Annual Report (Form 10-K), fiscal year 1994

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 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 certain related extended payment plan receivables, and in designated currencies outside the United States. Credco also purchases certain receivables arising from the use of the Optima sm Card. The American Express Card and the Optima Card are referred to herein as the "Card".
American Express Card Business
The Card is issued by TRS. Cards are currently issued in 35 currencies. The Card, which is issued to individuals for their personal account or through a corporate account established by their employer for its business purposes, permits Cardmembers to charge purchases of goods and services in the United States and in most countries around the world at establishments that have agreed to accept the Card. TRS accepts from each participating establishment the charges arising from Cardmember purchases at a discount that varies with the type of participating establishment, the charge volume, the timing and method of payment to the establishment, the method of submission of charges and, in certain instances, the average charge amount and the amount of information provided.
Except in the case of the Optima Card, the Card is primarily designed for use as a method of payment and not as a means of financing purchases of goods and services and carries no pre-set spending limit. Charges are approved based on a Cardmember's past spending and payment patterns, credit history and personal resources. Except in the case of the Optima Card and certain extended payment plans, payment of the full amount billed each month is due from the Cardmember upon receipt of the bill, and no finance charges are assessed. Card accounts that are past due by a given number of days are subject, in most cases, to a delinquency assessment.
The Optima Card is a revolving credit card which is marketed to individuals in the United States and several other countries.
The American Express Card and consumer lending businesses are subject to extensive regulation in the United States under a number of federal laws and regulations. Federal legislation regulates abusive debt collection practices. In addition, a number of states and foreign countries have similar consumer credit protection and disclosure laws. These laws and regulations have not had, and are not expected to have, a material adverse effect on the 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 Cardmember receivables at face amount less a specified discount agreed upon from time to time and interest-bearing 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, 1994 and 1993, extended payment plan receivables owned by Credco totaled $1.5 billion and $1.1 billion respectively, representing 10.4 percent and 8.8 percent, respectively, of all 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 and non- interest-bearing deferred merchandise receivables.
As part of TRS's asset securitization program, Credco purchases participation interests in securitized receivables. See note 3 in "Notes to Consolidated Financial Statements" appearing herein.
The Card issuers, at their expense and as agents for Credco, perform accounting, clerical and other services necessary to bill and collect all Cardmember receivables owned by Credco. The Receivables Agreements provide that, without prior written consent of Credco, the credit standards used to determine whether a Card is to be issued to an applicant may not be materially reduced and that the policy as to the cancellation of Cards for credit reasons may not be materially liberalized.
The Receivables Agreements may be terminated at any time by the parties thereto. 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.
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 the receivables owned by Credco at the end of such years (millions):
Volume of Cardmember Cardmember Receivables Owned Receivables Purchased at December 31,
Year Domestic Foreign Total Domestic Foreign Total ---- -------- ------- -------- -------- ------- ------- 1994 $83,851 $25,639 $109,490 $11,273 $2,747 $14,020 1993 80,202 14,635 94,837 10,758 2,210 12,968 1992 81,311 13,041 94,352 10,412 1,287 11,699 1991 80,844 18,934 99,778 10,581 1,639 12,220 1990 87,323 16,117 103,440 11,278 1,790 13,068
TRS's asset securitization program disclosed above reduced the volume of domestic Cardmember receivables purchased and the amount owned by Credco at December 31, 1994, 1993 and 1992.
In July 1993, Credco began purchasing certain foreign currency Cardmember receivables which had been sold to an affiliate during the period from December 1991 through June 1993. In December 1993, Credco repurchased participation interests in a portion of its foreign receivables which had previously been sold to an affiliate during the period from December 1991 through November 1993. These transactions increased the volume of foreign Cardmember receivables purchased and the amount owned by Credco from December 31, 1993.
The average life of Cardmember receivables owned by Credco for each of the five years ending December 31, 1994 (based upon the ratio of the average amount of both billed and unbilled receivables owned by Credco at the end of each month during the years indicated to the volume of Cardmember receivables purchased by Credco, net of Cardmember receivables sold to affiliates) was 43 days.
The following table shows the aging of billed, non-interest-bearing Cardmember receivables:
December 31, 1994 1993 ------------------------------------------------------------------- Current 78.4% 80.5% 30 to 59 days 15.8 14.0 60 to 89 days 2.4 2.0 90 days and over 3.4 3.5
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 Cardmember receivables and after six contractual payments are past due for interest-bearing Cardmember receivables. Accounts are written off earlier if deemed uncollectible.
The following table sets forth Credco's write-offs, net of recoveries for the year, expressed as a percentage of the volume of Cardmember receivables purchased by Credco, net of Cardmember receivables sold to affiliates, in each of the years indicated:
Year --------------------------------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- .41% .57% .70% .81% .70%
Sources of Funds
Credco's business is financed by short-term borrowings consisting principally of commercial paper, borrowings under bank lines of credit and issuances of medium and long-term debt, as well as through operations. The weighted average interest costs on an annual basis of all borrowings, after giving effect to commitment fees under lines of credit and the impact of interest rate swaps, during the following years were:
Weighted Average Year Interest Cost ---- ------------- 1994 5.06% 1993 4.61 1992 5.80 1991 7.54 1990 8.85
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, 1994 was $2.7 billion. At December 31, 1994, the amount borrowed was $2.0 billion. See notes 4 and 5 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, 7 and 10 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 31,1994, Credco had 51 employees.
Item 2.



Item 2. PROPERTIES.
Credco neither owns nor leases any material physical properties.
Item 3.

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.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction J(2)(c) to Form 10-K.
PART II Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON STOCK 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 $100 million and $125 million to TRS in December, 1994 and 1993, respectively.
For information about limitations on Credco's ability to pay dividends, see note 6 in "Notes to Consolidated Financial Statements" appearing herein.
Item 6.

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, 1994. 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (dollars in millions) Income Statement Data
Revenues 1,401 1,282 1,605 2,070 2,131
Interest expense 736 599 728 946 1,022
Provision for doubtful accounts, net of recoveries 443 475 661 855 811
Income tax provision 75 64 70 87 99
Extraordinary charge net of taxes - 22 - - -
Net income 139 115 138 174 191
Balance Sheet Data
Accounts receivable 14,020 12,968 11,699 12,220 13,068
Reserve for doubtful accounts (498) (542) (603) (731) (719)
Total assets 16,868 14,943 13,631 14,127 14,222
Short-term debt 11,525 9,738 7,581 7,918 7,450
Current portion of long-term debt 405 692 969 768 823
Long-term debt 2,282 1,776 2,303 3,136 3,403
Shareholder's equity 1,733 1,662 1,672 1,784 1,610
Cash Dividends 100 125 250 - -
Item 7.

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, participation interests in charge card receivables and extended payment plan receivables purchased without recourse from TRS throughout the world. At December 31, 1994 and 1993, respectively, Credco owned $12.6 billion and $11.8 billion of charge card receivables and participations in charge card receivables, representing 89.6 percent and 91.2 percent of the total receivables owned, and $1.5 billion and $1.1 billion of extended payment plan receivables, representing 10.4 percent and 8.8 percent of the total receivables owned.
At December 31, 1994 and 1993, $2 billion of variable rate loans made to American Express Centurion Bank ("Centurion Bank") were outstanding, which are secured by Optima receivables owned by Centurion Bank. 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 $10.0 billion for 1994 and $8.7 billion for 1993.
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. At December 31, 1994 and 1993, Credco, through its wholly-owned subsidiary, American Express Overseas Credit Corporation Limited ("AEOCC"), had outstanding borrowings of $42 million and $58 million, respectively, under these committed lines of credit. In addition, Credco, through AEOCC, had short-term borrowings under uncommitted lines of credit totaling $150 million and $65 million at December 31, 1994 and 1993, respectively.
In May 1994, Credco issued a $910 million variable rate bond at current interest rates to American Express due June 1, 2004, as part of a redeployment of corporate assets by American Express. In July 1994 and December 1994, Credco purchased $300 million and $350 million, respectively, of variable rate bonds at current interest rates from American Express due July 15, 2004. At December 31, 1994, these amounts were included in long-term debt and loans and deposits with affiliates, respectively. During 1994, 1993 and 1992, Credco's average long-term debt outstanding was $2.6 billion, $2.8 billion and $3.7 billion, respectively. At December 31, 1994, Credco had $810 million of medium and long-term debt which may be issued under shelf registrations filed with the Securities and Exchange Commission.
Credco paid dividends to TRS of $100 million and $125 million in December, 1994 and 1993, respectively.
Results of Operations
Credco purchases Cardmember receivables without recourse from TRS. Non- interest-bearing Cardmember receivables are purchased at face amount less a specified discount agreed upon from time to time, and interest-bearing Cardmember receivables are generally purchased at face amount. Non- interest-bearing receivables are purchased under Receivables Agreements that generally provide that the discount rate shall not be lower than a rate that yields earnings of at least 1.25 times fixed charges on an annual basis. The ratio of earnings to fixed charges was 1.29, 1.34 and 1.29 in 1994, 1993 and 1992, respectively. The ratio of earnings to fixed charges in 1993 calculated in accordance with the Receivables Agreements after the impact of the extraordinary charge, resulting from the early retirement of debt, was 1.28. The Receivables Agreements also provide that consideration will be given from time to time to revising the discount rate applicable to purchases of new receivables to reflect changes in money market interest rates or significant changes in the collectibility of receivables. Pretax income depends primarily on the volume of Cardmember receivables purchased, the discount rates applicable thereto, the relationship of total discount to Credco's interest expense and the collectibility of the receivables purchased. The average life of Cardmember receivables was 43 days for each of the years ended December 31, 1994, 1993 and 1992.
The following is an analysis of the increase (decrease) in key revenue and expense accounts (millions): --------------------------------------------------------------------------- 1994 1993 1992 --------------------------------------------------------------------------- Revenue earned from purchased accounts receivable-changes attributable to: Volume of receivables purchased $ 186 $ 24 $ (89) Discount rate (112) (334) (333) --------------------------------------------------------------------------- Total $ 74 $(310) $(422) --------------------------------------------------------------------------- Interest income from affiliates-changes attributable to: Average loans $ 3 $ (7) $ 19 Interest rates 28 (14) (51) --------------------------------------------------------------------------- Total $ 31 $ (21) $ (32) --------------------------------------------------------------------------- Interest income from investments-changes attributable to: Average investments $ (8) $ 14 $ 34 Interest rates 21 (11) (40) --------------------------------------------------------------------------- Total $ 13 $ 3 $ (6) --------------------------------------------------------------------------- Interest expense-changes attributable to: Average debt $ 73 $ 24 $ 1 Interest rates 64 (153) (219) --------------------------------------------------------------------------- Total $ 137 $(129) $(218) --------------------------------------------------------------------------- Provision for doubtful accounts-changes attributable to: Volume of receivables purchased $ 104 $ 9 $ (57) Provision rates and volume of recoveries (136) (195) (137) --------------------------------------------------------------------------- Total $ (32) $(186) $(194) ---------------------------------------------------------------------------
Item 8.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
1. Financial Statements.
See "Index to Financial Statements" at page hereof.
2. Supplementary Financial Information.
(a) Selected quarterly financial data. See note 11 in "Notes to Consolidated Financial Statements" appearing herein.
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10.



Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to General Instruction J(2)(c) to Form 10-K.
Item 11.

Item 11. EXECUTIVE COMPENSATION.
Omitted pursuant to General Instruction J(2)(c) to Form 10-K.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted pursuant to General Instruction J(2)(c) to Form 10-K.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to General Instruction J(2)(c) to Form 10-K.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements: See "Index to Financial Statements" at page hereof.
2. Financial Statement Schedule: See "Index to Financial Statements" at page hereof.
3. Exhibits: See "Exhibit Index" hereof.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN EXPRESS CREDIT CORPORATION (Registrant)
DATE March 30, 1995 /s/ Vincent P. Lisanke -------------- ------------------------------- Vincent P. Lisanke President and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
DATE March 30, 1995 /s/ Vincent P. Lisanke -------------- -------------------------------- Vincent P. Lisanke President, Chief Executive Officer and Director (principal executive and principal accounting officer)
DATE March 30, 1995 /s/ Walter S. Berman -------------- -------------------------------- Walter S. Berman Chairman of the Board and Director (principal financial officer)
DATE March 30, 1995 /s/ Michael P. Monaco -------------- -------------------------------- Michael P. Monaco Director
AMERICAN EXPRESS CREDIT CORPORATION
COVERED BY REPORT OF INDEPENDENT AUDITORS
(Item 14(a))
Page Number ----------------------- Financial Statements
Report of independent auditors............... F - 2
Consolidated statements of income for the three years ended December 31, 1994 ......... F - 3
Consolidated balance sheets at December 31, 1994 and 1993 ............................... F - 4
Consolidated statements of cash flows for the three years ended December 31, 1994...... F - 5
Consolidated statements of shareholder's equity for the three years ended December 31, 1994 F - 6
Notes to consolidated financial statements .. F - 7 to F - 15
Schedule:
II - Valuation and qualifying accounts for the years ended December 31, 1994, 1993 and 1992 ......................... F - 16
All other schedules are omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto.
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, 1994 and 1993, 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, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of American Express Credit Corporation's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Express Credit Corporation at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, 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.
Ernst & Young LLP
New York, New York February 2, 1995
AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED STATEMENTS OF INCOME (millions)
------------------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 -------------------------------------------------------------------------
Revenues
Revenue earned from purchased accounts receivable $1,213 $1,139 $1,449 Interest income from affiliates 101 70 91 Interest income from investments 80 67 64 Other income 7 6 1 --------------------------------------------------------------------------- Total 1,401 1,282 1,605 ---------------------------------------------------------------------------
Expenses
Interest 736 599 728 Provision for doubtful accounts, net of recoveries of $177, $175 and $201 443 475 661 Operating expenses 8 7 8 --------------------------------------------------------------------------- Total 1,187 1,081 1,397 ---------------------------------------------------------------------------
Income before taxes 214 201 208 Income tax provision 75 64 70 ---------------------------------------------------------------------------
Income before extraordinary charges 139 137 138 Extraordinary charges for early retirement of debt (net of income taxes of $12 million) - 22 - ---------------------------------------------------------------------------
Net income $ 139 $ 115 $ 138 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
See notes to consolidated financial statements.
AMERICAN EXPRESS CREDIT CORPORATION CONSOLIDATED BALANCE SHEETS (millions)
-----------------------------------------------------------------------------
December 31, 1994 1993 -----------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 460 $ 257
Accounts receivable 14,020 12,968 Less reserve for doubtful accounts 498 542 ----------------------------------------------------------------------------- 13,522 12,426 Loans and deposits with affiliates 2,650 2,000 Deferred charges and other assets 236 260 ----------------------------------------------------------------------------- Total assets $16,868 $14,943 ----------------------------------------------------------------------------- -----------------------------------------------------------------------------
Liabilities and shareholder's equity
Short-term debt $11,525 $ 9,738 Current portion of long-term debt 405 692 Long-term debt 2,282 1,776 Due to affiliates 707 932 Accrued interest and other liabilities 121 97 ----------------------------------------------------------------------------- Total liabilities 15,040 13,235 -----------------------------------------------------------------------------
Deferred discount revenue 95 46 -----------------------------------------------------------------------------
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 161 129 Retained earnings 1,571 1,532 ----------------------------------------------------------------------------- Total shareholder's equity 1,733 1,662 ----------------------------------------------------------------------------- Total liabilities and shareholder's equity $16,868 $14,943 ----------------------------------------------------------------------------- -----------------------------------------------------------------------------
See notes to consolidated financial statements.
See notes to consolidated financial statements.
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Years Ended December 31, 1994, 1993 and 1992
(millions)
Total Shareholder's Common Capital Retained Equity Shares Surplus Earnings ------------------------------------------- Balances at January 1, 1992 $1,784 $ 1 $ 129 $1,654
Net Income 138 138 Dividends to TRS (250) (250) ----- ----- ----- -----
Balances at December 31, 1992 1,672 1 129 1,542
Net Income 115 115 Dividends to TRS (125) (125) ----- ----- ----- ----- Balances at December 31, 1993 1,662 1 129 1,532
Net Income 139 139 Dividends to TRS (100) (100) Contributions from TRS 32 32 ----- ----- ----- ----- Balances at December 31, 1994 $1,733 $ 1 $ 161 $1,571 ===== ===== ===== =====
See notes to consolidated financial statements.
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.
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 income at the time of purchase; the remaining portion is deferred and recorded as income 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 established at the time receivables are purchased and 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.
Fair Values of Financial Instruments
The fair values of financial instruments are estimates based upon current market conditions and perceived risks and require varying degrees of management judgment.
The fair values of long-term debt and derivative and other off-balance- sheet financial 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 hedging its interest rate exposure. The net interest receivable or payable in these agreements is recorded as an adjustment to interest expense and is recognized in earnings over the life of the agreements.
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 transactions as a means of hedging foreign exchange exposure. Foreign exchange contracts generally are marked-to-market, with the unrealized gain or loss offset by the gain or loss on the hedged position.
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, 1994 and 1993, included in cash and cash equivalents was $75 million and $200 million, respectively, of overnight securities purchased to resell.
3. Accounts Receivable
At December 31, 1994 and 1993, respectively, Credco owned $12.6 billion and $11.8 billion of charge card receivables and participations in charge card receivables, representing 89.6 percent and 91.2 percent of the total receivables owned. In 1992, Credco purchased participation interests in the seller's interest in Cardmember receivables owned by a Master Trust which was formed by TRS as part of an asset securitization program. In 1994 and 1993, Credco purchased additional participation interests. At December 31, 1994 and 1993, Credco owned approximately $2.2 billion and $2.0 billion, respectively, of participation interests in securitized receivables, representing 15.9 percent and 15.4 percent, respectively, of its total accounts receivable.
Credco purchases certain billed and unbilled Cardmember receivables arising from extended payment plans from certain TRS subsidiaries. Credco owned $1.5 billion and $1.1 billion of these receivables as of December 31, 1994 and 1993, representing 10.4 percent and 8.8 percent, respectively, of its total accounts receivable. Finance charges on such interest-bearing extended payment plan receivables ranged from .67 percent to 1.75 percent per month of the unpaid receivable balance as of December 31, 1994. These finance charges, which are included in revenues, were $181 million, $136 million and $149 million for 1994, 1993 and 1992, respectively.
4. Short-term Debt
At December 31, short-term debt consisted of (millions): --------------------------------------------------------------------------- 1994 1993 --------------------------------------------------------------------------- Commercial paper $ 9,849 $8,810 Borrowings from affiliates 1,127 588 Borrowings under lines of credit 192 123 Borrowing agreements with bank trust departments and others 357 217 --------------------------------------------------------------------------- Total short-term debt $11,525 $9,738 ---------------------------------------------------------------------------
Credco has various facilities available to obtain short-term credit, including the issuance of commercial paper and agreements with banks.
Credco had unused committed credit lines totaling $4.9 billion and $4.4 billion at December 31, 1994 and 1993, respectively. Credco pays fees to the financial institutions that provide these credit line facilities. The fair value of the unused lines of credit is not significant at December 31, 1994 and 1993.
At December 31, 1994 and 1993, Credco, through AEOCC, had short-term borrowings under uncommitted lines of credit totaling $150 million and $65 million, respectively, and borrowings under committed lines of credit totaling $42 million and $58 million, respectively.
Credco's annual weighted average short-term interest rate was 4.74 percent, 3.57 percent and 4.73 percent for the years ended December 31, 1994, 1993 and 1992, respectively. These rates include the cost of maintaining credit line facilities for the periods and the impact of interest rate swaps. At December 31, 1994, $1.9 billion of short-term debt outstanding was modified by interest rate swaps, resulting in a year-end weighted average effective interest rate of 5.80%.
Credco paid $508 million, $347 million and $356 million of interest on short-term debt obligations in 1994, 1993 and 1992, respectively.
5. Long-term Debt
(a) For the floating rate debt issuance, the stated rate was based on the rate at December 31, 1994; 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 $405 million and $692 million at December 31, 1994 and 1993, 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, 1994 and 1993, was $2.6 billion for both years.
Aggregate annual maturities of long-term debt for the five years ending December 31, 1999 are as follows (millions): 1995, $405; 1996, $407; 1997, $217; 1998, $0; 1999, $350.
Credco paid $222 million, $290 million and $332 million of interest on long-term debt obligations in 1994, 1993 and 1992, respectively.
6. 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.
7. Derivative and Other Off-Balance-Sheet Financial Instruments
Credco enters into transactions involving derivative financial instruments for purposes other than trading. Credco uses such derivatives to manage its exposure to interest and foreign exchange rate risks and to manage its funding costs. These instruments are used to provide a more efficient means for Credco to manage its risk exposure than if Credco entered into the cash marketplace. Credco manages risks associated with derivatives as described below.
Market risk is the possibility that the value of the derivative financial instrument will change due to fluctuations in a factor from which the instrument derives its value, primarily an interest rate or a foreign exchange rate. Credco is not impacted by market risk beyond that inherent in cash market transactions. Foreign currency and certain interest rate products that manage related risks have cash flow and income effects that are inverse to the effects of the underlying transactions. Credco does not enter into derivative contracts with imbedded options or other complex features that would expose it to additional market risk.
Credit exposure is the possibility that the counterparty will not fulfill the terms of the contract. Credco monitors credit exposure related to derivative financial instruments through established approval procedures, including setting concentration limits by counterparty and industry, reviewing credit ratings and requiring collateral where appropriate. The majority of Credco's counterparties are rated A or better by nationally recognized credit rating agencies. Whenever possible, Credco's credit exposure is further reduced through the use of master netting agreements, which allows Credco to settle all contracts under the agreement in one net receipt or payment in the event of counterparty default.
The notional or contract amount of a derivative financial instrument is generally used to calculate the cash flows that are received or paid over the life of the agreement. Notional amounts do not represent market risk or credit exposure. The aggregate notional amount of Credco's derivative instruments at December 31, 1994 and 1993 was $5.9 billion ($105 million with an affiliate) and $4.7 billion ($1.3 billion with affiliates), respectively. At December 31, 1994 and 1993, the related credit exposure, which approximates the fair value of contracts in a gain position (asset), was $58 million ($.4 million with an affiliate) and $56 million ($18 million with an affiliate), respectively. The fair value of interest rate and foreign currency products in a loss position (liability) at December 31, 1993 was $90 million ($25 million with affiliates). The fair value represents the replacement cost and is determined by the market values, dealer quotes or pricing models.
The following tables detail information regarding Credco's derivatives: (millions)
Notional Carrying Value Fair Value December 31, 1994 Amount Asset Liability Asset Liability ----------------- ------ ----- --------- ----- --------- Interest rate swaps $4,760 $ 33 $ 36 $ 35 $ 109 Forward contracts 1,125 7 1 23 1 ----- -- -- -- --- Total $5,885 $ 40 $ 37 $ 58 $ 110 ----- -- -- -- ---
At December 31, 1994, foreign currency forward contracts with an affiliate had a notional amount of $105 million with a carrying value asset and liability of $.4 million and $.1 million, respectively, and a fair value asset and liability of $.4 million and $.1 million, respectively.
(millions) Total Notional Credit December 31, 1993 Amount Exposure ----------------- ------ -------- Interest rate swaps $3,903 $ 52 Forward contracts 751 4 ----- --- Total $4,654 $ 56 ----- ---
Interest Rate Products Credco uses interest rate products, for the most part, to manage funding costs related to charge Card and consumer lending businesses. The principal products used are 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.
Credco uses interest rate swaps to obtain the most cost effective and flexible funding structure to fund its charge Card and consumer lending receivables, as well as to lock in the spread on consumer lending receivables. Credco uses interest rate swaps to achieve a targeted, predetermined mix of fixed and floating rate debt to fund its charge Card receivables. These agreements have varying maturities through 2000.
Interest rates charged on Credco's consumer lending receivables are linked to a floating rate base and reprice at three and six month intervals. Credco generally enters into interest rate swaps paying a rate that reprices when the base rate of the underlying consumer lending receivables changes. At December 31, 1994 and 1993, the notional amount of interest rate swaps includes $975 million and $575 million, respectively, of swaps that go into effect subsequent to each such year.
For interest rate swaps that meet the criteria for hedge accounting, interest is accrued and reported in accounts receivable and other assets, or accrued interest and other liabilities, and interest expense, as appropriate.
Foreign Currency Products Credco uses foreign currency products to manage transactions denominated in foreign currencies.
Foreign currency exposures are hedged, where practicable, through foreign currency forward contracts. Foreign currency forward contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. Foreign currency forward contracts generally mature within one year. At December 31, 1994, Credco had no significant unhedged foreign currency exposures.
For foreign currency contracts that manage transactions denominated in foreign currencies, unrealized gains and losses are reported in other assets and other income, as appropriate. Related premiums and discounts are reported in other assets or other liabilities, as appropriate, and amortized into interest expense over the term of the contract.
Other Off-Balance-Sheet Financial Instruments Financial institutions have extended lines of credit to Credco of $4.9 billion and $4.4 billion at December 31, 1994 and 1993, respectively.
8. Transactions with Affiliates
In 1994, 1993 and 1992, Credco purchased Cardmember receivables without recourse from TRS and certain of its subsidiaries totaling approximately $109 billion, $95 billion and $94 billion, respectively. Receivables Agreements for 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.
As part of TRS's asset securitization program, in July 1994, Credco sold back to TRS $1.2 billion of gross receivables arising under specified domestic, consumer Cardmember accounts. TRS sold these receivables, together with the right to receive subsequent receivables arising from such Cardmember accounts, to its subsidiary, American Express Receivables Financing Corporation ("RFC"), which conveyed them to American Express Master Trust (the "Trust"). As Credco purchases the sellers' interest in the Trust, this resulted in an increase in the participation interest owned by CRC, in securitized receivables, for which CRC paid $1.2 billion. In September 1994, the Trust issued $900 million of receivables trust certificates in three series. At the time of such issuance, CRC, sold, at face amount less applicable reserve, $972 million of gross participation interest in RFC's sellers interest to RFC.
In July 1993, Credco began repurchasing certain foreign currency Cardmember receivables which had been sold to an affiliate during the period from December 1991 through June 1993. In December 1993, Credco repurchased the participation interests in a portion of its foreign currency receivables which had been previously sold to an affiliate during the period from December 1991 through November 1993.
Other transactions with American Express and its subsidiaries for the years ended December 31 were as follows (millions):
------------------------------------------------------------------------------ 1994 1993 1992 ------------------------------------------------------------------------------ Cash and cash equivalents at December 31 $ - $ 3 $ 27 Maximum month-end level of cash and cash equivalents during the year 20 229 475 Secured loans to American Express Centurion Bank at December 31 2,000 2,000 2,000 Other loans and deposits to affiliates at December 31 650 - 140 Maximum month-end level of loans and deposits to affiliates during the year 2,650 2,001 2,140 Borrowings at December 31 2,037 588 390 Maximum month-end level of borrowings during the year 2,734 2,451 1,439 Interest income 101 70 91 Other income 6 6 7 Interest expense 96 48 78 ------------------------------------------------------------------------------
At December 31, 1994, 1993 and 1992, Credco held $2 billion of variable rate secured loans from American Express Centurion Bank ("Centurion Bank"), a wholly-owned subsidiary of TRS, and $650 million of variable rate loans with American Express due in 2004. The loans with Centurion Bank are secured by certain interest-bearing extended payment plan receivables owned by Centurion Bank. Interest income from these variable rate loans was $101 million, $67 million and $81 million for 1994, 1993 and 1992, respectively.
In 1994, American Express spun-off Lehman Brothers Holdings Inc. ("Lehman") to its shareholders through a special dividend. References to an affiliate contained in the footnotes, for periods prior to May 1994, include subsidiaries of Lehman.
In 1994, TRS made a noncash contribution to Credco of AEB-CFS Limited, a foreign company incorporated to fund certain Optima Card receivables outside the U.S., for book value.
9. Income Taxes
The taxable income of Credco is included in the consolidated U.S. federal income tax return of American Express. Under an agreement with TRS, taxes are recognized on a stand-alone basis. If benefits for all future tax deductions, foreign tax credits and net operating losses cannot be recognized on a stand-alone basis, such benefits are then recognized based upon a share, derived by formula, of those deductions and credits that are recognizable on a TRS consolidated reporting basis.
Deferred income tax assets and liabilities result from the recognition of temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in differences between income for tax purposes and income for financial statement purposes in future years. The current and deferred components of the provision (benefit) for income taxes consist of the following (millions):
--------------------------------------------------------------------------- 1994 1993 1992 ---------------------------------------------------------------------------
Current $36 $ 18 $64 Deferred 39 46 6 ----------------------------------------------------------------------------- Total income tax provision before extraordinary item 75 64 70 Income tax benefit from extraordinary item - (12) - ----------------------------------------------------------------------------- Total income tax provision $75 $ 52 $70 -----------------------------------------------------------------------------
Credco's net deferred tax assets consisted of the following (millions): ---------------------------------------------------------------------------- 1994 1993 ----------------------------------------------------------------------------- Gross deferred tax assets: Reserve for loan losses $158 $181 ----------------------------------------------------------------------------- Total gross deferred tax assets 158 181 Gross deferred tax liabilities: Foreign exchange contracts (5) (5) Other (3) (2) ----------------------------------------------------------------------------- Total gross deferred tax liabilities (8) (7) ----------------------------------------------------------------------------- Net deferred tax assets $150 $174 -----------------------------------------------------------------------------
Credco has not recorded a valuation allowance.
Federal tax overpayments of $33 million and $14 million at December 31, 1994 and 1993, respectively, are included in due to affiliates.
Income taxes paid to TRS during 1994, 1993 and 1992 were $55 million, $21 million and $75 million, respectively.
The U.S. statutory tax rate and effective tax rate for 1994 and 1993 was approximately 35 percent. In 1993, the U.S. federal tax rate increased from 34 percent to 35 percent, resulting in a one-time benefit of $6 million in Credco's deferred tax assets. As a result of this one-time benefit, the income tax provision for continuing operations for 1993 is different than that computed using the U.S. statutory tax rate of 35 percent. The U.S. statutory tax rate and effective tax rate in 1992 was 34 percent.
10. 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):
1994 1993 1992 ----------------------------------------------------------------------- Revenues United States $ 1,180 $ 1,134 $ 1,425 International 221 148 180 ----------------------------------------------------------------------- Consolidated $ 1,401 $ 1,282 $ 1,605 ----------------------------------------------------------------------- Income before taxes United States $ 171 $ 173 $ 192 International 43 28 16 ----------------------------------------------------------------------- Consolidated $ 214 $ 201 $ 208 ----------------------------------------------------------------------- Identifiable assets United States $14,174 $12,787 $12,233 International 2,694 2,156 1,398 ----------------------------------------------------------------------- Consolidated $16,868 $14,943 $13,631 -----------------------------------------------------------------------
11. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data is as follows (millions):
------------------------------------------------------------------------------ Quarter Ended 12/31 9/30 6/30 3/31 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Revenues $391 $340 $356 $314 Income before taxes 64 53 53 44 Net income 41 35 34 29
------------------------------------------------------------------------------ Revenues $295 $321 $336 $330 Income before taxes 40 64 39 58 Net income 26 35 25 29 ------------------------------------------------------------------------------
AMERICAN EXPRESS CREDIT CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (millions)
1994 1993 1992 ------ ------ ------
Reserve for doubtful accounts:
Balance at beginning of year $ 542 $ 603 $731 Additions: Provision for doubtful accounts charged to income (1) 620 650 862 Other credits (2) 75 55 121 Foreign translation 3 - -
Deductions: Accounts written off 621 704 864 Other charges (3) 121 62 240 Foreign translation - - 7 ----- ----- ----- Balance at end of year $ 498 $ 542 $ 603 ===== ===== =====
Reserve for doubtful accounts as a percentage of Cardmember receivables owned at year end 3.55% 4.18% 5.15% ===== ===== =====
(1) Before recoveries on accounts previously written off of (millions): 1994-$177, 1993-$175 and 1992-$201.
(2) Reserve balances applicable to new groups of Cardmember receivables purchased from TRS and certain of its subsidiaries.
(3) Reserve balances applicable to certain groups of Cardmember receivables and participation interests sold to affiliates.
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit No. Description
3(a) Registrant's Certificate of Incorporated by Incorporation, as amended reference to Exhibit 3(a) to Registrant's Registration Statement on Form S-1 dated February 25, 1972 (File No. 2-43170).
3(b) Registrant's By-Laws, amended Incorporated by and restated as of November 24, reference to Exhibit 1980 3(b) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985.
4(a) Registrant's Debt Securities Incorporated by ref- Indenture dated as of erence to Exhibit 4(s) September 1, 1987 to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
4(b) Form of Note with optional Incorporated by redemption provisions reference to Exhibit 4(t) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
4(c) Form of Debenture with Incorporated by optional redemption and reference to Exhibit sinking fund provisions 4(u) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
4(d) Form of Original Issue Incorporated by Discount Note with reference to Exhibit optional redemption 4(v) to Registrant's provision Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
4(e) Form of Zero Coupon Note Incorporated by with optional redemption reference to Exhibit provisions 4(w) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
4(f) Form of Variable Rate Note Incorporated by with optional redemption and reference to Exhibit repayment provisions 4(x) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
4(g) Form of Extendible Note Incorporated by with optional redemption reference to Exhibit and repayment provisions 4(y) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
4(h) Form of Fixed Rate Incorporated by Medium-Term Note reference to Exhibit 4(z) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
4(i) Form of Floating Rate Incorporated by Medium-Term Note reference to Exhibit 4(aa) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
4(j) Form of Warrant Agreement Incorporated by reference to Exhibit 4(bb) to Registrant's Registration Statement on Form S-3 dated September 2, 1987 (File No. 33-16874).
4(k) Form of Supplemental Indenture Incorporated by reference to Exhibit 4(cc) to Registrant's Registration Statement on Form S-3 dated September 2, l987 (File No. 33-16874).
4(l) The Registrant hereby agrees to furnish the Commission, upon request, with copies of the instruments defining the rights of holders of each issue of long-term debt of the Registrant for which the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Registrant
10(a) Receivables Agreement Incorporated by dated as of January 1, 1983 reference to Exhibit between the Registrant and 10(b) to Registrant's American Express Travel Annual Report on Form Related Services Company, 10-K for the year Inc. ended December 31, 1987.
10(b) Secured Loan Agreement Incorporated by dated as of June 30, 1988 reference to Exhibit between the Registrant 10(b) to Registrant's and American Express Annual Report on Centurion Bank Form 10-K for the year ended December 31, 1988.
10(c) Participation Agreement Incorporated by dated as of August 3, 1992 reference to Exhibit between American Express 10(c) to Registrant's Receivables Financing Annual Report on Corporation and Credco Form 10-K for the year Receivables Corp. ended December 31, 1992.
12 Statement re: computation of ratios Electronically filed herewith.
23 Consent of Independent Auditors Electronically filed herewith.
27 Financial Data Schedule Electronically filed herewith.