 1,892 Due to affiliates 383 (283) 962 --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 887 (3,112) (2,679) --------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net (decrease) increase in short-term debt with affiliates with maturities of ninety days or less (71) 791 233 Net (decrease) increase in short-term debt - other with maturities of ninety days or less (3,515) 4,137 350 Issuance of debt 7,629 4,296 10,426 Redemption of debt (7,046) (7,142) (8,653) Dividend paid to TRS - (200) (150) --------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (3,003) 1,882 2,206 --------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (600) (94) 454 --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 1,008 1,102 648 --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 408 $ 1,008 $ 1,102 ---------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-5 AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Accumulated Other Common Capital Comprehensive Retained Three Years Ended December 31, (Millions) Total Stock Surplus (Loss)/Income Earnings -------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1998 $1,994 $1 $161 $ - $1,832 -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 223 223 Change in net unrealized securities losses (6) (6) ------- Total comprehensive income 217 Dividend to TRS (150) (150) -------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1999 2,061 1 161 (6) 1,905 -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 286 286 Change in net unrealized securities losses 5 5 ------ Total comprehensive income 291 Dividend to TRS (200) (200) -------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2000 2,152 1 161 (1) 1,991 -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 277 277 Change in net unrealized securities losses (3) (3) Cumulative effect of adopting SFAS No. 133 (59) (59) Change in net unrealized derivatives losses (456) (456) Derivatives losses reclassified to earnings 289 289 ------- Total comprehensive income 48 -------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2001 $2,200 $1 $161 $(230) $2,268 --------------------------------------------------------------------------------------------------------------------------
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"), Credco Receivables Corp. ("CRC") and Credco Finance, Inc. together with its subsidiaries ("CFI"), 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 its subsidiaries. All significant intercompany transactions are eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation. Amounts Based on Estimates and Assumptions Accounting estimates are an integral part of the consolidated financial statements. In part they are based on assumptions concerning future events. Among the more significant are those which relate to reserves for Cardmember credit losses and recognition of other than temporary impairment within the investment portfolio (see Note 3). These reflect the best judgment of management and actual results could differ. 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. Reserves for Credit Losses Reserves for credit losses related to Cardmember receivables and loans are primarily based upon statistically driven models derived from historical experience, as well as management judgment as to the business and economic environment. In determining the reserves, management evaluates both internal credit metrics, such as migration analysis, write-off rates, recovery rates and net write-off coverage, as well as external economic data, such as unemployment, bankruptcy filings and consumer confidence, among other indicators that may impact the portfolios. Credco generally writes off against its reserve for credit losses 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. F-7 Cash and Cash Equivalents Credco has defined cash and cash equivalents as cash and short-term investments with original maturities of ninety days or less. Fair Values of Financial Instruments The fair values of financial instruments are estimates based upon current market conditions and perceived risks at December 31, 2001 and 2000 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 investments and long-term debt 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 uses interest rate products, principally swaps, primarily to manage funding costs related to its Charge Card receivables and Cardmember loans. For its Charge Card and fixed rate lending products, Credco uses interest rate swaps and, to a lesser extent, caps to achieve a mix of fixed and floating rate funding. For the majority of its Cardmember loans, which are linked to a floating rate base and generally reprice each month, Credco uses floating rate funding. These interest rate products 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 products or the underlying debt to which the products are designated prior to maturity. In the event Credco terminates, sells or disposes of an interest rate product 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. Recently Adopted Accounting Standards Effective January 1, 2001, Credco adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Changes in the fair value of a derivative are recorded in earnings or directly to equity, depending on the instrument's designated use. The adoption of SFAS No. 133 resulted in a cumulative after-tax reduction to other comprehensive income of $59 million. See Note 8 for further discussion of Credco's derivatives and hedging activities. 3. Investments At December 31, 2001 and 2000, Credco held American Express Master Trust Class B Certificates with an amortized cost of $213 million and $194 million, respectively. These securities were classified as Held-to-Maturity and stated at amortized cost at December 31, 2000. Pursuant to the adoption of SFAS No. 133, as amended, Credco elected to reclassify its Held-to-Maturity investments to Available-for-Sale as of January 1, 2001. The fair value of these securities at December 31, 2001 and 2000 was $219 million and $196 million, respectively. F-8 Available-for-Sale securities are stated at fair value, with the unrealized gains and losses included in shareholder's equity. 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 demand or funding sources and terms. In addition to the American Express Master Trust Class B Certificates previously mentioned, Credco held American Express Credit Account Master Trust Class C Certificates that were classified as Available-for-Sale at December 31, 2001 and 2000. The fair value of these securities was $1,209 million and $815 million at December 31, 2001 and 2000, respectively. In addition, at December 31, 2000, Credco had a portfolio of corporate and government securities that was managed by American Express Financial Advisors, Inc., a wholly-owned indirect subsidiary of American Express. The fair value of these Available-for-Sale securities at December 31, 2000 was $257 million. These investments were sold in 2001. The change in net unrealized securities gains (losses) recognized in other comprehensive loss includes two components: (1) unrealized gains (losses) that arose from changes in market value of securities that were held during the period (holding gains (losses)), and (2) gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales of Available-for-Sale securities (reclassification to realized gains (losses)). This reclassification has no effect on total comprehensive income (loss) or shareholder's equity. The components of other comprehensive loss (net of tax) were ($4.2 million) and $4.8 million in holding (losses) gains, for the years ended December 31, 2001 and 2000, respectively, and $0.8 million in realized losses at both December 31, 2001 and 2000. 4. Accounts Receivable At December 31, 2001 and 2000, respectively, Credco owned $19.1 billion and $22.6 billion of Charge Card receivables and participation in Charge Card receivables, representing 83.0 percent and 91.3 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. The gross participation interests represent undivided interests in the receivables conveyed to the Trust by RFC. In 2001, the Trust securitized $750 million of Charge Card receivables. At the time of this issuance,CRC sold $829 million of seller's interest ($793 million, net of reserves) to RFC. In addition, at the time of the issuance, CRC purchased, as an investment, $60.8 million in Class B Certificates collateralized by the receivables held by the Trust. Additionally, in 2001, $300 million Class A Fixed Rate Account Receivable Trust Certificates and $300 million Class A Floating Rate Accounts Receivable Trust Certificates matured from the Charge Card securitization portfolio which increased the participation interest owned by CRC. CRC owns a participation interest in the seller's interest in charge Cardmember receivables that have been conveyed to the Trust. In addition, $41.7 million of Class B Certificates owned by CRC matured in 2001. At December 31, 2001 and 2000, CRC owned approximately $3.8 billion and $4.3 billion, respectively, of participation interests in receivables conveyed to the Trust, representing 16.6 percent and 17.4 percent, respectively, of its total accounts receivable. In January 2002, the Trust securitized an additional $750 million of Charge Card receivables. At the time of this issuance, CRC sold $829 million of seller's interest ($797 million, net of reserves) to RFC. In addition, at the time of the issuance, CRC purchased, as an investment, $60.8 million in Class B Certificates collateralized by the receivables held by the Trust. At December 31, 2001 and 2000, Credco owned extended payment plan receivables totaling $3.9 billion and $2.1 billion, respectively, including revolving credit loans purchased directly from American Express Centurion Bank ("Centurion Bank"), a wholly-owned subsidiary of TRS, representing 17.0 percent and 8.7 F-9 percent, respectively, of its total interests in accounts receivable. The extended payment plan receivables owned at December 31, 2001 and 2000 include $212 million and $277 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 in 1996 to securitize revolving credit loans. In 2001 and 2000, the Master Trust securitized $4.3 billion and $4.0 billion, respectively, of loans through the public issuances of two classes of investor certificates and privately placed collateral interests in the assets of the Master Trust. At the time of these issuances, CRC sold $32.5 million of gross seller's interest ($31.7 million, net of reserves) to American Express Receivables Financing Corporation II ("RFCII"), a wholly-owned subsidiary of TRS. In addition, in 2001, CRC purchased, as an investment, $406 million of Class C Certificates issued by the Master Trust, collateralized by the revolving credit receivables held by the Master Trust. In February 2002, the Master Trust securitized an additional $920 million of loans. At the time of this issuance, CRC sold $3.1 million of gross seller's interest ($3.0 million, net of reserves) to RFCII. In addition, at the time of this issuance, CRC purchased, as an investment, $87.4 million of Class C Certificates, collateralized by the revolving credit receivables held by the Master Trust. 5. Short-term Debt
December 31, (Millions) 2001 2000 ------------------------------------------------------------------------------------------------------- Commercial paper $ 17,955 $ 20,286 Borrowings from affiliates 2,214 2,285 Borrowings under lines of credit 68 84 Borrowing agreements with bank trust departments and others 347 317 ------------------------------------------------------------------------------------------------------- Total short-term debt $ 20,584 $ 22,972 -------------------------------------------------------------------------------------------------------
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 $10.4 billion and $9.7 billion at December 31, 2001 and 2000, respectively. Credco pays fees to the financial institutions that provide these credit line facilities. The fair value of the unused lines of credit is not significant at December 31, 2001 and 2000. At December 31, 2001 and 2000, Credco, through AEOCC, had short-term borrowings under uncommitted lines of credit totaling $68 million and $84 million, respectively. Credco's annual weighted average short-term interest rate was 6.14 percent, 5.97 percent and 5.12 percent for the years ended December 31, 2001, 2000, and 1999, respectively. These rates include the cost of maintaining credit line facilities for the periods and the impact of interest rate swaps. At December 31, 2001, $14.9 billion of short-term debt outstanding was modified by interest rate swaps, resulting in a year-end weighted average effective interest rate of 5.88 percent. Credco paid $1.3 billion, $1.3 billion and $962 million of interest on short-term debt obligations in 2001, 2000 and 1999, respectively. F-10 6. Long-term Debt
December 31, (Millions) 2001 ------------------------------------------------------------------------------------------------------ Outstanding Notional Year-End Year-End Maturity Balance Amount Stated Effective of of Rate Interest Swaps Swaps on Rate Debt with (a,b) Swaps (a,b) ------------------------------------------------------------------------------------------------------ Senior notes due 2001 and 2005 $ 100 $ 100 7.45% 2.21% 2005 Variable rate debt with American Express due 2004 910 -- 1.83% -- -- Medium-term fixed rate note 400 400 6.50% 2.08% 2002 due 2002 Medium-term variable rate 400 400 2.28% 2.22% 2002 note due 2002 Swiss franc notes due 1 -- 5.13% -- -- 2002-2003 Fair value adjustment 19 -- -- -- -- ------------------------------------------------------------------------------------------------------ Total $1,830 $ 900 ------------------------------------------------------------------------------------------------------ 2000 ------------------------------------------------------------------------------------------------------ Outstanding Notional Year-End Year-End Maturity Balance Amount Stated Effective of of Rate Interest Swaps Swaps on Rate Debt with (a,b) Swaps (a,b) ------------------------------------------------------------------------------------------------------ Senior notes due 2001 and 2005 $ 650 $ 350 6.57% 7.44% 2001 & 2005 Variable rate debt with American Express due 2004 910 -- 6.45% -- -- Medium-term fixed rate note 400 400 6.50% 6.83% 2002 due 2002 Medium-term variable rate 400 400 6.81% 6.90% 2002 note due 2002 Swiss franc notes due 1 -- 5.13% -- -- 2002-2003 Fair value adjustment -- -- -- -- -- ------------------------------------------------------------------------------------------------------ Total $2,361 $1,150 ------------------------------------------------------------------------------------------------------
(a) For floating rate debt issuances, the stated and effective interest rates were based on the respective rates at December 31, 2001 and 2000; these rates are 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 $800 million and $550 million at December 31, 2001 and 2000, respectively. In 2000, Credco called $150 million 1.125% Cash Exchangeable Notes due 2003. These notes were exchangeable for an amount in cash which was linked to the price of the common shares of American Express. Credco had entered into agreements to fully hedge its obligations. Accordingly, the related hedging agreements were called at the same time. 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, was $1.8 billion and $2.4 billion, at December 31, 2001 and 2000, respectively. Credco paid interest on long-term debt obligations of $119 million, $186 million and $175 million in 2001, 2000 and 1999, respectively. Aggregate annual maturities of long-term debt for the five years ending December 31, 2006 are as follows (millions): 2002, $800; 2003, $1; 2004, $910; 2005, $100 and 2006, $0. 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. Derivatives and Hedging Activities As prescribed by SFAS No. 133, derivative instruments that are designated and qualify as hedging instruments are further classified as either a cash flow hedge, a fair value hedge, or a hedge of a net investment in a foreign operation, based upon the exposure being hedged. F-11 For derivative instruments that are designated and qualify as a cash flow hedge, the portion of the gain or loss on the derivative instrument effective at offsetting changes in the hedged item is reported as a component of other comprehensive income (loss) and reclassified into earnings when the hedged transaction affects earnings. Any ineffective portion of the gain or loss on the derivative instrument is recognized currently in earnings. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign operation, the effective portion of the gain or loss on the derivative is reported in other comprehensive income (loss) as part of the cumulative translation adjustment. For derivative instruments not designated as hedging instruments, the gain or loss is recognized currently in earnings. Cash Flow Hedges Credco uses interest rate products, primarily swaps, to manage funding costs related to its Charge Card business. For its Charge Card products, Credco uses interest rate swaps to achieve a targeted mix of fixed and floating rate funding. These interest rate swaps are used to protect Credco from the interest rate risk that arises from short-term funding. At December 31, 2001, Credco expects to reclassify $144 million of net pretax losses on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next twelve months. Currently, the longest period of time over which Credco is hedging exposure to the variability in future cash flows for forecasted transactions, excluding those forecasted transactions related to the payment of variable interest on existing financial instruments, is 5 years and relates to funding of foreign currency denominated receivables. Fair Value Hedges Credco uses interest rate swaps to hedge its fixed rate debt and firm commitments to transfer, at a fixed rate, receivables to trusts established in connection with its asset securitizations. During 2001, the amount Credco recognized primarily related to the time value element of its fair value hedging instruments was immaterial. Derivatives not Designated as Hedges Under SFAS No. 133 Credco has economic hedges that either do not qualify or are not designated for hedge accounting treatment under SFAS No. 133. For the year ended December 31, 2001, the net effect on earnings of accounting for the net changes in fair value of the following undesignated derivatives under SFAS No. 133 compared with prior rules was immaterial. o Foreign currency transaction exposures are economically hedged, where practical, through foreign currency contracts. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. Such foreign currency forward contracts entered into by Credco generally mature within one year. See Notes 5 and 6 for further information regarding Credco's use of interest rate products related to short- and long-term debt obligations. F-12 9. Transactions with Affiliates In 2001, 2000 and 1999, Credco purchased Cardmember receivables without recourse from TRS and certain of its subsidiaries totaling approximately $204 billion, $206 billion and $174 billion, respectively. Agreements for the purchase of non-interest-bearing receivables generally require that Credco purchase such receivables at discount rates which yield to Credco earnings of not less than 1.25 times its fixed charges on an annual basis. The agreements require TRS and other Card Issuers, at their 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 each month. At December 31, 2001 and 2000, CRC held American Express Master Trust Class B Certificates with a fair value of $219 million and $196 million, respectively, and American Express Credit Account Master Trust Class C Certificates with a fair value of $1,209 million and $815 million, respectively. At December 31, 2001 and 2000, CRC owned approximately $3.8 billion and $4.3 billion, respectively, of participation interests in receivables conveyed to the Trust, representing 16.6 percent and 17.4 percent, respectively, of Credco's total accounts receivable. In 2001, $300 million Class A Fixed Rate Account Receivable Trust Certificates and $300 million Class A Floating Rate Accounts Receivable Trust Certificates matured from the Charge Card securitization portfolio which increased the participation interest owned by CRC. CRC owns a participation interest in the seller's interest in charge Cardmember receivables that have been conveyed to the Trust. The extended payment plan receivables owned at December 31, 2001 and 2000 include $212 million and $277 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:
December 31, (Millions) 2001 2000 1999 ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at December 31 $ 4 $ 3 $ 5 Maximum month-end level of cash and cash equivalents during the year 10 11 7 Other loans and deposits to affiliates at December 31 1,907 1,742 1,461 Maximum month-end level of loans and deposits to affiliates during the year 1,907 1,742 3,433 Borrowings at December 31 3,124 3,195 2,404 Maximum month-end level of borrowings during the year 6,436 4,840 4,725 Interest income 82 103 120 Other income 9 5 4 Interest expense 160 219 145 ------------------------------------------------------------------------------------------------------------
At December 31, 2001, 2000 and 1999, Credco held variable rate loans to American Express due in 2004 of $850 million. Additionally, Credco had $468 million, $448 million and $605 million of loans to American Express ATM Holdings, Inc., a wholly-owned subsidiary of TRS, at December 31, 2001, 2000 and 1999, respectively. At both December 31, 2001 and 2000, CFI had $330 million of loans to Amex Bank of Canada, a wholly-owned subsidiary of TRS. F-13 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. The provisions for income taxes were as follows (millions):
2001 2000 1999 ------------------------------------------------------------------------------------------------------ Federal $ 128 $ 140 $ 110 Foreign 12 10 10 ------------------------------------------------------------------------------------------------------ Total $ 140 $ 150 $ 120 ------------------------------------------------------------------------------------------------------
Deferred income tax assets and liabilities result from the recognition of temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in differences between income for tax purposes and income for financial statement purposes in future years. The current and deferred components of the provision (benefit) for income taxes were as follows (millions):
2001 2000 1999 ------------------------------------------------------------------------------------------------------ Current $ 200 $ 179 $ 134 Deferred (60) (29) (14) ------------------------------------------------------------------------------------------------------ Total income tax provision $ 140 $ 150 $ 120 ------------------------------------------------------------------------------------------------------
Credco's deferred tax assets were $428 million and $245 million as of December 31, 2001 and 2000, respectively. These amounts were included in other assets. Credco's deferred tax liabilities were not material as of December 31, 2001 and 2000. Deferred tax assets for 2001 and 2000 consist primarily of reserve for loan losses of $305 million and $245 million, respectively, and deferred taxes related to SFAS No. 133 of $121 million for 2001. At December 31, 2001 and 2000, no valuation allowances were required. Included in due to affiliates is the current federal tax payable to TRS of $15 million and current federal tax receivable from TRS of $16 million at December 31, 2001 and 2000, respectively. In 2001, 2000 and 1999, total net income taxes paid, including taxes paid to TRS, were $166 million, $198 million and $159 million, respectively. These amounts include estimated tax payments and cash settlements relating to prior tax years. The principal reasons that the aggregate income tax provision is different from that computed by using the U.S. statutory rate of 35 percent is as follows:
------------------------------------------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------------------------------------------ Statutory rate 35% 35% Foreign operations (1) (1) ------------------------------------------------------------------------------------------------------ Total 34% 34% ------------------------------------------------------------------------------------------------------
The U.S. statutory tax rate and effective tax rate for 1999 was approximately 35%. The items comprising Comprehensive Income in the Consolidated Statements of Shareholder's Equity are presented net of income tax (benefit) provision. The changes in net unrealized securities are presented net of F-14 tax (benefit) provision of ($2) million for 2001 and $3 million for 2000. The changes related to cash flow hedges are presented net of tax benefit of $121 million for 2001. 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):
2001 2000 1999 --------------------------------------------------------------------------------------------------------- Revenues United States $ 2,353 $ 2,165 $ 1,811 International 489 436 357 --------------------------------------------------------------------------------------------------------- Consolidated $ 2,842 $ 2,601 $ 2,168 --------------------------------------------------------------------------------------------------------- Pretax income United States $ 357 $ 367 $ 295 International 60 69 48 --------------------------------------------------------------------------------------------------------- Consolidated $ 417 $ 436 $ 343 ---------------------------------------------------------------------------------------------------------
12. Quarterly Financial Data (Unaudited)
2001 2000 ---------------------------------------------------------------------------------------------------------------------- Quarters Ended, (Millions) 12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31 ---------------------------------------------------------------------------------------------------------------------- Revenues $ 696 $ 703 $ 730 $ 713 $ 686 $ 616 $ 690 $ 609 Pretax income 63 114 124 116 126 85 118 107 Net income 42 75 83 77 83 57 76 70 ----------------------------------------------------------------------------------------------------------------------
F-15 AMERICAN EXPRESS CREDIT CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, (Millions) 2001 2000 1999 ------------------------------------------------------------------------------------------------------- Reserve for credit losses: Balance at beginning of year $ 739 $ 684 $ 597 Additions: Provision for credit losses charged to income (1) 1,130 867 844 Other credits (2) 124 63 71 Deductions: Accounts written off 1,061 832 788 Other charges (3) 85 43 40 ------- ------- ------- Balance at end of year $ 847 $ 739 $ 684 ======= ======= ======= Reserve for credit losses as a percentage of gross Cardmember receivables owned at year-end 3.65% 2.96% 2.91% ======= ======= =======
(1) Before recoveries on accounts previously written off of $193 million, $178 million and $172 million in 2001, 2000 and 1999, respectively. (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) Primarily relates to reserve balances applicable to certain groups of Cardmember receivables and participation interests sold to affiliates. F-16 EXHIBIT INDEX Pursuant to Item 601 of Regulation S-K
Exhibit No. Description 3 (a) Registrant's Certificate of Incorporation, Incorporated by reference to 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, amended and restated as Incorporated by reference to of November 24, 1980 Exhibit 3 (b) to Registrant's Annual Report on Form 10-K (Commission File No. 1-6908) for the year ended December 31, 1985. 4 (a) Registrant's Debt Securities Indenture dated Incorporated by reference to as of September 1, 1987 Exhibit 4 (s) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (b) Form of Note with optional redemption Incorporated by reference to 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 optional redemption and Incorporated by reference to sinking fund provisions Exhibit 4 (u) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
E-1 4 (d) Form of Original Issue Discount Note with Incorporated by reference to optional redemption provision Exhibit 4 (v) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4(e) Form of Zero Coupon Note with optional Incorporated by reference to redemption provisions Exhibit 4 (w) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (f) Form of Variable Rate Note with optional Incorporated by reference to redemption and repayment provisions Exhibit 4 (x) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (g) Form of Extendible Note with optional Incorporated by reference to redemption and repayment provisions Exhibit 4 (y) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (h) Form of Fixed Rate Medium-Term Note Incorporated by reference to Exhibit 4 (z) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874). 4 (i) Form of Floating Rate Medium-Term Note Incorporated by reference to Exhibit 4 (aa) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
E-2 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 debt instruments to be Incorporated by reference to issued outside the U.S. Exhibit 4(l) to Registrant's Annual Report on Form 10-K (Commission File No. 1-6908) for the year ended December 31, 1997. 4 (m) Form of Permanent Global Fixed Rate Incorporated by reference to Medium-Term Senior Note, Series B Exhibit 4(s) to Registrant's Current Report on Form 8-K dated December 21, 2001. 4 (n) Form of Permanent Global Floating Rate Incorporated by reference to Medium-Term Senior Note, Series B Exhibit 4(t) to Registrant's Current Report on Form 8-K dated December 21, 2001. 4 (o) 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 as of January 1, Incorporated by reference to 1983 between the Registrant and American Exhibit 10 (b) to Express Travel Related Services Company, Inc. Registrant's Annual Report on Form 10-K (Commission File No. 1-6908) for the year ended December 31, 1987.
E-3 10 (b) Participation Agreement dated as of August 3, Incorporated by reference to 1992 between American Express Receivables Exhibit 10(c) to Financing Corporation and Credco Receivables Registrant's Annual Report Corp. on Form 10-K (Commission File No. 1-6908) for the year ended December 31, 1992. 12.1 Computation in Support of Ratio of Earnings to Electronically filed Fixed Charges of American Express Credit herewith. Corporation 12.2 Computation in Support of Ratio of Earnings to Electronically filed Fixed Charges of American Express Company herewith. 23 Consent of Independent Auditors Electronically filed herewith.
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