<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________
FORM 10-Q
____________________
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) 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, Wilmington, Delaware 19801-2919
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 594-3350
- - ---------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)
(a) AND (b) OF FORM 10-Q AND HAS THEREFORE OMITTED CERTAIN ITEMS FROM THIS
REPORT IN ACCORDANCE WITH THE REDUCED DISCLOSURE FORMAT PERMITTED UNDER
GENERAL INSTRUCTIONS H(2).
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 16, 1998
- - ---------------------------- --------------------------------
Common Stock, $.10 par value 1,504,938 shares
<PAGE>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
FORM 10-Q
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated statements
of income and retained earnings -
three and nine months ended
September 30, 1998 and 1997 3
Condensed consolidated balance
sheets - September 30, 1998 and
December 31, 1997 4
Condensed consolidated statements
of cash flows - nine months ended
September 30, 1998 and 1997 5
Notes to condensed consolidated
financial statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
2
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
PART I
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
(millions)
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Revenue earned from purchased
accounts receivable $ 457 $ 456 $1,421 $1,300
Interest income from affiliates 46 46 136 127
Interest income from investments 41 39 105 98
Other income 1 1 4 4
------ ------ ------ ------
Total 545 542 1,666 1,529
------ ------ ------ ------
Expenses
Interest expense - affiliates 38 49 132 130
Interest expense - other 266 245 767 690
Provision for doubtful accounts,
net of recoveries 148 155 480 429
Other expenses 6 7 20 22
Total ------ ------ ------ ------
458 456 1,399 1,271
------ ------ ------ ------
Income before taxes 87 86 267 258
Income tax provision 30 30 93 90
------ ------ ------ ------
Net income 57 56 174 168
Retained earnings at beginning of period 1,862 1,795 1,745 1,683
------ ------ ------ ------
Retained earnings at end of period $1,919 $1,851 $1,919 $1,851
====== ====== ====== ======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions)
(Unaudited)
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,378 $ 374
Investments 353 218
Accounts receivable 17,984 19,609
Less: reserve for doubtful accounts 603 633
------- -------
17,381 18,976
Loans and deposits with affiliates 3,152 3,150
Deferred charges and other assets 487 335
------- -------
Total assets $23,751 $23,053
======= =======
Liabilities and shareholder's equity
Short-term debt with affiliates $ 1,626 $ 1,770
Short-term debt - other 16,265 14,812
Current portion of long-term debt - other 353 4
Long-term debt with affiliate 910 910
Long-term debt - other 2,144 2,354
------- -------
Total debt 21,298 19,850
Due to affiliates 46 1,027
Accrued interest and other liabilities 215 152
------- -------
Total liabilities 21,559 21,029
------- -------
Deferred discount revenue 111 117
------- -------
Shareholder's equity:
Common stock 1 1
Capital surplus 161 161
Retained earnings 1,919 1,745
------- -------
Total shareholder's equity 2,081 1,907
------- -------
Total liabilities and shareholder's equity $23,751 $23,053
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
(Unaudited)
Nine Months Ended
September 30,
-----------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 174 $ 168
Adjustments to reconcile net income to net
cash and cash equivalents provided by
operating activities:
Provision for doubtful accounts, net of recoveries 480 429
Amortization of deferred underwriting fees and
bond discount/premium 4 6
Changes in operating assets and liabilities:
Decrease (increase) in deferred tax assets 11 (50)
(Increase) decrease in interest receivable
and other operating assets (75) 5
Increase in due to affiliates 4 89
Increase in accrued interest and other liabilities 39 40
Decrease in deferred discount revenue (6) (11)
------- -------
Net cash provided by operating activities 631 676
------- -------
Cash Flows from Investing Activities:
Decrease (increase) in accounts receivable 216 (785)
Recoveries of accounts receivable previously
written off 127 136
Purchase of participation interest in seller's
interest in accounts receivable from an affiliate (312) (728)
Sale of participation interest in seller's interest
in accounts receivable to an affiliate 1,120 95
Sale of net accounts receivable to an affiliate - 219
Purchase of investments (153) (247)
Maturity of investments 17 29
Net increase in loans and deposits due from
affiliates (2) (300)
Net increase in loans and deposits to third parties (94) -
Decrease in due to affiliates (998) (450)
------- -------
Net cash used in investing activities (79) (2,031)
------- -------
Cash Flows from Financing Activities:
Net (decrease) increase in short-term debt with
affiliates with maturity less than ninety days (144) 944
Net increase (decrease) in short-term debt -
other with maturity less than ninety days 705 (4)
Proceeds from issuance of debt 4,492 6,561
Repayment of debt (3,601) (5,031)
------- -------
Net cash provided by financing activities 1,452 2,470
------- -------
Net increase in cash and cash equivalents 2,004 1,115
Cash and cash equivalents at beginning of period 374 267
------- -------
Cash and cash equivalents at end of period $2,378 $1,382
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements should be read in
conjunction with the Annual Report on Form 10-K of American Express
Credit Corporation, including its subsidiaries where appropriate
("Credco"), for the year ended December 31, 1997. Significant accounting
policies disclosed therein have not changed.
The condensed consolidated financial statements are unaudited; however,
in the opinion of management, they include all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the
consolidated financial position of Credco at September 30, 1998 and the
consolidated results of its operations and changes in its retained earnings
for the nine-month periods ended September 30, 1998 and 1997 and cash flows
for the nine-month periods ended September 30, 1998 and 1997. Results of
operations reported for interim periods are not necessarily indicative of
results for the entire year.
2. For the nine-month periods ended September 30, 1998 and 1997, Credco paid
$885 million and $809 million of interest, respectively. Income taxes paid
for each of the nine-month periods ended September 30, 1998 and 1997 were
$70 million and $44 million, respectively.
3. 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. At
September 30, 1998, Credco held $258 million of American Express Master
Trust Class B Certificates which were classified as held to maturity. The
fair value of the held to maturity securities at September 30, 1998 were
$271 million.
Available for sale securities are stated at fair value, with the unrealized
gains and losses included in shareholder's equity. At September 30, 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 September 30, 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 demand or funding source and terms.
4. In early 1998, Credco purchased interest rate caps to limit the adverse
effect of an interest rate increase on substantially all charge Cardmember
receivables funding costs. The majority of the caps will mature by the end
of 1998.
5. 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 obligations under these notes.
6. In May 1998, the American Express Master Trust (the "Trust") issued an
additional $1 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 to American Express
Receivables Financing Corporation ("RFC"), a wholly-owned subsidiary of
American Express Travel Related Services Company, Inc. ("TRS"), at face
amount less applicable reserve, $1.1 billion of its gross participation in
RFC's seller's interest in the receivables owned by the Trust back to RFC.
7. 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 for hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Changes in the fair
value of a derivative will be recorded either to the Statement of Income
or Shareholder's Equity, depending on the intended use of the derivative.
Based on the derivatives Credco currently has in place, the adoption of this
Statement is not expected to have a material impact on net income.*
However, the actual impact will dpeend on the derivatives Credco has in
place at the time of adoption.
8. In September 1998, $300 million Class A Fixed Rate Accounts Receivable
Trust Certificates matured from the charge card securitization portfolio
which increases 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 American Express Master Trust.
* This is a forward looking statement which is subject to risks and
uncertainties. Important factors that could cause results to differ
materially from the forward looking statement include, among other things,
unanticipated changes in volume, type, use and price of derivatives held
by Credco.
6
<PAGE>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
At September 30, 1998, American Express Credit Corporation, including its
subsidiaries where appropriate ("Credco"), had the ability to issue $1.9
billion of debt under the Euro Medium Term Note program for the issuance of
debt outside the United States to non-U.S. persons. This program was
established during 1996 by Credco, American Express Travel Related Services
Company, Inc. ("TRS"), a wholly-owned subsidiary of American Express Company
("American Express"), American Express Overseas Credit Corporation Limited
("AEOCC"), a wholly-owned subsidiary of Credco, and American Express Bank Ltd.
(a wholly-owned subsidiary of American Express). In 1997, American Express
Centurion Bank ("Centurion Bank"), a wholly-owned subsidiary of TRS, was added
to this program. The maximum aggregate principal amount of debt instruments
outstanding at any one time under the program will not exceed $3 billion.
In early 1998, Credco purchased interest rate caps to limit the adverse effect
of an interest rate increase on substantially all charge Cardmember
receivables funding costs. The majority of the caps will mature by the end of
1998.
In February 1998, Credco issued $150 million 1 1/8% Cash Exchangeable Notes
due February 19, 2003. Holders of these notes may exchange them for an amount
in cash which is linked to the price of the common shares of American Express.
Credco has entered into hedging agreements designed to fully hedge its
obligations under these notes.
At September 30, 1998, Credco had the ability to issue $2.4 billion of
medium- and long-term debt securities under shelf registrations filed with
the Securities and Exchange Commission.
In May 1998, Credco renegotiated its credit facilities, increasing available
credit lines by $350 million to $7.2 billion.
Results of Operations
Credco purchases Cardmember receivables without recourse from TRS or its
subsidiaries. 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 for the nine-month periods ended September 30, 1998 and 1997 was
1.30 and 1.32, respectively. The ratio of earnings to fixed charges for
American Express, the parent of TRS, for the nine-month periods ended
September 30, 1998 and 1997 was 2.27 and 2.24, 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 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 the receivables purchased.
7
<PAGE>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
Credco purchased $113 billion and $105 billion of Cardmember receivables
during the nine-month periods ended September 30, 1998 and 1997, respectively.
At September 30, 1998 and December 31, 1997, Credco owned $15.9 billion and
$17.8 billion, respectively, of charge card receivables of which $1.7 billion
and $3.8 billion, respectively, were participation interests owned by Credco
Receivables Corp.("CRC"), a wholly-owned subsidiary of Credco. CRC owns a
participation in the seller's interest in charge Cardmember receivables that
have been conveyed to the American Express Master Trust (the "Trust"). This
Trust was formed in 1992 by TRS to securitize U.S. consumer charge Cardmember
receivables.
In addition, at September 30, 1998 and December 31, 1997, Credco owned extended
payment plan receivables totaling $2.1 billion and $1.8 billion respectively,
including revolving credit loans purchased directly from Centurion Bank. The
extended payment plan receivables owned at September 30, 1998 and December 31,
1997 include $140 million and $229 million, respectively, of participation
interest owned by CRC. This represents a participation in the seller's
interest in revolving credit receivables that have been conveyed to the
American Express Credit Account Master Trust (the "Master Trust"). This
Master Trust was formed by Centurion Bank in 1996 to securitize revolving
credit loans.
For the nine-month periods ended September 30, 1998 and 1997, the average life
of Cardmember receivables owned by Credco was 43 and 44 days, respectively.
Credco's write-offs, net of recoveries, as a percentage of the volume of
Cardmember receivables purchased for both nine-month periods ended
September 30, 1998 and 1997 was .43 percent.
Credco's increase in revenue for the nine-month period ended September 30, 1998,
is primarily due to an increase in the volume of receivables purchased.
Increased interest income for the nine-month period ended September 30, 1998
is attributable to higher volume of average investments outstanding. Interest
expense increased for the nine-month period ended September 30, 1998, due
predominantly to an increase in average debt outstanding. Provision for
doubtful accounts for the nine-month period also increased reflecting volume
growth.
8
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
The following is an analysis of the increase (decrease) in key revenue and
expense accounts for the nine-month period ended September 30, 1998, compared
with the nine-month period ended September 30, 1997 ($ in millions):
Nine
Month
Period
------
<S> <C>
Revenue earned from purchased accounts receivable-
changes attributable to:
Volume of receivables purchased 91
Discount and interest rates 30
----
Total 121
====
Interest income from affiliates-changes attributable to:
Volume of average investments outstanding 9
Interest rates -
----
Total 9
====
Interest income from investments-changes attributable to:
Volume of average investments outstanding 5
Interest rates 2
----
Total 7
====
Interest expense (affiliates)-changes attributable to:
Volume of average debt outstanding (1)
Interest rates 3
----
Total 2
====
Interest expense (other)-changes attributable to:
Volume of average debt outstanding 57
Interest rates 20
----
Total 77
====
Provision for doubtful accounts-changes attributable to:
Volume of receivables purchased 47
Provision rates and volume of recoveries 4
----
Total 51
====
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
The following is an analysis of Cardmember reserve for doubtful accounts:
1998 1997
---- ----
<S> <C> <C>
Balance, January 1 $ 633 $ 638
Provision for losses 607 565
Accounts written off (614) (583)
Other (23) 14
----- -----
Balance, September 30 $ 603 $ 634
===== =====
The following table shows the aging of charge card receivables:
September
--------------------
1998 1997
---- ----
Current 80.7% 78.7%
30 to 59 days 14.2 15.5
60 to 89 days 2.1 2.3
90 days and over 3.0 3.5
</TABLE>
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than 2000. Credco's internal debt management systems have been
reviewed and remediated in light of the Year 2000 issue. The Card issuers,
which are subsidiaries or affiliates of American Express, 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 Year 2000 issue. Steps are being taken
by American Express to resolve any potential problems including modifications
to existing software and the purchase of new software. These measures are
scheduled to be completed and tested on a timely basis. American Express'
goals are to substantially complete remediation of critical systems by the
end of 1998, complete testing of those 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, through 1999.**
The costs related to the Year 2000 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 Year 2000 issue please see
pages 9 through 11 under the heading "Year 2000" of American Express Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, (dated
November 16, 1998) and which is incorporated herein by reference and attached
as Exhibit 99.
Various statements in this Year 2000 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
Year 2000 issues.
10
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
12.1 Computation in support of ratio of earnings to fixed
charges of American Express Credit Corporation.
12.2 Computation in support of ratio of earnings to fixed
charges of American Express Company.
27. Financial data schedule.
99. Pages 9 through 11 of American Express Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, discussing Year 2000.
(b) Reports on Form 8-K:
None.
11
<PAGE>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
SIGNATURES
Pursuant to the requirements 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 November 16, 1998 /s/Vincent P. Lisanke
--------------------------------------
Vincent P. Lisanke
(President, Chief Executive Officer
and Chief Accounting Officer)
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Description How Filed
----------- ---------
Exhibit 12.1 Computation in support of ratio of Electronically
earnings to fixed charges of filed herewith.
American Express Credit Corporation
Exhibit 12.2 Computation in support of ratio of Electronically
earnings to fixed charges of filed herewith.
American Express Company.
Exhibit 27. Financial data schedule. Electronically
filed herewith.
Exhibit 99. Pages 9 through 11 of American Electronically
Express Company's Quarterly Report filed herewith.
on Form 10-Q for the quarter ended
September 30, 1998, discussing Year
2000.
12
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
EXHIBIT 12.1
COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
OF AMERICAN EXPRESS CREDIT CORPORATION
(millions)
Nine Months
Ended
September 30, Year Ended December 31,
(Unaudited)
-----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before
extraordinary charge $ 174 $ 168 $ 212 $ 215 $ 197 $ 139 $ 137
Income tax provision 93 90 114 115 105 75 64
Interest expense 899 820 1,125 1,117 1,054 736 599
------ ------ ------ ------ ------ ----- -----
Total earnings $1,166 $1,078 $1,451 $1,447 $1,356 $ 950 $ 800
====== ====== ====== ====== ====== ===== =====
Fixed charges -
interest expense $ 899 $ 820 $1,125 $1,117 $1,054 $ 736 $ 599
====== ====== ====== ====== ====== ===== =====
Ratio of earnings
to fixed charges 1.30 1.32 1.29 1.30 1.29 1.29 1.34*
</TABLE>
Note: Gross rentals on long-term leases were minimal in each of the periods
shown.
* The ratio of earnings to fixed charges calculated in accordance
with the Receivables Agreements after the impact of the extraordinary
charge of $34 million (pretax) was 1.28.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
(a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc.)
EXHIBIT 12.2
COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
OF AMERICAN EXPRESS COMPANY
(Dollars in millions)
Nine Months
Ended
September 30, Years Ended December 31,
1998 --------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings:
Pretax income from
continuing operations $2,212 $2,750 $2,664 $2,183 $1,891 $2,326
Interest expense 1,655 2,122 2,160 2,343 1,925 1,776
Other adjustments 91 127 139 95 103 88
------ ------ ------ ------ ------ ------
Total earnings(a) $3,958 $4,999 $4,963 $4,621 $3,919 $4,190
------ ------ ------ ------ ------ ------
Fixed charges:
Interest expense $1,655 $2,122 $2,160 $2,343 $1,925 $1,776
Other adjustments 89 129 130 135 142 130
------ ------ ------ ------ ------ ------
Total fixed charges(b) $1,744 $2,251 $2,290 $2,478 $2,067 $1,906
------ ------ ------ ------ ------ ------
Ratio of earnings
to fixed charges (a/b) 2.27 2.22 2.17 1.86 1.90 2.20
</TABLE>
Included in interest expense in the above computation is interest expense
related to the international banking operations of American Express Company
(the Company) 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 the Company, 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, the Company completed the spin-off of Lehman Brothers through
a dividend to American Express common shareholders. Accordingly, Lehman
Brothers' results are reported as a discontinued operation and are excluded
from the above computation for all periods presented. In March 1993, the
Company reduced its ownership in First Data Corporation(FDC) to approximately
22 percent through a public offering. As a result, beginning in 1993, FDC
was reported as an equity investment in the above computation. In the fourth
quarter of 1995, the Company's ownership was further reduced to approximately
10 percent as a result of shares issued by FDC in connection with a merger
transaction. Accordingly, as of December 31, 1995, the Company's investment
in FDC is accounted for as Investments - Available for Sale.
Excerpt from American Express Company's
Quarterly Report on Form 10-Q for quarter ended September 30, 1998.
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
9
<PAGE>
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 substantially complete remediation of critical
systems by the end of 1998, complete testing of those 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, 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. As of October 31, 1998, for Millenniax, the
remediation/decommission, testing and implementation phases are
approximately 80%, 65% and 55% complete, respectively. For Business T,
such phases are approximately 70%, 55% and 55% 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
$311 million through September 30, 1998 and are estimated to be in the
range of $210 - $235 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 15%, 5% and 1% of the AET budget for the years 1998,
1999 and 2000, respectively. Millenniax costs have been substantially
offset by an earnings payout from Travelers Inc. related to the 1993 sale
of the Shearson Lehman Brothers Division, sales of securities and
adjustment of valuation allowances related to certain corporate assets.
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.
10
<PAGE>
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 has not completed its assessment of reasonably
likely Y2K systems failures and related consequences. However, the Company
is in the process of 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 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 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.
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Credco's
Condensed Consolidated Balance Sheet at September 30, 1998 and Condensed
Consolidated Statement of Income for the nine months ended September 30, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,378
<SECURITIES> 353
<RECEIVABLES> 17,984
<ALLOWANCES> 603
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,751
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<BONDS> 21,298
0
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<TOTAL-LIABILITY-AND-EQUITY> 23,751
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<TOTAL-REVENUES> 1,666
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</TABLE>
