American Express 2005 Annual Report Download - page 90

NOTE 14 Significant Credit Concentrations
A credit concentration may exist if customers are
involved in similar industries, economic sectors and
geographic regions. The Company’s customers operate
in diverse economic sectors and geographic regions.
Therefore, management does not expect any material
adverse consequences to the Company’s financial posi-
tion, results of operations or cash flows to result from
these types of credit concentrations.
Certain distinctions between categories require manage-
ment judgment. The following table represents the
Company’s maximum credit exposure by industry,
including the credit exposure associated with derivative
financial instruments, at December 31:
(Billions, except percentages) 2005 2004
Financial institutions
(a)
$ 15.3 $ 16.2
Individuals, including
cardmember receivables
and loans
(b)
287.4 238.9
U.S. Government and agencies
(c)
12.9 12.3
All other 7.9 10.1
Total $ 323.5 $ 277.5
Composition:
On-balance sheet 34% 36%
Off-balance sheet 66% 64%
Total 100% 100%
(a)Financial institutions primarily include banks, broker-dealers, insurance
companies and savings and loan associations.
(b)Charge card products have no preset spending limit; therefore, the quan-
tified credit amount includes the total credit line available to cardmem-
bers. The unused lines aggregating $213 billion and $176 billion in 2005
and 2004, respectively, represent commitments of the Company. See Note
11 for further explanation.
(c)U.S. Government and agencies represent the U.S. Government and its
agencies, states and municipalities, and quasi-government agencies.
Exposure to Airline Industry
Historically, the Company has not experienced
significant revenue declines resulting from a particular
airline’s scaling-back or closure of operations due to
bankruptcy or other financial challenges because the
volumes generated from the airline are typically shifted
to other participants in the industry that accept the
Company’s card products. Nonetheless, the Company is
exposed to business and credit risk in the airline indus-
try primarily through business arrangements where the
Company has remitted payment to the airline for a card-
member purchase of tickets that have not yet been used
or “flown.” This creates a potential exposure for the
Company in the event that the cardmember is not able
to use the ticket and the Company, based on the facts
and circumstances, credits the cardmember for the
unused ticket. Historically, this type of exposure has not
generated any significant losses for the Company
because of the need for an airline that is operating under
bankruptcy protection to continue accepting credit and
charge cards and honoring requests for credits and
refunds in the ordinary course of business, and in fur-
therance of its reorganization and its formal assumption,
with bankruptcy court approval, of its card acceptance
agreement, including approval of the Company’s right to
hold cash to cover these potential exposures to provide
credits to cardmembers. Typically, as an airline’s finan-
cial situation deteriorates, the Company delays payment
to the airlines thereby increasing cash held to protect
itself in the event of an ultimate liquidation of the airline.
The Company’s goal in these distressed situations is to
hold sufficient cash over time to ensure that upon liq-
uidation the cash held is equivalent to the credit expo-
sure related to any unused tickets.
As part of Delta Airlines’ (Delta) decision to file for pro-
tection under Chapter 11 of the Bankruptcy Code, the
Company agreed with Delta to restructure certain of its
financial arrangements with the airline. In particular,
Delta agreed to repay to the Company an aggregate $557
million, primarily representing the Company’s prepay-
ment of Delta SkyMiles rewards points. Contemporane-
ously with the repayment, the Company lent to Delta
$350 million as part of Delta’s post-petition, debtor-in-
possession (DIP) financing under the Bankruptcy Code.
At December 31, 2005, the remaining principal balance
is $300 million. This post-petition facility continues to
be structured as an advance against the Company’s obli-
gations to purchase Delta SkyMiles rewards points
under the Company’s co-brand and Membership
Rewards agreements and will be amortized ratably each
month beginning in July 2006 through November
2007. The Company’s post-petition facility is secured by
(i) senior liens on Delta assets specifically related to its
American Express co-brand, Membership Rewards and
card acceptance relationships and (ii) liens subordinate
to senior liens on all other Delta assets including the
assets and shares of certain Delta subsidiaries.
NOTE 15 Stock Plans
Stock Option and Award Programs
Under the 1998 Incentive Compensation Plan, awards
may be granted to officers and other key individuals
who perform services for the Company and its partici-
pating subsidiaries. These awards may be in the form of
stock options, restricted stock, portfolio grants and
Notes to Consolidated
Financial Statements
AXP / AR.2005
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