Back to GetFilings.com
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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 1-6908
AMERICAN EXPRESS CREDIT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 11-1988350
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Christina Centre, 301 North Walnut Street 19801-2919
Suite 1002, Wilmington, Delaware (Zip Code)
(Address of principal executive offices)
Registrant's telephone number including area code: (302) 594-3350.
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ---------------------------------------- -----------------------
Step-Up Senior Notes due August 10, 2005 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND
(b) OF FORM 10-K AND HAS THEREFORE OMITTED CERTAIN ITEMS FROM THIS REPORT IN
ACCORDANCE WITH THE REDUCED DISCLOSURE FORMAT PERMITTED UNDER INSTRUCTION I.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [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 25, 2005, 1,504,938 shares were
outstanding.
Documents incorporated by reference: None
PART I
Item 1. BUSINESS.
Introduction
American Express Credit Corporation (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. (TRS), a wholly-owned subsidiary
of American Express.
Credco is primarily engaged in the business of financing most
non-interest-bearing cardmember receivables arising from the use of the American
Express'r' card, 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 interest-bearing and discounted
revolving loans and extended payment plan receivables comprised of American
Express credit cards, Sign & Travel'r' and Extended Payment Option receivables,
lines of credit and loans to American Express Bank Ltd. customers and
interest-bearing equipment financing installment loans and leases. American
Express cards and American Express credit cards are collectively referred to
herein as the card.
American Express Card Business
American Express cards are currently issued in 45 currencies (including cards
issued by third-party 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 service establishments that
have agreed to accept the card. As a merchant processor, TRS accepts and
processes from each participating establishment the charges arising from
cardmember purchases at a discount that is principally determined by the value
that is delivered to the service establishment and generally includes a premium
over other card networks. Value is delivered to the service establishment
through higher spending cardmembers relative to competing card networks, the
volume of spending by all cardmembers, marketing programs and the insistence of
cardmembers to use their cards when enrolled in rewards or other card loyalty
programs. When establishing the discount rate, consideration is also given to a
number of other factors, such as industry specific requirements, estimated
charge volume and payment terms.
The charge card, which is marketed in the United States and many other countries
and carries no preset spending limit, is primarily designed as a method of
payment and not as a means of financing purchases of goods or services. Charges
are approved based on a variety of factors including a cardmember's account
history, credit record and personal resources. Charge cards generally require
payment by the cardmember of the full amount billed each month, and no finance
charges are assessed. Charge card accounts that are past due are subject, in
most cases, to a delinquency assessment and, if not brought to current status,
subject to cancellation. TRS and its licensees also offer a variety of revolving
credit cards marketed in the United States and other countries. These cards have
a range of payment terms, grace periods and rate and fee structures.
The American Express card businesses are subject to extensive regulation in the
United States, as well as in foreign jurisdictions. In the United States, the
business is subject to a number of federal laws and regulations, including:
o the Equal Credit Opportunity Act (which generally prohibits discrimination
in the granting and handling of credit);
o 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);
1
o the Truth in Lending Act (which, among other things, requires extensive
disclosure of the terms upon which credit is granted);
o the Fair Credit Billing Act (which, among other things, regulates the
manner in which billing inquiries are handled and specifies certain billing
requirements);
o the Fair Credit and Charge Card Disclosure Act (which mandates certain
disclosures on credit and charge card applications); and
o the Electronic Funds Transfer Act (which regulates disclosures and
settlement of transactions for electronic funds transfers including those
at ATMs).
Certain federal privacy-related laws and regulations govern the collection and
use of customer information by financial institutions. Federal legislation also
regulates abusive debt collection practices. In addition, a number of states,
the European Union and many foreign countries have significant consumer credit
protection, disclosure and privacy-related laws (in certain cases more stringent
than the laws in the U.S.). The application of bankruptcy and debtor relief
laws affect Credco to the extent that such laws result in amounts owed being
classified as delinquent and/or written-off as uncollectible. Card issuers and
card networks are subject to anti-money laundering and anti-terrorism
legislation, including, in the United States, the USA Patriot Act.
General Nature of Credco's Business
Credco generally purchases certain cardmember receivables and cardmember loans
arising from the use of the card throughout the world pursuant to agreements
(the Receivables Agreements) with TRS and certain of its subsidiaries that issue
the card (Card Issuers). Net income primarily depends on the volume of
receivables arising from the use of the card purchased by Credco, the discount
rates applicable thereto, the relationship of total discount to Credco's
interest expense and the collectibility of the receivables purchased. The
average life and collectibility of accounts receivable generated by the use of
the card are affected by factors such as general economic conditions, overall
levels of consumer debt and the number of new cards issued.
Credco generally purchases cardmember receivables and loans without recourse.
Amounts resulting from unauthorized charges (for example, those made with a lost
or stolen card) are excluded from the definition of receivables and loans under
the Receivables Agreements and are not eligible for purchase by Credco. If the
unauthorized nature of the charge is discovered after purchase by Credco, the
Card Issuer repurchases the charge from Credco.
Credco generally purchases non-interest-bearing cardmember receivables at face
amount less a specified discount agreed upon from time to time, and
interest-bearing revolving credit cardmember receivables at face amount. The
Receivables Agreements generally require that non-interest-bearing receivables
be purchased at a discount rate which yields to Credco earnings of at least 1.25
times its fixed charges on an annual basis. The Receivables Agreements also
provide that consideration will be given from time to time to revising the
discount rate applicable to purchases of new receivables to reflect changes in
money market interest rates or significant changes in the collectibility of the
receivables. New groups of cardmember receivables are generally purchased net of
reserve balances.
As part of its receivables funding activities, Credco regularly reviews funding
sources and strategies in international markets. During 2004, Credco began
funding cardmember receivables and cardmember loans in Canada through loans to
Amex Bank of Canada, the card issuer and a wholly-owned subsidiary of TRS,
rather than through the purchase of receivables without recourse. In Australia,
the United Kingdom and Germany, Credco began funding cardmember receivables and
cardmember loans by acquiring such receivables and loans with recourse from the
local card issuers, which are wholly-owned subsidiaries of TRS. These changes in
local funding strategies resulted in Credco recording additional loans with
affiliates in the aggregate of $6.6 billion in its Consolidated Balance Sheet at
December 31, 2004.
2
Cardmember loans, which include extended payment plan receivables, are primarily
funded by subsidiaries of TRS other than Credco, although certain cardmember
loans are purchased by Credco. At December 31, 2004 and 2003, gross cardmember
loans owned by Credco totaled $0.6 billion and $5.1 billion, respectively,
representing approximately 3 percent and 19 percent, respectively, of all
interests in cardmember receivables and loans owned by Credco. These cardmember
loans consist of certain interest-bearing and discounted extended payment plan
receivables comprised of American Express credit card, Sign & Travel and
Extended Payment Option receivables, lines of credit and loans to American
Express Bank Ltd. customers and interest-bearing equipment financing installment
loans and leases. In December 2004, TRS sold the leasing product line in its
small business financing unit, American Express Business Finance Corporation
(AEBF). In conjunction with the TRS sale, Credco sold $1.3 billion of leasing
receivables to AEBF at par.
In conjunction with TRS' securitization program, Credco, through its
wholly-owned subsidiary, Credco Receivables Corporation (CRC), purchases
participation interests from American Express Receivables Finance Corporation
(RFC), a wholly-owned subsidiary of TRS. The participation interests represent
undivided interests in cardmember receivables transferred to the American
Express Master Trust by TRS, which originated the receivables. The American
Express Master Trust is a non-qualifying special purpose entity that is
consolidated by TRS.
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 and loans owned by Credco. The Receivables Agreements provide that,
without the prior written consent of Credco, the credit standards used to
determine whether a card is to be issued to an applicant may not be materially
reduced and that the policy as to the cancellation of cards for credit reasons
may not be materially liberalized.
American Express, as the parent of TRS, has agreed with Credco that it will take
all necessary steps to assure performance of certain TRS obligations under the
Receivables 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 for Credco. The obligations of
Credco are not guaranteed under the Receivables Agreements or otherwise by
American Express or the Card Issuers.
Volume of Business
The following table shows the volume of all cardmember receivables and
cardmember loans purchased by Credco, excluding cardmember receivables and
cardmember loans sold to affiliates, during each of the years indicated,
together with cardmember receivables and cardmember loans owned by Credco at the
end of such years (billions):
Volume of Gross Receivables and Loans Owned
Receivables and Loans Purchased at December 31,
------------------------------- ---------------------------
Year Domestic Foreign Total Domestic Foreign Total
- ---- -------------------------------------------------------------
2004 $188.8 $51.3 $240.1 $19.7 $2.8 $22.5
2003 153.2 56.1 209.3 17.8 8.4 26.2
2002 137.2 46.9 184.1 15.2 6.8 22.0
2001 159.0 45.1 204.1 17.4 5.6 23.0
2000 161.3 44.8 206.1 19.5 5.2 24.7
The card business does not experience significant seasonal fluctuation, although
card billed business tends to be moderately higher in the fourth quarter than in
other quarters.
3
Cardmember Receivables
At December 31, 2004 and 2003, Credco owned $21.9 billion and $21.2 billion,
respectively, of cardmember receivables and participation in cardmember
receivables, representing 97 percent and 81 percent of the total cardmember
receivables and loans owned at December 31, 2004 and 2003, respectively. As
previously noted, CRC purchases the participation interests from RFC in
conjunction with TRS' securitization program. During 2004, RFC participated to
CRC an additional undivided interest totaling $1.2 billion ($1.1 billion net of
reserves). At December 31, 2004 and 2003, CRC owned approximately $6.3 billion
and $5.1 billion, respectively, of participation interests.
Years ended December 31, (Millions, except
percentages and where indicated) 2004 2003 2002 2001 2000
-----------------------------------------------
Total cardmember receivables $21,888 $21,165 $17,169 $19,121 $22,565
90 days past due as a % of total 2.1% 2.2% 2.6% 3.6% 2.7%
Loss reserves $ 555 $ 555 $ 498 $ 683 $ 640
as a % of receivables 2.5% 2.6% 2.9% 3.5% 2.8%
as a % of 90 days past due 122% 121% 112% 99% 105%
Write-offs, net of recoveries $ 471 $ 463 $ 568 $ 703 $ 543
Net loss ratio (1) 0.20% 0.23% 0.32% 0.35% 0.27%
Average life of cardmember receivables (in days) (2) 32 33 34 36 37
(1) Credco's write-offs, net of recoveries, expressed as a percentage of the
volume of cardmember receivables purchased by Credco in each of the years
indicated.
(2) Represents the average life of cardmember receivables owned by Credco,
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.
Cardmember Loans
At December 31, 2004 and 2003, Credco owned cardmember loans totaling $0.6
billion and $5.1 billion, respectively, representing 3 percent and 19 percent of
all interests in cardmember receivables and loans owned by Credco at December
31, 2004 and 2003, respectively. These loans consist of certain interest-bearing
and discounted extended payment plan receivables comprised of American Express
credit card, Sign & Travel and Extended Payment Option receivables, and lines of
credit and loans to American Express Bank Ltd. customers. At December 31, 2004
and 2003, CRC did not own any participation interests in cardmember loans.
Years ended December 31, (Millions, except
percentages and where indicated) 2004 2003 2002 2001 2000
-----------------------------------------
Total cardmember loans $ 622 $5,067 $4,858 $3,927 $2,145
Past due cardmember loans as a % of total:
30-89 days 6.1% 3.2% 4.2% 5.2% 6.7%
90+ days 1.8% 1.5% 1.7% 1.6% 1.7%
Loss reserves $ 55 $ 182 $ 243 $ 164 $ 99
as a % of cardmember loans 8.9% 3.6% 5.0% 4.2% 4.6%
as a % of past due 113% 76% 84% 62% 55%
Write-offs, net of recoveries $ 183 $ 310 $ 330 $ 165 $ 111
Net write-off rate (1) 4.40% 6.07% 7.37% 5.31% 4.66%
(1) Credco's write-offs, net of recoveries, expressed as a percentage of the
average amount of cardmember loans owned by Credco at the beginning of the
year and at the end of each month in each of the years indicated.
4
The year over year decrease in Credco's owned cardmember loans was primarily
driven by Credco's change in funding strategies during 2004 for cardmember
receivables and loans in certain international markets, and the TRS sale of
its small business financing unit, AEBF, in December 2004.
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 U.S.
and non-U.S. dollar medium- and long-term debt as well as through operations.
The weighted average interest rate 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 was:
Weighted Average
Year Interest Rate
- -----------------------
2004 2.98%
2003 3.46
2002 3.96
2001 5.98
2000 6.04
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 or
at interest rates based on LIBOR, 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, 2004, was $8.2 billion. At December 31,
2004, the amount borrowed was $5.5 billion. See Notes 4 and 5 to the
Consolidated Financial Statements for additional information about Credco's
debt, including Credco's lines of credit and long-term debt.
Foreign Operations
See Notes 1, 7 and 13 to the Consolidated Financial Statements for information
about Credco's foreign exchange risks and operations in different geographic
regions.
Employees
At December 31, 2004, Credco had 25 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.
5
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
American Express, through its 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 cash dividends of $125 million to TRS in 2004. No dividends were
paid in 2003 or 2002. For information about limitations on Credco's ability to
pay dividends, see Note 6 to the Consolidated Financial Statements.
6
Item 6. SELECTED FINANCIAL DATA.
The following summary of certain consolidated financial information of Credco
was derived from audited financial statements for the five years ended December
31:
($ in millions) 2004 2003 2002 2001 2000
-----------------------------------------------
Income Statement Data
Revenues $ 1,832 $ 1,987 $ 2,153 $ 2,842 $ 2,601
Provision for losses, net of recoveries 628 701 846 937 689
Interest expense 863 852 916 1,458 1,459
Income tax provision 75 135 118 140 150
Net income 234 260 228 277 286
Balance Sheet Data
Gross cardmember receivables $21,888 $21,165 $17,169 $19,121 $22,565
Reserve for losses, cardmember receivables (555) (555) (498) (683) (640)
Gross cardmember loans 622 5,067 4,858 3,927 2,145
Reserve for losses, cardmember loans (55) (182) (243) (164) (99)
Loans and deposits with affiliates 7,039 1,923 2,047 1,907 1,742
Total assets 36,260 31,949 27,665 26,542 28,326
Short-term debt 13,245 15,718 15,145 20,584 22,972
Current portion of long-term debt 5,734 1,978 5,751 800 550
Long-term debt 12,880 10,216 2,117 1,030 1,811
Shareholder's equity 2,993 2,750 2,315 2,200 2,152
Cash dividends 125 -- -- -- 200
7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Critical Accounting Policies
American Express Credit Corporation's (Credco) significant accounting policies
are described in Note 1 to the Consolidated Financial Statements. The following
provides information about critical accounting policies that are important to
the Consolidated Financial Statements and that involve estimates requiring
significant management assumptions and judgments about the effect of matters
that are uncertain. These policies relate to reserves for cardmember losses and
investment securities valuation.
Reserves for cardmember losses
Credco's reserves for losses relating to cardmember receivables and loans
represent management's estimate of the amount necessary to absorb losses
inherent in Credco's outstanding portfolio of cardmember receivables and loans.
Management's evaluation process requires certain estimates and judgments.
Reserves for these losses are primarily based upon models that analyze specific
portfolio statistics and also reflect, to a lesser extent, management's judgment
regarding overall adequacy. The analytic models take into account several
factors, including average write-off rates for various stages of receivable
aging (i.e., current, 30 days, 60 days, 90 days) over a 24-month period and
average bankruptcy and recovery rates. In exercising its judgment to adjust
reserves that are calculated by the analytic model, management considers the
level of coverage of past-due accounts, as well as external indicators, such as
leading economic indicators, unemployment rate, consumer confidence index,
purchasing manager's index, bankruptcy filings and the regulatory environment.
Management believes the impact of each of these indicators can change from time
to time and thus reviews these indicators in concert.
Receivables and loans are written-off when management deems amounts to be
uncollectible, which is generally determined by the numbers of days past due. In
general, bankruptcy and deceased accounts are written-off upon notification, or
when 180 days past due for lending products and 360 days past due for charge
card products. For all other accounts, write-off policy is based upon the
delinquency and product. Given both the size and the volatility of write-offs,
management continually monitors evolving trends and adjusts its business
strategy accordingly. To the extent historical credit experience is not
indicative of future performance or other assumptions used by management do not
prevail, loss experience could differ significantly, resulting in either higher
or lower future provisions for losses, as applicable. As of December 31, 2004,
if average write-off rates were 5 percent higher or lower, the reserve for
losses would change by approximately $30 million.
Investment securities valuation
Investment securities are carried at fair value on the balance sheet with
unrealized gains (losses) recorded in accumulated other comprehensive income
(loss) within equity, net of income tax provisions (benefits). Gains and losses
are recognized in results of operations upon disposition of the securities.
Losses are also recognized when management determines that a decline in value is
other-than-temporary, which requires judgment regarding the amount and timing of
recovery. Indicators of other-than-temporary impairment for debt securities
include issuer downgrade, default or bankruptcy. Credco also considers the
extent to which cost exceeds fair value, the duration and size of that gap and
management's judgment about the issuer's current and prospective financial
condition. The fair value of the Available-for-Sale investment portfolio is
primarily based on quoted market prices. As of December 31, 2004, there were $38
million in gross unrealized losses that related to $3.2 billion of
Available-for-Sale securities. Credco does not have any securities which have
been in a continuous unrealized loss position over a period of 12 months or more
as of December 31, 2004. As part of its ongoing monitoring process, management
has determined that all of the gross unrealized losses on these securities are
attributable to changes in interest rates. Additionally, Credco
8
has the ability and intent to hold these securities for a time sufficient to
recover its amortized cost and has, therefore, concluded that none of these
securities is other-than-temporarily impaired at December 31, 2004.
See Recently Issued Accounting Standards section of Note 1 to the Consolidated
Financial Statements for a discussion of Emerging Issues Task Force (EITF)
Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments," which, when finalized by the Financial Accounting
Standards Board (FASB), may affect Credco's investment securities valuation
policy.
Liquidity and Capital Resources
Financing Activities
Credco's portfolio consists principally of cardmember receivables and cardmember
loans generally purchased without recourse from Card Issuers throughout the
world. Additionally, Credco's portfolio includes participation interests
representing undivided interests in non-interest-bearing cardmember receivables
purchased without recourse from RFC. At December 31, 2004 and 2003, Credco owned
$21.9 billion and $21.2 billion, respectively, of cardmember receivables and
participation in cardmember receivables, representing approximately 97 percent
and 81 percent, respectively, of the total cardmember receivables and loans
owned. Cardmember loans, representing approximately 3 percent and 19 percent of
the total cardmember receivables and loans owned, were $0.6 billion and $5.1
billion at December 31, 2004 and 2003, respectively.
During June 2004, Credco Receivables Corporation (CRC), a wholly-owned
subsidiary of Credco, sold $1.2 billion of Class C Notes previously issued by
the American Express Credit Account Master Trust, a qualified special purpose
entity, to American Express Receivables Financing Corporation II, a wholly-owned
subsidiary of TRS. The Class C Notes were sold at par and, as such, no gain or
loss was recognized in conjunction with the transaction. Additionally, during
2004, $255 million of the Class C Notes matured. At December 31, 2004, CRC has
approximately $56 million of Class C Note investments remaining. CRC is also
invested in certain Class B Notes that have been issued by the American
Express Master Trust. During 2004, $78 million of the Class B Notes matured.
At December 31, 2004, CRC has approximately $142 million of Class B Note
investments remaining. At the time of the Class B Note maturities, RFC
participated to CRC additional interests totaling $1.2 billion ($1.1 billion
net of reserves) in cardmember receivables held by the American Express Master
Trust. CRC owned approximately $6.3 billion and $5.1 billion, respectively, of
participation interests at December 31, 2004 and 2003.
Credco's assets are financed through a combination of short-term debt,
medium-term notes, long-term senior notes, committed bank borrowing facilities
and equity capital. Funding requirements are met primarily by the sale of
commercial paper, the issuance of medium-term notes and borrowings under
long-term committed bank credit facilities in certain international markets.
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. During 2004, Credco had uninterrupted access to the commercial paper and
capital markets to fund its business operations.
The commercial paper market represents the primary source of short-term funding
for Credco. Credco's commercial paper is a widely recognized name among
short-term investors. At December 31, 2004, Credco had $7.6 billion of
commercial paper outstanding. The outstanding amount declined $2.7 billion or 26
percent from a year ago primarily as a result of a change in Credco's funding
strategy in certain international markets. Average commercial paper outstanding
was $7.6 billion and $9.7 billion in 2004 and 2003, respectively. Credco
currently manages the level of commercial paper outstanding, net of certain
short-term investments, such that the ratio of its committed bank credit
facility to net short-term debt is not less than 100%. Net short-term debt,
which consists mainly of commercial paper less cash and cash equivalents, was
$4.0 billion at December 31, 2004. Based on the maximum available borrowings
under
9
committed bank credit facilities, Credco's committed bank line coverage of net
short-term debt was 228% at December 31, 2004.
Medium- and long-term debt is raised through the offering of debt securities in
the U.S. and international capital markets. Medium-term debt is generally
defined as any debt with an original maturity greater than 12 months but less
than 36 months. Long-term debt is generally defined as any debt with an original
maturity greater than 36 months. At December 31, 2004 and 2003, Credco had an
aggregate of $12.2 billion and $9.4 billion, respectively, of medium-term debt
outstanding at fixed and floating rates, a portion of which can be extended by
the holders up to an additional four years. Credco's outstanding long-term debt
at December 31, 2004 and 2003 was $6.4 billion and $2.8 billion, respectively.
During 2004 and 2003, Credco's average medium- and long-term debt outstanding
was $15.0 billion and $10.4 billion, respectively.
In 2004, medium- and long-term debt with maturities ranging from two to five
years was issued. Credco's 2004 term offerings are highlighted in the table
below:
(Millions) Amount
- --------------------------------------------------------------------------------
Floating Rate Medium-Term Notes $2,550
Fixed Rate Medium-Term Notes $2,726
Borrowings under bank credit facilities $3,417
- --------------------------------------------------------------------------------
These long-term debt issues have longer average maturities and a wider
distribution along the maturity spectrum as compared to the 2003 long-term
funding activity to reduce and spread out the refinancing requirement in future
periods.
Credco's funding strategy is designed to maintain high and stable debt ratings
from the major credit rating agencies, Moody's, Standard & Poor's and
FitchRatings. Maintenance of high and stable debt ratings is critical to
ensuring Credco has continuous access to the capital and credit markets. It also
enables Credco to reduce its overall borrowing costs. At December 31, 2004,
Credco's debt ratings were as follows:
Standard
Moody's & Poor's FitchRatings
- --------------------------------------------------------------------------------
Short-term P-1 A-1 F1
Senior unsecured Aa3 A+ A+
- --------------------------------------------------------------------------------
Rating agencies review factors such as capital adequacy with a view towards
maintaining certain levels of capital, liquidity, business volumes, asset
quality and economic market trends, among others, in assessing Credco's and its
subsidiaries' appropriate ratings.
On February 1, 2005, American Express announced plans to pursue a tax-free
spin-off of the common stock of its American Express Financial Corporation
subsidiary through a special dividend to American Express common shareholders.
After the announcement of the proposed spin-off, Moody's affirmed American
Express' long-term and short-term debt ratings of A1 and P-1, respectively.
Moody's also affirmed Credco's long-term and short-term debt ratings of Aa3 and
P-1, respectively. Standard & Poor's and FitchRatings both affirmed American
Express' and Credco's short-term debt ratings of A-1 and F1, respectively, and
placed American Express and Credco on a negative credit watch pending an
understanding of the final details of the proposed spin-off.
At December 31, 2004, Credco had the ability to issue approximately $7.3 billion
of debt securities under shelf registration statements filed with the Securities
and Exchange Commission (SEC).
In addition, Credco; TRS; American Express Overseas Credit Corporation Limited
(AEOCC), a wholly-owned subsidiary of Credco; American Express Centurion Bank
(Centurion Bank), a wholly-owned
10
subsidiary of TRS; and American Express Bank Ltd., a wholly-owned subsidiary of
American Express have established a program for the issuance, outside the United
States, of debt instruments to be listed on the Luxembourg Stock Exchange. The
maximum aggregate principal amount of debt instruments outstanding at any one
time under the program will not exceed $6.0 billion. In the third quarter of
2004, Credco issued pounds sterling 1.25 billion (approximately U.S. $2.2
billion) of fixed-rate debt instruments with maturities of three to five years
under this program. Additionally, in October 2004, Credco issued a euros 375
million (approximately U.S. $461 million) fixed-rate debt instrument with a
maturity of five years. The proceeds of these issuances were used for financing
operations, including the purchase of receivables and the repayment of
previously issued debt. At December 31, 2004, $3.4 billion was outstanding under
this program, including $2.9 billion issued by Credco during the year. At
December 31, 2003, $0.5 billion of debt was outstanding under this program.
In August 2004, Credco established a new 99.9 percent owned entity, American
Express Capital Australia (AECA). In September 2004, Credco borrowed Australian
$2.7 billion (approximately U.S. $1.9 billion) to provide an alternate funding
source for business in Australia. At the same time, Credco sold its Australian
cardmember loan portfolio, net of reserves, of $980 million and cardmember
receivable portfolio of $1,023 million to American Express Australia Limited
(AEAL), a wholly-owned subsidiary of TRS and the issuer of charge and credit
cards in Australia. Subsequently, AEAL transferred with recourse these
cardmember receivables and cardmember loans to AECA and will transfer with
recourse new cardmember receivables and cardmember loans originated by AEAL in
the future to AECA. The transfer of cardmember receivables and cardmember loans
with recourse to AECA resulted in Credco recording a loan with affiliate of $2.1
billion in its Consolidated Balance Sheet at December 31, 2004.
Additionally, in October 2004, Credco established two additional 99.9 percent
owned entities, American Express Sterling Funding Limited Partnership (AESLP)
and American Express Euro Funding Limited Partnership (AEELP) in connection with
the implementation of alternate receivable funding strategies in the United
Kingdom and Germany. AESLP in turn established a wholly-owned subsidiary,
American Express Funding (Luxembourg) SARL (SARL). These entities were funded
with the proceeds of debt securities issued by Credco in pounds sterling and
euros, in the third and fourth quarters of 2004, respectively. During the fourth
quarter of 2004, Credco sold its cardmember loan and receivable portfolios in
the United Kingdom and Germany to American Express Services Europe Limited
(AESEL), a wholly-owned subsidiary of TRS. Subsequently, AESEL transferred
with recourse cardmember receivables and cardmember loans of pounds
sterling 1.3 billion (approximately U.S. $2.5 billion) and euros 485 million
(approximately U.S. $619 million) to SARL and AEELP, respectively. These
transfers of cardmember receivables and cardmember loans with recourse resulted
in Credco recording additional loans with affiliates of $2.9 billion in its
Consolidated Balance Sheet at December 31, 2004.
Credco paid cash dividends of $125 million to TRS in 2004. No dividends were
paid in 2003 or 2002.
Liquidity
Credco balances the trade-offs between having too much liquidity, which can be
costly and limit financial flexibility, with having inadequate liquidity, which
may result in financial distress during a liquidity crisis (see Contingent
Liquidity Planning section below). Credco considers various factors in
determining its liquidity needs, such as economic and financial market
conditions, seasonality in business operations, cost and availability of
alternative liquidity sources, and credit rating agency considerations.
In 2004, Credco continued to strengthen its liquidity position by reducing its
reliance on short-term debt, extending and spreading out its debt maturities and
enhancing the capacity and flexibility of its contingent funding resources.
Short-term debt as a percentage of total debt declined to 42% at December 31,
2004 from 57% at December 31, 2003.
Credco estimates it will have funding requirements of approximately $5.7 billion
within the next year related to the maturity of medium- and long-term debt
obligations. In addition, Credco expects to maintain short-
11
term debt of approximately $8 billion over the period. Credco believes that its
funding plan is adequate to meet these requirements.
Credco believes that its existing sources of funding provide sufficient depth
and breadth to meet normal operating needs. In addition, alternative liquidity
sources are available, mainly in the form of the liquidity portfolio,
securitization of cardmember receivables and loans through American Express
affiliates, and committed bank credit facilities, to provide uninterrupted
funding over a twelve-month period should access to unsecured debt sources
become impaired.
Liquidity Portfolio
During the normal course of business, funding activities may raise more proceeds
than are necessary for immediate funding needs. These amounts are invested
principally in overnight, highly liquid instruments. In addition, in the fourth
quarter of 2003, Credco began a program to develop a liquidity portfolio in
which proceeds raised from such borrowings are invested in U.S. Treasury
securities. At December 31, 2004, Credco held $3.0 billion of U.S. Treasury
notes under this program. The invested amounts of the liquidity portfolio
provide back-up liquidity, primarily for Credco's commercial paper program. U.S.
Treasury securities are the highest credit quality and most liquid of investment
instruments available. Credco can easily sell these securities or enter into
sale/repurchase agreements to immediately raise cash proceeds to meet liquidity
needs.
Committed Bank Credit Facilities
Credco maintained committed bank credit facilities with 53 large institutions
totaling $12.7 billion (including $1.96 billion available to American Express
and the $2.3 billion Australian Credit Facility discussed below) at December 31,
2004. As contemplated, in the second quarter of 2004, Credco borrowed $1.47
billion under these facilities as part of a change in local funding strategy for
business in Canada. Credco has the right to borrow a maximum of $12.7 billion
(including amounts outstanding) under these facilities, with a commensurate
reduction in the amount available to American Express. These facilities expire
as follows (billions): 2005, $3.3; 2006, $2.2; 2007, $1.0 and 2009, $6.2.
The availability of the credit lines is subject to Credco's compliance with
certain financial covenants, including the maintenance of a 1.25 ratio of
combined earnings and fixed charges to fixed charges. At December 31, 2004,
Credco's ratio of combined earnings and fixed charges to fixed charges was 1.36.
In the third quarter of 2004, Credco entered into a new 5-year multi-bank credit
facility for Australian $3.25 billion (approximately U.S. $2.3 billion) and
borrowed Australian $2.7 billion (approximately U.S. $1.9 billion) under this
credit facility to provide an alternate funding source for business in
Australia. The availability of the Australian credit facility is subject to
Credco's maintenance of a 1.25 ratio of combined earnings and fixed charges to
fixed charges.
Committed bank credit facilities do not contain material adverse change clauses,
which may preclude borrowing under the credit facilities. The facilities may not
be terminated should there be a change in Credco's credit rating.
Contingent Liquidity Planning
Credco has developed a contingent funding plan that enables it to meet its daily
funding obligations when access to unsecured funds in the debt capital markets
is impaired or unavailable. This plan is designed to ensure that Credco could
continuously maintain normal business operations for at least a twelve-month
period in which its access to unsecured funds is interrupted. From time to time,
Credco may increase its liquidity portfolio in order to pre-refund maturing debt
obligations when financial market conditions are
12
favorable. These levels are monitored and adjusted when necessary to maintain
short-term liquidity needs in response to seasonal or changing business
conditions.
The funding sources that would be relied upon depend on the exact nature of such
a hypothetical liquidity crisis; nonetheless, Credco's liquidity sources are
designed with the goal of ensuring there is sufficient cash on hand to fund
business operations over a twelve-month period regardless of whether the
liquidity crisis is caused by an external, industry or Credco-specific event.
The contingent funding plan also addresses operating flexibilities in quickly
making these funding sources available to meet all financial obligations. The
simulated liquidity crisis is defined as a sudden and unexpected event that
temporarily impairs access to or makes unavailable funding in the unsecured debt
markets. The contingent funding plan includes access to diverse sources of
alternative funding, including but not limited to its liquidity investment
portfolio, securitization of cardmember receivables and loans through American
Express affiliates, committed bank lines, and intercompany borrowings. Credco
estimates that, under a worst case liquidity crisis scenario, it has in excess
of $12 billion in alternate funding sources available to cover cash needs over
the first 60 days after a liquidity crisis has occurred.
Results of Operations
Credco generally 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 revolving
credit cardmember receivables are generally purchased at face amount.
Non-interest-bearing cardmember 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 1.36, 1.46 and 1.38 in 2004,
2003 and 2002, respectively. The ratio of earnings to fixed charges for American
Express for 2004, 2003 and 2002 was 3.75, 3.44 and 2.89, respectively. The
Receivables Agreements also provide that consideration will be given from time
to time to revising the discount rate applicable to purchases of new receivables
to reflect changes in money market interest rates or significant changes in the
collectibility of the receivables. Pretax income depends primarily on the volume
of cardmember receivables and loans purchased, the discount rates applicable
thereto, the relationship of total discount to Credco's interest expense and the
collectibility of cardmember receivables and loans purchased.
13
The following table summarizes the changes attributable to the increase
(decrease) in key revenue and expense accounts (millions):
2004 2003
- --------------------------------------------------------------------------------
Discount revenue earned on purchased accounts receivable:
Volume of receivables purchased $ 187 $ 240
Discount rates (320) (329)
- --------------------------------------------------------------------------------
Total $(133) $ (89)
- --------------------------------------------------------------------------------
Finance charge revenue:
Volume of loans purchased $ (97) $ (14)
Interest rates (40) (41)
- --------------------------------------------------------------------------------
Total $(137) $ (55)
- --------------------------------------------------------------------------------
Interest income from investments:
Volume of average investments outstanding $ 31 $ 12
Interest rates 4 (26)
- --------------------------------------------------------------------------------
Total $ 35 $ (14)
- --------------------------------------------------------------------------------
Interest income from affiliates:
Volume of average investments outstanding $ 22 $ (2)
Interest rates 66 (12)
- --------------------------------------------------------------------------------
Total $ 88 $ (14)
- --------------------------------------------------------------------------------
Interest expense:
Volume of average debt outstanding $ 159 $ 72
Interest rates (183) (108)
- --------------------------------------------------------------------------------
Total $ (24) $ (36)
- --------------------------------------------------------------------------------
Provision for losses:
Volume of receivables purchased $ 133 $ 146
Provision rates and volume of recoveries (206) (291)
- --------------------------------------------------------------------------------
Total $ (73) $(145)
- --------------------------------------------------------------------------------
Interest expense-affiliates:
Volume of average debt outstanding $ 6 $ (2)
Interest rates 29 (26)
- --------------------------------------------------------------------------------
Total $ 35 $ (28)
- --------------------------------------------------------------------------------
Credco's decrease in discount revenue earned on purchased accounts receivable
during 2004 is attributable to lower discount rates, partially offset by an
increase in the volume of cardmember receivables purchased. Finance charge
revenue in 2004 decreased as a result of lower gross yields and volume of
average interest-bearing cardmember loans outstanding. Interest income from
investments in 2004 increased primarily due to higher volume of average
investments outstanding. The increase in interest income from affiliates is
attributable to higher yields and greater volume of average investments
outstanding. Interest expense decreased in 2004 as a result of lower interest
rates partially offset by an increase in the volume of average debt outstanding.
Provision for losses decreased during 2004 reflecting lower provision rates due
to improved credit quality partially offset by an increase in the volume of
cardmember receivables purchased.
Credco's effective tax rate for the years ended December 31, 2004, 2003 and 2002
was 24.3 percent, 34.2 percent and 34.1 percent, respectively. The effective tax
rate was lower in 2004 as compared to 2003 and 2002 primarily as a result of
one-time and ongoing benefits related to changes in international funding
strategy during 2004. The shifts in international funding strategy, which
diversify funding sources and increase liquidity, are expected also to benefit
Credco's effective tax rate and net income in future periods despite somewhat
higher related funding costs.
14
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Credco's risk management objective is to monitor and control risk exposures to
earn returns commensurate with the appropriate level of risk assumed. In
addition to business risk, Credco recognizes three fundamental sources of risk:
credit risk, market risk and operational risk. These risks are interrelated, and
management has adopted well defined principles to guide Credco's business
strategies and objectives. Credco views credit risk as a component of driving
profitable growth. Market risk is hedged or managed within established
parameters to sustain such earnings growth, while operational risk arising from
Credco's business activities is carefully monitored to maintain it within
acceptable limits.
Credco's risk management oversight is performed through internal and independent
oversight functions. Risk management governance at Credco begins with the
American Express Board approved risk management policies, objectives and the
American Express Board oversight of risk management parameters. Supporting the
American Express Board in its oversight function are other risk management
oversight committees, such as American Express' Treasury Department and other
asset and liability management committees. The American Express Enterprise Risk
Management Committee (ERMC) supplements the risk management capabilities
resident within American Express' business segments by routinely reviewing key
market, credit, operational and other risk concentrations across American
Express and recommending action where appropriate. The ERMC recommends risk
limits, promotes a rigorous understanding of risks across American Express,
including Credco, and supports management in making risk-return decisions.
Credit risk is defined as the risk of loss from obligor or counterparty default.
Credco is exposed to credit risk through the cardmember receivables and
cardmember loans it purchases generally without recourse, as well as through its
participation interests. As a portfolio consisting of millions of borrowers and
individual exposures, a portfolio effect from diversification is considerable,
with a loss distribution characterized by a higher frequency but manageable
severity that is more closely linked to general economic conditions than to
borrower-specific events. Receivable and loan purchase decisions and the related
discount pricing are impacted by the overall credit risk considerations inherent
in the cardmember receivables and cardmember loans. Credit risk associated with
Credco's derivatives is limited to the risk that a derivative counterparty will
not perform in accordance with the terms of the contract. To mitigate such risk,
Credco's counterparties are all required to be rated investment grade or higher.
Additionally, Credco enters into master netting agreements with its
counterparties wherever practical.
Market risk represents loss in value of portfolios and financial instruments due
to adverse changes in market variables. Credco's market risk consists primarily
of interest rate risk and foreign exchange risk. Market risk exposures are
monitored and managed by various risk committees, American Express' Treasury
Department as well as by management. The American Express Board approved
policies related to funding, investments and the use of derivative financial
instruments have been established. With respect to derivative financial
instruments, the value of such instruments is derived from an underlying
variable or multiple variables, including commodity, equity, foreign exchange
and interest rate indices or prices. These instruments enable end users to
increase, reduce, or alter exposure to various market risks and, as such, are an
integral part of Credco's market risk and asset liability management strategy
and processes. Interest rate risk is generated by the funding of cardmember
receivables and fixed rate cardmember loan purchases through longer term
variable rate borrowings. Such assets and liabilities generally do not create
naturally offsetting positions as it relates to basis, re-pricing or maturity
characteristics. By using derivative financial instruments, such as interest
rate swaps, the interest rate profile can be adjusted to maintain and manage a
desired profile. In addition, foreign exchange risk is generated by
cross-currency purchased cardmember receivables and cardmember loans, foreign
currency denominated balance sheet exposures and foreign currency earnings in
international units. Credco hedges this market exposure to the extent it is
economically justified through various means including local market
cross-currency funding and the use of derivative financial instruments, such as
foreign exchange forward and cross-currency swap contracts, which can help "lock
in" Credco's exposure to specific currencies at a specified rate. As a general
matter, virtually all foreign exchange risk is risk managed to decrease Credco's
exposure to currency rate fluctuations.
15
The following discussion includes sensitivity analysis of interest rate and
foreign currency risk and estimates the effects of hypothetical sudden and
sustained changes in the applicable market conditions on the ensuing year's
earnings, based on year-end positions. The market changes, assumed to occur as
of year-end, are a 100 basis point increase in market interest rates and a 10
percent strengthening of the U.S. dollar versus all other currencies.
Computations of the prospective effects of hypothetical interest rate and
foreign exchange rate changes are based on numerous assumptions, including
relative levels of market interest rates and foreign exchange rates, as well as
the levels of assets and liabilities. The hypothetical changes and assumptions
will be different from what actually occurs in the future. Furthermore, the
computations do not incorporate actions that management could take if the
hypothetical market changes actually occur, including revising the discount rate
applicable to purchases of new receivables. As a result, actual earnings
consequences will differ from those quantified. The detrimental effect on
Credco's pre-tax earnings of a hypothetical 100 basis point increase in interest
rates would be approximately $65 million and $47 million, based on 2004 and 2003
year-end positions, respectively. This effect is primarily a function of the
extent of variable rate funding of charge card and fixed rate lending products,
to the degree that interest rate exposure is not managed by derivative financial
instruments. From a foreign exchange risk perspective, based on the year-end
2004 and 2003 foreign exchange positions, the effect on Credco's earnings of the
hypothetical 10 percent strengthening of the U.S. dollar would be immaterial.
Credco defines operational risk as the risk of not achieving business objectives
due to failed processes, people or information systems, or from the external
environment (e.g., natural disasters). The management of operational risk is an
important priority for Credco. Operational risk can impact an organization
through direct or indirect financial loss, brand or reputational damage,
customer dissatisfaction, or legal or regulatory penalties. Credco is committed
to improving its ability to prioritize and manage operational risk through the
delivery of a comprehensive operational risk program. American Express'
Operational Risk Committee, which includes representatives from Credco's
management, is developing enterprise-wide guidelines and tools for managing
operational risk. However, day-to-day management of operational risk lies with
Credco. Credco continues to enhance its operational risk management practices on
an on-going basis. During 2005 and 2006, Credco will implement a robust
self-assessment methodology. The self-assessment methodology is based on COSO
(The Committee of Sponsoring Organizations of the Treadway Commission)
principles, and facilitates compliance with Section 404 of the Sarbanes-Oxley
Act. The implementation of this methodology is expected to result in improved
operational risk intelligence and a heightened level of preparedness to deal
with operational risk events and conditions that may adversely impact Credco's
operations.
Forward-looking Statements
Various forward-looking statements have been made in this Annual Report on Form
10-K. Forward-looking statements may also be made in Credco's other reports
filed with the SEC and in other documents. In addition, from time to time,
Credco through its management may make oral forward-looking statements.
Forward-looking statements are subject to risks and uncertainties, including
those identified below, which could cause actual results to differ materially
from such statements. The words "believe", "expect", "anticipate", "optimistic",
"intend", "evaluate", "plan", "estimate", "aim", "will", "may", "should",
"could", "would", "likely" and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date on which
they are made. Credco undertakes no obligation to update publicly or revise
any forward-looking statements. Factors that could cause actual results to
differ materially from Credco's forward-looking statements include, but are
not limited to:
o credit trends and the rate of bankruptcies, which can affect spending
on card products and debt payments by individual and corporate
customers;
16
o Credco's ability to accurately estimate the provision for losses in
Credco's outstanding portfolio of cardmember receivables and loans;
o fluctuations in foreign currency exchange rates;
o negative changes in Credco's credit ratings, which could result in
decreased liquidity and higher borrowing costs;
o the effect of fluctuating interest rates, which could affect Credco's
borrowing costs; and
o the impact on American Express Company's business resulting from
continuing geopolitical uncertainty.
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 14
to the Consolidated Financial Statements appearing herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
Item 9A. CONTROLS AND PROCEDURES.
Credco's management, with the participation of Credco's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of Credco's disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report. Based on such evaluation,
Credco's Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, Credco's disclosure
controls and procedures are effective. There have not been any changes
in Credco's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during Credco's fourth fiscal quarter that have materially affected,
or are reasonably likely to materially affect, Credco's internal
control over financial reporting.
Item 9B. OTHER INFORMATION.
Not applicable.
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.
17
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
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.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The Audit Committee of the Board of Directors of American Express
Company has appointed Ernst & Young LLP (Ernst & Young) as the
independent registered public accounting firm to audit the
Consolidated Financial Statements of Credco for the year ended
December 31, 2004.
On November 22, 2004, the Audit Committee of the Board of Directors of
American Express Company appointed PricewaterhouseCoopers LLP as the
independent registered public accounting firm for Credco for the year
beginning January 1, 2005 and dismissed Ernst & Young for such period.
Each year the Audit Committee reviews the accountants' qualifications,
performance and independence in accordance with regulatory
requirements and guidelines. At least every ten years, the Audit
Committee charter requires a detailed review of American Express'
accounting firm, which would include a comparison of resources
available in other firms. The Committee conducted such a review in
2004, resulting in the appointment of PricewaterhouseCoopers.
Ernst & Young's reports on Credco's Consolidated Financial Statements
for the fiscal years ended December 31, 2004 and 2003 did not contain
an adverse opinion or a disclaimer of opinion, and were not qualified
or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audits of Credco's Consolidated Financial
Statements for the years ended December 31, 2004 and 2003 and through
the date hereof, there were no disagreements between us and Ernst &
Young on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to Ernst & Young's satisfaction, would
have caused Ernst & Young to make a reference to the subject matter of
disagreements in connection with its reports. During the years ended
December 31, 2004 and 2003, and during the subsequent interim period
through the date hereof, there have been no reportable events, as
defined in Item 304(a)(1)(v) of Regulation S-K. During Credco's two
most recent fiscal years and through the date hereof, we did not
consult with PricewaterhouseCoopers in respect of our consolidated
financial statements for the years ended December 31, 2004 and
December 31, 2003 regarding any of the matters or events set forth in
Item 304(a)(2)(i) and (ii) of Regulation S-K.
Audit Fees
The aggregate fees billed or to be billed by Ernst & Young for each of
the last two years for professional services rendered for the audit of
Credco's Consolidated Financial Statements and services that were
provided in connection with statutory and regulatory filings or
engagements and other attest services were $315,000 for 2004 and
$407,000 for 2003.
Audit-Related Fees
Credco was not billed by Ernst & Young for any fees for audit-related
services for 2004 or 2003.
18
Tax Fees
Credco was not billed by Ernst & Young for any tax fees for 2004 or
2003.
All Other Fees
Credco was not billed by Ernst & Young for any other fees for 2004 or
2003.
Policy on Pre-Approval of Services Provided by Independent Registered
Public Accountants
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the
terms of the engagement of Credco's independent registered public
accountants are subject to the specific pre-approval of the Audit
Committee of American Express. All audit and permitted non-audit
services to be performed by Credco's independent registered public
accountants require pre-approval by the Audit Committee in accordance
with pre-approval procedures established by the Audit Committee. The
procedures require all proposed engagements of Credco's independent
registered public accountants for services to Credco of any kind to be
directed to the General Auditor of American Express and then submitted
for approval to the Audit Committee of American Express prior to the
beginning of any services.
19
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements:
See Index to the Financial Statements at page F-1 hereof.
2. Financial Statement Schedule:
See Index to the Financial Statements at page F-1 hereof.
3. Exhibits:
See Exhibit Index hereof.
20
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, 2005 By /s/ Walker C. Tompkins, Jr.
---------------------------------------
Walker C. Tompkins, Jr.
President and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
DATE: March 31, 2005 By /s/ Walker C. Tompkins, Jr.
---------------------------------------
Walker C. Tompkins, Jr.
President, Chief Executive Officer
and Director
DATE: March 31, 2005 /s/ Erich Komdat
---------------------------------------
Erich Komdat
Vice President and Chief Accounting
Officer
DATE: March 31, 2005 /s/ Paul H. Hough
---------------------------------------
Paul H. Hough
Chief Financial Officer and Director
DATE: March 31, 2005 /s/ David L. Yowan
---------------------------------------
David L. Yowan
Vice President and Director
21
AMERICAN EXPRESS CREDIT CORPORATION
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(Item 14 (a))
Page Number
---------------
Financial Statements:
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Income F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Shareholder's Equity F-6
Notes to Consolidated Financial Statements F-7 to F-20
Schedule:
II - Valuation and Qualifying Accounts F-21
All other schedules are omitted since the required information is not present or
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements or notes thereto.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of
American Express Credit Corporation
We have audited the accompanying consolidated balance sheets of American Express
Credit Corporation as of December 31, 2004 and 2003, 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, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of American Express Credit Corporation's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and 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, 2004 and 2003, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ Ernst & Young LLP
New York, New York
March 16, 2005
F-2
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, (Millions) 2004 2003 2002
- --------------------------------------------------------------------------------
Revenues
Discount revenue earned from purchased cardmember
receivables and loans $1,266 $1,399 $1,488
Finance charge revenue 339 476 531
Interest income from investments 104 69 83
Interest income from affiliates 119 31 45
Other 4 12 6
- --------------------------------------------------------------------------------
Total revenues 1,832 1,987 2,153
- --------------------------------------------------------------------------------
Expenses
Provision for losses, net of recoveries
of: 2004, $187; 2003, $204; 2002, $221 628 701 846
Interest expense 758 782 818
Interest expense - affiliates 105 70 98
Other 32 39 45
- --------------------------------------------------------------------------------
Total expenses 1,523 1,592 1,807
- --------------------------------------------------------------------------------
Pretax income 309 395 346
Income tax provision 75 135 118
- --------------------------------------------------------------------------------
Net income $ 234 $ 260 $ 228
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-3
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, (Millions, except share data) 2004 2003
- ------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 3,802 $ 1,528
Investments 3,183 2,593
Cardmember receivables, less reserves:
2004, $555; 2003, $555 21,333 20,610
Cardmember loans, less reserves:
2004, $55; 2003, $182 567 4,885
Loans and deposits with affiliates 7,039 1,923
Deferred charges and other assets 336 410
- ------------------------------------------------------------------------------------------------
Total assets $ 36,260 $ 31,949
- ------------------------------------------------------------------------------------------------
Liabilities and Shareholder's Equity
Short-term debt $ 7,780 $ 10,563
Short-term debt with affiliates 5,465 5,155
Current portion of long-term debt 5,734 1,060
Current portion of long-term debt with affiliates -- 918
Long-term debt 12,880 9,496
Long-term debt with affiliates -- 720
-------- --------
Total debt 31,859 27,912
Due to affiliates 1,148 419
Accrued interest and other liabilities 260 868
- ------------------------------------------------------------------------------------------------
Total liabilities 33,267 29,199
- ------------------------------------------------------------------------------------------------
Shareholder's Equity
Common stock-authorized 3 million
shares of $.10 par value; issued and outstanding 1.5 million shares 1 1
Capital surplus 161 161
Retained earnings 2,865 2,756
Accumulated other comprehensive income (loss):
Net unrealized securities gains (losses), net of tax:
2004, $13; 2003, $(6) (25) 11
Net unrealized derivatives losses, net of tax:
2004, $6; 2003, $96 (11) (179)
Foreign currency translation adjustments, net of tax:
2004, $(1); 2003, $- 2 --
- ------------------------------------------------------------------------------------------------
Total accumulated other comprehensive loss (34) (168)
- ------------------------------------------------------------------------------------------------
Total shareholder's equity 2,993 2,750
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 36,260 $ 31,949
- ------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-4
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (Millions) 2004 2003 2002
- --------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 234 $ 260 $ 228
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for losses 628 701 846
Amortization and other 13 -- --
Changes in operating assets and liabilities:
Deferred tax assets 29 (3) 54
Due to affiliates 11 16 (143)
Other operating assets and liabilities (298) 182 388
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 617 1,156 1,373
- --------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Decrease (increase) in cardmember receivables and loans 1,150 (3,166) (1,329)
Recoveries of cardmember receivables and loans previously written off 187 204 221
Purchase of participation interest in seller's interest in
cardmember receivables and loans from affiliate (1,121) (2,051) (1,518)
Sale of participation interest in seller's interest in cardmember
receivables and loans to affiliate -- 106 1,866
Sale of net cardmember receivables and loans to affiliate 3,128 460 1,543
Purchase of net cardmember receivables and loans from affiliate (377) (462) (713)
Purchase of investments (2,237) (888) (579)
Maturity of investments 333 230 95
Sale of investments 1,244 -- --
Loans and deposits due from affiliates (4,760) 123 (140)
Increase (decrease) due to affiliates 718 (1,015) 136
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,735) (6,459) (418)
- --------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net increase in short-term debt with affiliates
with maturities of ninety days or less 309 1,376 1,565
Net decrease in short-term debt - other with
maturities of ninety days or less (1,490) (559) (5,050)
Issuance of debt 9,538 13,560 11,209
Redemption of debt (4,840) (9,470) (7,163)
Dividends paid (125) -- --
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,392 4,907 561
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,274 (396) 1,516
Cash and cash equivalents at beginning of year 1,528 1,924 408
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,802 $ 1,528 $ 1,924
========================================================================================================
See Notes to Consolidated Financial Statements.
F-5
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Accumulated
Other
Common Capital Comprehensive Retained
Three Years Ended December 31, (Millions) Total Stock Surplus Loss Earnings
- --------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 $2,200 $1 $161 $(230) $2,268
- --------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 228 228
Change in net unrealized securities losses (7) (7)
Change in net unrealized derivatives losses (400) (400)
Derivatives losses reclassified to earnings 294 294
------
Total comprehensive income 115
- --------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 2,315 1 161 (343) 2,496
- --------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 260 260
Change in net unrealized securities gains 22 22
Change in net unrealized derivatives losses (147) (147)
Derivatives losses reclassified to earnings 300 300
------
Total comprehensive income 435
- --------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 2,750 1 161 (168) 2,756
- --------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 234 234
Change in net unrealized securities losses (36) (36)
Change in net unrealized derivatives gains 26 26
Derivatives losses reclassified to earnings 142 142
Foreign currency translation adjustments 2 2
------
Total comprehensive income 368
Cash dividends paid (125) (125)
- --------------------------------------------------------------------------------------------------------
Balances at December 31, 2004 $2,993 $1 $161 $ (34) $2,865
- --------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-6
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 Summary of Significant Accounting Policies
Basis of Presentation
American Express Credit Corporation together with its subsidiaries (Credco), is
a wholly-owned subsidiary of American Express Travel Related Services Company,
Inc. (TRS), which is a wholly-owned subsidiary of American Express Company
(American Express). American Express Overseas Credit Corporation Limited
together with its subsidiaries (AEOCC), Credco Receivables Corporation (CRC),
Credco Finance, Inc. together with its subsidiaries (CFI), American Express
Canada Credit Corporation (AECCC) and American Express Canada Finance Limited
(AECFL), are wholly-owned subsidiaries of Credco.
In August 2004, Credco purchased a 99.9 percent ownership interest in American
Express Capital Australia (AECA), with the remaining 0.1 percent interest held
by American Express International Inc. (AEII), a wholly-owned subsidiary of
American Express Limited (AEL), which is a wholly-owned subsidiary of TRS. AECA
was established as part of a change in local funding strategy for business in
Australia.
In October 2004, Credco established two additional 99.9 percent owned entities,
American Express Sterling Funding Limited Partnership (AESLP) and American
Express Euro Funding Limited Partnership (AEELP) in connection with the
implementation of alternate receivable funding strategies in the United Kingdom
and Germany. AESLP in turn established a wholly-owned subsidiary, American
Express Funding (Luxembourg) SARL (SARL). The remaining 0.1 percent interests in
AESLP and AEELP are held by AEII.
Principles of Consolidation
Credco consolidates all non-variable interest entities in which it holds a
greater than 50 percent voting interest. Entities in which Credco holds a
greater than 20 percent but less than 50 percent voting interest are accounted
for under the equity method. All other investments are accounted for under the
cost method unless Credco determines that it exercises significant influence
over the entity by means other than voting rights, in which case these entities
are either accounted for under the equity method or are consolidated, as
appropriate.
Credco also consolidates all variable interest entities (VIEs) for which it is
considered to be the primary beneficiary pursuant to Financial Accounting
Standards Board (FASB) Interpretation No. 46, "Consolidation of Variable
Interest Entities," as revised (FIN 46). The determination as to whether an
entity is a VIE is based on the amount and characteristics of the entity's
equity. In general, FIN 46 requires a VIE to be consolidated when an enterprise
has a variable interest for which it is deemed to be the primary beneficiary,
which means that it will absorb a majority of the VIE's expected losses or
receive a majority of the VIE's expected residual return.
All significant intercompany transactions are eliminated. Certain
reclassifications of prior period amounts have been made to conform to the
current presentation.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated into
U.S. dollars based upon exchange rates prevailing at the end of each year. The
resulting translation adjustments, along with any related hedge and tax effects,
are included in accumulated other comprehensive income (loss), a component of
shareholder's equity. Revenues and expenses are translated at the average month
end exchange rates during the year. Gains
F-7
and losses related to non-functional currency transactions, including non-U.S.
operations where the functional currency is the U.S. dollar, are reported net in
other revenue in Credco's Consolidated Statements of Income.
Amounts Based on Estimates and Assumptions
Accounting estimates are an integral part of the Consolidated Financial
Statements. In part, they are based upon assumptions concerning future events.
Among the more significant assumptions are those that relate to reserves for
cardmember losses and investment securities valuation. These accounting
estimates reflect the best judgment of management and actual results could
differ.
Discount Revenue
Credco earns discount revenue from purchasing cardmember receivables and loans.
For purchases of non-interest bearing cardmember receivables, the component of
the total discount revenue that is equal to the applicable provision for losses
is immediately recognized as revenue at time of purchase; the remaining amount
is deferred and recognized as revenue ratably over the period that the
receivables are estimated to be outstanding. Estimates are based on the recent
historical average life of cardmember receivables.
Finance Charge Revenue
Cardmember lending finance charges are assessed using the average daily balance
method for receivables owned and are recognized based upon the principal amount
outstanding in accordance with the terms of the applicable account agreement
until the outstanding balance is paid or written-off.
Cash and Cash Equivalents
Credco has defined cash and cash equivalents to include time deposits and other
highly liquid investments with original maturities of 90 days or less.
Investments
Available-for-Sale investment securities are carried at fair value on the
balance sheet with unrealized gains (losses) recorded in other comprehensive
income (loss), net of income tax provisions (benefits). Gains and losses are
recognized in the Consolidated Statements of Income in other revenue upon
disposition of the securities. Losses are also recognized when management
determines that a decline in value is other-than-temporary, which requires
judgment regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for debt securities include issuer downgrade,
default or bankruptcy. Credco also considers the extent to which cost exceeds
fair value, the duration and size of that gap and management's judgment about
the issuer's current and prospective financial condition. The fair value of the
Available-for-Sale investment portfolio is primarily based on quoted market
prices.
Reserves for Losses - Cardmember Receivables and Loans
Cardmember receivables represent amounts due from American Express charge card
customers and are recorded at the time that a cardmember enters into a
point-of-sale transaction at a service establishment. Cardmember receivable
balances are presented on the balance sheet net of reserves for losses and
typically include principal and any related fees. Cardmember loans represent
amounts due from customers of American Express' lending products and are
recorded at the time that a cardmember point-of-sale transaction is captured.
These loans are presented on the balance sheet net of reserves for cardmember
losses and include accrued interest receivable and fees as of the balance sheet
date. Additionally, cardmember loans include balances with extended payment
terms on certain charge card products, such as Sign and Travel and Extended
Payment Option. Credco's policy is to cease accruing for interest receivable
once a related cardmember loan is greater than 180 days past due. Accruals that
cease generally are not resumed.
F-8
Credco's reserves for losses relating to cardmember receivables and loans
represent management's estimate of the amount necessary to absorb losses
inherent in Credco's outstanding portfolio of cardmember receivables and loans.
Management's evaluation process requires certain estimates and judgments.
Reserves for these losses are primarily based upon models that analyze specific
portfolio statistics and also reflect, to a lesser extent, management's judgment
regarding overall adequacy. The analytic models take into account several
factors, including average write-off rates for various stages of receivable
aging (i.e., current, 30 days, 60 days, 90 days) over a 24-month period and
average bankruptcy and recovery rates. In exercising its judgment to adjust
reserves that are calculated by the analytic model, management considers the
level of coverage of past-due accounts, as well as external indicators, such as
leading economic indicators, unemployment rate, consumer confidence index,
purchasing manager's index, bankruptcy filings and the regulatory environment.
Receivables and loans are written-off when management deems amounts to be
uncollectible, which is generally determined by the numbers of days past due. In
general, bankruptcy and deceased accounts are written-off upon notification, or
when 180 days past due for lending products and 360 days past due for charge
card products. For all other accounts, write-off policy is based upon the
delinquency and product. Given both the size and the volatility of write-offs,
management continually monitors evolving trends and adjusts its business
strategy accordingly. To the extent historical credit experience is not
indicative of future performance or other assumptions used by management do not
prevail, loss experience could differ significantly, resulting in either higher
or lower future provisions for losses, as applicable.
Derivative Financial Instruments and Hedging Activities
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, establishes
accounting and reporting requirements for derivative financial instruments,
including hedging activities. SFAS No. 133 requires that all derivatives are
recognized on balance sheet at fair value as either assets or liabilities in
Credco's Consolidated Balance Sheets. The fair value of Credco's derivative
financial instruments are determined using either market quotes or valuation
models that are based upon the net present value of estimated future cash flows
and incorporate current market data inputs. Credco reports its derivative assets
and liabilities in other assets and other liabilities, respectively. The
accounting for the change in the fair value of a derivative instrument depends
on its intended use and the resulting hedge designation, if any.
Cash flow hedges
For derivative financial instruments that qualify as cash flow hedges, the
effective portions of the gain or loss on the derivatives are recorded in
accumulated other comprehensive income (loss) and reclassified into earnings
when the hedged item or transactions impact earnings. The amount that is
reclassified into earnings is presented in the income statement with the hedged
instrument or transaction impact, generally, in interest expense. Any
ineffective portion of the gain or loss is reported as a component of other
revenue. If a hedge is de-designated or terminated prior to maturity, the amount
previously recorded in accumulated other comprehensive income (loss) is
recognized into earnings over the period that the hedged item impacts earnings.
For any hedge relationships that are discontinued because the forecasted
transaction is not expected to occur according to the original strategy, any
related amounts previously recorded in accumulated other comprehensive income
(loss) are recognized into earnings.
Fair value hedges
For derivative financial instruments that qualify as fair value hedges, changes
in the fair value of the derivatives as well as of the corresponding hedged
assets, liabilities or firm commitments are recorded in earnings as a component
of other revenue. If a fair value hedge is de-designated or terminated prior to
maturity, previous adjustments to the carrying value of the hedged item are
recognized into earnings to match the earnings pattern of the hedged item.
F-9
Non-designated derivatives and trading activities
For derivative financial instruments that do not qualify for hedge accounting or
are not designated under SFAS No. 133 as hedges, changes in fair value are
reported in current period earnings generally as a component of other revenue.
Derivative financial instruments that are entered into for hedging purposes are
designated as such at the time that Credco enters into the contract. As required
by SFAS No. 133, for all derivative financial instruments that are designated
for hedging activities, Credco formally documents all of the hedging
relationships between the hedge instruments and the hedged items at the
inception of the relationships. Management also formally documents its risk
management objectives and strategies for entering into the hedge transactions.
Credco formally assesses, at inception and on a quarterly basis, whether
derivatives designated as hedges are highly effective in offsetting the fair
value or cash flows of hedged items. If it is determined that a derivative is
not highly effective as a hedge, Credco will discontinue the application of
hedge accounting.
Recently Issued Accounting Standards
In December 2004, the FASB issued FASB Staff Position FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004 (the Act)" (FSP FAS 109-2) to allow
additional time beyond the financial reporting period of enactment to evaluate
the effect of the Act on Credco's plan for reinvestment or repatriation of
foreign earnings for purposes of calculating the income tax provision. See Note
12 for further discussion of the Act, including the status of Credco's
evaluation of the Act.
In November 2003, the FASB ratified a consensus on the disclosure provisions of
Emerging Issues Task Force Issue 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" (EITF 03-1). Credco
complied with the disclosure provisions of this rule in its Annual Report on
Form 10-K for the year ended December 31, 2003. In March 2004, the FASB reached
a consensus regarding the application of a three-step impairment model to
determine whether investments accounted for in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and other
cost method investments are other-than-temporarily impaired. However, with the
issuance of FASB Staff Position (FSP) EITF 03-1-1, "Effective Date of Paragraphs
10-20 of EITF 03-1," on September 30, 2004, the provisions of the consensus
relating to the measurement and recognition of other-than temporary impairments
will be deferred pending further clarification from the FASB. The remaining
provisions of this rule, which primarily relate to disclosure requirements, are
required to be applied prospectively to all current and future investments
accounted for in accordance with SFAS No. 115 and other cost method investments.
Credco will evaluate the potential impact of EITF 03-1 after the FASB completes
its reassessment.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133. The adoption of this Statement did
not have a material impact on Credco's financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), as revised, which addresses consolidation
by business enterprises of variable interest entities and was subsequently
revised in December 2003. The original adoption of this Interpretation did not
have a material impact on Credco's financial statements. See Note 8 for further
discussion.
F-10
Note 2 Investments
Investments classified as Available-for-Sale at December 31 are distributed by
type as presented below:
2004 2003
- ---------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Fair Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
American Express Master
Trust Class B Notes $ 142 $-- $ -- $ 142 $ 220 $-- $-- $ 220
American Express Credit
Account Master Trust
Class C Notes 56 -- -- 56 1,555 15 -- 1,570
U.S. Treasury Notes 3,023 -- (38) 2,985 801 2 -- 803
- ---------------------------------------------------------------------------------------------------------------
Total $3,221 $-- $(38) $3,183 $2,576 $17 $-- $2,593
- ---------------------------------------------------------------------------------------------------------------
Available-for-Sale securities are reported at fair value, with the unrealized
gains and losses included in other comprehensive income (loss). The
Available-for-Sale classification does not mean that Credco necessarily expects
to sell these securities. They are available to meet possible liquidity needs
should there be significant changes in market interest rates, customer demand or
funding sources and terms.
Credco does not have any securities which have been in a continuous unrealized
loss position over a period of twelve months or more as of December 31, 2004. As
part of its ongoing monitoring process, management has determined that all of
the gross unrealized losses on the securities are attributable to changes in
interest rates. Additionally, Credco has the ability and intent to hold these
securities for a time sufficient to recover its amortized cost and has,
therefore, concluded that none of these securities is other-than-temporarily
impaired at December 31, 2004.
The change in net unrealized securities gains (losses) recognized in other
comprehensive income includes two components: (i) unrealized gains (losses) that
arose from changes in market value of securities that were held during the
period, and (ii) gains (losses) that were previously unrealized, but have been
recognized in current period net income due to sales of Available-for-Sale
securities (reclassification for realized (gains) losses). The following table
presents the components of the change in other comprehensive income for the
years ended December 31:
(Millions, net of taxes) 2004 2003 2002
- --------------------------------------------------------------------------------
Unrealized (losses) gains $(25) $11 $(7)
Reclassification for realized (losses) gains (11) 11 --
- --------------------------------------------------------------------------------
Net unrealized securities (losses) gains in other
comprehensive income $(36) $22 $(7)
- --------------------------------------------------------------------------------
The following is a distribution of Available-for-Sale investments by maturity as
of December 31, 2004:
(Millions) Cost Fair Value
- --------------------------------------------------------------------------------
Due within 1 year $ 801 $ 793
Due after 1 year through 5 years 2,222 2,192
- --------------------------------------------------------------------------------
3,023 2,985
American Express Master Trust Class B Notes 142 142
American Express Credit Account Master Trust Class C Notes 56 56
- --------------------------------------------------------------------------------
Total $3,221 $3,183
- --------------------------------------------------------------------------------
The expected payments on the Class B and Class C Notes may not coincide with
their contractual maturities. As such, these securities were not included in the
maturities distribution.
F-11
The table below includes purchases, sales and maturities of Available-for Sale
investments for the years ended December 31:
(Millions) 2004 2003
- --------------------------------------------------------------------------------
Purchases $2,237 $888
Sales $1,244 $ --
Maturities $ 333 $230
- --------------------------------------------------------------------------------
During 2004, Credco purchased $2.2 billion of U.S Treasury Notes. In June 2004,
Credco Receivables Corporation (CRC), a wholly-owned subsidiary of Credco, sold
$1.2 billion of Class C Notes previously issued by the American Express Credit
Account Master Trust, a qualified special purpose entity, to American Express
Receivables Financing Corporation II, a wholly-owned subsidiary of TRS. The
Class C Notes were sold at par and, as such, no gain or loss was recognized in
conjunction with the transaction. Additionally, during 2004, $255 million of the
Class C Notes matured. CRC is also invested in certain Class B Notes that have
been issued by American Express Master Trust, a non-qualifying special purpose
entity that is consolidated by TRS. During 2004, $78 million of the Class B
Notes matured.
Note 3 Cardmember Receivables and Loans
At December 31, 2004 and 2003, Credco owned $21.9 billion and $21.2 billion,
respectively, of cardmember receivables and participations in cardmember
receivables, representing approximately 97 percent and 81 percent, respectively,
of the total cardmember receivables and cardmember loans owned. CRC purchases
the participation interests from American Express Receivables Financing
Corporation (RFC) in conjunction with TRS' securitization program. The
participation interests represent undivided interests in cardmember receivables
transferred to the American Express Master Trust by TRS, which originated the
receivables. As discussed in Note 2, the American Express Master Trust is a
non-qualifying special purpose entity that is consolidated by TRS. At the time
of the Class B note maturities, RFC participated to CRC an additional undivided
interest totaling $1.2 billion ($1.1 billion net of reserves). At December 31,
2004 and 2003, CRC owned approximately $6.3 billion and $5.1 billion,
respectively, of participation interests, representing 28 percent and 20
percent, respectively, of Credco's total cardmember receivables and loans owned.
At December 31, 2004 and 2003, Credco held cardmember loans totaling $0.6
billion and $5.1 billion, respectively, including certain interest-bearing and
discounted extended payment plan receivables comprised of American Express
credit card, Sign & Travel and Extended Payment Option receivables and lines
of credit and loans to American Express Bank Ltd. customers, representing
approximately 3 percent and 19 percent, respectively, of the total cardmember
receivables and cardmember loans owned. In December 2004, TRS sold the leasing
product line in its small business financing unit, American Express Business
Finance Corporation (AEBF). In conjunction with the TRS sale, Credco sold $1.3
billion of leasing receivables to AEBF at par.
F-12
The following table presents the changes in the reserves for losses related
to cardmember receivables and loans:
Years Ended December 31, (Millions) 2004 2003 2002
- -------------------------------------------------------------------------------
Reserve for losses:
Balance at beginning of year $737 $741 $ 847
Additions:
Provision for losses charged to income (1) 815 905 1,067
Other credits (2) 53 134 144
Deductions:
Accounts written-off 841 976 1,119
Other charges (3) 154 67 198
---- ---- ------
Balance at end of year $610 $737 $ 741
==== ==== ======
Reserve for losses as a percentage of gross
cardmember receivables and loans owned at
year-end 2.70% 2.80% 3.34%
==== ==== ======
(1) Before recoveries on accounts previously written-off of $187 million, $204
million and $221 million in 2004, 2003 and 2002, respectively.
(2) Reserve balances applicable to new groups of cardmember receivables and
loans purchased from TRS and certain of its subsidiaries and participation
interests purchased from affiliates.
(3) Primarily relates to reserve balances applicable to certain groups of
cardmember receivables and loans and participation interests sold to
affiliates.
During 2004 Credco changed its funding strategy for cardmember receivables and
cardmember loans in certain international markets, which resulted in additional
loans with affiliates. At December 31, 2004 and 2003, Credco had loans to
affiliates outstanding of $7.0 billion and $1.9 billion. Such amounts represent
intercompany borrowings by other wholly-owned TRS subsidiaries and American
Express. Of the $7.0 billion outstanding as of December 31, 2004, $5.0 billion
is collateralized by third party assets owned by American Express or TRS and its
subsidiaries. Loss reserves related to these amounts are established on a
specific identification basis. See Note 9 for further discussion regarding loans
to affiliates.
Note 4 Short-term Debt
Credco's short-term debt outstanding, defined as debt with original maturities
of less than one year, consists of commercial paper and other notes payable.
Short-term debt at December 31 is as follows:
(Dollars in millions) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Year- Year-End Year- Year-End
Notional End Effective End Effective
Amount Stated Interest Notional Stated Interest
Outstanding of Rate on Rate with Maturity Outstanding Amount of Rate on Rate with Maturity
Balance Swaps Debt(a) Swaps(a) of Swaps Balance Swaps Debt(a) Swaps(a) of Swaps
- -------------------------------------------------------------------------------------------------------------------------------
Commercial paper $7,604 $363 2.17% 2.16% Various $10,308 $3,520 1.03% 1.90% Various
Other notes payable 176 -- 2.65% -- -- 255 -- 1.05% -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total $7,780 $363 2.18% $10,563 $3,520 1.03%
- ------------------------------------------------------------------------------------------------------------------------------
(a) For floating rate debt issuances, the stated and effective interest rates
were based on the respective rates at December 31, 2004 and 2003; these rates
are not an indication of future interest rates.
At December 31, 2004 and 2003, short-term debt with affiliates was $5,465
million and $5,155 million, respectively.
Credco has various facilities available to obtain short-term funding, including
the issuance of commercial paper and agreements with banks. At December 31, 2004
and 2003, Credco, through AEOCC, had short-term
F-13
borrowings under uncommitted lines of credit totaling $26 million and $119
million, respectively. Unused lines of credit available to support commercial
paper borrowings were approximately $9.0 billion and $10.5 billion at December
31, 2004 and 2003, respectively. Credco pays fees to the financial institutions
that provide these credit line facilities. The fair value of the unused lines of
credit was not significant at December 31, 2004 and 2003.
Credco paid $705 million, $764 million, and $654 million of interest on
short-term debt obligations in 2004, 2003 and 2002, respectively.
Note 5 Long-term Debt
(Dollars in millions) 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------
Year- Year-End Year- Year-End
End Effective End Effective
Notional Stated Interest Notional Stated Interest Maturity
Outstanding Amount of Rate on Rate with Maturity Outstanding Amount of Rate on Rate with of
Balance Swaps Debt(a) Swaps(a) of Swaps Balance Swaps Debt(a) Swaps(a) Swaps
- -----------------------------------------------------------------------------------------------------------------------------
Fixed Rate Senior
Notes due 2006
- 2017 $ 999 $ -- 3.00% -- -- $ 999 $ -- 3.00% -- --
Fixed Rate
Medium-Term
Notes due
2005 - 2009 3,251 350 5.22% 4.92% 2005 626 350 3.56% 1.25% 2005
Floating Rate
Medium-Term
Notes due
2004 - 2006 (b) 10,681 8,000 2.45% 2.92% Various 8,931 1,300 1.22% 1.55% Various
Borrowings under
Bank Credit
Facilities due
2009 3,683 785 4.54% 4.54% Various -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total $18,614 $9,135 3.38% $10,556 $1,650 1.53%
- -----------------------------------------------------------------------------------------------------------------------------
(a) For floating rate debt issuances, the stated and effective interest rates
were based on the respective rates at December 31, 2004 and 2003; these
rates are not an indication of future interest rates.
(b) These balances include $2 billion and $1 billion notes which are subject to
extension by the holders through March 5, 2008 and June 20, 2008,
respectively.
The above table includes the current portion of long-term debt of $5,734 million
and $1,060 million at December 31, 2004 and 2003, respectively. Aggregate annual
maturities of long-term debt are as follows (millions): 2005, $5,734; 2006,
$5,300; 2007, $1,151; 2008, $999; and thereafter, $5,430. Additionally,
long-term debt with affiliates was $1,638 million at December 31, 2003.
Credco paid interest on long-term debt obligations of $319 million, $170 million
and $121 million in 2004, 2003 and 2002, respectively.
Other financial institutions have committed to extend lines of credit to Credco
of $12.7 billion and $10.5 billion at December 31, 2004 and 2003, respectively.
Of these amounts, $9.0 billion and $10.5 billion were unutilized as of December
31, 2004 and 2003, respectively.
Note 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.
Note 7 Derivatives and Hedging Activities
Derivative financial instruments enable the end users to manage exposure to
credit or various market risks. The value of such instruments is derived from an
underlying variable or multiple variables, including commodity, equity, foreign
exchange, and interest rate indices or prices. Credco enters into various
derivative financial instruments as part of its ongoing risk management
activities. Credco does not engage in any trading activities. Credit risk
associated with Credco's derivatives is limited to the risk that a derivative
counterparty will not perform in accordance with the terms of the contract. To
mitigate such risk, Credco's counterparties are all
F-14
required to be rated investment grade or higher. Additionally, Credco enters
into master netting agreements with its counterparties wherever practical. As of
December 31, 2004, the total net fair value, excluding accruals, of derivative
product assets was $51.8 million and derivative product liabilities was $130.5
million, respectively. The total notional of derivatives at December 31, 2004
was $22.3 billion. The following summarizes Credco's use of derivative financial
instruments:
Cash Flow Hedges
Credco uses interest rate products, primarily interest rate swaps, to manage
funding costs and interest rate risk. Credco uses these derivatives to achieve a
targeted mix of fixed and floating rate funding, as well as to protect Credco
from the interest rate risk through hedging of its existing long-term debt,
the rollover of short-term borrowings (primarily commercial paper), and the
anticipated issuance of additional funding. During 2004, 2003 and 2002, Credco
reclassified into earnings pre-tax losses of $218 million, $461 million and $452
million, respectively ($141.7 million, $299.7 million and $293.8 million
after-tax, respectively). At December 31, 2004, Credco expects to reclassify $74
million of net pre-tax losses on derivative instruments from accumulated other
comprehensive income (loss) to earnings during the next twelve months.
Currently, the longest period of time over which Credco is hedging exposure to
the variability in future cash flows for forecasted transactions, excluding
those forecasted transactions related to the payment of variable interest on
existing financial instruments, is five years and relates to funding of foreign
currency denominated receivables. For 2004, 2003 and 2002, there were no gains
or losses on derivative transactions or portions thereof that were excluded from
the assessment of hedge effectiveness. During 2004 and 2003, certain hedge
relationships were discontinued and the related derivatives terminated because
certain forecasted transactions were not expected to occur according to the
original strategy. The amount of other comprehensive income that was immediately
recognized into earnings was a pre-tax gain of approximately $16 million in 2004
and $0.73 million in 2003. No hedge relationships were discontinued during the
year ended December 31, 2002 due to forecasted transactions no longer expected
to occur according to the original hedge strategy. The amount of hedge
ineffectiveness recognized for cash flow hedges in the year ended December 31,
2004 was a gain of approximately $0.66 million. No hedge ineffectiveness was
recognized for the years ended December 31, 2003 and 2002.
Fair Value Hedges
Credco is exposed to interest rate risk associated with fixed rate debt and,
from time to time, uses interest rate swaps to convert certain fixed rate debt
to floating rate. For 2004, 2003 and 2002, there were no gains or losses on
derivative transactions or portions thereof that were excluded from the
assessment of hedge effectiveness. No hedge ineffectiveness was recognized for
the years ended December 31, 2004, 2003 and 2002.
Derivatives not Designated as Hedges Under SFAS No. 133
Credco has economic hedges that either do not qualify or are not designated for
hedge accounting treatment under SFAS No. 133. Accordingly, the derivatives are
marked to market and the gain or loss is included in earnings. Such contracts
primarily relate to foreign currency transaction exposures that are economically
hedged, where practical, through the use of foreign currency contracts. Foreign
currency contracts involve the purchase and sale of a designated currency at an
agreed upon rate for settlement on a specified date. Such foreign currency
forward contracts entered into by Credco generally mature within one year.
Note 8 Variable Interest Entities
During the second quarter of 2004, Credco established a VIE used primarily to
loan funds to affiliates, which are funded by third party borrowings. Credco is
considered the primary beneficiary of the entity and, therefore, consolidates
the entity. Total assets as of December 31, 2004 were $1.6 billion. Credco has
no significant interest in a VIE for which it is not considered the primary
beneficiary.
Note 9 Transactions with Affiliates
In 2004, 2003 and 2002, Credco purchased cardmember receivables and loans
without recourse from TRS and certain of its subsidiaries totaling approximately
$240 billion, $209 billion and $184 billion, respectively.
F-15
Agreements for the purchase of cardmember receivables generally require that
Credco purchase such receivables at discount rates that yield to Credco earnings
of not less than 1.25 times its fixed charges on an annual basis. The agreements
require TRS and other Card Issuers, at their expense, to perform accounting,
clerical and other services necessary to bill and collect all cardmember
receivables owned by Credco. Since settlements under the agreements occur
monthly, an amount due from, or payable to, such affiliates may arise at the end
of each month.
As discussed in Note 2, at December 31, 2004 and 2003, CRC held American Express
Master Trust Class B Notes with a fair value of $142 million and $220 million,
respectively, and American Express Credit Account Master Trust Class C Notes
with a fair value of $56 million and $1,570 million, respectively. Additionally,
as discussed in Note 3, at December 31, 2004 and 2003, CRC owned approximately
$6.3 billion and $5.1 billion, respectively, of participation interests
purchased from RFC, representing approximately 28 percent and 20 percent,
respectively, of Credco's total cardmember receivables and cardmember loans. At
December 31, 2004 and 2003, there was no participation interest in cardmember
loans owned by CRC.
Other transactions with American Express and its subsidiaries for the years
ended December 31 were as follows:
December 31, (Millions) 2004 2003 2002
- --------------------------------------------------------------------------------
Cash and cash equivalents $ 8 $ 4 $ 2
Maximum month-end level of cash and cash
equivalents during the year 11 8 6
Loans and deposits with affiliates 7,039 1,923 2,047
Maximum month-end level of loans and deposits with
affiliates during the year 7,039 1,923 2,047
Short- and long-term debt with affiliates 5,465 6,793 4,722
Maximum month-end level of borrowings during the year 8,170 7,404 6,311
Interest income 119 31 45
Other income 4 12 6
Interest expense 105 70 98
- --------------------------------------------------------------------------------
In June 2004, Credco began funding cardmember receivables and cardmember loans
in Canada through loans to Amex Bank of Canada, the card issuer and a
wholly-owned subsidiary of TRS, rather than through the purchase of receivables
without recourse. Credco funded these loans to Amex Bank of Canada by borrowing,
through a newly established wholly-owned subsidiary, Canadian $2.0 billion
(approximately U.S. $1.47 billion) from a group of banks under a five year
committed credit facility.
In August 2004, Credco established a new 99.9 percent owned entity, American
Express Capital Australia (AECA). In September 2004, Credco borrowed Australian
$2.7 billion (approximately U.S. $1.9 billion) to provide an alternate funding
source for business in Australia. At the same time, Credco sold its Australian
cardmember loan portfolio, net of reserves, of $980 million and cardmember
receivable portfolio of $1,023 million to American Express Australia Limited
(AEAL), a wholly-owned subsidiary of TRS and the issuer of charge and credit
cards in Australia. Subsequently, AEAL transferred with recourse these
cardmember receivables and cardmember loans to AECA and will transfer with
recourse new cardmember receivables and cardmember loans originated by AEAL in
the future to AECA. The transfer of cardmember receivables and cardmember loans
with recourse to AECA resulted in Credco recording a loan with affiliate of $2.1
billion in its Consolidated Balance Sheet at December 31, 2004.
Additionally, in October 2004, Credco established two additional 99.9 percent
owned entities, American Express Sterling Funding Limited Partnership (AESLP)
and American Express Euro Funding Limited Partnership (AEELP) in connection with
the implementation of alternate receivable funding strategies in the United
Kingdom and Germany. AESLP in turn established a wholly-owned subsidiary,
American Express Funding (Luxembourg) SARL (SARL). These entities were funded
with the proceeds of debt securities issued by Credco in pounds sterling and
euros, in the third and fourth quarters of 2004, respectively. During the fourth
F-16
quarter of 2004, Credco sold its cardmember loan and receivable portfolios in
the United Kingdom and Germany to American Express Services Europe Limited
(AESEL), a wholly-owned subsidiary of TRS. Subsequently, AESEL transferred
with recourse cardmember receivables and cardmember loans of pounds sterling 1.3
billion (approximately U.S. $2.5 billion) and euros 485 million (approximately
U.S. $619 million) to SARL and AEELP, respectively. These transfers of
cardmember receivables and cardmember loans with recourse resulted in Credco
recording additional loans with affiliates of $2.9 billion in its Consolidated
Balance Sheet at December 31, 2004.
Components of loans and deposits with affiliates for the years ended December 31
were as follows:
(Millions) 2004 2003 2002
- --------------------------------------------------------------------------------
American Express $ -- $ 850 $ 850
TRS Subsidiaries:
American Express Services Europe Limited 2,930 -- --
American Express Australia Limited 2,111 -- --
Amex Bank of Canada 1,553 359 339
American Express International Inc. 445 329 369
ATM Holdings, Inc. -- 385 489
- --------------------------------------------------------------------------------
Total $7,039 $1,923 $2,047
- --------------------------------------------------------------------------------
Note 10 Fair Values of Financial Instruments
For the years ended December 31, 2004 and 2003, the estimated fair value for
cash and cash equivalents, cardmember receivables, cardmember loans, loans and
deposits with affiliates, short-term debt and floating rate long-term debt,
approximate their carrying amounts due to the short-term nature or variable
interest terms inherent in the financial instruments. Derivative product assets
and liabilities and investments are recorded in the Consolidated Balance Sheets
at their estimated fair values. The estimated fair value of the fixed rate
long-term debt is determined using quoted market prices or discounted cash flow
analyses. The aggregate fair value of total long-term debt, including the
current amount outstanding, was $18.8 billion and $12.2 billion at December 31,
2004 and 2003, respectively. Fair value amounts represent an estimate of value
at a point in time. Significant assumptions regarding economic conditions and
risk characteristics associated with the particular financial instruments and
other factors were used for purposes of this disclosure. These assumptions are
subjective in nature and involve a matter of judgment. Changes in the
assumptions could have a material impact on the fair value amounts estimated.
Note 11 Significant Credit Concentrations
A credit concentration may exist if customers are involved in similar
industries, economic sectors and geographic regions. Credco's customers operate
in diverse economic sectors and geographic regions. Therefore, management does
not expect any material adverse consequences to Credco's financial position to
result from these types of credit concentrations.
Note 12 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 income tax benefits for net operating
losses, future tax deductions and foreign tax credits 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.
F-17
The components of income tax provision included in Credco's Consolidated
Statements of Income were as follows:
(Millions) 2004 2003 2002
- --------------------------------------------------------------------------------
Current income tax provision:
U.S. federal $39 $135 $ 55
Foreign 6 3 9
- --------------------------------------------------------------------------------
Total current provision $45 $138 $ 64
- --------------------------------------------------------------------------------
Deferred income tax provision (benefit):
U.S. federal $30 $ (3) $ 54
Foreign -- -- --
- --------------------------------------------------------------------------------
Total deferred provision (benefit) $30 $ (3) $ 54
- --------------------------------------------------------------------------------
Total income tax provision $75 $135 $118
- --------------------------------------------------------------------------------
A reconciliation of the U.S. Federal statutory income tax rate of 35% to
Credco's effective income tax rates for 2004, 2003 and 2002 was as follows:
2004 2003 2002
- --------------------------------------------------------------------------------
Combined tax at U.S. statutory rate 35.0% 35.0% 35.0%
Changes in taxes resulting from
Foreign income taxes at rates other than U.S. statutory
rate (10.7) (0.8) (0.9)
- --------------------------------------------------------------------------------
Effective tax rates 24.3% 34.2% 34.1%
- --------------------------------------------------------------------------------
Accumulated earnings of certain foreign subsidiaries, which totaled $158 million
at December 31, 2004, are intended to be permanently reinvested outside the
United States. Accordingly, federal taxes, which would have aggregated
approximately $48 million, have not been provided on those earnings.
As discussed in Note 1, the American Jobs Creation Act of 2004 (the Act) was
enacted on October 22, 2004. The Act contains a provision that permits an 85%
dividends received deduction for qualified repatriations of earnings that would
otherwise be permanently reinvested outside of the United States. Credco is
currently examining the specific requirements of the legislation to determine
whether a qualifying repatriation is advisable and will make a decision in 2005.
The amount of potential repatriation, if executed, will be between zero and $108
million, which is the statutory limit for Credco. Depending upon the amount of
the repatriation, if any, Credco will incur an additional tax expense between
zero and $6 million. The final tax liability may be reduced by available foreign
tax credits offset in part by the disallowance, for tax purposes, of expenses
incurred to implement the repatriation.
F-18
Deferred income tax provision (benefit) results from differences between assets
and liabilities measured for financial reporting and for income tax return
purposes. The significant components of deferred tax assets and liabilities at
December 31, 2004 and 2003 are reflected in the following table:
(Millions) 2004 2003
- --------------------------------------------------------------------------------
Deferred tax assets:
Reserves not yet deducted for tax purposes $226 $254
Net unrealized derivative losses 6 96
Net unrealized securities losses 13 --
- --------------------------------------------------------------------------------
Total deferred tax assets $245 $350
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Net unrealized securities gains $ -- $ 6
Other 1 --
- --------------------------------------------------------------------------------
Total deferred tax liabilities $ 1 $ 6
- --------------------------------------------------------------------------------
Net deferred tax assets $244 $344
- --------------------------------------------------------------------------------
In 2004 and 2003, due to affiliates included current federal taxes payable to
TRS of $2 million and $35 million, respectively.
Net income taxes paid by Credco during 2004, 2003 and 2002, including taxes paid
to TRS, were $79 million, $183 million and $0.2 million, respectively, and
include estimated tax payments and cash settlements relating to prior tax years.
Comprehensive income in the Consolidated Statements of Shareholder's Equity is
presented net of the following income tax provision (benefit) amounts:
(Millions) 2004 2003 2002
- --------------------------------------------------------------------------------
Net unrealized securities (losses) gains $(19) $12 $ (4)
Net unrealized derivative gains (losses) 90 83 (57)
- --------------------------------------------------------------------------------
Net income tax provision (benefit) $ 71 $95 $(61)
- --------------------------------------------------------------------------------
Note 13 Geographic Segments
Credco is principally engaged in the business of purchasing and financing
cardmember receivables and loans 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):
(Millions) 2004 2003 2002
- --------------------------------------------------------------------------------
Revenues
United States $1,196 $1,408 $1,550
International 636 579 603
- --------------------------------------------------------------------------------
Consolidated 1,832 1,987 2,153
- --------------------------------------------------------------------------------
Pretax income
United States 223 313 308
International 86 82 38
- --------------------------------------------------------------------------------
Consolidated $ 309 $ 395 $ 346
- --------------------------------------------------------------------------------
F-19
Note 14 Quarterly Financial Data (Unaudited)
2004 2003
- ------------------------------------------------------------------------------------
Quarters Ended, (Millions) 12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
- ------------------------------------------------------------------------------------
Revenues $449 $477 $472 $434 $510 $488 $507 $482
Pretax income 30 93 99 87 107 82 105 101
Net income 46 65 66 57 71 54 69 66
- ------------------------------------------------------------------------------------
F-20
AMERICAN EXPRESS CREDIT CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, (Millions) 2004 2003 2002
- --------------------------------------------------------------------------------
Reserve for losses:
Balance at beginning of year $ 737 $ 741 $ 847
Additions:
Provision for losses charged to income (1) 815 905 1,067
Other credits (2) 53 134 144
Deductions:
Accounts written-off 841 976 1,119
Other charges (3) 154 67 198
----- ----- ------
Balance at end of year $ 610 $ 737 $ 741
===== ===== ======
Reserve for losses as a percentage of gross
cardmember receivables and loans owned at
year-end 2.70% 2.80% 3.34%
===== ===== ======
(1) Before recoveries on accounts previously written-off of $187 million, $204
million and $221 million in 2004, 2003 and 2002, respectively.
(2) Reserve balances applicable to new groups of cardmember receivables and
loans purchased from TRS and certain of its subsidiaries and participation
interests purchased from affiliates.
(3) Primarily relates to reserve balances applicable to certain groups of
cardmember receivables and loans and participation interests sold to
affiliates
F-21
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, amended Incorporated by reference to
and restated as of November Exhibit 3(b) to Registrant's
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).
E-1
4(d) Form of Original Issue Incorporated by reference to
Discount Note with optional Exhibit 4(v) to Registrant's
redemption provisions Registration Statement on Form S-3
dated September 2, 1987 (File No.
33-16874).
4(e) Form of Zero Coupon Note with Incorporated by reference to
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 and Exhibit 4(x) to Registrant's
repayment provisions Registration Statement on Form S-3
dated September 2, 1987 (File No.
33-16874).
4(g) Form of Extendible Note with Incorporated by reference to
optional redemption and Exhibit 4(y) to Registrant's
repayment provisions Registration Statement on Form S-3
dated September 2, 1987 (File No.
33-16874).
4(h) Form of Fixed Rate Incorporated by reference to
Medium-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).
E-2
4(j) Form of Warrant Agreement Incorporated by reference to
Exhibit 4(bb) to Registrant's
Registration Statement on Form S-3
dated September 2, 1987 (File No.
33-16874).
4(k) Form of Supplemental Incorporated by reference to
Indenture Exhibit 4(cc) to Registrant's
Registration Statement on Form S-3
dated September 2, 1987 (File No.
33-16874).
4(l) Terms and conditions of debt Incorporated by reference to
instruments to be issued Exhibit 4(l) to Registrant's
outside the United States Annual Report on Form 10-K
(Commission File No. 1-6908) for
the year ended December 31, 1997.
4(m) Form of Permanent Global Incorporated by reference to
Fixed Rate Medium-Term Senior Exhibit 4(s) to Registrant's
Note, Series B Current Report on Form 8-K
(Commission File No. 1-6908) dated
December 21, 2001.
4(n) Form of Permanent Global Incorporated by reference to
Floating Rate Medium-Term Exhibit 4(t) to Registrant's
Senior Note, Series B Current Report on Form 8-K
(Commission File No. 1-6908) dated
December 21, 2001.
4(o) Form of Senior Floating Rate Incorporated by reference to
Note Extendible Liquidity Exhibit 4(u) to Registrant's
Securities'r'(EXLs'r') Current Report on Form 8-K
(Commission File No. 1-6908) dated
February 6, 2003.
4(p) Form of Global Fixed Rate Incorporated by reference to
Note Exhibit 4(v) to Registrant's
Current Report on Form 8-K
(Commission File No. 1-6908) dated
May 14, 2003.
4(q) Form of Global LIBOR Floating Incorporated by reference to
Rate Note Exhibit 4(w) to Registrant's
Current Report on Form 8-K
(Commision File No. 1-6908) dated
May 14, 2003.
E-3
4(r) 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) for
Services Company, Inc. the year ended December 31, 1987.
10(b) Participation Agreement dated Incorporated by reference to
as of August 3, 1992 between Exhibit 10(c) to Registrant's
American Express Receivables Annual Report on Form 10-K
Financing Corporation and (Commission File No. 1-6908) for
Credco Receivables Corp. the year ended December 31, 1992.
12.1 Computation in Support of Electronically filed herewith.
Ratio of Earnings to Fixed
Charges of American Express
Credit Corporation
12.2 Computation in Support of Electronically filed herewith.
Ratio of Earnings to Fixed
Charges of American Express
Company
16 Letter from Ernst & Young LLP Incorporated by reference to
regarding change in Exhibit 16.1 of Credco's Current
certifying accountant Report on Form 8-K (Commission
File No. 1-6908) dated November
22, 2004 (as amended by Credco's
Current Report on Form 8-K/A
(Commission File No. 1-6908) dated
November 22, 2004 (filed December
8, 2004) and Credco's Current
Report on Form 8-K/A (Commission
File No. 1-6908) dated November
22, 2004 (filed March 31, 2005.)).
23 Consent of Independent Electronically filed
Registered Public herewith.
Accounting Firm
E-4
31.1 Certification of Walker C. Electronically filed herewith.
Tompkins, Jr., Chief
Executive Officer, pursuant
to Rule 13a-14(a) promulgated
under the Securities Exchange
Act of 1934, as amended
31.2 Certification of Paul H. Electronically filed herewith.
Hough, Chief Financial
Officer, pursuant to Rule
13a-14(a) promulgated under
the Securities Exchange Act
of 1934, as amended
32.1 Certification of Walker C. Electronically filed herewith.
Tompkins, Jr., Chief Executive
Officer, pursuant to 18
U.S.C. Section 1350, as
adopted pursuant to Section
906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of Paul H. Electronically filed herewith.
Hough, Chief Financial
Officer, pursuant to 18
U.S.C. Section 1350, as
adopted pursuant to Section
906 of the Sarbanes-Oxley Act
of 2002
E-5
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as..................... 'r'