<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K
_____________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 1-6908
AMERICAN EXPRESS CREDIT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 11-1988350
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Christina Center, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (302) 594-3350.
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
----------------------------------------- -------------------
6 1/8% Senior Debentures due June 15, 2000 New York Stock Exchange
1 1/8% Cash Exchangeable Notes due Chicago Board Options Exchange
February 19, 2003
Securities registered pursuant to Section 12 (g) of the Act: None.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a)
AND (b) OF FORM 10-K AND HAS THEREFORE OMITTED CERTAIN ITEMS FROM THIS
REPORT IN ACCORDANCE WITH THE REDUCED DISCLOSURE FORMAT PERMITTED UNDER
INSTRUCTION I.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
---
American Express Company, through a wholly-owned subsidiary, owns all of
the outstanding common stock of the Registrant. Accordingly, there is
no market for the Registrant's common stock. At March 31, 1999,
1,504,938 shares were outstanding.
Documents incorporated by reference: None
<PAGE>
PART I
Item 1. BUSINESS.
Introduction
American Express Credit Corporation (including its subsidiaries, where
appropriate, "Credco") was incorporated in Delaware in 1962 and was acquired
by American Express Company ("American Express") in December 1965. On
January 1, 1983, Credco became a wholly-owned subsidiary of American Express
Travel Related Services Company, Inc. (including its subsidiaries, where
appropriate, "TRS"), a wholly-owned subsidiary of American Express.
Credco is primarily engaged in the business of purchasing most charge Cardmember
receivables arising from the use of the American Express(R) Card, including the
American Express(R) Gold Card, Platinum Card(R) and Corporate Card issued in the
United States, and in designated currencies outside the United States. Credco
also purchases certain revolving credit receivables arising from the use of the
Optima(R) Card and interest-bearing extended payment plan Sign & Travel
receivables, Special Purchase Accounts(SM) receivables which provide for
extended payment for certain charges, interest-bearing equipment financing
installment loans and non-interest-bearing deferred merchandise receivables
arising from direct mail merchandise sales by TRS. The American Express Card and
the Optima Card are referred to herein as the "Card."
American Express Card Business
TRS currently issues the Card in 45 currencies (including cards issued by
banks and other qualified institutions). The Card, which is issued to
individual consumers for their personal account or through a corporate
account established by their employer for its business purposes, permits
Cardmembers to charge purchases of goods or services in the United States
and in most countries around the world at establishments that have agreed
to accept the Card. TRS accepts and processes from each participating
establishment the charges arising from Cardmember purchases at a discount
that varies with the type of participating establishment, the charge volume,
the timing and method of payment to the establishment, the method of
submission of charges, and in certain instances, the average charge amount
and the amount of information provided.
The Charge Card is primarily designed as a method of payment and not as a
means of financing purchases of goods or services and carries no pre-set
spending limit. Charges are approved based on a variety of factors including
a Cardmember's account history, credit record and personal resources. Except
in the case of certain extended payment plans, Charge Cards require payment
of the full amount billed each month from the Cardmember upon receipt of the
bill, and no finance charges are assessed. Charge Card accounts that are
past due are subject, in most cases, to a delinquency assessment and, if not
brought to current status, subject to cancellation. The Optima Card
comprises a family of revolving credit cards marketed in the United States
and other countries. TRS and its licensees also issue revolving credit cards
which do not carry the Optima brand, primarily outside the United States.
The American Express Charge Card and consumer lending businesses are subject
to extensive regulation in the United States under a number of federal laws
and regulations, including the Equal Credit Opportunity Act, which generally
prohibits discrimination in the granting and handling of credit; the Fair
Credit Reporting Act, which, among other things, regulates use by creditors
of consumer credit reports and credit prescreening practices and requires
certain disclosures when an application for credit is rejected; the Truth in
Lending Act, which, among other things, requires extensive disclosure of the
terms upon which credit is granted; the Fair Credit Billing Act, which,
among other things, regulates the manner in which billing
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inquiries are handled and specifies certain billing requirements; and the
Fair Credit and Charge Card Disclosure Act, which mandates certain disclosures
on credit and charge card applications. Federal legislation also regulates
abusive debt collection practices. In addition, a number of states and foreign
countries have similar consumer credit protection and disclosure laws. The
application of federal and state bankruptcy and debtor relief laws affect
Credco to the extent such laws result in any amounts owed being classified as
delinquent and/or charged off as uncollectible. These laws and regulations have
not had, and are not expected to have, a material adverse effect on the Charge
Card and consumer lending businesses, either in the United States or on a
worldwide basis.
General Nature of Credco's Business
Credco purchases certain Cardmember receivables arising from the
use of the Card throughout the world pursuant to agreements (the
"Receivables Agreements") with TRS. Net income primarily depends
on the volume of receivables arising from the use of the Card
purchased by Credco, the discount rates applicable thereto, the
relationship of total discount to Credco's interest expense and
the collectibility of the receivables purchased. The average life
and collectibility of accounts receivable generated by the use of
the Card are affected by factors such as general economic
conditions, overall levels of consumer debt and the number of new
Cards issued.
Credco purchases Cardmember receivables without recourse. Amounts
resulting from unauthorized charges (for example, those made with a
lost or stolen Card) are excluded from the definition of
"receivables" under the Receivables Agreements and are not eligible
for purchase by Credco. If the unauthorized nature of the charge
is discovered after purchase by Credco, TRS repurchases the charge
from Credco.
Credco generally purchases non-interest-bearing charge Cardmember
receivables at face amount less a specified discount agreed upon
from time to time and interest-bearing revolving credit Cardmember
receivables at face amount. The Receivables Agreements generally
require that non-interest-bearing receivables be purchased at
discount rates which yield to Credco earnings of not less than 1.25
times its fixed charges on an annual basis. The Receivables
Agreements also provide that consideration will be given from time
to time to revising the discount rate applicable to purchases of
new receivables to reflect changes in money market rates or
significant changes in the collectibility of receivables. New
groups of Cardmember receivables are generally purchased net of
reserve balances applicable thereto.
Extended payment plan receivables are primarily funded by
subsidiaries of TRS other than Credco; however, Credco purchases
certain extended payment plan receivables. At December 31, 1998
and 1997, extended payment plan receivables owned by Credco totaled
$2.1 billion and $1.8 billion representing 11.1 percent and 9.4
percent, respectively, of all interests in receivables owned by
Credco. These extended payment plan receivables consist of certain
interest-bearing extended payment plan receivables comprised
principally of Optima and Sign & Travel accounts receivables,
Special Purchase Accounts receivables, interest-bearing equipment
financing installment loans and non-interest-bearing deferred merchandise
receivables arising from direct mail merchandise sales by TRS.
Credco, through a wholly-owned subsidiary, Credco Receivables Corp. ("CRC"),
purchases gross participation interests in the seller's interest in
both non-interest-bearing and interest-bearing Cardmember
receivables owned by two master trusts formed by TRS as part of its
asset securitization programs. The gross participation interests
represent undivided interests in the receivables originated by TRS
and by American Express Centurion Bank, a wholly-owned subsidiary of
TRS. See note 4 in "Notes to Consolidated Financial Statements"
appearing herein.
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The Card issuers, at their expense and as agents for Credco,
perform accounting, clerical and other services necessary to bill and
collect all Cardmember receivables owned by Credco. The Receivables
Agreements provide that, without prior written consent of Credco,
the credit standards used to determine whether a Card is to be issued
to an applicant may not be materially reduced and that the policy as to
the cancellation of Cards for credit reasons may not be materially
liberalized.
American Express, as the parent of TRS, has agreed with Credco that
it will take all necessary steps to assure performance of certain
of TRS' obligations under the Receivables Agreement between TRS and
Credco. The Receivables Agreements may be terminated at any time
by the parties thereto, generally upon little or no notice.
Alternatively, such parties may agree to reduce the required 1.25
fixed charge coverage ratio, which could result in lower discount
rates and, consequently, lower revenues and net income of Credco.
The obligations of Credco are not guaranteed under the Receivables
Agreements or otherwise by American Express or the Card issuers.
Volume of Business
The following table shows the volume of Cardmember receivables
purchased by Credco, net of Cardmember receivables sold to
affiliates, during each of the years indicated, together with
receivables owned by Credco at the end of such years (millions):
<TABLE>
<CAPTION>
Volume of Cardmember Cardmember Receivables Owned
Receivables Purchased at December 31,
Year Domestic Foreign Total Domestic Foreign Total
- ---- -------- ------- ----- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
1998 $116,957 $38,105 $155,062 $15,198 $4,043 $19,241
1997 108,573 37,030 145,603 15,581 4,028 19,609
1996 100,512 35,299 135,811 13,530 3,829 17,359
1995 91,299 30,638 121,937 13,179 3,260 16,439
1994 83,851 25,639 109,490 11,273 2,747 14,020
</TABLE>
The Card business does not experience significant seasonal
fluctuation, although Card billed business tends to be moderately
higher in the fourth quarter than in other calendar quarters.
TRS' asset securitization programs disclosed above have reduced the
volume of domestic Cardmember receivables purchased and the amount
owned by Credco.
The average life of charge Cardmember receivables owned by Credco
for each of the five years ending December 31, 1998 (based upon the
ratio of the average amount of both billed and unbilled receivables
owned by Credco at the end of each month during the years indicated
to the volume of Cardmember receivables purchased by Credco) was 43 days.
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The following table shows the aging of billed, non-interest-bearing
charge Cardmember receivables:
<TABLE>
<CAPTION>
December 31,
1998 1997
----------------------------------------------------------
<S> <C> <C>
Current 79.4% 79.6%
30 to 59 days 15.2 14.7
60 to 89 days 2.4 2.3
90 days and over 3.0 3.4
</TABLE>
Loss Experience
Credco generally writes off against its reserve for doubtful
accounts the total balance in an account for which any portion
remains unpaid 12 months from the date of original billing for non-
interest-bearing Charge Card receivables and after six contractual
payments are past due for interest-bearing revolving credit
receivables. Accounts are written off earlier if deemed
uncollectible.
The following table sets forth Credco's write-offs, net of
recoveries, expressed in millions and as a percentage of the volume
of Cardmember receivables purchased by Credco in each of the years indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Write-offs, net of recoveries $647 $615 $630 $508 $444
% of net Cardmember receivables
purchased .42% .42% .46% .42% .41%
</TABLE>
Sources of Funds
Credco's business is financed by short-term borrowings consisting
principally of commercial paper, borrowings under bank lines of
credit and issuances of medium- and long-term debt, as well as
through operations. The weighted average interest costs on an
annual basis of all borrowings, after giving effect to commitment
fees under lines of credit and the impact of interest rate swaps,
during the following years were:
<TABLE>
<CAPTION>
Weighted Average
Year Interest Cost
---- -------------
<S> <C> <C>
1998 5.66%
1997 5.66
1996 5.67
1995 6.30
1994 5.06
</TABLE>
From time to time, American Express and certain of its subsidiaries
purchase Credco's commercial paper at prevailing rates, enter into
variable rate note agreements at interest rates generally above the
13-week treasury bill rate and provide lines of credit. The
largest amount of borrowings from American Express or its
subsidiaries at any month end during the five years ended December
31, 1998 was $5.8 billion. At
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December 31, 1998, the amount borrowed was $2.2 billion. See notes 5
and 6 in "Notes to Consolidated Financial Statements" appearing
herein for information about Credco's debt, including Credco's lines
of credit from various banks and long-term debt.
Foreign Operations
See notes 2, 8 and 11 in "Notes to Consolidated Financial
Statements" appearing herein for information about Credco's foreign
exchange risks and operations in different geographical regions.
Employees
At December 31, 1998 Credco had 28 employees.
Item 2. PROPERTIES.
Credco neither owns nor leases any material physical properties.
Item 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which Credco or
its subsidiaries is a party or of which any of their property is
the subject. Credco knows of no such proceedings being
contemplated by government authorities or other parties.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I(2)(c) to Form 10-K.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
American Express, through a wholly-owned subsidiary, TRS, owns all
of the outstanding common stock of Credco. Therefore, there is no
market for Credco's common stock.
Credco paid dividends of $150 million to TRS in both December, 1998
and 1997.
For information about limitations on Credco's ability to pay
dividends, see note 7 in "Notes to Consolidated Financial
Statements" appearing herein.
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Item 6. SELECTED FINANCIAL DATA.
The following summary of certain consolidated financial information
of Credco was derived from audited financial statements for the
five years ended December 31, 1998.
<TABLE>
<CAPTION>
(dollars in millions) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data
Revenues 2,214 2,064 2,166 1,988 1,401
Interest expense 1,190 1,125 1,117 1,054 736
Provision for doubtful
accounts, net of
recoveries 632 584 712 625 443
Income tax provision 128 114 115 105 75
Net income 237 212 215 197 139
Balance Sheet Data
Accounts receivable 19,241 19,609 17,359 16,439 14,020
Reserve for doubtful
accounts (597) (633) (638) (624) (498)
Total assets 23,650 23,053 20,165 20,192 16,868
Short-term debt 17,528 16,582 14,537 14,202 11,525
Current portion of
long-term debt 353 4 211 409 405
Long-term debt 3,053 3,264 2,469 2,673 2,282
Shareholder's equity 1,994 1,907 1,845 1,780 1,733
Cash dividends 150 150 150 150 100
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources
Credco's receivables portfolio consists of Charge Card receivables
and revolving credit receivables purchased without recourse from
TRS throughout the world and participation interests purchased
without recourse in the seller's interest in both non-interest-
bearing and interest-bearing Cardmember receivables. These
participation interests are owned by two master trusts formed by
TRS as part of its asset securitization programs. At December 31, 1998
and 1997, respectively, Credco owned $17.1 billion and $17.8 billion of
Charge Card receivables and participation in Charge Card receivables,
representing 88.9 percent and 90.6 percent, respectively, of the total
receivables owned. Revolving credit receivables, representing 11.1 percent and
9.4 percent of the total receivables owned, were $2.1 billion and $1.8 billion
at December 31, 1998 and 1997, respectively.
As part of Credco's business of funding receivables, Credco makes
variable rate loans to American Express Centurion Bank ("Centurion
Bank"), a wholly-owned subsidiary of TRS, which are secured by Optima
receivables owned by Centurion Bank. At both December 31, 1998
and 1997, $2.3 billion of such loans were outstanding. The loan
agreements require Centurion Bank to maintain, as collateral,
Optima receivables equal to the outstanding loan balance plus an
amount equal to three times the receivable reserve applicable to
such Optima receivables.
Credco's assets are financed through a combination of short-term
debt, long-term senior notes, equity capital and retained earnings.
Daily funding requirements are met primarily by the sale of
commercial paper. Credco has readily sold the volume of commercial
paper necessary to meet its funding needs as well as to cover the
daily maturities of commercial paper issued. The average amount of
commercial paper outstanding was $15.2 billion for 1998 and $14.1
billion for 1997.
An alternate source of borrowing consists of committed credit line
facilities. The aggregate commitment of these facilities is
generally maintained at 50 percent of short-term debt, net of short-
term investments and cash equivalents. Committed credit line
facilities at December 31, 1998 and 1997 totaled $8.2 billion and
$7.3 billion, respectively. Credco, through its wholly-owned
subsidiary, American Express Overseas Credit Corporation Limited
("AEOCC"), had no outstanding borrowings at December 31, 1998 and
$17.4 million at December 31, 1997, under these committed lines of
credit. In addition, Credco, through AEOCC, had short-term
borrowings under uncommitted lines of credit totaling $68 million
and $241 million at December 31, 1998 and 1997, respectively.
During 1998, Credco's average long-term debt outstanding was $3.4
billion. Credco's average long-term debt outstanding was $2.9
billion during 1997 and 1996. At December 31, 1998, Credco had
approximately $2.4 billion of medium- and long-term debt and
warrants available for issuance under shelf registrations filed
with the Securities and Exchange Commission. In addition, at
December 31, 1998, Credco had the ability to issue $1.9 billion of
debt under the Euro Medium-Term Note program established by Credco,
TRS, AEOCC, Centurion Bank and American Express Bank, Ltd. (a
wholly-owned subsidiary of American Express). In January 1999,
under the Euro-Medium Term Note program, TRS issued and sold an
additional $500 million 5.625% Fixed Rate Notes. These notes will
mature in 2004.
Credco paid dividends to TRS of $150 million in both December, 1998
and 1997.
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In February 1998, Credco issued $150 million 1 1/8% Cash
Exchangeable Notes due February 19, 2003. Holders of these notes
may exchange them for an amount in cash which is linked to the
price of the common shares of American Express Company. Credco has
entered into hedging agreements designed to fully hedge its obligation
under these notes.
In May 1998, the American Express Master Trust (the "Trust") issued
an additional $1.0 billion of Class A Fixed Rate Accounts Receivable
Trust Certificates. At the time of such issuance, Credco
Receivables Corp. ("CRC"), a wholly-owned subsidiary of Credco,
sold back to American Express Receivables Financing Corporation
("RFC"), a wholly-owned subsidiary of TRS, at face amount less
applicable reserve, $1.1 billion of CRC's gross participation in
RFC's seller's interest in the receivables owned by the Trust.
In September 1998, $300 million Class A Fixed Rate Accounts
Receivable Trust Certificates matured from the Charge Card
securitization portfolio which increased the participation
interests owned by CRC. CRC owns a participation interest in the
seller's interest in charge Cardmember receivables that have been
conveyed to the Trust.
Results of Operations
Credco purchases Cardmember receivables without recourse from TRS.
Non-interest-bearing charge Cardmember receivables are purchased at
face amount less a specified discount agreed upon from time to
time, and interest-bearing revolving credit Cardmember receivables
are generally purchased at face amount. Non-interest-bearing
receivables are purchased under Receivables Agreements that
generally provide that the discount rate shall not be lower than a
rate that yields earnings of at least 1.25 times fixed charges on
an annual basis. The ratio of earnings to fixed charges was 1.31
in 1998, 1.29 in 1997, and 1.30 in 1996. The Receivables
Agreements also provide that consideration will be given from time
to time to revising the discount rate applicable to purchases of
new receivables to reflect changes in money market interest rates
or significant changes in the collectibility of the receivables.
Pretax income depends primarily on the volume of Cardmember
receivables purchased, the discount rates applicable thereto, the
relationship of total discount to Credco's interest expense and the
collectibility of receivables purchased. The average life of
Cardmember receivables was 43 days for each of the years ended
December 31, 1998, 1997 and 1996.
Credco's increase in revenues in 1998 is primarily due to an
increase in the volume of receivables purchased. The increase in
interest income in 1998 is due to an increase in the volume of
average investments outstanding. Interest expense increased in
1998 due to an increase in the volume of average debt
outstanding. Provision for doubtful accounts increased in 1998
reflecting higher volume of receivables purchased.
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<TABLE>
<CAPTION>
The following is a further analysis of the increase (decrease) in
key revenue and expense accounts (millions):
------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
Revenue earned from purchased accounts
receivable-changes attributable to:
Volume of receivables purchased $ 97 $ 157 $ 166
Discount and interest rates 40 (214) (28)
------------------------------------------------------------
Total $137 $ (57) $ 138
------------------------------------------------------------
Interest income from affiliates-changes
attributable to:
Volume of average investments
outstanding $ 11 $ 9 $ 5
Interest rates (4) 4 (15)
------------------------------------------------------------
Total $ 7 $ 13 $(10)
------------------------------------------------------------
Interest income from investments-changes
attributable to:
Volume of average investments
outstanding $ 6 $ (65) $ 71
Interest rates 0 6 (19)
------------------------------------------------------------
Total $ 6 $ (59) $ 52
------------------------------------------------------------
Interest expense (affiliates)-changes
attributable to:
Volume of average debt outstanding $(14) $ 37 $ 11
Interest rates (1) 8 (13)
------------------------------------------------------------
Total $(15) $ 45 $ (2)
------------------------------------------------------------
Interest expense (other)-changes
attributable to:
Volume of average debt outstanding $ 79 $ (31) $178
Interest rates 1 (6) (113)
------------------------------------------------------------
Total $ 80 $ (37) $ 65
------------------------------------------------------------
Provision for doubtful accounts-changes
attributable to:
Volume of receivables purchased $ 50 $ 65 $ 91
Provision rates and volume of
recoveries (2) (193) (4)
------------------------------------------------------------
Total $ 48 $(128) $ 87
------------------------------------------------------------
</TABLE>
Year 2000
The Year 2000 (Y2K) issue is the result of computer programs having
been written using two digits rather than four to define a year.
Any programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than 2000. Credco's internal
debt management systems have been reviewed and remediated in light
of the Y2K issue. The Card issuers, which are subsidiaries or
affiliates of TRS, at their expense and as agents for
Credco, perform all services necessary to bill and collect all
Cardmember receivables owned by Credco. American Express has
conducted a comprehensive review of its computer systems and
business processes (including systems and processes of the Card
issuers) to identify the major systems that could be affected by
the Y2K issue. Steps are being taken by American Express to
resolve any potential problems including modifications to existing
software and the purchase of new software. These measures are
scheduled to be completed and tested on a timely basis. American
Express' goals are to complete testing of critical systems by early
1999 and to continue compliance efforts, including but not limited
to, the testing of systems on an integrated basis and independent
validation of such testing,
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through 1999.** The costs related to the Y2K issue, which are
expensed by American Express as incurred have not had, nor are
they expected to have, a material impact on Credco's results of
operations or financial condition.** For further discussion of
American Express' addressing of the Y2K issue, please see pages 22
and 23 of American Express' 1998 Annual Report to Shareholders,
which discussion is incorporated herein by reference and attached
hereto as Exhibit 99.
Various statements in this Y2K discussion marked with two asterisks
(**), are forward-looking statements which are subject to risks and
uncertainties. Important factors that could cause results to
differ materially from these forward-looking statements include,
among other things, the ability of Credco and American Express to
successfully identify systems containing two-digit codes, the
nature and amount of programming required to fix the affected
systems, the costs of labor and consultants related to such
efforts, the continued availability of such resources, and the
ability of third parties that interface with Credco and American
Express to successfully address their Y2K issues.
Accounting Development
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which is
effective January 1, 2000. This Statement establishes accounting
and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. The ultimate
effect of the new rule will be measured based on the derivatives in
place at adoption and cannot be estimated at this time. Based on
Credco's current derivatives position, the effect on Credco's
earnings and financial position upon adoption would not be
significant.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
American Express management establishes and oversees implementation
of Board-approved policies covering its funding, investments and
use of derivative financial instruments and monitors aggregate risk
exposures on an ongoing basis. The objective is to realize returns
commensurate with the level of risk assumed while achieving
consistent earnings growth. See note 8 in "Notes to Consolidated
Financial Statements" appearing herein for a discussion of Credco's
use of derivatives.
The following sections include sensitivity analyses of two
different tests of market risk and estimate the effects of
hypothetical sudden and sustained changes in the applicable market
conditions on the ensuing year's earnings, based on year-end
positions. The market changes, assumed to occur as of year-end,
are a 100 basis point increase in market interest rates and a 10%
strengthening of the U.S. dollar versus all other currencies.
Computations of the prospective effects of hypothetical interest
rate and foreign exchange rate changes are based on numerous
assumptions, including relative levels of market interest rates and
foreign exchange rates, as well as the levels of assets and
liabilities. The hypothetical changes and assumptions will be
different from what actually occurs in the future. Furthermore,
the computations do not anticipate actions that may be taken by
management if the hypothetical market changes actually occur over
time. As a result, actual earnings effects in the future will
differ from those quantified below.
Credco's hedging policies are established, maintained and monitored
by a centralized treasury function. Credco generally manages its
exposures along product lines. A variety of interest rate and
foreign exchange
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hedging strategies are employed to manage interest rate and foreign
currency risks.
Credco funds its Charge Card receivables using sources such as long-
term debt, medium-term notes, commercial paper and other debt.
Interest rate exposure is managed through the issuance of long- and
short-term debt and the use of interest rate swaps to achieve a
targeted mix of fixed and floating rate funding. During 1998 and
1997, Credco targeted this mix to be approximately 100 percent
floating rate. In early 1998, Credco purchased interest rate caps
to limit the adverse effect of an interest rate increase on
substantially all Charge Card funding costs. The majority of these
caps matured during 1998. In 1999, Credco began entering into a
series of interest rate swaps to convert a portion of its funding
from floating rate to fixed rate.
Credco funds its revolving credit receivables using a mix of long-
and short-term debt. The interest rates on these revolving credit
receivables are generally linked to a floating rate base and
typically reprice each month. Credco generally enters into
interest rate agreements paying a rate that reprices when the base
rate of the underlying receivables changes.
The detrimental effect on Credco's pretax earnings of a
hypothetical 100 basis point increase in interest rates would be
approximately $115 million and $119 million, based on 1998 and 1997
year-end positions, respectively. This effect is primarily due to
the variable rate funding of the Charge Card products. Had the
series of swaps purchased in early 1999 been in effect at December
31, 1998, the 1998 effect would have been substantially lower.
Similarly, had the interest rate caps purchased in early 1998 been
in effect at December 31, 1997, the 1997 effect would be reduced by
nearly half.
Credco's foreign exchange risk arising from cross-currency charges
and balance sheet exposures is managed primarily by entering into
agreements to buy and sell currencies on a spot or forward basis.
Based on the year-end 1998 and 1997 foreign exchange positions, the
effect on Credco's earnings of the hypothetical 10% strengthening
of the U.S. dollar would be immaterial.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
1. Financial Statements.
See "Index to Financial Statements" at page F-1 hereof.
2. Supplementary Financial Information.
Selected quarterly financial data. See note 12 in
"Notes to Consolidated Financial Statements"
appearing herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
11
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to General Instruction I(2)(c) to Form 10-K.
Item 11. EXECUTIVE COMPENSATION.
Omitted pursuant to General Instruction I(2)(c) to Form 10-K.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Omitted pursuant to General Instruction I(2)(c) to Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to General Instruction I(2)(c) to Form 10-K.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements:
See "Index to Financial Statements" at page F-1 hereof.
2. Financial Statement Schedule:
See "Index to Financial Statements" at page F-1 hereof.
3. Exhibits:
See "Exhibit Index" hereof.
(b) Reports on Form 8-K:
None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN EXPRESS CREDIT CORPORATION
(Registrant)
DATE March 31, 1999 /s/ Vincent P. Lisanke
----------------------------------------------------------
Vincent P. Lisanke
President, Chief Executive Officer
and Director
Pursuant to the requirement of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities on the dates indicated.
DATE March 31, 1999 /s/ Vincent P. Lisanke
----------------------------------------------------------
Vincent P. Lisanke
President, Chief Executive
Officer and Director (principal
executive and principal
accounting officer)
DATE March 31, 1999 /s/ Richard K. Goeltz
----------------------------------------------------------
Richard K. Goeltz
Chairman of the Board
and Director (principal financial officer)
DATE March 31, 1999 /s/ Jay B. Stevelman
-----------------------------------------------------------
Jay B. Stevelman
Treasurer and Director
13
<PAGE>
AMERICAN EXPRESS CREDIT CORPORATION
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
(Item 14 (a))
Page Number
-----------
Financial Statements:
Report of independent auditors F - 2
Consolidated statements of income for each of the
three years ended December 31, 1998, 1997 and 1996 F - 3
Consolidated balance sheets at December 31,
1998 and 1997 F - 4
Consolidated statements of cash flows for each of the
three years ended December 31, 1998, 1997 and 1996 F - 5
Consolidated statements of shareholder's equity for
each of the three years ended December 31,
1998, 1997 and 1996 F - 6
Notes to consolidated financial statements F - 7 to F - 16
Schedule:
II - Valuation and qualifying accounts for
the three years ended December 31, 1998 F - 17
All other schedules are omitted since the required information
is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the consolidated financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American Express Credit Corporation
We have audited the accompanying consolidated balance sheets of
American Express Credit Corporation as of December 31, 1998 and
1997, and the related consolidated statements of income,
shareholder's equity and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14 (a).
These financial statements and schedule are the responsibility of
the management of American Express Credit Corporation. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of American Express Credit Corporation at December 31,
1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
February 4, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(millions)
--------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Revenue earned from purchased
accounts receivable $1,893 $1,756 $1,813
Interest income from affiliates 180 173 160
Interest income from investments 136 130 189
Other income 5 5 4
--------------------------------------------------------------
Total 2,214 2,064 2,166
--------------------------------------------------------------
Expenses
Interest expense - affiliates 164 179 134
Interest expense - other 1,026 946 983
Provision for doubtful accounts, net
of recoveries of $168, $183 and $186 632 584 712
Other expenses 27 29 7
--------------------------------------------------------------
Total 1,849 1,738 1,836
--------------------------------------------------------------
Income before taxes 365 326 330
Income tax provision 128 114 115
--------------------------------------------------------------
Net income $ 237 $ 212 $ 215
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions)
-------------------------------------------------------------------
December 31, 1998 1997
-------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 648 $ 374
Investments 353 218
Accounts receivable 19,241 19,609
Less: reserve for doubtful accounts 597 633
------ ------
18,644 18,976
Loans and deposits with affiliates 3,353 3,150
Deferred charges and other assets 652 335
--------------------------------------------------------------------
Total assets $23,650 $23,053
--------------------------------------------------------------------
Liabilities and shareholder's equity
Short-term debt with affiliates $ 1,261 $ 1,770
Short-term debt - other 16,267 14,812
Current portion of long-term debt 353 4
Long-term debt with affiliates 910 910
Long-term debt - other 2,143 2,354
------ ------
Total debt 20,934 19,850
Due to affiliates 425 1,027
Accrued interest and other liabilities 182 152
--------------------------------------------------------------------
Total liabilities 21,541 21,029
--------------------------------------------------------------------
--------------------------------------------------------------------
Deferred discount revenue 115 117
--------------------------------------------------------------------
Shareholder's equity
Common stock-authorized 3,000,000
shares of $.10 par value; issued
and outstanding 1,504,938 shares 1 1
Capital surplus 161 161
Retained earnings 1,832 1,745
Other comprehensive income, net of tax:
Net unrealized securities gains - -
Foreign currency translation adjustment - -
--------------------------------------------------------------------
Total shareholder's equity 1,994 1,907
--------------------------------------------------------------------
Total liabilities and shareholder's equity $23,650 $23,053
--------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
- ----------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 237 $ 212 $ 215
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for doubtful accounts, net of recoveries 632 584 712
Amortization of deferred underwriting
fees and bond discount/premium 5 - 1
(Decrease) increase in deferred discount revenue (2) 17 (16)
(Increase) decrease in deferred tax assets (28) 43 (11)
Increase in interest receivable and
operating assets (33) (12) (6)
Increase (decrease) in accrued interest
and other liabilities 42 18 (18)
Increase in due to affiliates 52 8 79
- ----------------------------------------------------------------------------
Net cash and cash equivalents provided
by operating activities 905 870 956
- ----------------------------------------------------------------------------
Cash Flows From Investing Activities:
Increase in accounts receivable (1,261) (2,694) (3,194)
Sale of net accounts receivable to an affiliate - 219 2,294
Purchase of participation interest in seller's
interest in accounts receivable from an affiliate (312) (728) (2,178)
Sale of participation interest in seller's
interest in accounts receivable to an affiliate 1,120 95 1,304
Recoveries of accounts receivable
previously written off 168 183 186
Purchase of investments (153) (247) -
Maturity of investments 17 29 -
Increase in loans and deposits due from affiliates (201) (300) -
(Decrease) increase in due to affiliates (949) 192 (57)
- ----------------------------------------------------------------------------
Net cash and cash equivalents used in
investing activities (1,571) (3,251) (1,645)
- ----------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net (decrease) increase in short-term debt with
affiliates with maturities less than ninety days (510) 496 188
Net increase in short-term debt - other
with maturities less than ninety days 795 3,271 4,469
Proceeds from issuance of debt 5,492 8,027 9,684
Redemption of debt (4,687) (9,156) (14,425)
Dividends paid to TRS (150) (150) (150)
- ----------------------------------------------------------------------------
Net cash and cash equivalents provided
by (used in) financing activities 940 2,488 (234)
- ----------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 274 107 (923)
- ----------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 374 267 1,190
- ----------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 648 $ 374 $ 267
- ----------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Years ended December 31, 1998, 1997 and 1996
(millions)
-----------------------------------------------------
Accumulated
Total Other
Shareholder's Common Capital Comprehensive Retained
Equity Stock Surplus Income Earnings
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $1,780 $ 1 $ 161 $ - $1,618
Comprehensive Income:
Net income 215 215
Net unrealized securities
gains/losses - -
Foreign currency
translation adjustments - -
-----
Total comprehensive income 215
Dividends to TRS (150) - - - (150)
----- ----- ----- ----- -----
Balances at December 31, 1996 1,845 1 161 - 1,683
Comprehensive Income:
Net income 212 212
Net unrealized securities
gains/losses - -
Foreign currency
translation adjustments - -
-----
Total comprehensive income 212
Dividends to TRS (150) - - - (150)
----- ----- ----- ----- -----
Balances at December 31, 1997 1,907 1 161 - 1,745
Comprehensive Income:
Net income 237 237
Net unrealized securities
gains/losses - -
Foreign currency
translation adjustments - -
-----
Total comprehensive income 237
Dividends to TRS (150) - - - (150)
----- ---- ----- ----- -----
Balances at December 31, 1998 $1,994 $ 1 $ 161 $ - $1,832
===== ===== ===== ===== =====
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
1. Basis of Presentation
American Express Credit Corporation together with its subsidiaries
("Credco") is a wholly-owned subsidiary of American Express Travel
Related Services Company, Inc. ("TRS"), which is a wholly-owned
subsidiary of American Express Company ("American Express").
American Express Overseas Credit Corporation Limited together with
its subsidiaries ("AEOCC") and Credco Receivables Corp. ("CRC")
are wholly-owned subsidiaries of Credco.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Credco and all its subsidiaries. All significant
intercompany transactions have been eliminated.
Use of Estimates and Assumptions
Credco's financial statements include amounts determined using
estimates and assumptions. For example, estimates and assumptions
are used in determining the reserves related to accounts
receivable. While these estimates are based on the best judgment
of management, actual results could differ from these estimates.
Revenue Earned from Purchased Accounts Receivable
A portion of discount revenue earned on purchases of non-interest-
bearing Cardmember receivables equal to the provision for doubtful
accounts is recognized as revenue at the time of purchase; the
remaining portion is deferred and recorded as revenue ratably over
the period that the receivables are outstanding.
Finance charge income on interest-bearing extended payment plan
receivables is recognized as it is earned. Credco ceases accruing
this income after six contractual payments are past due, or
earlier, if deemed uncollectible. Accruals that cease generally
are not resumed.
Reserve for Doubtful Accounts
The reserve for doubtful accounts is based on historical collection
experience and evaluation of the current status of existing
receivable balances. Credco generally writes off against its
reserve for doubtful accounts the total balance in an account for
which any portion remains unpaid twelve months from the date of
original billing for non-interest-bearing Cardmember receivables
and after six contractual payments are past due for interest-
bearing Cardmember receivables. Accounts are written off earlier
if deemed uncollectible.
Investments
Management determines the appropriate classification of debt
securities at the time of purchase. Debt securities are classified
as held to maturity when Credco has the positive intent and ability
to hold the securities to maturity. Held to maturity securities
are stated at amortized cost.
F-7
<PAGE>
Available for sale securities are stated at fair value, with the
unrealized gains and losses included in shareholder's equity.
Fair Values of Financial Instruments
The fair values of financial instruments are estimates based upon
current market conditions and perceived risks at December 31, 1998
and 1997 and require varying degrees of management judgment. The
fair values of the financial instruments presented may not be
indicative of their future fair values.
The fair values of long-term debt and derivative instruments are
included in the related footnotes. For all other financial
instruments, the carrying amounts in the consolidated balance
sheets approximate the fair values.
Interest Rate Transactions
Credco enters into various interest rate agreements as a means of
managing its interest rate exposure. Interest rates charged on
consumer lending receivables are linked to a floating rate base and
generally reprice monthly. Credco generally enters into interest
rate agreements paying a rate that reprices when the base rate of
the underlying receivables changes. These interest rate agreements
which modify the terms of an underlying debt obligation are
accounted for by recording interest expense using the revised
interest rate with any fees or other payments amortized as yield
adjustments. It is Credco's normal practice not to terminate, sell
or dispose of interest rate agreements or the underlying debt to
which the agreements are designated prior to maturity. In the
event Credco terminates, sells or disposes of an agreement prior to
maturity, the gain or loss would be deferred and recognized as an
adjustment of yield over the remaining life of the underlying debt.
Foreign Currency
Foreign currency assets and liabilities are translated into their
U.S. dollar equivalents based on rates of exchange prevailing at
the end of each year. Revenue and expense accounts are translated
at exchange rates prevailing during the year. Credco enters into
various foreign exchange contracts as a means of managing foreign
exchange exposure.
Cash and Cash Equivalents
Credco has defined cash and cash equivalents as cash and short-term
investments with a maturity of ninety days or less at the time of
purchase. At December 31, 1998 and December 31, 1997, included in
cash and cash equivalents was nil and $100 million, respectively,
of overnight securities purchased to resell.
Accounting Change
In 1998, Credco adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income". Comprehensive
income consists of net income and other comprehensive income; the
latter includes unrealized gains and losses on available for sale
securities and foreign exchange translation adjustments and is
presented in the Consolidated Statements of Shareholder's Equity.
The adoption of SFAS No. 130 had no effect on shareholder's equity.
Prior year financial statements have been reclassified to conform to
the SFAS No. 130 requirements.
F-8
<PAGE>
3. Investments
At December 31, 1998, Credco held $258 million of American Express
Master Trust Class B Certificates. These securities are classified
as held to maturity and are stated at amortized cost. The fair
value of these securities at December 31, 1998 was $267 million.
Available for sale securities are stated at fair value, with the
unrealized gains and losses included in shareholder's equity. At
December 31, 1998, Credco held American Express Credit Account
Master Trust Class C Certificates which were classified as
available for sale. The cost and fair value of these available for
sale securities at December 31, 1998 were $95 million. The
available for sale classification does not mean that Credco
necessarily expects to sell these securities. They are available
to meet possible liquidity needs should there be significant
changes in market interest rates, customer demands or funding
sources and terms.
4. Accounts Receivable
At December 31, 1998 and 1997, respectively, Credco owned $17.1
billion and $17.8 billion of Charge Card receivables and
participation in Charge Card receivables, representing 88.9 percent
and 90.6 percent, respectively, of the total receivables owned. In
connection with TRS' securitization program for U.S. charge
Cardmember receivables, CRC purchases from American Express
Receivables Financing Corporation ("RFC"), a wholly-owned subsidiary
of TRS, a participation interest in RFC's seller's interest in the
receivables owned by the American Express Master Trust (the "Trust"),
which was formed in 1992 to securitize U.S. Charge Cardmember receivables.
In May 1998, the Trust issued an additional $1.0 billion of Class A Fixed
Rate Accounts Receivable Trust Certificates to the public. At that
time, CRC sold to RFC, at face amount less applicable reserve, $1.1
billion of its gross participation interest. The gross
participation interests represent undivided interests in the
receivables conveyed to the Trust by RFC. At December 31, 1998 and
1997, Credco owned approximately $2.9 billion and $3.8 billion,
respectively, of participation interests in receivables owned by
the Trust, representing 14.9 percent and 19.6 percent,
respectively, of its total accounts receivable.
At December 31, 1998 and 1997, Credco owned extended payment
plan receivables totaling $2.1 billion and $1.8 billion, respectively,
including revolving credit loans purchased directly from American
Express Centurion Bank ("Centurion Bank"), a wholly-owned subsidiary
of TRS, representing 11.1 percent and 9.4 percent, respectively, of its
total interests in accounts receivable. The extended payment plan
receivables owned at December 31, 1998 and 1997 include $154
million and $229 million, respectively, of participation interest
owned by CRC. This represents a participation interest in the
seller's interest in revolving credit receivables that have been
conveyed to the American Express Credit Account Master Trust (the
"Master Trust"), formed by Centurion Bank during the second quarter
of 1996 to securitize revolving credit loans.
<TABLE>
<CAPTION>
5. Short-term Debt
At December 31, short-term debt consisted of (millions):
-----------------------------------------------------------------
1998 1997
-----------------------------------------------------------------
<S> <C> <C>
Commercial paper $16,064 $14,438
Borrowings from affiliates 1,261 1,770
Borrowings under lines of credit 68 241
Borrowing agreements with bank trust
departments and others 135 133
-----------------------------------------------------------------
Total short-term debt $17,528 $16,582
-----------------------------------------------------------------
</TABLE>
F-9
<PAGE>
Credco has various facilities available to obtain short-term
credit, including the issuance of commercial paper and agreements
with banks.
Credco had committed credit line facilities totaling $8.2 billion
and $7.3 billion at December 31, 1998 and 1997, respectively.
Credco pays fees to the financial institutions that provide these
credit line facilities. Credco, through AEOCC, had no outstanding
borrowings at December 31, 1998 and $17.4 million of outstanding
borrowings at December 31, 1997, under these committed lines of
credit. The fair value of the unused lines of credit is not
significant at December 31, 1998 and 1997.
At December 31, 1998 and 1997, Credco, through AEOCC, had short-
term borrowings under uncommitted lines of credit totaling $68
million and $241 million, respectively.
Credco's annual weighted average short-term interest rate was 5.62
percent, 5.60 percent and 5.57 percent for the years ended December
31, 1998, 1997 and 1996, respectively. These rates include the
cost of maintaining credit line facilities for the periods and the
impact of interest rate swaps. At December 31, 1998, $450 million
of short-term debt outstanding was modified by interest rate swaps,
resulting in a year-end weighted average effective interest rate of
5.32 percent.
Credco paid $977 million, $940 million and $913 million of interest
on short-term debt obligations in 1998, 1997 and 1996, respectively.
6. Long-term Debt
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------- ----------------------------------
1998 1997
------------------------------------------------------- ----------------------------------
Year-End
Effective
December 31, (millions) Year-End Interest
Notional Stated Rate Rate with Maturity Notional Year-End
Outstanding Amount of on Debt with of Outstanding Amount of Stated Rate
Balance Swaps (a,b) Swaps(b) Swaps Balance Swaps on Debt(b)
--------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Senior notes due
1999-2005 $1,548 $1,550 6.69% 5.45% 1999- $1,548 $1,550 6.69%
Variable rate 2005
debt with
American
Express due
2004 910 - 5.11% - - 910 - 5.67%
Medium-term fixed
rate notes
due 2002 400 400 6.50% 5.40% 2002 400 400 6.50%
Medium-term
variable rate
notes due 2002 399 399 5.27% 5.31% 2002 399 399 5.80%
Exchangeable
notes
due 2003 143 150 1.13% 5.14% 2003 - - -
Other senior
notes due
1999-2017 2 - 7.40% - - 2 - 8.00%
Swiss franc
notes due
1999-2003 5 - 3.87% - - 9 - 3.45%
Net unamortized
bond discount (1) - - - - - - -
--------------------------------------------------------------------------------------------------------
Total long-term
debt $3,406 $2,499 $3,268 $2,349
--------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the floating rate debt issuance, the stated rate was based on
the rate at December 31, 1998; this rate is not an indication of
future interest rates.
(b) Weighted average rates were determined where appropriate.
The above table includes the current portion of long-term debt of
$353 million and $4 million at December 31, 1998 and 1997, respectively.
The book value of variable rate long-term debt that reprices within
a year approximates fair value. The fair value of other long-term
debt is based on quoted market price or discounted cash flow. The
aggregate fair value of long-term debt, including the current
portion outstanding at December 31, 1998 and 1997, was $3.5 billion
and $3.3 billion, respectively.
Aggregate annual maturities of long-term debt for the five years
ending December 31, 2003 are as follows (millions): 1999 - $353,
2000 - $550, 2001 - $550, 2002 - $799, 2003 - $143.
F-10
<PAGE>
Credco paid $209 million in 1998, $192 million in 1997, and $217
million in 1996 of interest on long-term debt obligations.
7. Restrictions as to Dividends and Limitations on Indebtedness
The most restrictive limitation on dividends imposed by the debt
instruments issued by Credco is the requirement that Credco
maintain a minimum consolidated net worth of $50 million. There
are no limitations on the amount of debt that can be issued by
Credco.
8. Derivative Instruments
Credco uses derivative financial instruments for nontrading
purposes to manage its exposure to interest and foreign exchange
rates, financial indices and funding costs.
There are a number of risks associated with derivatives. Market
risk is the possibility that the value of the derivative financial
instrument will change. Credco is not exposed to market risk
related to derivatives held for nontrading purposes beyond that
inherent in cash market transactions. Credco does not enter into
derivative contracts with features that would leverage or multiply
its market risk. Credit risk related to derivative and other off-
balance sheet financial instruments is the possibility that the
counterparty will not fulfill the terms of the contract. It is
monitored through established approval procedures, including
setting concentration limits by counterparty and country, reviewing
credit ratings and requiring collateral where appropriate. A
significant portion of Credco's transactions are with
counterparties rated A or better by nationally recognized credit
rating agencies. Credco also uses master netting agreements, which
allow Credco to settle multiple contracts with a single
counterparty in one net receipt or payment in the event of
counterparty default. At December 31, 1998 and 1997, the aggregate
notional amount of Credco's derivative instruments was $9.5 billion
($360 million with affiliates) and $7.4 billion ($562 million with
affiliates), respectively. Credit risk approximates the fair value
of contracts in a gain position (asset) and totaled $101 million
($1.7 million with affiliates) at December 31, 1998 and $94 million
($3.6 million with an affiliate) at December 31, 1997. The fair
value represents the replacement cost and is determined by market
values, dealer quotes or pricing models.
The following tables detail information regarding Credco's
derivatives (millions):
<TABLE>
<CAPTION>
Notional Carrying Value Fair Value
December 31, 1998 Amount Asset Liability Asset Liability
----------------- ------ ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
Interest rate products $7,505 $ 68 $ 52 $ 83 $ 83
Forward contracts 2,037 12 3 18 4
------ ------ ------ ------ ------
Total $9,542 $ 80 $ 55 $ 101 $ 87
------ ------ ------ ------ ------
Notional Carrying Value Fair Value
December 31, 1997 Amount Asset Liability Asset Liability
----------------- ------ ----- --------- ----- ---------
Interest rate products $5,321 $ 66 $ 36 $ 76 $ 40
Forward contracts 2,069 18 16 18 16
------ ------ ------ ------ ------
Total $7,390 $ 84 $ 52 $ 94 $ 56
------ ------ ------ ------ ------
</TABLE>
F-11
<PAGE>
Interest Rate Products
Credco uses interest rate products to maintain a predetermined mix
of fixed and variable rate debt in order to achieve a desired level of
interest rate exposure to manage funding costs related to its Cardmember
receivables and Cardmember loans. The principal product used is
interest rate swaps, which involve the exchange for a specified
period of time of fixed or floating rate interest payments based on
a notional or contractual amount. In early 1998, Credco purchased
interest rate caps to limit the adverse effect of an interest rate
increase on substantially all Charge Cardmember receivables funding
costs. The majority of the caps matured during 1998. In 1999,
Credco began entering into a series of interest rate swaps to
convert a portion of its funding from floating rate to fixed rate.
Credco enters into currency swaps to convert U.S. dollar
denominated debt into other currencies in order to match foreign
denominated receivables with funding of the same currency and to
achieve a desired level of interest rate exposure. Currency swap
agreements are contracts to exchange currency and interest payments
for a specific period of time.
Interest rates charged on Credco's revolving credit receivables are
linked to a floating rate base and generally reprice each month.
Credco generally enters into interest rate swaps paying rates that
reprice similarly with changes in the base rate of the underlying loans.
As interest rate products manage interest rate exposure, interest
is accrued and reported in accounts receivable and other assets, or
accrued interest and other liabilities, and interest expense, as
appropriate.
Aggregate annual expirations of interest rate swaps are as follows
(notional amount in millions): 1999 - $1,870, 2000 - $1,119, 2001 -
$1,118, 2002 - $1,033, 2003 - $265, 2004 - $100.
The following table details information regarding Credco's interest
rate products* at December 31, 1998 (millions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Notional Primary Variable Weighted Average Interest Rate
Type Amount Rate Index Fixed Floating
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Floating to fixed $2,698 1 month LIBOR 5.56% 5.34%
Fixed to floating $2,407 1 month LIBOR 5.99% 5.02%
Floating to floating $ 400 1 month LIBOR and - 5.09%/5.07%
3 month LIBOR
</TABLE>
*Excludes $2.0 billion of interest rate caps.
Foreign Currency Products
Credco uses foreign currency products to manage transactions
denominated in foreign currencies.
Foreign currency exposures are hedged, where practical and
economical, through foreign currency forward contracts. Foreign
currency forward contracts involve the purchase or sale of a
designated currency at an agreed upon rate for settlement on a
specified date. As Credco is exposed to transaction risk with
regard to receivables denominated in foreign currencies and since
foreign currency forward contracts reduce that
F-12
<PAGE>
exposure, the contracts are accounted for as hedges. These foreign currency
forward contracts are marked to the current spot rate with the gain or
loss recorded in income to offset the transaction gain or loss resulting
from the receivables. The receivable or payable with the counterparty to
the foreign currency forward contracts which result from this process
are reported in other assets or liabilities, as appropriate. The discount
or premium on foreign currency forward contracts is reported in other assets
or liabilities, as appropriate, and amortized to interest expense over the
terms of the contracts.
<TABLE>
<CAPTION>
The following table summarizes Credco's forward contracts by major
currencies as of December 31 (millions):
------------------------------------------------------
1998 1997
------------------------------------------------------
<S> <C> <C>
Canadian Dollar $ 501 $ 486
Pound Sterling 915 538
Australian Dollar 35 269
Hong Kong Dollar 223 179
German Mark 178 258
Other 185 339
------------------------------------------------------
Total forward contracts $2,037 $2,069
------------------------------------------------------
</TABLE>
Foreign currency forward contracts generally mature within one
year. At December 31, 1998, Credco had no significant unhedged
foreign currency exposures.
9. Transactions with Affiliates
In 1998, 1997 and 1996, Credco purchased Cardmember receivables
without recourse from TRS and certain of its subsidiaries totaling
approximately $155 billion, $146 billion and $136 billion,
respectively. Agreements for the purchase of non-interest-bearing
receivables generally provide that Credco purchase such receivables
at a discount rate which yields earnings to Credco equal to at
least 1.25 times its fixed charges on an annual basis.
The agreements require TRS, at its expense, to perform accounting,
clerical and other services necessary to bill and collect all
Cardmember receivables owned by Credco. Since settlements under
the agreements occur monthly, an amount due from, or payable to,
such affiliates may arise at the end of the month.
In 1996, as part of TRS' asset securitization program for U.S.
Charge Cardmember receivables, Credco sold back to TRS
approximately $2.2 billion of gross receivables arising under
specified U.S. Charge Cardmember accounts. TRS sold these
receivables, together with the right to receive subsequent
receivables arising from such Cardmember accounts, to its
subsidiary, RFC. RFC, in turn, conveyed them to the Trust. This
resulted in an increase in the gross participation interest in
RFC's seller's interest in the securitized receivables owned by
CRC, for which CRC paid $2.2 billion. In September 1996, the Trust
issued $1.25 billion of receivables trust certificates in two series.
At the time of such issuance, CRC sold, at face amount less applicable
reserve, $1.3 billion of its gross participation interest in RFC's seller's
interest back to RFC.
In May 1998, the Trust issued an additional $1.0 billion of Class A
Fixed Rate Accounts Receivable Trust Certificates. At the time of
such issuance, CRC sold back to RFC at face amount less applicable
reserve, $1.1 billion of CRC's gross participation in RFC's
seller's interest in the receivables owned by the Trust.
In September 1998 and July 1997, $300 million and $500 million,
respectively, Class A Fixed Rate Accounts
F-13
<PAGE>
Receivable Trust Certificates matured from the Charge Card securitization
portfolio which increased the participation interests owned by CRC.
CRC owns a participation interest in the seller's interest in charge
Cardmember receivables that have been conveyed to the Trust.
At December 31, 1998 and 1997, Credco owned approximately $2.9
billion and $3.8 billion, respectively, of participation interests
in receivables owned by the Trust, representing 14.9 percent and
19.6 percent, respectively, of its total accounts receivable.
The extended payment plan receivables owned at December 31, 1998
and 1997 include $154 million and $229 million, respectively, of
participation interest owned by CRC. This represents a
participation interest in the seller's interest in revolving credit
receivables that have been conveyed to the Master Trust.
Other transactions with American Express and its subsidiaries for
the years ended December 31 were as follows (millions):
<TABLE>
<CAPTION>
----------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at December 31 $ 4 $ 6 $ 2
Maximum month-end level of cash and
cash equivalents during the year 17 9 9
Secured loans to American Express
Centurion Bank at December 31 2,300 2,300 2,000
Other loans and deposits to
affiliates at December 31 1,053 850 850
Maximum month-end level of loans and
deposits to affiliates during the year 3,353 3,150 2,850
Borrowings at December 31 2,171 2,680 2,185
Maximum month-end level of
borrowings during the year 5,819 4,588 4,024
Interest income 180 173 160
Other income 5 5 4
Interest expense 164 179 134
----------------------------------------------------------------
</TABLE>
At both December 31, 1998 and 1997, Credco held $2.3 billion of
variable rate secured loans to Centurion Bank and $2.0 billion at
December 31, 1996. At December 31, 1998, 1997 and 1996, Credco also
held variable rate loans to American Express due in 2004 of $850
million. The loans to Centurion Bank are secured by certain
interest-bearing extended payment plan receivables owned by
Centurion Bank. Interest income from these variable rate loans was
$180 million, $173 million, and $160 million for 1998, 1997 and
1996, respectively.
10. Income Taxes
The taxable income of Credco is included in the consolidated U.S.
federal income tax return of American Express. Under an agreement
with TRS, taxes are recognized on a stand-alone basis. If benefits
for all future tax deductions, foreign tax credits and net
operating losses cannot be recognized on a stand-alone basis, such
benefits are then recognized based upon a share, derived by
formula, of those deductions and credits that are recognizable on a
TRS consolidated reporting basis.
Deferred income tax assets and liabilities result from the
recognition of temporary differences. Temporary
F-14
<PAGE>
differences are differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements
that will result in differences between income for tax purposes and
income for financial statement purposes in future years. The current
and deferred components of the provision (benefit) for income taxes
consist of the following (millions):
<TABLE>
<CAPTION>
-------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C>
Current $ 156 $ 71 $ 126
Deferred (28) 43 (11)
-------------------------------------------------------------
Total income tax provision $ 128 $ 114 $ 115
-------------------------------------------------------------
</TABLE>
Credco's net deferred tax assets, which are included in other
assets, consisted of the following (millions):
<TABLE>
<CAPTION>
-------------------------------------------
1998 1997
-------------------------------------------
<S> <C> <C>
Deferred tax assets $ 203 $ 182
Deferred tax liabilities (1) (8)
-------------------------------------------
Net deferred tax assets $ 202 $ 174
-------------------------------------------
</TABLE>
Deferred tax assets for 1998 and 1997 consists primarily of reserve
for loan losses of $201 million and $182 million, respectively.
Deferred tax liabilities for 1998 and 1997 consists primarily of
foreign exchange contracts of $1 million and $7 million,
respectively. At December 31, 1998 and 1997, no valuation
allowances were required.
Included in due to affiliates is the current federal tax payable
to TRS of $30 million and a receivable of $29 million at December
31, 1998 and 1997, respectively.
Income taxes paid to TRS during 1998, 1997 and 1996 were $95
million, $73 million and $155 million, respectively.
The U.S. statutory tax rate and effective tax rate for 1998, 1997
and 1996 was approximately 35 percent.
F-15
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C>
Revenues
United States $1,857 $1,723 $1,855
International 357 341 311
-------------------------------------------------------------
Consolidated $2,214 $2,064 $2,166
-------------------------------------------------------------
Income before taxes
United States $ 316 $ 286 $ 275
International 49 40 55
-------------------------------------------------------------
Consolidated $ 365 $ 326 $ 330
-------------------------------------------------------------
12. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data is as follows (millions):
------------------------------------------------------------
Quarter Ended 12/31 9/30 6/30 3/31
------------------------------------------------------------
1998
------------------------------------------------------------
Revenues $548 $545 $581 $540
Income before taxes 98 87 94 86
Net income 63 57 61 56
------------------------------------------------------------
1997
------------------------------------------------------------
Revenues $535 $542 $516 $471
Income before taxes 68 86 81 91
Net income 44 56 53 59
------------------------------------------------------------
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EXPRESS CREDIT CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(millions)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Reserve for doubtful accounts:
Balance at beginning of year $633 $638 $624
Additions:
Provision for doubtful accounts
charged to income (1) 800 767 898
Other credits (2) 48 53 94
Foreign translation (1) (5) 2
Deductions:
Accounts written off 815 798 816
Other charges (3) 68 22 164
---- ---- ----
Balance at end of year $597 $633 $638
==== ==== ====
Reserve for doubtful accounts
as a percentage of Cardmember
receivables owned at year end 3.10% 3.23% 3.68%
===== ===== =====
</TABLE>
(1) Before recoveries on accounts previously written off of (millions):
1998-$168, 1997-$183 and 1996-$186.
(2) Reserve balances applicable to new groups of Cardmember
receivables purchased from TRS and certain of its subsidiaries
and participation interests purchased from affiliates.
(3) Reserve balances applicable to certain groups of Cardmember
receivables and participation interests sold to affiliates.
F-17
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit No. Description
3 (a) Registrant's Certificate of Incorporated by reference to
Incorporation, as amended Exhibit 3(a) to Registrant's
Registration Statement on
Form S-1 dated February 25, 1972
(File No. 2-43170).
3 (b) Registrant's By-Laws, Incorporated by reference to
amended and restated as of Exhibit 3 (b) to Registrant's
November 24, 1980 Annual Report on Form 10-K
(Commission File No. 1-6908)
for the year ended
December 31, 1985.
4 (a) Registrant's Debt Securities Incorporated by reference to
Indenture dated as of Exhibit 4 (s) to Registrant's
September 1, 1987 Registration Statement on
Form S-3 dated September 2, 1987
(File No. 33-16874).
4 (b) Form of Note with optional Incorporated by reference to
redemption provisions Exhibit 4 (t) to Registrant's
Registration Statement on
Form S-3 dated September 2, 1987
(File No. 33-16874).
4 (c) Form of Debenture with Incorporated by reference to
optional redemption and Exhibit 4 (u) to Registrant's
sinking fund provisions Registration Statement on
Form S-3 dated September 2, 1987
(File No. 33-16874).
<PAGE>
4 (d) Form of Original Issue Incorporated by reference to
Discount Note with optional Exhibit 4 (v) to Registrant's
redemption provision Registration Statement on
Form S-3 dated September 2, 1987
(File No. 33-16874).
4 (e) Form of Zero Coupon Note Incorporated by reference to
with optional redemption Exhibit 4 (w) to Registrant's
provisions Registration Statement on
Form S-3 dated September 2, 1987
(File No. 33-16874).
4 (f) Form of Variable Rate Note Incorporated by reference to
with optional redemption Exhibit 4 (x) to Registrant's
and repayment provisions Registration Statement on
Form S-3 dated September 2, 1987
(File No. 33-16874).
4 (g) Form of Extendible Note Incorporated by reference to
with optional redemption Exhibit 4 (y) to Registrant's
and repayment provisions Registration Statement on
Form S-3 dated September 2, 1987
(File No. 33-16874).
4 (h) Form of Fixed Rate Medium- Incorporated by reference to
Term Note Exhibit 4 (z) to Registrant's
Registration Statement on
Form S-3 dated September 2, 1987
(File No. 33-16874).
4 (i) Form of Floating Rate Incorporated by reference to
Medium-Term Note Exhibit 4 (aa) to Registrant's
Registration Statement on
Form S-3 dated September 2, 1987
(File No. 33-16874).
<PAGE>
4 (j) Form of Warrant Agreement Incorporated by reference to
Exhibit 4 (bb) to Registrant's
Registration Statement on
Form S-3 dated September 2, 1987
(File No. 33-16874).
4 (k) Form of Supplemental Indenture Incorporated by reference to
Exhibit 4 (cc) to Registrant's
Registration Statement on
Form S-3 dated September 2, 1987
(File No. 33-16874).
4 (l) Terms and conditions of Incorporated by reference to
debt instruments to be issued Exhibit 4(l) to Registrant's
outside the U.S. Annual Report on Form 10-K
(Commission File No. 1-6908)
for the year ended
December 31, 1997.
4 (m) The Registrant hereby
agrees to furnish the
Commission, upon request,
with copies of the
instruments defining the
rights of holders of each
issue of long-term debt of
the Registrant for which
the total amount of
securities authorized
thereunder does not exceed
10% of the total assets of
the Registrant
10 (a) Receivables Agreement dated Incorporated by reference to
as of January 1, 1983 between Exhibit 10 (b) to Registrant's
the Registrant and American Annual Report on Form 10-K
Express Travel Related Commission File No. 1-6908)
Services Company, Inc. for the year ended
December 31, 1987.
10 (b) Secured Loan Agreement dated Incorporated by reference to
as of June 30, 1988 between Exhibit 10 (b) to Registrant's
the Registrant and American Annual Report on Form 10-K
Express Centurion Bank (Commission File No. 1-6908)
for the year ended
December 31, 1988.
<PAGE>
10 (c) Participation Agreement Incorporated by reference to
dated as of August 3, 1992 Exhibit 10 (c) to Registrant's
between American Express Annual Report on Form 10-K
Receivables Financing (Commission File No. 1-6908)
Corporation and Credco for the year ended
Receivables Corp. December 31, 1992.
12.1 Computation in Support of Electronically
Ratio of Earnings to Fixed filed herewith.
Charges of American
Express Credit Corporation
12.2 Computation in Support of Electronically
Ratio of Earnings to Fixed filed herewith.
Charges of American
Express Company
23 Consent of Independent Electronically
Auditors filed herewith.
27 Financial Data Schedule Electronically
filed herewith.
99 Pages 22 through 23 of Electronically
American Express Company's filed herewith.
1998 Annual Report to
Shareholders, discussing
Year 2000
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12.1
AMERICAN EXPRESS CREDIT CORPORATION
COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
(millions)
Years Ended December 31,
-----------------------
----------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Net Income $ 237 $ 212 $ 215 $ 197 $139
Income tax provision 128 114 115 105 75
Interest expense 1,190 1,125 1,117 1,054 736
------ ------ ------ ------ -----
Total earnings $1,555 $1,451 $1,447 $1,356 $950
====== ====== ====== ====== =====
Fixed charges-
interest expense $1,190 $1,125 $1,117 $1,054 $736
====== ====== ====== ====== =====
Ratio of earnings to
fixed charges 1.31 1.29 1.30 1.29 1.29
</TABLE>
Note: Gross rentals on long-term leases were minimal in
amount in each of the periods shown.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12.2
AMERICAN EXPRESS COMPANY
COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Years Ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings:
Pretax income from
continuing operations $2,925 $2,750 $2,664 $2,183 $1,891
Interest expense 2,224 2,122 2,160 2,343 1,925
Other adjustments 124 127 139 95 103
------ ------ ------ ------ ------
Total earnings(a) $5,273 $4,999 $4,963 $4,621 $3,919
------ ------ ------ ------ ------
Fixed charges:
Interest expense $2,224 $2,122 $2,160 $2,343 $1,925
Other adjustments 129 129 130 135 142
------ ------ ------ ------ ------
Total fixed charges(b) $2,353 $2,251 $2,290 $2,478 $2,067
------ ------ ------ ------ ------
Ratio of earnings to
fixed charges (a/b) 2.24 2.22 2.17 1.86 1.90
</TABLE>
Included in interest expense in the above computation is interest
expense related to the international banking operations of American
Express Company ("American Express") and Travel Related Services'
Cardmember lending activities, which is netted against interest and
dividends and Cardmember lending net finance charge revenue,
respectively, in the Consolidated Statements of Income of American
Express Company.
For purposes of the "earnings" computation, other adjustments
include adding the amortization of capitalized interest, the net
loss of affiliates accounted for at equity whose debt is not
guaranteed by American Express, the minority interest in the
earnings of majority-owned subsidiaries with fixed charges, and the
interest component of rental expense and subtracting undistributed
net income of affiliates accounted for at equity.
For purposes of the "fixed charges" computation, other adjustments
include capitalized interest costs and the interest component of
rental expense.
On May 31, 1994, American Express completed the spin-off of Lehman
Brothers through a dividend to American Express common
shareholders. Accordingly, Lehman Brothers' results are reported
as a discontinued operation and are excluded from the above
computation. In the fourth quarter of 1995, American Express' ownership
in First Data Corporation ("FDC") was reduced to approximately 10
percent as a result of shares issued by FDC in connection with a merger
transaction. Accordingly, as of December 31, 1995, American
Express' investment in FDC is accounted for as Investments -
Available for Sale.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements on Form S-3 (Registration Statement Nos. 33-
47497, 33-62797, 333-38199) of American Express Credit
Corporation and in the related Prospecti of our report dated
February 4, 1999, with respect to the consolidated financial
statements and schedule of American Express Credit Corporation
included in this Annual Report on Form 10-K for the year ended
December 31, 1998.
/s/ Ernst & Young LLP
New York, New York
March 26, 1999
Exhibit 99
PAGES 22 THROUGH 23 OF
AMERICAN EXPRESS COMPANY'S
1998 ANNUAL REPORT TO
SHAREHOLDERS, DISCUSSING
YEAR 2000
YEAR 2000
The Year 2000 (Y2K) issue is the result of computer programs having been written
using two digits rather than four to define a year. Some programs may recognize
a date using "00" as the year 1900 rather than 2000. This misinterpretation
could result in the failure of major systems or miscalculations, which could
have a material impact on the Company and its businesses or subsidiaries through
business interruption or shutdown, financial loss, reputational damage and legal
liability to third parties. The Company began addressing the Y2K issue in 1995
and has established a plan for resolution, which involves the remediation,
decommissioning and replacement of relevant systems, including mainframe,
mid-range and desktop computers, application software, operating systems,
systems software, date back-up archival and retrieval services, telephone and
other communications systems, and hardware peripherals and facilities dependent
on embedded technology. As a part of our plan, we have generally followed and
utilized the specific policies and guidelines established by the Federal
Financial Institutions Examination Council, as well as other U.S. and
international regulatory agencies. Additionally, we continue to participate in
Y2K related industry consortia sponsored by various partners and suppliers.
Progress is reviewed regularly with the Company's senior management and Board of
Directors.
Our Y2K compliance effort related to information technology (IT) systems is
divided into two initiatives. The first, which is the much larger initiative, is
known internally as "Millenniax," and relates to mainframe and other
technological systems maintained by the American Express Technologies
organization (AET). The second, known as "Business T," relates to the
technological assets that are owned, managed or maintained by the Company's
individual business units. Business T also encompasses the remediation of non-IT
systems. These initiatives involve a substantial number of employees and
external consultants. This multiple sourcing approach is intended to mitigate
the risk of becoming dependent on any one vendor or resource. While the vast
majority of our systems that require modification are being remediated, in some
cases we have chosen to migrate to new applications that are already Y2K
compliant.
The Company's plans for remediation with respect to Millenniax and Business
T include the following program phases: (i) employee awareness and mobilization,
(ii) inventory collection and assessment, (iii) impact analysis, (iv)
remediation/decommission, (v) testing and (vi) implementation. As part of the
first three phases, we have identified the Company's mission-critical systems
for purposes of prioritization. The Company's goals are to complete testing of
critical systems by early 1999, and to continue compliance efforts, including
but not limited to, the testing of systems on an integrated basis and
independent validation of such testing,
22
<PAGE>
through 1999.* We are currently on schedule to meet these goals. With respect to
systems maintained by the Company, the first three phases referred to above have
been substantially completed for both Millenniax and Business T. In addition,
remediation of critical systems is substantially complete. As of December 31,
1998, for Millenniax, the remediation/decommission, testing and implementation
phases for critical and non-critical systems in total are 82%, 75% and 60%
complete, respectively. For Business T, such phases are 85%, 70% and 69%
complete, respectively. Certain critical systems have already been made Y2K
compliant, such as the Worldwide Credit Authorization System, and we have
completed testing of the global point of sale infrastructure. As a result, we
have begun issuing Year 2000 dated charge and credit cards.
Our most commonly used methodology for remediation is the sliding window.
Once an application/system has been remediated, we apply specific types of
tests, such as stress, regression, unit, future date and baseline to ensure that
the remediation process has achieved Y2K compliance while maintaining the
fundamental data processing integrity of the particular system. To assist with
remediation and testing, we are using various standardized tools obtained from a
variety of vendors.
The Company's cumulative costs since inception of the Y2K initiatives were
$383 million through December 31, 1998 and are estimated to be in the range of
$135-$160 million for the remainder through 2000.* These include both
remediation costs and costs related to replacements that were or will be
required as a result of Y2K. These costs, which are expensed as incurred, relate
to both Millenniax and Business T, and have not had, nor are they expected to
have, a material adverse impact on the Company's results of operations or
financial condition.* Costs related to Millenniax, which represent most of the
total Y2K costs of the Company, are managed by and included in the Corporate and
Other segment; costs related to Business T are included in the business
segments. Y2K costs related to Millenniax represent 14%, 6% and 1% of the AET
budget for the years 1998, 1999 and 2000, respectively. The Company has not
deferred other critical technology projects or investment spending as a result
of Y2K. However, because the Company must continually prioritize the allocation
of finite financial and human resources, certain non-critical spending
initiatives have been deferred.
The Company's major businesses are heavily dependent upon internal computer
systems, and all have significant interaction with systems of third parties,
both domestically and internationally. The Company is working with key external
parties, including merchants, clients, counterparties, vendors, exchanges,
utilities, suppliers, agents and regulatory agencies to mitigate the potential
risks to us of Y2K. The failure of external parties to resolve their own Y2K
issues in a timely manner could result in a material financial risk to the
Company. As part of our overall compliance program, the Company is actively
communicating with third parties through face-to-face meetings and
correspondence, on an ongoing basis, to ascertain their state of readiness.
Although numerous third parties have indicated to us in writing that they are
addressing their Y2K issues on a timely basis, the readiness of third parties
overall varies across the spectrum. Because the Company's Y2K compliance is
dependent on key third parties being compliant on a timely basis, there can be
no assurances that the Company's efforts alone will resolve all Y2K issues.
At this point, the Company is in the process of performing an assessment of
reasonably likely Y2K systems failures and related consequences. The Company is
also preparing specific Y2K contingency plans for all key American Express
business units to mitigate the potential impact of such failures. This effort is
a full-scale initiative that includes both internal and external experts under
the guidance of a Company-wide steering committee. Our contingency plans, which
will be based in part on an assessment of the magnitude and probability of
potential risks, will primarily focus on proactive steps to prevent Y2K failures
from occurring, or if they should occur, to detect them quickly, minimize their
impact and expedite their repair. The Y2K contingency plans will supplement
disaster recovery and business continuity plans already in place, and are
expected to include measures such as selecting alternative suppliers and
channels of distribution, and developing our own technology infrastructure in
lieu of those provided by third parties. Development of the Y2K contingency
plans is expected to be substantially complete by the end of the first quarter
of 1999, and will continue to be refined throughout 1999 as additional
information related to our exposures is gathered.*
*Statements in this Y2K discussion marked with an asterisk are forward-
looking statements which are subject to risks and uncertainties. Important
factors that could cause results to differ materially from these forward-looking
statements include, among other things, the ability of the Company to
successfully identify systems containing two-digit codes, the nature and amount
of programming required to fix the affected systems, the costs of labor and
consultants related to such efforts, the continued availability of such
resources, and the ability of third parties that interface with the Company to
successfully address their Y2K issues.
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Credco's Condensed Consolidated Balance Sheet at December 31, 1998 and
Condensed Consolidated Statement of Income for the twelve months ended
December 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 648
<SECURITIES> 353
<RECEIVABLES> 19,241
<ALLOWANCES> 597
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,650
<CURRENT-LIABILITIES> 0
<BONDS> 20,934
0
0
<COMMON> 1
<OTHER-SE> 1,993
<TOTAL-LIABILITY-AND-EQUITY> 23,650
<SALES> 0
<TOTAL-REVENUES> 2,214
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 27
<LOSS-PROVISION> 632
<INTEREST-EXPENSE> 1,190
<INCOME-PRETAX> 365
<INCOME-TAX> 128
<INCOME-CONTINUING> 237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 237
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
