American Express 2007 Annual Report Download - page 98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The following table provides information related to such
guarantees as of December 31:
2007 2006
Type of Guarantee
Maximum
amount of
undiscounted
future
payments(a)
(Billions)
Amount
of related
liability(b)
(Millions)
Maximum
amount of
undiscounted
future
payments(a)
(Billions)
Amount
of related
liability(b)
(Millions)
Card and travel
operations(c) $77 $ 67 $75 $ 119
Other(d) 1 48 1 34
Total $78 $115 $76 $ 153
(a) Calculated using Management’s best estimate of maximum exposure under
the hypothetical scenario that all eligible claims (out of total billed business
volumes) occur within the next 12 months. The Merchant Protection
guarantee is calculated using Management’s best estimate of maximum
exposure based on all eligible claims as measured against annual billed
business volumes.
(b) Included as part of other liabilities on the Company’s Consolidated
Balance Sheets. The decrease in the liability from December 31, 2006 to
December 31, 2007, results substantially from a reduction in merchant-
related reserves primarily related to the airline industry.
(c) Includes Credit Card Registry, Merchandise Protection, Account Protection,
Merchant Protection and Baggage Protection. The Company generally has
no collateral or other recourse provisions related to these guarantees.
(d) Other primarily relates to real estate, tax, and Visa settlement indemnifications
as well as contingent consideration obligations, among other guarantees
provided in the ordinary course of business.
NOTE 14 COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in a number
of legal and arbitration proceedings, including class actions,
concerning matters arising in connection with the conduct of
their respective business activities. The Company believes it
has meritorious defenses to each of these actions and intends
to defend them vigorously. In the course of its business, the
Company and its subsidiaries are also subject to governmental
examinations, information gathering requests, subpoenas,
inquiries and investigations. The Company believes that it
is not a party to, nor are any of its properties the subject of,
any pending legal, arbitration, regulatory, tax or investigative
proceedings that would have a material adverse effect on
the Company’s consolidated financial condition or liquidity.
However, it is possible that the outcome of any such proceedings
could have a material impact on results of operations in any
particular reporting period as the proceedings are resolved.
On November 7, 2007, the Company announced that it
entered into an agreement with Visa Inc., Visa USA, and Visa
International (collectively Visa) to remove Visa and certain
of its member banks as defendants in the Company’s lawsuit
against MasterCard International, Inc. (MasterCard), Visa and
their member banks. The lawsuit alleges MasterCard, Visa and
their member banks illegally blocked the Company from the
bank-issued card business in the United States. The agreement
has been approved by Visa USA’s member banks.
Under terms of the settlement agreement reached with Visa,
the Company will receive an aggregate maximum payment of
$2.25 billion. The initial amount due March 31, 2008, of $1.13
billion ($700 million after-tax) was recorded as a gain in the
fourth quarter of 2007. The remaining payments, payable in
installments of up to $70 million ($43 million after-tax) per
quarter over the next four years, are subject to achieving certain
quarterly performance criteria within the U.S. Global Network
Services business the Company is optimistic it will achieve.
Given the performance criteria associated with the installment
payments, the Company will recognize these payments in
income when the performance criteria is achieved. Related to
the settlement, the Company recognized litigation expense of
$74 million ($46 million after-tax). Both the Visa settlement
gain and the related litigation expense are included in other,
net expenses within continuing operations in the Consolidated
Statements of Income and within the Corporate & Other
segment.
The Company also has contingent obligations to make
payments under contractual agreements entered into as part
of the ongoing operation of the Company’s business, primarily
with co-brand partners. The contingent obligations under
such arrangements were approximately $4.3 billion as of
December 31, 2007.
The Company leases certain facilities and equipment under
noncancelable and cancelable agreements. Total rental expense
amounted to $300 million, $297 million, and $353 million in
2007, 2006, and 2005, respectively. At December 31, 2007, the
minimum aggregate rental commitment under all noncancelable
operating leases (net of subleases of $28 million) was:
(Millions)
2008 $ 247
2009 232
2010 199
2011 162
2012 150
Thereafter 1,688
Total $2,678
Obligations under capital leases or other similar arrangements
entered into by the Company are not material.
During 2005, the Company completed sale-leaseback
transactions on several of its owned properties which were sold
at fair value. These transactions are included in total operating
lease obligations. For 2005, the proceeds totaled $172 million,
and pretax gains, net of closing costs, were $46 million. The
pretax gains have been deferred and are amortized over the ten-
year term of the operating leasebacks as a reduction to rental
expense.
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