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Section 1: 10-K (FORM 10-K)

Form 10-K

 

 

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, 2007

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. 1-7657

 

 

American Express Company

(Exact name of registrant as specified in its charter)

 

New York   13-4922250
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification No.)

 

World Financial Center

200 Vesey Street

New York, New York

  10285
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (212) 640-2000

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

 

Name of each exchange

on which registered

Common Shares (par value $0.20 per Share)

  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨    No  x

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 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x

  Accelerated filer  ¨

Non-accelerated filer  ¨ (Do not check if a smaller reporting company)

  Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨    No  x

As of June 29, 2007, the aggregate market value of the registrant’s voting shares held by non-affiliates of the registrant was approximately $72.2 billion based on the closing sale price as reported on the New York Stock Exchange.

As of February 20, 2008, there were 1,156,087,817 common shares of the registrant outstanding.

Documents Incorporated By Reference

Parts I, II and IV: Portions of Registrant’s 2007 Annual Report to Shareholders.

Part III: Portions of Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Shareholders to be held on April 28, 2008.

 

 

 


TABLE OF CONTENTS

Form 10-K

Item Number

 

PART I   
1.   

Business

   1
  

Introduction

   1
  

Global Network & Merchant Services

   3
  

U.S. Card Services

   15
  

International Card Services

   23
  

Global Commercial Services

   24
  

Corporate & Other

   28
  

Foreign Operations

   33
  

Segment Information and Classes of Similar Services

   35
  

Executive Officers of the Company

   36
  

Employees

   37
1A.   

Risk Factors

   37
1B.   

Unresolved Staff Comments

   45
2.   

Properties

   45
3.   

Legal Proceedings

   46
4.   

Submission of Matters to a Vote of Security Holders

   53
PART II   
5.   

Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   54
6.   

Selected Financial Data

   55
7.   

Management’s Discussion and Analysis of Financial Condition and Results of Operation

   55
7A.   

Quantitative and Qualitative Disclosures about Market Risk

   55
8.   

Financial Statements and Supplementary Data

   55
9.   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   55
9A.   

Controls and Procedures

   55
9B.   

Other Information

   56
PART III   
10.   

Directors, Executive Officers and Corporate Governance

   57
11.   

Executive Compensation

   57
12.   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   57
13.   

Certain Relationships and Related Transactions, and Director Independence

   57
14.   

Principal Accounting Fees and Services

   57
PART IV   
15.   

Exhibits and Financial Statement Schedules

   58
  

Signatures

   59
  

Index to Financial Statements Covered by Reports of Independent Registered Public Accounting Firm

   F-1
  

Exhibit Index

   E-1


PART I*

 

ITEM 1. BUSINESS

INTRODUCTION

Overview

American Express Company, together with its consolidated subsidiaries (“American Express,” the “Company,” “we,” “us” or “our”), is a leading global payments and travel company. Our principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. We were founded in 1850 as a joint stock association. We were incorporated in 1965 as a New York corporation.

Our headquarters are located in New York, New York in lower Manhattan. We also have offices in other locations in North America, as well as throughout the world.

During 2007, we realigned our reportable operating segments to reflect the reorganization of our businesses into two customer-focused groups—the Global Consumer Group and the Global Business-to-Business Group. Accordingly, U.S. Card Services and International Card Services are aligned within the Global Consumer Group and Global Commercial Services and Global Network & Merchant Services are aligned within the Global Business-to-Business Group.

Securities Exchange Act Reports and Additional Information

We maintain an Investor Relations Web site on the Internet at http://ir.americanexpress.com. We make available free of charge, on or through this Web site, our annual, quarterly and current reports and any amendments to those reports as soon as reasonably practicable following the time they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). To access these, just click on the “SEC Filings” link under the caption “Financial Information & Filings” found on our Investor Relations homepage.

You can also access our Investor Relations Web site through our main Web site at www.americanexpress.com by clicking on the “About American Express” link, which is located at the bottom of our homepage. Information contained on our Investor Relations Web site and our main Web site is not incorporated by reference into this report or any other report filed with or furnished to the SEC.

2007 Highlights

Compared with 2006, we delivered:

 

   

revenues net of interest expense of $27.7 billion, up 10% from $25.2 billion;

 

   

income from continuing operations of $4.0 billion, up 12% from $3.6 billion;

 

   

net income of $4.0 billion up 8% from $3.7 billion;

 

   

diluted earnings per share based on income from continuing operations of $3.39, up 16% from $2.92;

 

 

* Some of the statements in this report constitute forward-looking statements. You can identify forward-looking statements by words such as “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “estimate,” “predict,” “potential,” “continue” or other similar expressions. We discuss certain factors that affect our business and operations and that may cause our actual results to differ materially from these forward-looking statements under “Item 1A. Risk Factors” below. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements.

 

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diluted earnings per share based on net income of $3.36, up 12% from $2.99; and

 

   

return on average equity of 37%, compared with 35%.

This strong performance was tempered by events at the end of the year, when the Company began to feel the effects of the weakening U.S. economy as cardmember spending slowed and past-due and write-off rates in U.S. Card Services increased. These trends led us to increase credit-related reserves in the fourth quarter and to adopt a more cautious view for 2008.

For a complete discussion of our 2007 financial results, including financial information regarding each of our reportable operating segments, see pages 26 -113 of our 2007 Annual Report to Shareholders, which are incorporated herein by reference. For a summary of the Company and our reportable operating segments, and a discussion of our principal sources of revenue, see pages 26-29 and pages 72-75, respectively, of the 2007 Annual Report to Shareholders.

On September 18, 2007, we entered into an agreement to sell our international banking subsidiary, American Express Bank Ltd. (“AEBL”) and American Express International Deposit Company (“AEIDC”), a subsidiary that issues investment certificates to AEBL’s customers, to Standard Chartered PLC for the approximate value of $1.1 billion, subject to certain regulatory approvals. This transaction is described in more detail below and on pages 27-28 under the caption “Financial Review” and Note 2 to our Consolidated Financial Statements on page 80 of our 2007 Annual Report to Shareholders, which descriptions are incorporated herein by reference.

On November 7, 2007, we announced that we had 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. For additional information about this settlement agreement please see “Corporate Matters” within “Legal Proceedings” below.

Products and Services

The Company’s Global Consumer Group and Global Business-to-Business Group provide a variety of products and services worldwide.

The Global Consumer Group offers a range of products and services including:

 

   

charge and lending (i.e., credit) card products for consumers and small businesses worldwide;

 

   

consumer travel services; and

 

   

stored value products such as Travelers Cheques and prepaid products.

The Business-to-Business Group provides, among other products and services:

 

   

business travel, corporate cards and other expense management products and services;

 

   

network services and merchant acquisition and merchant processing for the Company’s network partners and proprietary payments businesses; and

 

   

point-of-sale, back-office, and marketing products and services for merchants.

In certain countries we have granted licenses to partially-owned affiliates and unaffiliated entities to offer some of these products and services.

 

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The Company’s various products and services are sold globally to diverse customer groups, including consumers, small businesses, middle-market companies, large corporations, and banking and financial institutions. These products and services are sold through various channels including direct mail, the Internet, employee and independent third party sales forces and direct response advertising.

Our general purpose card network, card issuing and merchant acquiring and processing businesses are global in scope. We are a world leader in providing charge and credit cards to consumers, small businesses and corporations. These cards include cards issued by American Express as well as cards issued by third-party banks and other institutions that are accepted on the American Express network (collectively, “Cards”). Our Cards permit Cardmembers to charge purchases of goods and services in most countries around the world at the millions of merchants that accept cards bearing our logo. We added a net total of 8.4 million Cards in 2007, bringing total worldwide Cards-in-force to 86.4 million (including Cards issued by third parties). In 2007, our worldwide billed business (spending on American Express® Cards, including Cards issued by third parties) was $647.3 billion.

Our business as a whole has not experienced significant seasonal fluctuations, although travel sales tend to be highest in the second and fourth quarters; Travelers Cheque sales and Travelers Cheques outstanding tend to be greatest each year in the summer months, peaking in the third quarter; American Express® Gift Card sales are highest in the months of November and December; and Card billed business tends to be moderately higher in the fourth quarter than in other quarters.

Spend-Centric Model is Competitive Advantage

We believe that our “spend-centric” business model (which focuses on generating revenues primarily by driving spending on our Cards and secondarily by finance charges and fees) has significant competitive advantages. Average spending per Card, which is substantially higher for us versus our competitors, represents greater value to merchants in the form of loyal customers and higher sales. This enables us to earn a premium discount rate and thereby invest in greater value-added services for merchants and Cardmembers. As a result of the higher revenues generated from higher spending, we have the flexibility to offer more attractive rewards, other incentives to Cardmembers and targeted marketing programs for merchants, which in turn create an incentive for Cardmembers to spend more on their Cards. This business model, along with our closed loop network, in which we are both the card issuer and, in most instances, the merchant acquirer, gives us a competitive advantage that we seek to leverage to provide more value to Cardmembers, merchants and Card issuing partners.

The American Express Brand

Our brand and its attributes—trust, security, integrity, quality and customer service—are key assets of the Company. We continue to focus on our brand by educating employees about these attributes and by incorporating them into our programs, products and services. Our brand has been rated one of the most valuable brands in the world in published studies, and we believe it provides us with a significant competitive advantage. We believe our brand and its attributes are critical to our success, and we invest heavily in managing, marketing and promoting it. (Marketing, promotion, rewards and cardmember services expenses are reflected in each segment based on actual expenses incurred, with the exception of brand advertising, which is reflected in the Global Network & Merchant Services segment.) In addition, we place significant importance on trademarks, service marks and patents, and diligently protect our intellectual property rights around the world.

GLOBAL NETWORK & MERCHANT SERVICES

The Global Network & Merchant Services (“GNMS”) segment operates a global general-purpose charge and credit card network, which includes both proprietary Cards and Cards issued under network partnership agreements. It also manages merchant services globally, which includes signing merchants to accept Cards as well as processing and settling card transactions for those merchants. This segment also offers merchants point-of-sale and back-office products, services, and marketing programs.

 

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Cards bearing our logo are issued by our principal operating subsidiary, American Express Travel Related Services Company, Inc. (“TRS”), and certain of its subsidiaries, and also by third-party institutions, and are accepted on our global card network at all merchant locations worldwide that accept American Express-branded Cards. In addition, depending on the product, Cards bearing our logo are generally accepted at ATM locations worldwide that accept Cards. TRS and its subsidiaries issue the vast majority of Cards on our network.

Our Global Network Services (“GNS”) business establishes and maintains relationships with banks and other institutions around the world who issue Cards and, in certain countries, acquire local merchants on the American Express network. GNS is a critical asset in broadening the Cardmember and merchant base for our network worldwide. Our Global Merchant Services (“GMS”) business provides us with access to rich transaction data through our closed loop network, which encompasses relationships with both the Cardmember and the merchant. This capability enables us to acquire new merchants, deepen relationships with existing merchant customers, process transactions, and provide targeted marketing and other value-added services to merchants in our network.

A key asset of our network is the American Express brand, which is one of the world’s most highly recognized and respected.

Global Network Services

We have been pursuing since May 1996 a strategy, through our GNS business, of inviting U.S. banks and other institutions to issue Cards on the American Express network, building on a business strategy we had implemented successfully in a number of countries outside the United States, where we have many banks and other financial institutions issuing Cards on the American Express network. By leveraging our global infrastructure and the appeal of the American Express brand, we aim to broaden our Cardmember and merchant base for our network worldwide. Our GNS business has established more than 117 card issuing and/or merchant acquiring arrangements with banks and other institutions in 125 countries.

In 2007, GNS signed 12 new partners to issue Cards on the American Express network. Additionally, GNS partners launched over 140 new products during 2007, bringing the total number of American Express-branded GNS partner products to approximately 680.

GNS focuses on partnering with qualified third-party banks and other financial institutions that choose to issue Cards accepted on our global network. Although we customize our network arrangements to the particular market and our partner’s requirements, as well as to our strategic plans in that marketplace, all GNS arrangements are designed to help issuers develop products for their highest-spending and most affluent customers and to support the value of American Express® Card acceptance to merchants. We choose to partner with institutions who share a core set of attributes such as commitment to high quality standards, strong marketing expertise and compatibility with the American Express brand, and we require adherence to our product, brand and service standards.*

With approximately 680 different Card products launched on our network so far by our bank partners, GNS is an increasingly important business that is strengthening our brand visibility around the world, driving more transaction volume onto our merchant network and increasing the number of merchants accepting the American Express® Card. GNS enables us to expand our global presence without having to invest large amounts of resources, as our GNS partners already have established attractive customer bases they can target with American Express-branded products. Since 1999, Cards-in-force issued by GNS partners have grown at a compound annual growth rate of 28%, and totaled 20 million Cards at the end of 2007. Outside the United States, 66% of new Cards issued in 2007 were Cards issued by one of our GNS partners. Spending on these GNS Cards has grown at a compound annual rate of 27% since 1999. Year over year spending growth in 2007 was 49%, with total spending equal to $53 billion.

 

 

* The use of the term “partner” or “partnering” does not mean or imply a formal legal partnership.

 

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GNS Arrangements

Although the structures and details for each of the GNS arrangements vary, all of them generate revenues for us from the Card transaction volumes they drive on the American Express network. Gross revenues we receive per dollar spent on a Card issued by a GNS partner are lower than those from our proprietary Card issuing business. However, because the GNS partner is responsible for most of the operating costs and risk of its Card issuing business, our operating expenses and credit losses are lower than those in our proprietary Card issuing business. The GNS business model generates an attractive earnings stream and risk profile that requires a lower level of capital support. The return on equity in our GNS business can thus be significantly higher than that of our proprietary Card issuing business. Because the majority of GNS costs are fixed, the GNS business is highly scalable. GNS partners benefit from their association with the American Express brand and their ability to gain attractive revenue streams and expand and differentiate their product offerings with innovative marketing programs.

Our GNS arrangements fall into the following three main categories: Independent Operator Arrangements, Network Card License Agreements and Joint Venture Arrangements.

Independent Operator Arrangements

The first type of GNS arrangement is known as an independent operator (“IO”) arrangement. As of the end of 2007, we had 59 of these arrangements around the world. We pursue these arrangements to expand the presence of the American Express network throughout the world, in markets in which we do not offer a proprietary local currency Card. Under this type of arrangement, the partner’s local presence and relationships help us enhance the impact of our brand in the market, reach merchant coverage goals more quickly, and operate at economic scale and cost levels that would be difficult for us to achieve on our own. Subject to meeting our standards, we license our IO bank partners to issue local currency Cards in their markets, including the classic Green, Gold and Platinum American Express® Cards. In addition, the majority of these partners serve as the merchant acquirer and processor for local merchants. American Express retains the relationship with multi-national merchants. Our IO partners own the customer relationships and credit risk for the Cards they issue, and make the decisions about which customers will be issued Cards. GNS generates revenues in IO arrangements from Card licensing fees, royalties on Cardmember billings, foreign exchange conversion revenue, royalties on merchant acquisition volume, discount revenue and, in some partnerships, royalties on net spread revenue. Our IO partners are responsible for transaction authorization, billing and pricing, Cardmember and merchant servicing and funding Card receivables for their Cards and payables for their merchants.

We bear the risk arising from the IO partner’s potential failure to meet its settlement obligations to us. We mitigate this risk by partnering with independent operators that we believe are financially sound and will meet their obligations, and by monitoring their financial health, their compliance with the terms of their relationship with us and the political, economic and regulatory environment in which they operate. In addition, we generally require IO partners to post a letter of credit, bank guarantee or other collateral to reduce this risk.

Examples of countries where we have entered into IO arrangements include Brazil, Russia, China, Ecuador, Greece, South Korea, Pakistan, Croatia, Peru, Portugal and Vietnam. In 2007, we sold our local proprietary Card issuing business in the Philippines and our local merchant acquiring business in Russia. Through our IO partnerships, we believe we can accelerate growth in Cardmember spending, Cards-in-force and merchant acceptance in these countries.

Network Card License Arrangements

The second type of GNS arrangement is known as a network card license (“NCL”). At the end of 2007, we had 54 of these arrangements in place. We pursue these arrangements to increase our brand presence and gain market share in markets in which we have a proprietary Card issuing business, and in a few cases those in which we also have IO partners. In an NCL arrangement, we grant the third-party financial institution a license to issue

 

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American Express-branded Cards. The NCL issuer owns the customer relationships for all Cards it issues, provides customer service to its Cardmembers, transaction authorization, billing and credit management, is responsible for the marketing of the Cards, and designs the Card product features (including rewards and other incentives for Cardmembers), subject to meeting certain standards. We operate the merchant network, route and process Card transactions from the merchant’s point-of-sale through submission to the issuer, and settle with issuers. The NCL is the type of arrangement that we have implemented with banks in the United States.

GNS’ revenues in NCL arrangements are driven by a variety of factors, including the level of Cardmember spending, royalties, currency conversions and licensing fees paid by the partner and fees charged to the Card issuer based on charge volume, and our provision of value-added services such as Cardmember insurance products and other Card features and benefits for the issuer’s Cards. As indicated above, the NCL issuer bears the credit risk for the issued Cards, as well as the Card marketing and acquisition costs, Cardmember fraud risks and costs of rewards and other loyalty initiatives. We bear the risk arising from the NCL partner’s potential failure to meet its settlement obligations to us. We mitigate this risk by partnering with issuers that we believe are financially sound and will meet their obligations, and by monitoring their financial health, their compliance with the terms of their relationship with us and the political, economic and regulatory environment in which they operate. In addition, we generally require NCL issuers to post a letter of credit, bank guarantee or other collateral to reduce this risk.

Examples of NCL arrangements include our relationships with Citibank (South Dakota), N.A. and Bank of America in the United States, Lloyds TSB Bank in the United Kingdom and Westpac Banking Corporation in Australia.

Joint Venture Arrangements

The third type of GNS arrangement is a joint venture (“JV”). We have utilized this type of arrangement in Switzerland, Belgium and several other countries. In these markets, TRS joins with a third party to establish a separate business in which TRS has a significant ownership stake. The JV typically signs new merchants to the American Express network and issues local currency Cards that carry our logo. In a JV arrangement, the JV assumes the Cardmember credit risk and bears the operating and marketing costs. Unlike the other two types of GNS arrangements, we share management, risk, and profit and loss responsibility with our JV partners. Income is generated by discount revenues, card fees and net spread revenues. The economics of the JV are similar to our proprietary Card issuing business, which we discuss below under “U.S. Card Services,” and we receive a portion of the JV’s income depending on the level of our ownership interest.

GNS Business Highlights

Outside the United States, in 2007, we signed a number of agreements to enhance our presence in markets such as China, Japan, and Brazil, and further expanded our global presence into new markets.

Some of the highlights of our GNS business outside the United States in 2007 include the:

 

   

Launch of the Airmiles Duo product in the United Kingdom with Lloyds TSB;

 

   

Introduction of the ICBC Staples Corporate American Express Card, the first American Express branded co-brand corporate card in China, and the ICBC Hainan Airlines American Express Card, the first American Express branded airline co-brand card in China with our partner the Industrial and Commercial Bank of China Limited (ICBC);

 

   

Entry into a new card issuing partnership with China CITIC Bank and the launch of the first product under this partnership;

 

   

Signing of an agreement with Banco Itau, one of the leading banks in Brazil, to issue and market cards on the American Express network;

 

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Entry into a new card issuing partnership with GE Consumer Finance in Japan (a Japanese subsidiary of GE Money, a unit of General Electric Company), and the launch of the first products under this partnership; and

 

   

Launch of the SunMiles American Express Cards, a portfolio of four new airline co-brand cards with Cyprus Airways issued by the Bank of Cyprus.

In contrast to the situation outside the United States, where banks and other qualified institutions have issued Cards on our network for many years, until 2004 no major U.S. banks had issued Cards in the United States on the American Express global network. This situation was the result of rules and policies of Visa U.S.A. and Visa International Service Association (together, “Visa”) and MasterCard Incorporated and MasterCard International, Inc. (together, “MasterCard”) in the United States, which mandated expulsion of members that issued American Express-branded Cards. No bank was willing to risk forfeiting membership in Visa and/or MasterCard (collectively, the “bankcard associations”) to issue cards on our network.

However, as a consequence of the decision in a lawsuit filed in October 1998 by the U.S. Department of Justice against Visa and MasterCard in which such rules and policies were found to violate the U.S. antitrust laws, these rules and policies were finally repealed in late 2004. The Supreme Court’s decision not to hear Visa’s and MasterCard’s appeal of the lower courts’ rulings against them cleared the way for implementation of the trial court’s order requiring the repeal of the illegal rules and policies. We view this decision as a major victory for U.S. consumers as well as U.S. banks because it opened the door to more vigorous network competition and more innovative card products and services.

For American Express, the conclusion of the litigation brought by the Justice Department meant that we were able to extend our network to other card issuers in the United States, just as we have done internationally. Building a network business in the United States that operates alongside our proprietary Card business provides us with new and substantial opportunities for growth. We have acted on this development by entering into several GNS arrangements with financial institutions in the United States, which have all launched products in the marketplace. These companies include MBNA (which subsequently merged with Bank of America), Bank of America, Citibank (South Dakota), N.A., HSBC Bank Nevada N.A., Barclays, USAA Federal Savings Bank and GE Money Bank.

Some of the highlights of our GNS business in the United States in 2007 include the:

 

 

 

Launch of the Bank of America Accolades American Express Card, the first premium credit card designed exclusively for Bank of America’s affluent, wealthy and ultra-wealthy clients served through Premier Banking & Investments™, The Private Bank of Bank of America, and its extension, Family Wealth Advisors; and

 

   

Launch of the ultra-premium Citi Chairman American Express Card.

In November 2004, we filed a lawsuit against Visa, MasterCard and certain of their member banks seeking monetary damages resulting from the illegal rules that were struck down in the U.S. Department of Justice lawsuit discussed above. On November 7, 2007, we announced that we had entered into an agreement with Visa to remove Visa and certain of its member banks as defendants in the lawsuit. Under terms of the settlement agreement reached with Visa, we will receive an aggregate maximum payment of up to $2.25 billion. MasterCard remains the sole defendant in the American Express case. (You can read more about this lawsuit and the Visa settlement in the “Legal Proceedings” section of this report below.)

Global Merchant Services

We operate a GMS business, which includes signing merchants to accept Cards, accepting and processing Card transactions, and paying merchants that accept Cards for purchases made by Cardmembers with Cards (“Charges”). We also provide point-of-sale and back-office products and services and marketing programs to merchants, leveraging the capabilities provided by our closed loop structure.

 

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Our objective is for Cardmembers to be able to use the Card wherever and however they desire, as well as to increase merchant coverage in key geographic areas and in selected new industries that have not traditionally accepted general purpose credit and charge cards as a means of payment. We add new merchants to our network through a number of sales channels: a proprietary sales force, third-party sales agents, strategic alliances with banks and processors, the Internet, telemarketing and inbound “Want to Honor” calls (i.e., merchants desiring to accept the Card contacting us directly). As discussed in the “Global Network Services” section, our IO partners and joint ventures add new local merchants to the American Express network outside the United States.

Since the early 1990s, we have significantly expanded the number of merchants that accept our Card products as well as the kinds of businesses that accept the Card. In recent years, we have focused our efforts on increasing the use of our Cards for everyday spending. In 1990, 64% of our U.S. billings came from the travel and entertainment sectors and 36% came from retail and other sectors. That proportion has now been more than reversed. In 2007, U.S. non-travel and entertainment billings represented over 69% of the U.S. billed business on American Express® Cards. This shift resulted from the growth, over time, in the types of merchants that began to accept charge and credit cards in response to consumers’ increased desire to use these cards for more of their purchases, and our focus on expanding Card acceptance to meet Cardmembers’ needs.

During 2007, we continued our efforts to encourage consumers to use the Card for everyday spending. We increased the number and types of merchants in retail and everyday spending categories that accept the Card, such as quick-serve restaurants, mass transit, healthcare and recurring billing merchants.

In addition, we also continued our drive to bring Card acceptance to industries where cash or checks are the predominant form of payment, including payments for residential rent, residence/destination clubs and private jet travel. In addition, we have made headway in promoting Card acceptance for Business-to-Business payments in industries such as pharmaceuticals, wholesale foods and consumer packaged goods. As we penetrate these industries, there is the potential to increase our average Cardmember spending.

Globally, acceptance of general purpose charge and credit cards continues to increase, including among merchants in industries that have not traditionally accepted charge and credit cards. As in prior years, during 2007, we continued to grow merchant acceptance of Cards around the world and to refine our approach to calculating merchant coverage in accordance with changes in the marketplace. Management estimates that, as of the end of 2007, our merchant network in the United States accommodated more than 90% of our Cardmembers’ general purpose charge and credit card spending, and our international merchant network as a whole accommodated approximately 80% of our Cardmembers’ general purpose charge and credit card spending. These percentages are based on comparing our Cardmembers’ spending on our network currently with our estimate of what our Cardmembers would spend on our network if all merchants that accept general purpose credit and charge cards accepted American Express® Cards.

We earn “discount” revenue from fees charged to merchants for accepting Cards as payment for goods or services sold. The merchant discount is the fee charged to the merchant for accepting Cards and is generally expressed as a percentage of the amount charged on a Card. The merchant discount is generally deducted from the amount of the payment that the “merchant acquirer” (in most cases, TRS or one of its subsidiaries) pays to a merchant for Charges submitted. A merchant acquirer is the entity that contracts for Card acceptance with the merchant, accepts transactions from the merchant, pays the merchant for these transactions and submits the transactions to the American Express network, which submits the transactions to the appropriate Card issuer. When a Cardmember presents the Card for payment, the merchant creates a record of charge for the transaction and submits it to the merchant acquirer for payment. To the extent that TRS or one of its subsidiaries is the merchant acquirer, the merchant discount is recorded by us as discount revenue at the time the transaction is received by us from the merchant.

Where we act as the merchant acquirer and the Card presented at a merchant is issued by a third-party bank or financial institution, such as in the case of our GNS partners, we will make financial settlement to the

 

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merchant and receive the discount revenue. In our role as the operator of the Card network, we will also receive financial settlement from the Card issuer, who receives an issuer rate (i.e., the individually negotiated amount that Card issuers receive for transactions charged on our network with Cards that they issue, which is usually expressed as a percentage of the charged amount). The difference between the discount revenue (received by us in the form of the merchant discount) and the issuer rate received by the Card issuer generates a return to us. Where we are the Card issuer and the merchant acquirer is a third-party bank or financial institution (which can be the case in a country in which the IO is the local merchant acquirer), we receive an individually negotiated issuer rate in our settlement with the merchant acquirer, which is recorded by us as discount revenue. By contrast with networks such as Visa and MasterCard, there is no collectively-set interchange rate on the American Express network.

The following diagrams depict the relationships among the parties in a point-of-sale transaction effected on the American Express network where we act as both the Card issuer and merchant acquirer (the “3-Party Model”) and under an NCL arrangement where third-party financial institutions act as Card issuers (the “NCL Model”):

LOGO

LOGO

The merchant discount rate that we charge is principally determined by the value we deliver to the merchant and generally represents a premium over other networks. We deliver greater value to the merchant through higher spending Cardmembers relative to cards issued on competing card networks, the overall higher volume of spending by all Cardmembers, marketing expertise, and Cardmembers’ insistence on using their Cards when enrolled in rewards or other Card loyalty programs, including Cardmembers who are part of our Corporate Card program.

The merchant discount rate varies, among other factors, with the industry in which the merchant does business, the Charge volume, the timing and method of payment to the merchant, the method of submission of Charges and, in certain instances, the geographic scope of the Card acceptance agreement signed with us (local or global) and the Charge amount.

 

9


In 2007, as in prior years, we experienced some reduction in our global weighted average merchant discount rate, principally reflecting the net impact of selective repricing initiatives, changes in the mix of business, regional market pressures and volume-related pricing adjustments. We expect that the effect of these factors will likely continue to result in some erosion over time of the weighted average merchant discount rate, particularly outside the United States.

While most merchants understand our merchant discount rate pricing in relation to the value provided, we do encounter a relatively small number of merchants that accept our Cards, but tell their customers that they prefer to accept another type of payment and, consequently, suppress use of the Card. We respond to this issue aggressively to ensure that our Cardmembers are able to use their Card where and when they want to and to protect the American Express brand. We have made progress by: concentrating on acquiring merchants where Cardmembers want to use the Card; continuing to enhance the value we provide by programs such as My WishList and American Express Selects®, which enable merchants to gain valuable exposure and additional sales by providing exclusive offers and experiences to American Express Cardmembers; providing better and earlier communication of our value proposition; and, when necessary, cancelling merchants who suppress the use of our Card products.

In the case of My WishList, a popular seasonal limited e-tail Web site we developed in the U.S. in conjunction with merchant partners, we provide Cardmembers with opportunities to buy a limited number of sought-after items, such as automobiles, trips, electronics and jewelry, and attractive travel and lifestyle experiences, at a significant discount from their retail prices, as well as access to numerous offers from top brands. My WishList brings attention to the merchant partners and allows them to reach out to our Cardmembers. Through American Express Selects®, we make available to our Cardmembers high quality shopping, dining and travel values from merchants all over the world, and these merchants have an opportunity to reach out to our Cardmembers. American Express Selects® is a global platform available to American Express Cardmembers and merchants.

Merchant satisfaction is a key goal of our Global Merchant Services business. We focus on understanding and addressing factors that influence merchant satisfaction, including developing and executing innovative programs that increase Card usage at merchants, using technology resources, enhancing operational efficiencies and merchants’ ease of doing business with us, applying our closed loop capabilities and deep marketing expertise, and strengthening our relationships with merchants through an expanding roster of services that help them meet their business goals. In 2007 and early 2008 we announced the signing of agreements with First Data Merchant Services Corporation, NOVA Information Systems, and Heartland Payment Systems allowing them to offer Card acceptance as part of an integrated solution for small- and medium-sized merchants. Under these arrangements, First Data Merchant Services Corporation, NOVA Information Systems, and Heartland Payment Systems will provide payment processing services to merchants on our behalf for Card transactions, while we will retain the acceptance contract with participating merchants, establish merchant pricing, and receive the same transactional information we always have received.

We also offer our merchant customers a full range of point-of-sale solutions, including integrated point-of-sale terminals and direct links that allow merchants to accept American Express® Cards, as well as bankcards, debit cards and checks, and contactless point-of-sale terminals that enable merchants to accept contactless payment products including our ExpressPay from American Express® products. Virtually all proprietary point-of-sale solutions support direct processing (i.e., direct connectivity) to American Express, which can lower a merchant’s cost of Card acceptance and enhance payment efficiency.

ExpressPay from American Express®, a contactless payment feature, is designed to be a fast, easy-to-use alternative for making everyday purchases at merchants where speed and convenience is important. ExpressPay is now accepted at over 30,000 locations in the United States, including top quick-service restaurant, movie theater, drug store and convenience store chains. ExpressPay, powered by radio-frequency technology, is currently available in a key-fob form and has also been introduced within several Card products. In 2007, we

 

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expanded merchant coverage of ExpressPay from American Express® through the entry into an agreement with Tully’s Coffee Corporation, a leading specialty coffee retailer with stores in Washington, California, Idaho and Arizona, and the expansion of merchant acceptance through Office Depot’s 1,200 nationwide locations.

We continue to focus our efforts on the recurring billing industry through Automatic Bill Payment, a service that allows merchants to bill Cardmembers on a regular basis for recurring charges such as insurance premiums, newspaper subscriptions, health club memberships, commutation costs and cable television service. We have also made modifications to our host authorization system to approve more transactions and reduce Cardmember inconvenience at the point-of-sale without a corresponding increase in fraud or credit losses.

Wherever we manage both the acquiring relationship with merchants and the Card issuing side of the business, there is a “closed loop,” which distinguishes our network from the bankcard networks in that we have access to information at both ends of the Card transaction. We maintain a direct relationship with both our Cardmembers and our merchants, and we handle all key aspects of those relationships. Our relationships allow us to analyze information on Cardmembers’ spend. This enables us to provide targeted marketing for merchants and special offers to Cardmembers through a variety of channels, subject to compliance with our privacy policy and legal requirements. We protect the confidentiality of this data, and comply with strict privacy, firewall and applicable legal requirements.

We work closely with our Card issuing and merchant acquiring bank partners to maintain key elements of this closed loop, which permits them to customize marketing efforts, deliver greater value to their Cardmembers and help us to direct increased business to merchants who accept the Card.

As the merchant acquirer, we have certain exposures that arise if a billing dispute between a Cardmember and a merchant is settled in favor of the Cardmember. Drivers of this liability are returns in the normal course of business, disputes over fraudulent charges, the quality or non-delivery of goods and services and billing errors. Typically, we offset the amount due to the Cardmember against payments for the merchant’s current or future Charge submissions. We can realize losses when a merchant’s offsetting charge submissions cease, such as when the merchant commences a bankruptcy proceeding or goes out of business. We actively monitor our merchant base to assess the risk of this exposure. When appropriate, we will take action to reduce the net exposure to a given merchant by requiring a parent company guarantee or letter of credit, holding cash reserves funded through Charge payable holdbacks from a merchant, lengthening the time between when the merchant submits a Charge for payment and when we pay the merchant or implementing other appropriate risk management tools. We also establish reserves on our balance sheet for these contingencies.

With the increase in electronic transmission of credit card transaction data over merchants’ point-of-sale systems, the necessity for merchants and merchant processors to secure this data against accidental or intentional compromise using a standard protocol that applies to all card types, became clear to American Express and the other major card networks. In 2006, in order to strengthen the security practices of merchants and payment processing firms and to secure payment account data in a globally consistent manner, we and Discover Financial Services, JCB, MasterCard Worldwide and Visa formed PCI Security Standards Council, LLC (“PCI SSC”), an independent standards-setting organization to manage the ongoing evolution of the Payment Card Industry (PCI) Data Security Standard, which focuses on improving payment card account security throughout the transaction process. By establishing PCI SSC to manage the PCI Data Security Standard, we and the other founders have developed a common standard that is more accessible and efficient for participants in the payment card industry. All our merchants and service providers that store, process and transmit payment card data are required to comply with the PCI Data Security Standard. PCI SSC is dedicated to driving greater education, awareness and adoption of the PCI Data Security Standard to ensure that all stakeholders involved in the payment process conduct their business responsibly.

In some markets outside the United States, particularly in Asia, third-party processors and some bankcard acquirers have begun to offer merchants the capability of converting credit card transactions from the local

 

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currency to the currency of the cardholder’s residence (i.e., the cardholder’s billing currency) at the point-of-sale, and submitting the transaction in the cardholder’s billing currency, thus bypassing the traditional foreign currency conversion process of the card network. This practice is known as “dynamic currency conversion.” If a merchant utilizes a dynamic currency conversion process, the merchant and processor share any fee assessed or spread earned for converting the transaction at the point of sale, thus reducing or eliminating revenue for card issuers and card networks relating to the conversion of foreign charges to the cardholder’s billing currency. This practice is not widespread, and it is uncertain to what extent consumers will prefer to have foreign currency transactions converted by merchants in this way. Our policy generally requires merchants to submit Charges and be paid in the currency of the country in which the transaction occurs, and we convert the transaction to the Cardmember’s billing currency.

GNMS—Competition

Our global card network, including our Global Merchant Services and Global Network Services businesses, competes with other charge and credit card networks, including, among others, Visa, MasterCard, Diners Club (which, in the United States and Canada, has been folded into the network operated by MasterCard), Discover (primarily in the United States), and JCB Co., Ltd. (primarily in Asia). We are the third largest general purpose charge and credit card network based on charge volume, behind Visa and MasterCard, which are larger than we are in most markets. In addition, apart from such network services, a range of companies globally, including merchant acquirers and processors, carry out some activities similar to certain activities performed by our Global Merchant Services and Global Network Services businesses. No single entity participates on a global basis in the full range of activities that are encompassed by our closed loop business model.

The principal competitive factors that affect the network and merchant service business include:

 

   

the number of Cards-in-force and amount of spending on these Cards;

 

   

the quantity and quality of the establishments where the Cards can be used;

 

   

the economic attractiveness to card issuers and merchant acquirers of participating in the network;

 

   

the success of marketing and promotional campaigns;

 

   

reputation and brand recognition;

 

   

innovation in systems, technology and product offerings;

 

   

the quality of customer service;

 

   

the security of Cardmember and merchant information;

 

   

the impact of existing litigations, legislation and government regulation; and

 

   

cost of Card acceptance relative to the value provided.

Another aspect of network competition is the recent emergence and rapid growth of alternative payment mechanisms and systems, which include aggregators (such as PayPal), wireless payment technologies (including using mobile telephone networks to carry out transactions), pre-paid systems and systems linked to credit cards, and bank transfer models. In the United States, alternative payment vehicles continue to emerge that seek to re-direct online customers to payment systems based on ACH (automated clearing house, i.e., inter-bank transfer), and existing debit networks are making efforts to develop online PIN functionality, which could potentially reduce the relative use of charge and credit cards online.

Some of our competitors have attempted to replicate our closed loop structure, such as Visa’s Visa Incentive Network. Although it remains to be seen how effective Visa will be, efforts by Visa and other card networks and payment providers to replicate the closed loop speak both to its continued value as well as the intense competitive environment in which we operate.

 

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GNMS—Regulation

Local regulations governing the issuance of charge and credit cards have not been a significant factor impacting our Global Network Services’ arrangements with banks and qualifying financial institutions, because such banks and institutions generally are already authorized to issue general purpose cards and, in the case of our IO arrangements, to operate merchant acquiring businesses. Accordingly, our GNS partners have generally not had difficulty in obtaining appropriate government authorization in the markets in which we have chosen to enter into GNS arrangements. As a network service provider to regulated U.S. banks, our GNS business is subject to review by certain federal bank regulators, including the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. As the operator of a general purpose card network, we are also subject to the USA PATRIOT Act of 2001 (the “Patriot Act”), which requires us to conduct due diligence on our GNS partners to ensure that they maintain sufficient anti-money laundering and “know your customer” programs to prevent our network from being used for money laundering or terrorist financing.

In recent years, regulators in several countries outside the United States have focused on the fees involved in the operation of card networks, including the fees merchants are charged to accept cards. Regulators in the United Kingdom, Poland, Germany, Spain, Hungary, the European Union (EU), Australia, Mexico, and Switzerland, among others, have conducted investigations into the way bankcard network members collectively set the “interchange,” which is the fee paid by the bankcard merchant acquirer to the card issuing bank in “four-party” payment networks, like Visa and MasterCard. The interchange fee is generally the largest component of the merchant service charge charged to merchants for bankcard debit and credit charges in these systems. By contrast, the American Express network does not have collectively-set interchange fees. Although the regulators’ focus has primarily been on Visa and MasterCard as the dominant card networks and their operations on a multilateral basis, antitrust actions and government regulation of the bankcard associations’ pricing could ultimately affect all networks. Lower interchange and/or merchant discount revenue may lead card issuers to look for other sources of revenue such as higher annual card fees, interest charges, as well as to reduce costs by scaling back or eliminating rewards programs.

In certain countries where antitrust actions or regulations have led our competitors to lower their fees, we have made adjustments to our pricing to merchants to reflect local competitive trends. For example, reductions in bankcard interchange mandated by the Reserve Bank of Australia reforms in 2003 have resulted in lower merchant discount rates for Visa and MasterCard acceptance. As a result of changes in the marketplace, we have reduced our own merchant discount rates in Australia although we have been able to increase billed business and the number of merchants accepting our Cards. In addition, under legislation enacted in Argentina, a merchant acquirer is required to charge the same merchant discount rate to all merchants in the same industry category, and merchant discount rates for credit cards cannot exceed 3%.

In Europe, interchange is usually handled as a matter for the domestic competition law authority, as well as the European Commission. In its Final Report on the retail banking sector issued in January 2007, which included a review of the payment cards industry, including interchange fees, the European Commission appeared to favor competition law enforcement tools, rather than regulation of price levels, to address perceived issues of insufficient competition. The conclusions of the European Commission in its Final Report do not have the force of law, but may be used as the basis for future regulation or antitrust enforcement action in the EU Member States.

In December 2007, the European Commission ruled that MasterCard’s multilateral interchange fees (MIF) for cross-border payment card transactions violate EC Treaty rules on restrictive business practices. MasterCard has indicated it will comply, although it is also lodging an appeal against the Commission’s findings. The ruling does not prevent MasterCard and its member banks from adopting an alternative MIF arrangement that can be proven to comply with EU Competition rules. However, based upon the information available to American Express, the Commission does not appear to have set out any particular methodology for how MIF should be calculated in a way that would comply with the rules. The Commission’s decision applies to cross-border consumer credit, charge and debit card transactions within the EU and to domestic transactions to which

 

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MasterCard has chosen to apply the cross-border MIF. Although the Commission’s investigation included commercial cards, the decision does not apply to commercial cards. The Commission is likely to produce another decision regarding MIF for commercial card transactions.

In 2002, the Commission granted an exemption to Visa regarding its MIFs. This exemption expired on December 31, 2007. The Commission has indicated that the MasterCard decision should “provide Visa with guidance for the way ahead,” although it stated that “every MIF must be examined on its own merits.”

These developments may impact how the competition authorities in the Member States of the EU view domestic interchange. Earlier in 2007, for example, the competition regulator in Poland found insufficient basis for Visa and MasterCard interchange fees and ordered the associations and their members to stop their current interchange setting practices with immediate effect. The banks are appealing that decision.

Regulators, including most recently the European Commission, have considered the industry practice of prohibiting merchants from passing the cost of merchant discount fees along to consumers through surcharges on

card purchases. Although some countries, such as the United Kingdom, have for a number of years permitted merchants to levy a surcharge on credit card purchases, there has to date been a relatively low overall incidence of surcharging, as merchants do not want to risk offending customers or losing them to competitors that do not assess surcharges for credit card purchases. In its Final Report, the European Commission indicated that prohibiting surcharging appeared to restrict inter-network competition and may constitute a barrier to entry for alternative, non-cash payment instruments. In Australia, we have seen selective, but increasing merchant surcharging on our Cards in certain industries and, in some cases, on a basis that is greater than that applied to cards issued on the bankcard networks.

The European Union has adopted a new legislative framework for electronic payment services, including cards, referred to as the Payment Services Directive. The Payment Services Directive prescribes common rules for licensing and supervision of payment services providers, including card issuers and merchant acquirers, and for their conduct of business. The objective of the Payment Services Directive is to facilitate the creation of a single, internal payments market in the EU through harmonization of EU Member State laws governing payment services. The Payment Services Directive must be incorporated into the national law of each EU Member State by November 2009. By the end of April 2011, licensing will be required and supervision will commence for American Express’ card operations in the EU. One provision of the Payment Services Directive permits merchants to surcharge, subject to disclosure requirements, but also allows individual Member States to override this rule by prohibiting surcharging. The Payment Services Directive complements another European initiative, the Single Euro Payments Area (“SEPA”), which is an industry-led initiative with support from EU institutions. Among other changes, SEPA will involve the adoption of new, pan-European technical standards for cards and card transactions. All of the foregoing will entail costs to implement and maintain.

In the United States, the Board of Governors of the Federal Reserve System and various Federal Reserve Banks have been following developments on interchange and have held several conferences focused on interchange rates. While the Federal Reserve has expressed interest in monitoring this issue, it has not indicated the need to regulate interchange rates in the United States. In Congress, there have been several hearings on Visa/MasterCard interchange over the last two years, and at the request of Congress, the Government Accountability Office undertook a study of the cost of credit card acceptance to federal agencies. During 2007, there were also a number of bills proposed in individual state legislatures seeking to impose caps on credit card interchange or to prohibit card companies from charging merchant discount on the state tax portion of credit card purchases. Other proposals were aimed at increasing the transparency of card network rules for merchants. In addition, a number of bills were proposed to establish merchant liability for the costs of a data security breach of a merchant’s system or require merchants to adopt technical safeguards to protect sensitive card holder payment information. It is expected that Congressional hearings and similar proposed state legislation will continue during 2008. It is possible that some of these proposals could surface at the federal level as well. In the event that governmental or regulatory activity to limit interchange or merchant fees continues or increases, or state data security legislation is adopted, our revenues and profitability could be adversely affected.

 

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U.S. CARD SERVICES

As a significant part of its proprietary Card issuing business, TRS and its U.S. banking subsidiaries issue a wide range of Card products and services to consumers and small businesses in the United States. Our consumer travel business, which provides travel services to Cardmembers and other consumers, complements our core Card business, as does our Travelers Cheques and prepaid services business. The proprietary Card business offers a broad set of card products to attract our target customer base. Core elements of our strategy are:

 

   

focusing on acquiring and retaining high-spending, creditworthy Cardmembers across multiple groups;

 

   

designing Card products with features that appeal to specific customer segments;

 

 

 

the use of strong incentives to drive spending on our various Card products, including our Membership Rewards® program and other rewards features;

 

 

 

the use of loyalty programs such as Delta SkyMiles®, sponsored by our co-brand and other partners to drive spending;

 

   

the development and nurturing of wide-ranging relationships with co-brand and other partners;

 

   

promoting and using incentives for Cardmembers to use their Cards in new and expanded merchant categories, including for everyday spend and traditional cash and check categories; and

 

   

a multi-card strategy (having multiple Card products in customers’ wallets); and

 

   

high-quality customer service.

American Express ranked highest in customer satisfaction among credit card companies in a study by J.D. Power and Associates, one of the world’s most respected consumer research firms. The study, which compared the 10 largest U.S. credit card issuers, looked at the key drivers of satisfaction: benefits and features, rewards, billing and payment processes, fees and rates, and problem resolution.

Consumer and Small Business Services

We offer individual consumer charge Cards such as the American Express® Card, the American Express® Gold Card, the Platinum Card®, and the ultra-premium Centurion® Card; revolving credit Cards such as Blue from American Express®, Blue Cash® Card from American Express and Blue Sky from American Express; and a variety of Cards sponsored by and co-branded with other corporations and institutions, such as the Delta SkyMiles® Credit Card from American Express, True Earnings® Card exclusively for Costco Members, Starwood Preferred Guest® Credit Card and JetBlue Card® from American Express.

Charge Cards

Our charge Cards, which carry no pre-set spending limits, are 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 current spending patterns, payment history, credit record, and financial resources. Cardmembers generally must pay the full amount billed each month, and no finance charges are assessed on the balance. Charge Card accounts that are past due are subject, in most cases, to a delinquency assessment and, if not brought to current status, may be cancelled. The no preset-spending limit and pay-in-full nature of these products attract high-spending Cardmembers who want to use a charge Card to facilitate larger payments.

The charge Cards also offer flexible payment features to Cardmembers. The Sign & Travel® program gives qualified U.S. Cardmembers the option of extended payments for airline, cruise and certain travel charges that are purchased with our charge Cards. The Extended Payment Option offers qualified U.S. Cardmembers the option of extending payment for certain charges on the charge Card in excess of a specified amount.

 

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Revolving Credit Cards

We offer a variety of revolving credit Cards. These Cards have a range of different payment terms, grace periods and rate and fee structures. Since late 1994, our lending balance growth has been among the top tier of card issuers. Much of this growth has been due to the breadth of our lending products, such as the American Express One® Card, Blue from American Express®, Blue Cash® from American Express and the Delta SkyMiles® Credit Card from American Express, as well as the increased number of charge Cardmembers who have taken advantage of our “lending on charge” options (such as the Sign & Travel® and Extended Payment Option programs described above).

Co-brand Cards

We issue Cards under co-brand agreements with selected commercial firms in the United States. The competition among card issuers and networks for attractive co-brand card partnerships is quite intense because these partnerships can generate high-spending loyal cardholders. The duration of our co-brand arrangements generally ranges from five to ten years. Cardmembers earn rewards provided by the partners’ respective loyalty programs based upon their spending on the co-brand Cards, such as frequent flyer miles, hotel loyalty points and cash back. We make payments to our co-brand partners, which can be significant, based primarily on the amount of Cardmember spending and corresponding rewards earned on such spending and, under certain arrangements, on the number of accounts acquired and retained. We expense amounts due under co-brand arrangements in the month earned. Payment terms vary by arrangement, but are monthly or quarterly. Generally, once we make payment to the co-brand partner, the partner is solely liable for providing rewards to the Cardmember under the co-brand partner’s own loyalty program. As the issuer of the co-brand card, we retain all the credit risk with the Cardmember and bear the receivables funding and operating expenses for such cards. The co-brand partner retains the risk associated with the miles, points or other currency earned by the Cardmember under the partner’s loyalty program.

Co-brand Partnerships with Financial Services Institutions

We also issue Cards that are marketed under co-brand partnership arrangements with financial services partners. Such partnerships involve the offering of a standard product (issued by TRS or one of its subsidiaries) to customers of the financial services partner, generally co-branded with the partner’s name on the Card. Under these arrangements, we make payments to the financial services partners that are primarily based on the number of accounts acquired and retained through the arrangement and the amount of Cardmember spending on such Cards. The duration of such arrangements generally ranges from three to seven years.

For example, during 2007 OPEN from American Express® announced strategic card relationships with Harris N.A. and BankAtlantic. Under the agreements, Harris and BankAtlantic will distribute OPEN from American Express® products to small business customers in Illinois, Indiana, and Florida.

American Express Centurion Bank and American Express Bank, FSB as Issuers of Certain Cards

Our revolving credit Cards in the United States are issued by American Express Centurion Bank (“Centurion Bank”), which markets primarily through direct mail and other remote marketing channels, and American Express Bank, FSB (“AEBFSB”), which markets through in-person selling and third-party co-brand partners as well. Centurion Bank also issues certain consumer charge cards and AEBFSB issues certain OPEN charge cards. Both banks are wholly owned subsidiaries of TRS.

Centurion Bank is a Utah-chartered industrial bank regulated, supervised and regularly examined by the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”). Centurion Bank is an FDIC-insured depository institution. AEBFSB is a federal savings bank regulated, supervised and regularly examined by the Office of Thrift Supervision (“OTS”), a bureau of the U.S. Department of the Treasury. AEBFSB is an FDIC-insured depository institution. The activities of Centurion Bank and AEBFSB are

 

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subject to examination by their respective regulators. Both banks take steps to maintain compliance programs to address the various safety and soundness, internal control and compliance requirements, including anti-money laundering requirements, that apply to them. You can find a further discussion of the anti-money laundering initiatives affecting us under “Corporate & Other” below.

Centurion Bank is subject to the risk-based capital adequacy requirements promulgated by the FDIC. Under these regulations, a bank is deemed to be well-capitalized if it maintains a tier one risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%. Based on Centurion Bank’s tier one risk-based capital, total risk-based capital and leverage ratios, Centurion Bank was considered to be well-capitalized at December 31, 2007.

AEBFSB is subject to the risk-based capital adequacy requirements promulgated by the OTS. Under these regulations, a federal savings bank is deemed to be well-capitalized if it maintains a tier one risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10%, and a tier one core capital ratio of at least 5%. Based on AEBFSB’s tier one risk-based capital, total risk-based capital and tier one core capital ratios, AEBFSB was considered to be well-capitalized at December 31, 2007.

Card Pricing and Account Management

Certain of our Cards, particularly charge Cards, charge an annual fee that varies based on the type of Card and the number of Cards for each account. We also offer many revolving credit Cards with no annual fee but on which we assess finance charges for revolving balances. Depending on the product, we also charge Cardmembers an annual program fee to participate in the Membership Rewards programs and fees for account performance (e.g., late fees) or for certain services (e.g., additional copies of account statements). We apply standards and criteria for creditworthiness to each Cardmember through a variety of means both at the time of initial solicitation or application and on an ongoing basis during the Card relationship. We use sophisticated credit models and techniques in our risk management operations and believe that our strong risk management capabilities provide us with a competitive advantage.

Membership Rewards® Program

The Membership Rewards® program from American Express has over 1,500 redemption partners worldwide, is offered in 98 markets around the world and is built around 48 programs, each tailored to local market needs. The program allows Cardmembers to earn one point for virtually every dollar charged on eligible, enrolled American Express® Cards, and then redeem their points for a wide array of rewards, including travel, retail merchandise, dining and entertainment, financial services and even donations to benefit tens of thousands of charities. Points have no expiration date and there is no limit on the number of points one can earn. A large majority of spending by eligible Cardmembers earns points under this program.

The U.S. Membership Rewards® program has over 160 redemption partners and features over 250 merchandise brands. Enrollees may also customize their own redemption experiences through the program’s Create Your Reward and Experiences options.

In 2007, we introduced new Membership Rewards® program levels aligned with specific card products to better meet Cardmember lifestyle and reward program usage needs. American Express Cardmembers now participate in one of three Membership Rewards program levels based on the Credit or Charge Card they have in their wallet. For those Cardmembers with American Express® Credit Cards, including Blue from American Express®, we have created the Membership Rewards Express® program. American Express Charge Cardmembers with American Express® Green and Gold Cards have the Membership Rewards program. Platinum Card® members and Centurion® Cardmembers are enrolled in the Membership Rewards First® program.

During the year we also announced a number of innovations and expanded our list of redemption partners across all levels of the Membership Rewards® program. We launched Points AdvanceSM, which allows

 

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Cardmembers to obtain points against future points earned at the time they choose to redeem points for a reward. We also launched Flight Finder and Room Finder, two innovative online tools for booking award travel. Flight Finder and Room Finder enable Charge Cardmembers enrolled in Membership Rewards® to easily search award inventory, transfer points directly into a frequent flyer or frequent guest account, and book flights or hotel stays in a single online transaction. We added several new program partners to our list of some of the world’s finest retail establishments and service providers, including the addition of luxury fashion brand Salvatore Ferragamo to First CollectionSM, a private portfolio of premium partners and rewards available exclusively to Platinum Card® and Centurion® Card members enrolled in the Membership Rewards First® program.

When a Cardmember enrolled in the Membership Rewards® program uses the Card, we establish reserves to cover the cost of estimated future reward redemptions for points earned to date. When a Membership Rewards® program enrollee redeems a reward using Membership Rewards® points, we make a payment to the Membership Rewards® program partner providing the reward pursuant to contractual arrangements. Because of higher charge volumes and increased customer participation in Membership Rewards®, the expense of the program has increased both in the United States and internationally over the past several years and continues to grow. At year end, we estimated that current Cardmembers will redeem approximately 90% of their points. For more information on our Membership Rewards Program, see “Critical Accounting Policies–Reserves for Membership Rewards® Costs” appearing on page 31 of our 2007 Annual Report to Shareholders, which information is incorporated herein by reference.

Despite the increasing costs of the Membership Rewards® program as penetration and usage expand, it plays a vital role in our profitability. The program continues to be an important driver of Cardmember spending and loyalty. We believe, based on historical experience, that Cardmembers enrolled in rewards programs yield higher spend, stronger credit performance and greater profit for us. For the three-year period through the end of 2007, total spending by U.S. Membership Rewards® participants increased by 52%. By offering a broader range of redemption choices, we have given our Cardmembers more flexibility in the use of their rewards points and favorably affected our average cost per point. We continually seek to optimize the overall economics of the program and make changes to enhance its value to Cardmembers. Our program is also valuable to merchants that become redemption partners as we bring them high-spending Cardmembers and new marketing channels to reach these Cardmembers.

Cardmember Special Services and Programs

Throughout the world, our Cardmembers have access to a variety of fee-free and fee-based special services and programs, depending on the type of Cards they have. Examples of these special services and programs include:

 

•     the Membership Rewards® program;

 

•     Global Assist® Hotline;

 

•     Buyer’s Assurance Plan;

 

•     Car Rental Loss and Damage Insurance
Plan;

 

•     Purchase Protection Plan;

 

•     Emergency Card Replacement;

 

•     Return Protection;

 

•     Manage Your Card Account Online;

 

•     Year-End Summary;

 

•     American Express Roadside Assistance Services;

  

•     American Express Bill Pay®;

 

•     Emergency Check Cashing Privileges;

 

•     Automatic Flight Insurance;

 

•     Premium Baggage Protection;

 

•     Assured Reservations;

 

•     Online Fraud Protection Guarantee;

 

•     Credit Card Registry;

 

•     Credit Bureau Monitoring and Reporting;

 

•     Identity Theft Assistance;

 

•     Event Ticket Protection Plan; and

 

•     Platinum Office Program

 

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OPEN from American Express®

In addition to our U.S. Consumer Card business, through AEBFSB we are also a leading provider of financial services to small businesses (firms that generally have less than 100 employees and/or annual sales of $10 million or less), a key growth area in the United States. OPEN from American Express (“OPEN”) offers small business owners a wide range of tools, services and savings designed to meet their evolving needs, including:

 

   

charge and credit Cards;

 

   

access to lines of credit up to $100,000;

 

   

discounts at select suppliers of business services and products, including airline tickets, car rentals, hotel stays, package shipping, computer and software equipment, telecommunications, printing and photocopying services and other business services;

 

   

expense management reporting;

 

   

enhanced online account management capabilities;

 

   

retail and travel protections such as baggage insurance; and

 

   

travel services.

During 2007, we continued to expand the breadth of products and services offered by OPEN® through the following:

 

 

 

The introduction of The Plum CardSM from OPEN from American Express®, a new trade terms product intended to respond to small business owners’ need to better manage cash flow and free working capital by providing them with the option to defer payment or receive early pay discounts for purchases made on the Card;

 

 

 

The announcement of two new agent bank agreements with Harris N.A. and BankAtlantic, allowing the distribution of our OPEN from American Express® small business charge and credit products in Illinois, Indiana, and Florida. In both cases, American Express will serve as the card issuer and will partner with each institution to develop joint marketing efforts for each region.

 

 

 

The enhancement of the OPEN from American Express® Business Platinum Card® with the expansion of certain travel and business benefits, including: complimentary domestic companion airfare; web content and special offers; the expansion of the hotels and destinations in the Fine Hotels & Resorts Program; increased baggage insurance; and the expansion of coverage for the Premium Global Assist® hotline;

 

 

 

The launch of the Platinum Office Program with OPEN from American Express® and The Regus Group, the world’s largest provider of workplace solutions, which will provide Business Platinum Card members access to flexible office space, services and technology, generally only available to much larger corporations; and

 

 

 

An additional benefit on the TrueEarnings® Business Card from Costco and American Express, offering an annual gasoline rebate of up to 5% at Costco Gasoline and stand-alone gas stations.

These programs are in addition to OPEN® Savings, which is a program that offers savings for OPEN customers on travel and other major business expenses simply by using their American Express® Business Card at participating companies. These savings may be combined with any existing discounts or offers. During 2007, we expanded OPEN® Savings by signing new partners and expanding relationships with existing ones in various categories, including American Express Incentive Services and internet services and products from Yahoo! Search Marketing and Yahoo! Small Business.

 

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Card Issuing Business—Competition

Our proprietary Card business encounters substantial and intense competition in the United States and internationally. As a card issuer, we compete in the United States with financial institutions (such as Citibank, Bank of America, JPMorgan Chase, and Capital One Financial) that issue general purpose charge and credit cards, primarily under revolving credit plans, and Discover Financial Services, which issues the Discover Card on the Discover Business Services network. We also encounter limited competition from businesses that issue their own cards or otherwise extend credit to their customers, such as retailers and airline associations, although these cards are generally accepted only at limited locations. Because of continuing consolidations among banking and financial services companies and credit card portfolio acquisitions by major card issuers, there are now a smaller number of significant issuers. The largest competing issuers have continued to grow, in several cases by acquiring card portfolios, and also by cross-selling through their retail branch networks, and competition among all issuers remains intense.

Competing card issuers offer a variety of products and services to attract cardholders, including premium cards with enhanced services or lines of credit, airline frequent flyer program mileage credits, cash rebates and other reward or rebate programs, services for small business owners, “teaser” promotional interest rates for both credit card acquisition and balance transfers, and co-branded arrangements with partners that offer benefits to cardholders. In recent years we have encountered increasingly intense competition in the small business sector, as competitors have targeted OPEN’s customer base and our leadership position in providing financial services to small businesses.

Most financial institutions that offer demand deposit accounts also issue debit cards to permit depositors to access their funds. Use of debit cards for point-of-sale purchases has grown as most financial institutions have replaced ATM cards with general purpose debit cards bearing either the Visa or MasterCard logo. As a result, the volume of transactions made with debit cards in the United States has continued to increase significantly and has grown more rapidly than credit and charge card transactions. Debit cards are marketed as replacements for cash and checks, and transactions made with debit cards are typically for small dollar amounts. The ability to substitute debit cards for credit and charge cards is limited because there is no credit extended and the consumer must have sufficient funds in his or her demand deposit account to pay for the purchase at the time of the transaction. We do not currently issue point-of-sale debit cards for use on the American Express network.

The principal competitive factors that affect the card-issuing business include:

 

   

the features and the quality of the services, including rewards programs, provided to Cardmembers;

 

   

the number, spending characteristics and credit performance of Cardmembers;

 

   

the quantity and quality of the establishments that accept Cards;

 

   

the cost of Cards to Cardmembers;

 

   

pricing, payment and other Card account terms and conditions;

 

   

the number and quality of other charge and credit cards available to Cardmembers;

 

   

the nature and quality of expense management data capture and reporting capability;

 

   

the success of targeted marketing and promotional campaigns;

 

   

reputation and brand recognition;

 

   

the ability of issuers to manage credit and interest rate risk throughout the economic cycle;

 

   

the ability of issuers to implement operational and cost efficiencies; and

 

   

the quality of customer service.

As the payment industry continues to evolve, we are also beginning to face competition from non-traditional players, such as online networks and telecom providers, that leverage new technologies and customers’ existing charge and credit card account relationships to create payment solutions.

 

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Financing Activities

American Express Credit Corporation, a wholly owned subsidiary of TRS, along with its subsidiaries (“Credco”), purchases the majority of charge Card receivables arising from the use of Cards issued in the United States and in certain currencies outside the United States. Credco finances the purchase of receivables principally through the issuance of commercial paper and the sale of medium- and long-term notes. Centurion Bank and AEBFSB finance their revolving credit receivables, in part, through the sale of short- and medium-term notes and certificates of deposit in the United States. TRS, Centurion Bank and AEBFSB also fund receivables through asset securitization programs. The cost of funding Cardmember receivables and loans is a major expense of Card operations. (You can find a discussion of our securitization and other financing activities on page 29, page 32, pages 42-48 and pages 55-56 under the caption “Financial Review,” and Note 6 on pages 85-87 of our 2007 Annual Report to Shareholders, which portions we incorporate herein by reference.)

Card Issuing Business—Regulation

The charge card and consumer lending businesses are subject to extensive regulation. In the United States, we are subject to a number of federal laws and regulations, including:

 

   

the Equal Credit Opportunity Act (which generally prohibits discrimination in the granting and handling of credit);

 

   

the Fair Credit Reporting Act (“FCRA”), as amended by the Fair and Accurate Credit Transactions Act (“FACT Act”) (which, among other things, regulates use by creditors of consumer credit reports and credit prescreening practices and requires certain disclosures when an application for credit is rejected);

 

   

the Truth in Lending Act (“TILA”) (which, among other things, requires extensive disclosure of the terms upon which credit is granted), including the amendments to TILA that were adopted through the enactment of the Fair Credit and Charge Card Disclosure Act (which mandates certain disclosures on credit and charge card applications);

 

   

the Fair Credit Billing Act (which, among other things, regulates the manner in which billing inquiries are handled and specifies certain billing requirements);

 

   

the Electronic Funds Transfer Act (which regulates disclosures and settlement of transactions for electronic funds transfers including those at ATMs); and

 

   

Federal and state laws and regulations that generally prohibit engaging in unfair and deceptive business practices.

Certain federal privacy-related laws and regulations govern the collection and use of customer information by financial institutions (see “Corporate & Other” below). Federal legislation also regulates abusive debt collection practices. In addition, a number of states, the European Union, and many foreign countries in which we operate have significant consumer credit protection and disclosure and privacy-related laws (in certain cases more stringent than the laws of the United States). Bankruptcy and debtor relief laws affect us to the extent that such laws result in amounts owed being classified as delinquent and/or charged off as uncollectible. Card issuers and card networks are subject to anti-money laundering and anti-terrorism legislation, including, in the United States, the Patriot Act. (For a discussion of this legislation and its effect on our business, see “Regulation—General” within “Corporate & Other” below.)

Centurion Bank, AEBFSB and our other bank entities are subject to a variety of laws and regulations applicable to financial institutions. Changes in such laws and regulations or in the regulatory application or judicial interpretation thereof could impact the manner in which we conduct our business and the costs of compliance. The regulatory environment in which our Card and lending businesses operate has become increasingly complex and robust. The U.S. Congress and regulators, as well as various consumer advocacy groups, have continued their focus and attention on certain practices of credit card issuers, such as increases in APRs, changes in the terms of the account, and the types and levels of fees and financial charges charged by card

 

21


issuers for, among other things, late payments, returned checks, payments by telephone, copies of statements and the like. We regularly review and, as appropriate, refine our business practices in light of existing and anticipated developments in laws, regulations and industry trends so we can continue to manage our business prudently and consistent with regulatory requirements and expectations.

In January 2003, the Federal Financial Institutions Examination Council (the “FFIEC”), an interagency body composed of the principal U.S. federal entities that regulate banks and other financial institutions, issued new guidance to the industry on credit card account management and loss allowance practices (the “Guidance”). The Guidance covers five areas: (i) credit line management; (ii) over-limit practices; (iii) minimum payment and negative amortization practices; (iv) workout and forbearance practices; and (v) certain income (fee) recognition and loss allowance practices. The Guidance is generally applicable to all institutions under the supervision of the federal bank regulatory agencies that comprise the FFIEC, although it is primarily the result of the identification by bank regulators in their examinations of other credit card lenders’ practices deemed by them to be inappropriate, particularly, but not exclusively, with regard to subprime lending programs. At present, we do not have any lending programs that target the subprime market. Centurion Bank and AEBFSB evaluate and discuss the Guidance with their respective regulators on an ongoing basis as part of their regulatory examination processes, and, as a result, may refine their practices from time to time based on regulatory input. The Guidance has not had, nor do we expect it to have, any material impact on our businesses or practices.

American Express Consumer Travel Network—USA

The American Express Consumer Travel Network—USA provides travel, financial and Cardmember services to consumers through American Express-owned travel service offices, call centers, participating American Express Representatives (independently-owned travel agency locations that operate under the American Express brand) and the Consumer Travel Web site. U.S. Consumer Travel has distinguished itself in the luxury marketplace through its Platinum Travel Services and Centurion Travel Services, which provide programs such as the International Airline Program, which offers two-for-one fares on certain international first and business class tickets, and the Fine Hotels & Resorts program, a luxury hotel program offering room upgrades and value-added amenities. Other premium programs developed by Consumer Travel for Centurion and Platinum Card members include Centurion Cruise Privileges®, Centurion Destinations® and Platinum Destinations® Vacations, the Private Jets Program, Private Villas and Yachts. Consumer Travel also provides Membership Rewards® programs designed for specific Cardmember segments such as Membership Rewards Land & Sea packages and Gold Card Destinations.

In 2007, we launched the American Express Going Once® Web site, where for a limited time U.S. and U.K. Cardmembers had an opportunity to purchase more than 25 travel packages in a declining price auction, including a luxury RV trip across America, an Antarctica adventure and a South African safari.

In addition, the Consumer Travel business operates a wholesale travel business in the United States through our Travel Impressions subsidiary. (A wholesaler purchases inventory, such as hotel rooms, from suppliers and then resells the services to the customer at retail prices that the wholesaler determines.) Our wholesale travel business packages American Express Vacations and distributes travel packages through other retail travel agents and private label brands for third parties in the United States.

Our Consumer Travel Web site, americanexpress.com/travel, offers a full range of travel rates and discounts on airfares, hotels, car rentals, last-minute deals, cruises and full vacation packages. The Web site offers unique

American Express Cardmember benefits such as an American Express Travel Office locator, Travel Specialist finder tools, double Membership Rewards points, and travel planning resources and destination content through the “Local Color” portion of the Web site. In addition, Cardmembers are able to redeem Membership Rewards points for some categories of travel through our Web site, as well as through our call centers and Travel Offices.

In 2007, Consumer Travel attracted 12 new members with 35 locations to our Representative Network, including Morris Murdock Travel, Piedmont Travel, and Hunter World Travel. In addition, we entered into an

 

22


agreement in 2007 with Smithsonian Journeys, the educational travel program of the Smithsonian Institution and the world’s largest museum-based travel program, to offer Smithsonian Journeys’ cultural and educational group trips to Cardmembers.

TRS’ worldwide travel network of retail travel locations is important in supporting the American Express brand and providing Cardmember servicing throughout the world, including a range of Traveler Cheques, Gift Cheques, Gift Cards and foreign exchange services.

Consumer Travel Network—USA—Competition

American Express Consumer Travel competes with a variety of different competitors including traditional “brick and mortar” travel agents, credit card companies with significant travel benefits, online travel agents and travel suppliers that distribute their products to consumers directly via the Internet or telephone-based customer service centers. In recent years we have experienced an increasing presence of “niche” players that are seeking to capitalize on the growth in the luxury travel segment by combining luxury travel offers with concierge-type services.

INTERNATIONAL CARD SERVICES

We issue our charge and credit Cards in numerous countries around the globe. Although our geographic scope is widespread, we generally do not have significant share in the markets in which we operate. We focus primarily on those markets that we believe offer us the greatest financial opportunity. For discussion of Cards issued internationally through our GNS partner relationships, please see the section “Global Network Services” above.

The Company continued to bolster its international proprietary Card business through the launch of numerous new or enhanced Card products during 2007. These are Cards that we issue, either on our own or, as further described below, as co-brands with partnering institutions. This past year, among other new proprietary products, we announced or launched Cards with Harrods in the United Kingdom, BMW in Germany and KingFisher Airlines in India.

We offer many of the same programs and services in our international proprietary Card issuing business as we do in our U.S. proprietary issuing business. For example, as in the United States, we offer various flexible payment options similar to our Sign & Travel® program and our Extended Payment Option to Cardmembers in several international markets.

Also, as in the United States, we issue Cards internationally under distribution agreements with banks. Another example of our distribution partnerships is affinity cards with fraternal, professional, educational and other organizations. For instance, we have been successful in penetrating the affinity card segment in Australia, where we issue Cards with the majority of the largest professional associations in that country. In Australia, affinity cards are a substantial part of our total revolving portfolio and contribute to our proprietary consumer lending activities.

As in the United States, rewards programs are a strong driver of Cardmember spending in the international consumer business. We have more than 1,400 redemption partners across our international business, with an average of 80 partners in each country; less than 23% of these partners are in the travel industry. Cardmembers can redeem their points with more than 50 airlines and over 200 hotels. Our redemption options include travel, retail merchandise, entertainment, shopping and recreation gift certificates, experiences, financial services and charity rewards. In 2007, we continued to enhance our rewards programs in several markets, offering more flexible choices that enable Cardmembers to redeem Membership Rewards® points more quickly. For example, we significantly expanded our Pay with Points program to include more redemption options, markets and channels. With the expansion of Pay with Points for travel, Membership Rewards® points can now be redeemed for rewards with virtually all major airlines and hotel groups.

 

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Membership Travel Services International provides premium travel and concierge services to our Platinum and Centurion Customers, through 25 exclusively dedicated call centers in 25 countries. Additionally, Membership Travel Services operates 24 proprietary Travel Service Offices in Mexico, Italy and Argentina to provide all Cardmembers with travel, foreign exchange and general card service assistance. We have taken steps to enhance our capabilities to sell exclusively-negotiated benefits and luxury travel packages with preferred suppliers through the Fine Hotels and Resorts Program, American Express Vacations and American Express’s International Airline Program to create tangible value and memorable experiences for our Cardmembers. In 2007, we added Delta Air Lines, British Airways, and Emirates to the existing 18 airline partners in our International Airline Program (IAP), which is exclusively available to Platinum and Centurion Cardmembers and which allows them to receive complimentary companion tickets or a class upgrade when flying on qualifying international flights in business or first class.

We increased the flexibility of payment for travel and concierge services by allowing Platinum and Centurion Cardmembers to use their Membership Rewards® points to pay for their travel purchases in 11 international markets.

International Proprietary Consumer Card—Competition

Compared to the United States, consumers outside the United States use general purpose charge and credit cards for a smaller percentage of their total payments, with some large emerging market countries just beginning to transition to card usage in any meaningful way. Currently, we have a small share of consumer general purpose charge and credit card spending outside the United States. Internationally, our proprietary Card issuing business is subject to competition from multinational banks, such as Citibank, HSBC and Banco Santander, as well as many local banks and financial institutions. Globally, we view Citibank and HSBC as our strongest competitors, as they currently offer card products in a large number of markets.

GLOBAL COMMERCIAL SERVICES

Through our Global Commercial Services (“GCS”) group, we provide expense management services to more than 100,000 firms worldwide through our Global Commercial Card & Services and Global Travel Services. American Express is a leading global issuer of commercial Cards and is also a leading global travel management company for corporations and businesses. During 2007, we added or retained several major Commercial Card clients in the United States and internationally, including NCR, Hewlett Packard, Microsoft, Black&Decker Corporation and Novartis Pharmaceutical Corporation. Additionally, in 2007, we added or retained several American Express Business Travel clients in the United States and internationally, including Rohm and Haas Company, Zale Corporation and EADS.

GCS offers four primary products and services:

 

   

Corporate Card, issued to individuals through a corporate account established by their employer and designed primarily for travel and entertainment spending;

 

   

Corporate Purchasing Solutions, an account established by corporations to pay for everyday business expenses such as office and computer supplies;

 

 

 

S2SSM suite of products, which include electronic solutions for companies looking to streamline their procurement processes; and

 

   

American Express Business Travel, which helps businesses manage and optimize their travel expenses through a variety of travel-related products, services and solutions.

Global Commercial Card & Services

Global Commercial Card & Services (“GCC&S”) offers a range of expense management solutions to companies worldwide through our Corporate Card program, Corporate Purchasing Solutions, and electronic invoicing and payment services (Source-to-Settle (“S2S”® )).

 

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The American Express® Corporate Card is a charge card that individuals may obtain through a corporate account established by their employer for business purposes. Through our Corporate Card Program, companies can manage their travel, entertainment and purchasing expenses and improve negotiating leverage with suppliers, among other benefits. We use our direct relationships with merchants to offer Corporate Card clients superior data about company spending, as well as streamlined dispute resolution. We issue local currency Corporate Cards in over 45 countries, which we distribute through proprietary operations and partner banks, and international dollar Corporate Cards in over 100 countries.

Corporate Purchasing Solutions (“CPS”) helps large corporations and mid-sized companies manage their everyday spending. CPS is used to pay for everyday goods and business expenses, such as office supplies, industrial supplies and business equipment in 24 markets around the world. This type of spending by corporations is less susceptible to economic downturns than traditional travel and entertainment spending and helps to diversify the spending mix on our Commercial Cards.

The S2S® suite of products are designed to help companies improve the efficiency of their supply chain, reduce processing costs, improve cash management, and increase control and compliance in the purchasing process. These solutions significantly expand the American Express suite of commercial card products and services and responds to clients’ needs as they transform their purchasing processes, from sourcing and ordering through invoice and payment. During 2007, we developed and began marketing S2S Contract Audit & RecoverySM, an analytical tool providing firms with best practices to achieve negotiated contract savings. We also unveiled eInvoice & Pay, a fully integrated Electronic Invoice Presentment and Payment (EIPP) solution, which allows companies to process 100% of their invoices and issue payments to suppliers from an online portal managed by American Express. Our focus on electronic payments also includes Buyer Initiated Payments (“BIP”), which allows clients to send us an “approved to pay” data file, so that we can pay invoices via Corporate Purchasing Card or other forms of electronic payment.

In addition to providing expense management services to large and global corporations, our GCC&S business markets the Commercial Card programs to middle market companies (defined in the United States as firms with annual revenues of $10 million to $1 billion) worldwide. GCC&S is focused on continuing to expand its business with mid-sized companies, which represent significant growth opportunities. Businesses of this size often do not have corporate card programs. However, once enrolled in a corporate card program, mid-sized companies, which usually do not have well-defined purchasing programs, typically put a significant portion of their business spending (both travel and entertainment and non-T&E, such as office supplies) on the commercial card because they can gain control, savings and employee benefits. GCS offers the Savings at Work® Program to mid-sized companies in the United States, as well as similar programs globally, which provide companies with cash back and/or discounted pricing on everyday business products and services, such as car rentals, hotels, restaurants and overnight shipping.

With the increased focus on cost containment by firms, we have experienced significant growth over the past few years in the Corporate Meeting Card, which helps U.S.-based and international companies control company meeting expenses. The Corporate Meeting Card is available in 21 global markets and provides clients with a tool to capture such spending and provides company meeting planners with a tool to simplify the meetings payment process and access to data to negotiate with suppliers. GCC&S also offers the Corporate Defined Expense Program (“CDEP”). This product allows companies to set a maximum amount to be charged on a CDEP Card before expiration and permits them to segregate spending data for specific purposes on projects. It is designed for companies that want to allocate funds for a specific purpose, such as employee relocations or training.

During 2007, we introduced new products and service enhancements to improve the overall experience of our Commercial Cardmembers, including the entry into a strategic partnership with Clear, the largest operator of security express lanes at airports in the United States, to offer Corporate Cardmembers preferred pricing on Clear membership and enrollment privileges. In addition, we now also provide proprietary Platinum Cardmembers and Platinum Global Dollar Cardmembers with free access to American Airlines’ Admiral Club lounges around the world.

 

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GCC&S also offers American Express @ Work®, a secure, web-based suite of online tools that enables clients to manage their Corporate Card, Corporate Purchasing Solutions and Corporate Meeting Card programs on a 24/7 basis through a single user interface. American Express @ Work® provides authorized client representatives online access to global management information to help them gain visibility into their spending patterns, as well as the ability to make changes to their program or Commercial Card accounts through an easy to use online interface. American Express @ Work® also includes automated expense reporting and reconciliation tools that enable clients to enforce program compliance and effectively integrate spend information with their internal accounting systems. This suite of online tools is intended to assist companies in managing expenses more efficiently than offline alternatives, thereby decreasing both the direct and indirect costs associated with maintaining accounts and ensuring program compliance.

Global Commercial Card Business—Competition

The commercial payments industry is dynamic and highly competitive, with competition increasingly intense at both the card network and card issuer levels. Our Commercial Card offerings have experienced increasing competition, including competitors’ aggressive expansion into new and emerging markets, efforts to transition business-to-business spend from cash and check to electronic invoicing and payment vehicles, and expanded marketing and advertising budgets for commercial services.

In addition, both Visa and MasterCard have increased efforts to support card issuers such as U.S. Bank, JPMorgan Chase, GE Capital Financial Inc. and Citibank (in the United States and globally, including Diner’s Club North America, its affiliate), to build and support data collection and reporting necessary to satisfy customer requirements.

Commercial Card issuers have increasingly acquired niche technology offerings to enhance data capture capabilities and reporting functionality. These efforts are built on the solid progress of the bankcard associations to offer more global, robust solutions. As such, global servicing, data quality, technological functionality and simplicity, and customer experience are among the key competitive factors in the commercial card business.

Global Travel Services

Global Travel Services (“GTS”) consists of American Express Business Travel and Global Foreign Exchange Services.

American Express Business Travel (“Business Travel”) provides globally integrated solutions, both online and offline, to help organizations manage and optimize their travel investments and service their traveling employees. These solutions include travel reservation advice and booking transaction processing; travel expense management policy consultation; supplier negotiation and consultation; advisory services; management information reporting, data analysis and benchmarking; and group and incentive travel services. Business Travel also provides 24-hour customer service to clients globally, both on a day-to-day and emergency basis.

The Company operates one of the world’s largest travel agencies with over 2,200 travel service locations in over 140 countries and territories worldwide. In total, we processed $24.6 billion of travel spend globally in 2007 through proprietary operations and consolidated joint ventures.

We continue to update our economic model and invest in innovative and new products, services and technologies to enhance the value that we deliver to our customers and address ongoing travel industry challenges and opportunities. For example, we have substantially reduced our reliance on commission revenues from suppliers (such as airlines or hotels), and now generate revenues primarily from customers who pay for the services that we provide. In 2007, we launched several innovative solutions and service enhancements that increased the savings and control clients could achieve amid rising costs in a strong demand environment, including:

 

 

 

American Express Intelligent Online Marketplace (“AXIOM”), a tool to support policy enforcement and preferred vendor compliance at the point-of-sale;

 

26


   

AX HotelHub, an interface bringing together many hotel properties around the globe into a unique one-stop-shop, and delivering better control of hotel spend with a more efficient way to manage corporate hotel programs both online and offline;

 

 

 

American Express AXIS @ Work, a new global web-based management information data reporting solution, which presents corporate travel purchasers and managers with centralized, online access to data on their firm’s business expenditures; and

 

   

The global implementation and standardization of servicing technology, customer service processes and measurement.

We offer a range of other solutions to our customers that provide them with savings, control, services and traveler care. For example, we offer customers savings and benefits through the Preferred Extra supplier value programs and advisory services, which provide preferred supplier rates and consulting solutions in all areas of travel and entertainment expense management. We also offer the TravelBahn® High-Speed Network, which is our data management network, and our TravelBahn® Distribution Solution, which provides access to airline inventory and fares for Business Travel customers with a number of carriers in North America and in select international markets.

Organic growth of the business along with strategies for acquiring and partnering with local market companies remain key components to Business Travel’s global growth strategy. In Hong Kong, we bought the remaining equity stake of Business Travel’s joint venture partner Farrington American Express Travel Services Ltd., a leading Hong Kong travel services provider.

Business Travel has also moved many of its business processes and customer servicing online. In the United States, more than 50% of all Business Travel transactions were processed online. In addition, the volume of online transactions is growing in other markets around the world.

Global Foreign Exchange Services (“FES”) consists of retail and wholesale foreign exchange services and International Payments. Other than in Australia, Mexico, Singapore and Italy, where we operate foreign exchange offices in city locations, we concentrate our retail foreign exchange business in key international airports. For corporate clients, our International Payments online product allows companies and banks to make cross-border payments in major foreign currencies at competitive exchange rates.

Global Travel Services—Competition

Business Travel continues to face intense competition in the United States and internationally from numerous traditional and online travel management companies, as well as from direct sales by airlines and other travel suppliers. Competition among travel management companies is mainly based on price, service, value creation, convenience, global capabilities and proximity to the customer. Competition also comes from corporate customers themselves, as some companies have become accredited as in-house corporate travel agents.

For many years, travel management companies have faced pressure on revenues from airlines, as most carriers have stopped paying “base” commissions to travel agents for tickets sold. Carriers have also increased the number of transactions they book directly through their Web sites and other means. These trends have reduced the revenue opportunities for travel agents because they do not receive distribution revenue from directly booked transactions. Recent announcements that several major airlines are in merger discussions indicate that the U.S. airline industry may be entering a period of significant consolidation. These types of structural changes may result in additional challenges to travel management companies.

Overall, intense competition among travel management companies, the ongoing trends of airline direct sales, rise of low-cost carriers and ongoing reductions in or elimination of airline commissions and fees continue to put pressure on revenue for travel agents. We believe that the restructuring of our business model over the last

 

27


few years (which allows us to charge customers for the services we provide and the value we create), restructuring our expense base through the rationalization of our call center locations, transitioning many of our services online, and leveraging our global presence, have helped us to balance these revenue pressures. In response to competitive pressures, we are continuing to look for new ways to enhance the value we deliver for our customers both online and offline.

CORPORATE & OTHER

Corporate & Other consists of corporate functions and auxiliary businesses, including the Company’s publishing business, Travelers Cheques and other prepaid products, and AEIDC and the continuing portions of AEBL not being sold to Standard Chartered PLC. We also discuss information relevant to the Company as a whole in this section.

American Express Publishing

Through American Express Publishing, we publish luxury lifestyle magazines such as Travel+Leisure®, T+L Golf®, Food & Wine® and Departures®; travel resources such as SkyGuide®; business resources such as the American Express Appointment Book and SkyGuide Executive Travel, a business traveler supplement; a variety of general interest, cooking, travel, wine, financial and time management books; branded membership services; a growing roster of international magazine editions; as well as directly sold and licensed products. American Express Publishing also has a custom publishing group and is expanding its service-driven Web sites such as: travelandleisure.com, foodandwine.com, departures.com, tlgolf.com, tlfamily.com and eskyguide.com. We have an agreement with Time Inc. under which it manages our publishing business, and we share profits relating to this business.

Global Travelers Cheques and Prepaid Services (“TCPS”)

We have been in the business of issuing and selling travelers checks since 1891. We sell the American Express® Travelers Cheque (“Travelers Cheque” or “Cheque”) as a safe and convenient alternative to cash. Travelers Cheques are available in U.S. dollars and five foreign currencies, including Euros. We also issue and sell other forms of paper travelers checks: American Express® Gift Cheques, which are available in U.S. and Canadian dollars, and the American Express® Cheque-Secure Funds, which are available in dollars and Euros, and are offered in certain countries as a safe way to keep cash at home. Sales of Travelers Cheques continued to decline in 2007.

In addition to travelers checks, TCPS also offers a variety of other prepaid products, including reloadable and non-reloadable prepaid cards. We offer prepaid gift cards in the United States: the American Express® Gift Card (“Gift Card”), which can be used in the United States at merchants that accept American Express Cards, and mall-branded gift cards, which can also be used at multiple unaffiliated merchants that are located within a specific shopping mall and that accept the American Express® Card. The Gift Cards we offer are not for use at car rental, cruise lines or ATMs and, subject to applicable law, a monthly service fee applies 12 months after purchase of the gift card. Sales of gift cards continued to rise in 2007, reflecting the growing popularity of these products and our efforts to increase buying convenience for customers. During the year, we expanded our gift card product offering to include a themed “Thank You” gift card and customizable gift cards. Both are designed for employers and businesses of all sizes who want a gift card they can personalize to their company or to a particular rewards, incentive, or consumer promotion occasion. The custom gift card can be embossed on the front with a short message such as “Congratulations” or “Happy Holidays.”

Through American Express Incentive Services L.L.C., a joint venture with Maritz Inc., we offer various incentive prepaid products, including the Corporate Gift Cheque, the Incentive Funds Card and several points-based incentive cards.

 

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We sell American Express prepaid products through a variety of channels, including sales directly to consumers via phone and the Internet. Travelers Cheques and Gift Cheques are sold primarily through a broad network of selling outlets worldwide, including American Express travel offices, independent travel agents and financial institutions. In 2007, we announced a global, multi-year agreement with Travelex, the world’s largest foreign exchange specialist, to offer Travelers Cheques through its global agency network of large banks and travel agencies, and directly to consumers through its over 700 retail locations. Gift Cards are primarily sold through travel offices and retail establishments, including supermarkets and drug stores. During the year we announced an agreement under which Bank of America is selling the Gift Card in its retail banking centers nationwide. We sometimes compensate selling outlets for their prepaid product sales.

During 2007, we decided to discontinue offering the Travelers Cheque Card, a reloadable prepaid card that was issued in the United States, the United Kingdom and Germany. This decision was based on our conclusion that travelers prefer paper Travelers Cheques when choosing a prepaid travel money product.

Travelers Cheques and Prepaid Cards—Competition

Travelers Cheques compete with a wide variety of financial payment products, including cash, foreign currency, checks, other brands of travelers checks, and, increasingly, debit and ATM cards and, to a limited extent, competing prepaid cards, and in some circumstances, other payment cards. The principal competitive factors affecting the travelers check and prepaid card industry are:

 

   

the number and location of merchants willing to accept the form of payment;

 

   

the availability to the consumer of other forms of payment;

 

   

the amount of fees charged to the consumer;

 

   

the compensation paid to, and frequency of settlement by, selling outlets;

 

   

the accessibility of sales and refunds for the products;

 

   

the success of marketing and promotional campaigns; and

 

   

the ability to service the customer satisfactorily, including for lost or stolen instruments.

Our prepaid cards (“open-system” cards that can be used at multiple unaffiliated sellers of goods or services) compete with the same payment methods described above; however, gift cards compete primarily with cash, checks and other open-system and store-specific gift cards.

Travelers Cheques and Prepaid Cards—Regulation

As an issuer of travelers checks, we are regulated in the United States under the “money transmitter” or “sale of check” laws in effect in most states. These laws require travelers check (and, where applicable, prepaid card) issuers to obtain licenses, to meet certain safety and soundness criteria, to hold outstanding proceeds of sale in highly-rated and secure investments, and to provide detailed reports. We invest the proceeds from sales of our Travelers Cheques and prepaid cards in accordance with applicable law, predominantly in highly-rated debt securities consisting primarily of intermediate- and long-term federal, state and municipal obligations. Many states examine licensees annually. In addition, travelers check issuers are required by the laws of many states to comply with state unclaimed and abandoned property laws under which such issuers must pay to states the face amount of any travelers check that is uncashed or unredeemed after 15 years. A few states have amended their abandoned property laws to apply to prepaid cards.

In the past few years, some states have enacted laws pertaining to the issuance and the sale of gift cards. We continue to monitor state legislative activity restricting the fees that consumers can be charged or the expiration

 

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dates that can apply to gift cards. In certain states where regulation has made it unprofitable for us to offer gift cards, we have limited or withdrawn from selling these cards. Federal anti-money laundering regulations require, among other things, the registration of traveler check issuers as “Money Service Businesses” and compliance with anti-money laundering recordkeeping and reporting requirements by issuers and selling outlets. At this time, stored value issuers and redeemers, while considered to be “Money Service Businesses,” are not required to register under these regulations. Outside the United States, there are varying licensing and anti-money laundering requirements, including some that are similar to those in the United States.

Service and Technology Infrastructure

We continue to make significant investments, both in the United States and internationally, in our Card systems and infrastructure to allow faster introduction and greater customization of products. We also are using technology to develop and improve our service capabilities to continue to deliver a high quality customer experience. For example, we maintain a service delivery platform that our employees use in the Card business to support a variety of customer servicing and account management activities such as account maintenance, updating of Cardmember information, the addition of new Cards to an account and resolving customer satisfaction issues. In international markets, we are building flexibility and enhancing our global platforms and capabilities, such as in revolving credit.

We continue to leverage the Internet to lower costs, improve service quality and enhance our business model. During 2007, we broadened our focus to include opportunities to use the Internet to drive revenue and build our brand, while continuing to focus on migrating transaction volumes at lower costs. We also continue to have more online interactions with U.S. customers than we do by telephone or in person.

As of year-end, customers had enrolled approximately 21 million Cards globally in our “Manage Your Card Account” service. This service enables Cardmembers to review and pay their American Express bills electronically, view and service their Membership Rewards program accounts and conduct various other functions quickly and securely online. We now have an online presence in 63 markets around the world, including GNS markets.

We continue to devote substantial resources to our technology platform to ensure the highest level of data integrity, security and privacy. In 2006, we and several other payment card networks formed PCI SS, an independent standards-setting organization to manage the evolution of the Data Security Standard. (For a discussion of this organization, see the “Global Network Services” section above.)

In 2002, we outsourced most of our technology operations work to IBM. The various arrangements covered under our agreement with IBM range in term from seven to eleven years, with certain rights to extend. This arrangement currently enables us to benefit from IBM’s expertise while lowering our information technology costs. IBM is responsible for managing most of our day-to-day technology operations functions, including most of our mainframe, midrange and desktop systems; web hosting; database administration; help desk services and data center operations. Our internal IT organization continues to retain the Company’s key technology competencies, including information technology strategy, information security, managing strategic relationships with technologies’ partners, developing and maintaining applications and databases and managing the technology portfolios of our businesses.

Regulation—General

Most aspects of our business are subject to rigorous regulation by U.S. Federal and state regulatory agencies and securities exchanges and by non-U.S. government agencies or regulatory bodies and securities exchanges. Certain of our public disclosure, internal control environment and corporate governance principles are subject to the Sarbanes-Oxley Act of 2002 and related regulations and rules of the SEC and the New York Stock Exchange, Inc. New laws or regulations or changes to existing laws and regulations (including changes in interpretation or

 

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enforcement) could materially adversely affect our financial condition or results of operations. As a global financial institution, to the extent that different regulatory systems impose overlapping or inconsistent requirements on the conduct of our business, we face complexity and additional costs in our compliance efforts.

We use information about our customers to develop and make available relevant, personalized products and services. Certain customers are given choices about how we use and disclose their information, and we give them notice regarding the measures we take to safeguard this information. Regulatory activity in the areas of privacy and data protection continues to increase worldwide, spurred by advancements in technology and related concerns about the rapid and widespread dissemination and use of information. As noted above, as part of our efforts to enhance payment account data security, in 2006, we and several other payment card networks formed PCI SSC, an independent standards-setting organization to manage the evolution of the PCI Data Security Standard.

The Gramm-Leach-Bliley Act (“GLBA”) became effective on July 1, 2001. GLBA provides for disclosure of a financial institution’s privacy policies and practices and affords customers the right to “opt out” of the institution’s disclosure of their personal financial information to unaffiliated third parties (with limited exceptions). This legislation does not preempt state laws that afford greater privacy protections to consumers, and several states have adopted such legislation. For example, in 2003 California enacted that state’s Financial Information Privacy Act. We continue our efforts to safeguard the data entrusted to us in accordance with applicable law and our internal data protection policies, including taking steps to reduce the potential for identity theft, while seeking to collect and use data properly to achieve our business objectives.

Approximately 38 states, Puerto Rico and the District of Columbia have enacted security breach legislation, requiring varying levels of consumer notification in the event of a security breach, and several other states are considering similar legislation. In addition, several states are considering legislation requiring certain data security standards that could result in higher technology costs for the Company. In 1995, the European Parliament and Council passed European Directive 95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data (commonly referred to as the Data Protection Directive), which obligates the controller of an individual’s personal data to take the necessary technical and organizational measures to protect personal data. The Data Protection Directive has been implemented through local laws regulating data protection in European Union Member States.

The Fair Credit Reporting Act of 1970 (“FCRA”) regulates the disclosure of consumer credit reports by consumer reporting agencies and the use of consumer credit report information by banks and other companies. FCRA was significantly amended by the enactment in December 2003 of the Fair and Accurate Credit Transactions Act (the “FACT Act”). The FACT Act requires any company that receives information concerning a consumer from an affiliate, subject to certain exceptions, to permit the consumer to opt out from having that information used to market the company’s products to the consumer. In October 2007, the FDIC issued a final rule implementing the affiliate marketing provisions of the FACT Act. Other Federal banking agencies are expected to promulgate similar rules imminently. Companies subject to FDIC oversight must comply with the rules by October 1, 2008. The FACT Act further amends the FCRA by adding several new provisions designed to prevent or decrease identity theft and to improve the accuracy of consumer credit information. The FDIC published a final rule in October 2007 requiring financial institutions to implement a program containing reasonable policies and procedures to address the risk of identity theft and to identify accounts where identity theft is more likely to occur. Other Federal banking agencies are expected to adopt similar rules in the near future. Companies subject to FDIC oversight must comply with the rule by November 1, 2008. The FACT Act also imposes new duties on both consumer reporting agencies and on businesses that furnish or use information contained in consumer credit reports. For example, a furnisher of information is required to implement procedures to prevent the reporting of any information that it learns is the result of identity theft. Also, if a consumer disputes the accuracy of information provided to a consumer reporting agency, the furnisher of that information must conduct an investigation and respond to the consumer in a timely fashion. The Federal banking regulatory agencies and the FTC have proposed rules that specify the circumstances under which furnishers of information would be required to investigate disputes regarding the accuracy of the information provided to a

 

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consumer reporting agency. The FACT Act also requires grantors of credit that use consumer credit report information in making a determination to offer a borrower credit on terms that are “materially less favorable” than the terms offered to most of the lender’s other customers to notify the borrower that the terms are based on a consumer credit report. In such a case the borrower is entitled to receive a free copy of the report from the consumer reporting agency. Grantors of credit using pre-screened consumer credit report information in credit solicitations are also required to include an enhanced notice to consumers that they have the right to opt out from receiving further pre-screened offers of credit. The enactment of the FACT Act and the promulgation of rules implementing it are not expected to have a significant impact on our business or practices.

In the United States, the Patriot Act was enacted in October 2001 in the wake of the September 11, 2001 terrorist attacks. The Patriot Act substantially broadened existing anti-money laundering (“AML”) and terrorist financing legislation and the extraterritorial jurisdiction of the United States. The Patriot Act contains a wide variety of provisions aimed at fighting terrorism and money laundering, including provisions aimed at impeding terrorists’ ability to access and move funds used in support of terrorist activities. Among other things, the Patriot Act requires federal regulators, led by the Secretary of the Treasury, to regulate or take other steps to require financial institutions to establish AML programs that meet certain standards, including expanded reporting and enhanced information gathering and recordkeeping requirements. While American Express has long maintained AML programs in our businesses, the Secretary of the Treasury has issued regulations under the Patriot Act applicable to certain of our business activities conducted within AEB, TRS and their affiliates, prescribing minimum standards for such AML programs. In response to these regulations, as well as other AML regulatory requirements that we are subject to (both in the United States and in other jurisdictions in which we conduct business), we have enhanced our existing AML compliance programs and developed and implemented new ones. For example, in April 2002, the U.S. Secretary of the Treasury issued regulations applicable to operators of credit card networks (such as Visa, MasterCard, Diners Club, Discover and American Express) that would require credit card networks to have risk-based programs to screen institutions that are licensed to issue cards or acquire merchants on their networks. As a result, we developed and implemented a program for our GNS business. We have also developed and implemented a Customer Identification Program applicable to many of our businesses, and we have enhanced our Know Your Customer and Enhanced Due Diligence programs in others. We will take steps to comply with any additional regulations or initiatives that are adopted, whether in the United States or in other jurisdictions in which we conduct business.

Throughout 2007, the industry has seen, from a regulatory and enforcement perspective, an increased scrutiny of financial institutions’ compliance with AML requirements, including the requirements to report large currency transactions and to file Suspicious Activity Reports. Likewise, the industry has seen an increased focus by regulators on how their regulated institutions manage their enterprise AML risk. Our AML compliance programs primarily consist of risk-based policies, procedures and controls that are reasonably designed to prevent, detect and report money laundering. We have committed to our consolidated supervisor, the Office of Thrift Supervision (“OTS”), that we will complete our efforts to develop and implement an enterprise-wide AML compliance program that will govern compliance throughout the American Express organization, and will ensure that each of its subsidiaries is provided with resources adequate to meet our legal and regulatory obligations. We will report periodically on our progress to the OTS. During 2007, we entered into settlements with various regulators relating to deficiencies in our AML program, which resulted in fines and penalties totaling $65 million. For a discussion of our recent settlements relating to deficiencies in our AML program, see “Legal Proceedings—Other Matters” below.

In 2007, regulators in the United States and abroad continued to expand AML requirements to non-bank financial institutions and non-traditional industries and professions. In addition, several countries enacted rules requiring that financial institutions perform “enhanced due diligence” when doing business with “Politically Exposed Persons.”

We have significant operations in the European Union, including a number of regulated businesses. We monitor developments in EU legislation, as well as in the other markets in which we operate, to ensure that we are in a position to comply with all applicable legal requirements, including European Union directives applicable to credit institutions, insurance intermediaries and other financial institutions.

 

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FOREIGN OPERATIONS

We derive a significant portion of our revenues from the use of our Card products, Travelers Cheques, travel and other financial products and services in countries outside the United States and continue to broaden the use of these products and services outside the United States. (For a discussion of our revenue by geographic region, see Note 21 to our Consolidated Financial Statements, which you can find on pages 108-110 of our 2007 Annual Report to Shareholders and which is incorporated herein by reference.) Our revenues can be affected by political and economic conditions in these countries (including the availability of foreign exchange for the payment by the local Card issuer of obligations arising out of local Cardmembers’ spending outside such country, for the payment of Card bills by Cardmembers who are billed in other than their local currency, and for the remittance of the proceeds of Travelers Cheque sales). Substantial and sudden devaluation of local Cardmembers’ currency can also affect their ability to make payments to the local issuer of the Card in connection with spending outside the local country.

As a result of our foreign operations, we are exposed to the possibility that, because of foreign exchange rate fluctuations, assets and liabilities denominated in currencies other than the U.S. dollar may be realized in amounts greater or less than the U.S. dollar amounts at which they are currently recorded in our Consolidated Financial Statements. Examples of transactions in which this may occur include the purchase by Cardmembers of goods and services in a currency other than the currency in which they are billed; the sale in one currency of a Travelers Cheque denominated in a second currency; and, in most instances, investments in foreign operations. These risks, unless properly monitored and managed, could have an adverse effect on our operations. For more information on how we manage risk relating to foreign exchange, see “Risk Management—Market Risk Management Process” on pages 51 of our 2007 Annual Report to Shareholders, which information is incorporated herein by reference.

DISCONTINUED OPERATIONS

On September 18, 2007, we entered into an agreement to sell our international banking subsidiary, American Express Bank Ltd. (“AEBL”), and American Express International Deposit Company (“AEIDC”), a subsidiary that issues investment certificates to AEBL’s customers, to Standard Chartered PLC (“Standard Chartered”) for the approximate value of $1.1 billion, subject to certain regulatory approvals. Standard Chartered will pay us an amount equal to the net asset value of the AEBL businesses that are being sold at the closing date plus $300 million. At December 31, 2007, this would have amounted to approximately $819 million. We also expect to realize an additional amount representing the net asset value of AEIDC, which was also contracted to be sold to Standard Chartered 18 months after the close of the AEBL sale, through a put/call agreement. As of December 31, 2007, the net asset value of that business was $232 million. This value is expected to be realized through (1) dividends from the subsidiary to us and (2) a subsequent payment from Standard Chartered based on the net asset value of AEIDC on the date the business is transferred to them.

For 2007 and all prior periods presented, the operating results, assets and liabilities, and cash flows of AEBL (except for certain components of AEBL that are not being sold) have been removed from the Corporate & Other segment and reported within the discontinued operations captions in our Consolidated Financial Statements. AEIDC will continue to be included in continuing operations within the Corporate & Other segment until such time as AEIDC qualifies for classification as a discontinued operation, which will occur approximately one year prior to its transfer to Standard Chartered. Beginning with the third quarter of 2007, AEIDC’s investment portfolio was reclassified to Trading from Available-for-Sale due to the impact on the holding period of AEIDC’s investments as a result of the related AEBL sale agreement.

You can find more information regarding this transaction on pages 27-28 under caption “Financial Review” of our 2007 Annual Report to Shareholders and in Note 2 to our Consolidated Financial Statements, appearing on page 80 of our 2007 Annual Report to Shareholders, which information is incorporated herein by reference.

 

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American Express Bank

American Express Bank (“AEB”) serves affluent and high net worth individuals and financial institutions through over 78 locations in 48 countries and regions worldwide. AEB’s operations are conducted primarily through our indirect wholly owned subsidiary, AEBL, and its subsidiaries. AEB serves financial institutions worldwide and individual clients outside the United States. AEB does not directly or indirectly do business in the United States except as may be incidental to its activities outside the United States. The following discussion relating to AEB generally does not distinguish between U.S.- and non-U.S.-based activities.

AEB’s two primary business lines are Global Wealth Management (“GWM”), which incorporates The Private Bank and Financial Advisory Services, and the Financial Institutions Group (“FIG”). The Private Bank focuses on delivering an extensive range of investment management, trust and estate planning and banking services to high net worth individuals. Financial Advisory Services provides a wide variety of local, domestic saving and investment products to affluent individuals in select markets. FIG provides financial institution clients with a wide range of correspondent banking products, including international payments processing (wire transfers and checks), trade-related payments and financing, cash management, loans, extensions of credit and investment products.

AEB’s worldwide headquarters are located in New York City. It maintains an international banking agency in New York City and Miami, Florida, and facility offices in San Francisco, San Diego and Los Angeles, California, as well as a representative office in Atlanta, Georgia. Its wholly owned Edge Act subsidiary, American Express Bank International (“AEBI”), is headquartered in Miami, Florida, and has branches in New York City and Miami.

Banking Services—Risks

The global nature of AEB’s business activities is such that concentrations of credit to geographic regions are not unusual. AEB continually monitors and actively manages its credit concentrations to reduce the associated risk. The Private Bank’s loans are generally secured by liquid, marketable collateral. FIG controls its exposures by limiting its relationships to select banks and limiting its exposures to such banks to quantitative limits (by obligor, by country and by exposure type) that are periodically re-evaluated; such exposures also typically carry a short-term tenure and are trade-related, which generally has a lower risk profile.

AEB’s earnings are sensitive to interest rates because the repricing of its liabilities does not, generally, match the repricing of its assets. AEB invests deposits in excess of loans and the proceeds of investment certificates in highly-rated investment securities. It maintains mandatory investment portfolios in a number of countries as required by central banks. AEB monitors and controls its assets-liability mismatches both on a country and global level through a rigorous Earnings at Risk process and manages the mismatch of assets and liabilities by adjusting the repricing frequency of its investments or by using derivatives.

AEB sells foreign exchange, interest rate and equity products to its customer base and may decide to take short-term proprietary trading positions as a result of this business. The foreign exchange, interest rate and equity risk is managed at the branch and global level through a comprehensive Value at Risk process. AEB manages counterparty credit exposure on foreign exchange and interest rate derivatives through a dynamic mark-to-market and potential future exposure process, in which the current fair value and potential future exposure are calculated and managed against counterparty loan equivalent limits.

Because AEB conducts significant business in emerging market countries and in countries that are less politically and economically stable than the United States or those in Western Europe, its Private Banking, Financial Advisory Services and FIG activities may be subject to greater credit and compliance risks than are found in more well-developed jurisdictions. AEB continually monitors its exposures in such jurisdictions, and regularly evaluates its client base to identify potential legal risks as a result of clients’ use of AEB’s banking services.

 

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Banking Services—Competition

The banking services of AEB are subject to vigorous competition everywhere AEB operates. Competitors include local and international banks whose assets often exceed those of AEB, other financial institutions and, in certain cases, governmental agencies.

Banking Services—Regulation

American Express Banking Corp. (“AEBC”) is a New York investment company organized under Article XII of the New York Banking Law and is a wholly owned direct subsidiary of American Express. AEBL is a wholly owned direct subsidiary of AEBC. AEBC, AEBL and AEBL’s global network of offices and subsidiaries are subject to continuous supervision and examination by the New York State Banking Department (“NYSBD”) pursuant to the New York Banking Law. AEBC does not directly engage in banking activities. AEBL’s branches, representative offices and subsidiaries are licensed and regulated in the jurisdictions in which they do business and are subject to the same local requirements as other competitors that have the same license.

Since AEBC and AEBL do not do business in the United States, except as may be incidental to their activities outside the United States, our affiliation with AEBC and AEBL does not require us to register as a bank holding company under Regulation Y promulgated by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). AEBC and AEBL are not members of the Federal Reserve System, are not subject to supervision by the FDIC, and are not subject to any of the restrictions imposed by the Competitive Equality Banking Act of 1987 other than anti-tying rules with respect to transactions involving products and services of certain of its affiliates. AEBC and AEBL are not financial holding companies under the Gramm-Leach-Bliley Act.

The NYSBD requires AEBC, on a consolidated basis, to monitor its financial condition and maintain risk-based and leverage capital in accordance with minimum thresholds established by the NYSBD. At year-end 2007, AEB had Tier One, Total and Leverage capital (as those terms are defined under the Federal Reserve Board’s risk-based capital guidelines) that exceeded the minimum standards established by the NYSBD. Additionally, AEB is not required to comply on a consolidated basis with the Advanced Internal Ratings Based Approach incorporated in the Basel II Capital Accord Framework published in June 2004. AEB monitors developments with respect to the implementation of the Basel II Capital Accord in jurisdictions where its branch and subsidiary network is located.

Immediately prior to the sale of AEBL to Standard Chartered as discussed above AEBL will transfer to AEBC its banking business in Greece and Card and related businesses in India. Following the sale, AEBC will directly own and operate these businesses. AEBC will continue to be regulated by the NYSBD in a manner similar to the regulation described above.

In recent years, U.S. and foreign regulatory authorities, together with international organizations, have raised increasing concerns over the ability of criminal organizations and corrupt persons to use global financial intermediaries to facilitate money laundering. In the United States, the Secretary of the Treasury has issued regulations pursuant to the Patriot Act that specifically impact certain money laundering prevention activities of entities involved, as AEBL is, in correspondent and private banking activities. Compliance efforts to combat money laundering remain a high priority for AEBL, and it has increased its efforts to address evolving regulatory and supervisory standards and requirements in jurisdictions in which it does business. For a further discussion of anti-money laundering regulation and our recent settlement relating to deficiencies in our anti-money laundering program, see “Regulation—General” within “Corporate & Other” above and “Legal Proceedings—Other Matters” below.

SEGMENT INFORMATION AND CLASSES OF SIMILAR SERVICES

You can find information regarding the Company’s reportable operating segments, geographic operations and classes of similar services in Note 21 to our Consolidated Financial Statements, which appears on pages 108-110 of our 2007 Annual Report to Shareholders, which Note is incorporated herein by reference.

 

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EXECUTIVE OFFICERS OF THE COMPANY

Set forth below is a list of all our executive officers as of February 28, 2008. None of our executive officers has any family relationship with any other executive officer, and none of our executive officers became an officer pursuant to any arrangement or understanding with any other person. Each executive officer has been elected to serve until the next annual election of officers or until his or her successor is elected and qualified. Each officer’s age is indicated by the number in parentheses next to his or her name.

 

KENNETH I. CHENAULT -    Chairman and Chief Executive Officer

Mr. Chenault (56) has been Chairman since April 2001 and Chief Executive Officer since January 2001.

L. KEVIN COX -    Executive Vice President, Human Resources

Mr. Cox (44) has been Executive Vice President, Human Resources of the Company since April 2005. Prior thereto, he had been Executive Vice President of The Pepsi Bottling Group since September 2004. Prior thereto, he had been Senior Vice President, Human Resources of such company since March 1999.

EDWARD P. GILLIGAN -    Vice Chairman

Mr. Gilligan (48) has been Vice Chairman of the Company and head of the Company’s Global Business-to-Business Group since July 2007. Prior thereto, he had been Group President, American Express International & Global Corporate Services since July 2005. Prior thereto, he had been Group President, Global Corporate Services since June 2000 and Group President, Global Corporate Services & International Payments, since July 2003.

ASHWINI GUPTA -    Executive Vice President, Chief Risk Officer and President of Risk, Information Management and Banking

Mr. Gupta (54) has been Executive Vice President, Chief Risk Officer and President of Risk, Information Management and Banking since July 2007. Prior thereto, he had been Executive Vice President and Chief Risk Officer of the Company since July 2003.

JOHN D. HAYES -    Executive Vice President, Global Advertising and Brand Management and Chief Marketing Officer

Mr. Hayes (53) has been Executive Vice President, Global Advertising and Brand Management since May 1995 and Chief Marketing Officer of the Company since August 2003.

DANIEL T. HENRY -    Executive Vice President and Chief Financial Officer

Mr. Henry (58) has been Executive Vice President and Chief Financial Officer of the Company since October 2007. Since February 2007, Mr. Henry had been serving as Executive Vice President and Acting Chief Financial Officer of the Company. Prior thereto, he had been Executive Vice President and Chief Financial Officer, U.S. Consumer, Small Business and Merchant Services since October 2005 and Executive Vice President and Chief Financial Officer, U.S. Consumer and Small Business Services since August 2000.

ALFRED F. KELLY, JR. -    President

Mr. Kelly (49) has been President of the Company and head of the Company’s Global Consumer Group since July 2007. Prior thereto, he was Group President, Consumer, Small Business and Merchant Services since October 2005. Prior thereto, he had been President, U.S. Consumer and Small Business Services since June 2000.

 

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JUDSON C. LINVILLE -    President and Chief Executive Officer, U.S. Consumer Services.

Mr. Linville (50) has been President and Chief Executive Officer of U.S. Consumer Services, since July 2007. Prior thereto, he had been President, U.S. Consumer Card Services Group from 2005 through 2007. Prior thereto, he was Executive Vice President, Service Delivery Network from 2001 through 2005.

 

LOUISE M. PARENT -    Executive Vice President and General Counsel

Ms. Parent (57) has been Executive Vice President and General Counsel since May 1993.

 

THOMAS SCHICK -    Executive Vice President, Corporate Affairs and Communications

Mr. Schick (61) has been Executive Vice President, Corporate Affairs and Communications since March 1993.

 

STEPHEN SQUERI -    Executive Vice President and Chief Information Officer

Mr. Squeri (48) has been Executive Vice President and Chief Information Officer since May 2005. Prior thereto, he had been President, Global Commercial Card – Global Corporate Services since January 2002.

EMPLOYEES

We had approximately 67,700 employees on December 31, 2007.

 

ITEM 1A.    RISK FACTORS

This section highlights specific risks that could affect our Company and its businesses. You should carefully consider each of the following risks and all of the other information set forth in this Annual Report on Form 10-K. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our Company. However, the risks and uncertainties our Company faces are not limited to those described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

If any of the following risks and uncertainties develops into actual events or the circumstances described in the risks and uncertainties occur, these events or circumstances could have a material adverse effect on our business, financial condition or results of operations. These events could also have a negative effect on the trading price of our securities.

Our operating results may suffer because of substantial and increasingly intense competition worldwide in the payments industry.

The payments industry is highly competitive and includes, in addition to charge and credit card networks, evolving alternative payment mechanisms and systems. We are the third largest general purpose charge and credit card network based on charge volume, behind Visa and MasterCard, which are larger than we are in most markets. As a result, other card issuers may be able to benefit from the strong position and marketing and pricing power of Visa and MasterCard. Because of continuing consolidations among banking and financial services companies and credit card portfolio acquisitions by major card issuers, there are now a smaller number of significant issuers. The largest competing issuers have continued to grow, in several cases by acquiring card portfolios, and also by cross-selling through their retail branch networks, and competition among all issuers remains intense. We are also subject to increasing pricing pressure from our competitors. In addition, some of our competitors have developed, or may develop, substantially greater financial and other resources than we have, may offer a wider range of programs and services than we offer or may use more effective advertising and marketing strategies to achieve broader brand recognition or merchant acceptance than we have. We may not continue to be able to compete effectively against these threats. In addition, our competitors may be more efficient in introducing innovative products, programs and services than we are. As a result, our revenue or profitability may decline.

 

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We face increasingly intense competitive pressure that may impact the prices we charge merchants who accept our cards for payment for goods and services.

Unlike our competitors in the payments industry that rely on high revolving credit balances to drive profits, our business model is focused on Cardmember spending. Discount revenue, which represents fees charged to merchants when Cardmembers use their Cards to purchase goods and services on our network, is primarily driven by billed business volumes and is our largest single revenue source. In recent years, we have been under market pressure to reduce merchant discount rates and undertake other repricing initiatives. This pressure arises, in part, due to the regulatory pressure on our competitors outside the United States, which has been increasing. If we continue to experience a decline in the average merchant discount rate we charge merchants or are unable to sustain premium merchant discount rates on our Cards without experiencing overall volume growth or an increase in merchant coverage, our revenues and profitability could be materially and adversely affected.

We may not be able to increase consumer and business spending and borrowing on our payment services products or manage the costs of our Cardmember benefits intended to stimulate such use.

Our business is characterized by the high level of spending by our Cardmembers. Increasing consumer and business spending and borrowing on our payment services products, particularly credit and charge Cards and Travelers Cheques and other prepaid products, and growth in Card lending balances, depend in part on our ability to develop and issue new or enhanced Card and prepaid products and increase revenues from such products. It also depends on our ability to attract new Cardmembers, reduce Cardmember attrition, increase merchant coverage, and capture a greater share of customers’ total spending on Cards issued on our network, both in the United States and in our international operations. One of the ways in which we attract new Cardmembers is through our Membership Rewards program, as well as other Cardmember benefits. We may not be able to cost effectively manage and expand Cardmember benefits, including containing the growth of marketing, promotion and rewards expenses and Cardmember services expenses. In addition, many credit card issuers have instituted rewards programs that are similar to ours, and issuers may in the future institute rewards programs that are more attractive to cardmembers than our programs. If we are not successful in increasing consumer and business spending or in managing the costs of our Cardmember benefits, our revenues and profitability could be negatively affected.

Our brand and reputation are key assets of our Company and our business may be affected by how we are perceived in the marketplace.

Our brand and its attributes are key assets of the Company. Our ability to attract and retain consumer Cardmembers and corporate clients is highly dependent upon the external perceptions of our level of service, business practices and financial condition. Negative perceptions or publicity regarding these matters could damage our reputation among existing and potential Cardmembers and corporate clients, which could make it difficult for us to attract new Cardmembers and maintain existing ones. Adverse developments with respect to our industry may also, by association, negatively impact our reputation, or result in greater regulatory or legislative scrutiny or litigation against us. Although we monitor developments for areas of potential risk to our reputation and brand, negative perceptions or publicity could materially and adversely affect our revenues and profitability.

An increase in account data breaches and fraudulent activity using our Cards could lead to reputational damage to our brand and could reduce the use and acceptance of our charge and credit Cards.

We and other third parties store Cardmember account information in connection with our charge and credit Cards. Criminals are using increasingly sophisticated methods to capture various types of information relating to Cardmembers’ accounts, including Membership Rewards accounts, to engage in illegal activities such as fraud and identity theft. As outsourcing and specialization become a more acceptable and common way of doing business in the payments industry, there are more third parties involved in processing transactions using our Cards. If data breaches or fraud levels involving our Cards were to rise, it could lead to regulatory intervention

 

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(such as mandatory card reissuance) and reputational and financial damage to our brand, which could reduce the use and acceptance of our Cards, and have a material adverse impact on our business.

Global economic, political and other conditions may adversely affect trends in consumer spending and in travel.

Our business depends heavily upon the overall level of spending using our credit and charge Cards, and we are not insulated from the effects of economic cycles. A sustained deterioration in general economic conditions, particularly in the United States or Europe, or increases in interest rates in key countries in which we operate, may adversely affect our financial performance by reducing the number or average purchase amount of transactions involving our charge and credit Cards and result in increasing delinquencies and credit losses. Political or economic instability in certain regions or countries could also affect our commercial or other lending activities, among other businesses, or result in restrictions on convertibility of certain currencies. In addition, our travel network may be adversely affected by world geopolitical and other conditions. Travel expenditures are sensitive to business and personal discretionary spending levels and tend to decline during general economic downturns.

Terrorist attacks, natural disasters or other catastrophic events may have a negative effect on our business. Because of our proximity to the World Trade Center, our headquarters were damaged as a result of the terrorist attacks of September 11, 2001. Similar events or other disasters or catastrophic events in the future could have a negative effect on our businesses and infrastructure, including our information technology systems. Because we derive a portion of our revenues from travel-related spending, our business will be sensitive to safety concerns, and thus may decline during periods in which travelers become concerned about safety issues or when travel might involve health-related risks.

We have agreements with business partners in a variety of industries, including the airline industry, that represent a significant portion of our billed business. We are exposed to the risk of downturns in these industries, including bankruptcies, restructurings and consolidations of our partners, and the possible obligation to make payments to our partners.

In the ordinary course of our business we enter into different types of contractual arrangements with business partners in a variety of industries. For example, we have partnered with Costco to offer co-branded cards for consumers and small businesses, and through our Membership Rewards program we have partnered with businesses in many industries, most notably the airline industry, to offer benefits to Cardmember participants. The airline industry represents a significant portion of our billed business and in recent years has undergone bankruptcies, restructurings, consolidations and other similar events. In addition, under some types of these contractual arrangements, upon the occurrence of certain triggering events, we may be obligated

to make payments to certain co-brand partners, merchants, vendors and customers. If we are not able to effectively manage the triggering events, we could unexpectedly have to make payments to these partners, which could have a negative effect on our financial condition and results of operations. We are also exposed to risk from bankruptcies, restructurings, consolidations and other similar events that may occur in any industry representing a significant portion of our billed business, which could negatively impact particular card products and services (and billed business generally) and our financial condition and results of operations.

Many industry analysts and some carriers have indicated that there could be significant consolidation in the airline industry in 2008, particularly in the United States. We would not expect consolidation to have any significant effect on our merchant relationships with the airlines. However, airlines are also some of the most important and valuable partners in our Membership Rewards program. If a participating airline merged with an airline that did not participate in Membership Rewards, the combined airline would have to determine whether or not to continue participation. Similarly, if one of our co-brand airline partners merged with an airline that had a competing co-brand card, the combined airline would have to determine which co-brand cards it would offer. If a surviving airline determined to withdraw from Membership Rewards or to cease offering an American Express

 

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co-brand card, our business could be adversely affected. For additional information relating to the agreements with Delta and general risks related to the airline industry, see “Financial Review—Exposure to Airline Industry” on page 61 of our 2007 Annual Report to Shareholders.

Our reengineering and other cost control initiatives may not prove successful, and we may not realize all or a significant portion of the benefits that we intended.

We have regularly undertaken, and are currently considering undertaking, a variety of efforts to reengineer our business operations in order to achieve cost savings and other benefits (including the reinvestment of such savings in key areas such as marketing, promotion and rewards), enhance revenue-generating opportunities and improve our operating expense to revenue ratio both in the short-term and over time. These efforts include cost management, structural and strategic measures such as vendor, process, facilities and operations consolidation, outsourcing functions (including, among others, technologies operations), relocating certain functions to lower cost overseas locations, moving internal and external functions to the Internet to save costs and planned staff reductions relating to certain of these reengineering actions. If we do not successfully achieve these efforts in a timely manner or if we are not able to capitalize on these efforts, we may not realize all or a significant portion of the benefits that we intended. Failure to achieve these benefits could have a negative effect on our financial condition and results of operations.

Our risk management policies and procedures may not be effective.

We must effectively manage credit risk related to consumer debt, business loans, settlement risk with regard to GNS partners, merchant bankruptcies, the rate of bankruptcies, and other credit trends which can affect spending on card products, debt payments by individual and corporate customers and businesses that accept our card products.

Credit risk is the risk of loss from obligor or counterparty default. We are exposed to both consumer credit risk, principally from Cardmember receivables and our other consumer lending activities, and institutional credit risk from merchants and GNS partners. While consumer credit risk is more closely linked to general economic conditions than borrower-specific events like institutional credit risk, both expose us to a risk of loss. Third parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Country, regional and political risks are components of credit risk. Rising delinquencies and rising rates of bankruptcy are often precursors of future write-offs and may require us to increase our reserve for loan losses. Higher write-off rates and an increase in our reserve for loan losses may adversely affect our profitability and the performance of our securitizations, and may increase our cost of funds.

Although we make estimates to provide for credit losses in our outstanding portfolio of loans and receivables, these estimates may not be accurate. In addition, the information that we use in managing our credit risk may be inaccurate or incomplete. Although we regularly review our credit exposure to specific clients and counterparties and to specific industries, countries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to foresee or detect, such as fraud. We may also fail to receive full information with respect to the credit risks of our customers.

We must also effectively manage market risk to which we are exposed. Market risk represents the loss in value of portfolios and financial instruments due to adverse changes in market variables. We are exposed to market risk from interest rates in our Card business. Changes in the interest rates at which we borrow and lend money affect the value of our assets and liabilities. If the rate of interest we pay on our borrowings increases more than the rate of interest we earn on our loans, our net finance charge revenue, and consequently our net income, could fall.

 

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We must also accurately estimate the fair value of the assets in our investment portfolio and, in particular, those investments that are not readily marketable, including the valuation of the interest-only strip (commonly referred to as the I/O strip) arising from our securitization of credit Card receivables.

Additionally, we must also effectively manage liquidity risk to which we are exposed. Liquidity risk is defined as the inability to access cash and equivalents needed to meet business requirements and satisfy our obligations. If we are unsuccessful in managing our liquidity risk, we may maintain too much liquidity, which can be costly and limit financial flexibility, or we may be too illiquid, which could result in financial distress during a liquidity event. For additional information regarding our management of liquidity risk, see “Our access to financing, including securitizations, may be limited ” below.

Finally, we must also manage the operational risks to which we are exposed. We consider operational risk to be the risk of not achieving our business objectives due to failed processes, people or information systems, or from the external environment, such as natural disasters. Operational risks include the risk that we may not comply with specific regulatory or legal requirements, exposing us to fines and/or penalties and possibly brand damage; employee error or intentional misconduct that results in a material financial misstatement; or a failure to monitor an outsource partner’s compliance with a service level agreement, resulting in economic harm to us.

Although we have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future, our hedging strategies and other risk management techniques may not be fully effective. See Financial Review—Risk Management” on pages 49-52 of our 2007 Annual Report to Shareholders for a discussion of the policies and procedures we use to identify, monitor and manage the risks we assume in conducting our businesses. Management of credit, market and operational risk requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective.

Adverse currency fluctuations and foreign exchange controls could decrease revenue we receive from our international operations.

During 2007, over 30% of our revenue net of interest expense was generated from activities outside the United States. We are exposed to foreign exchange risk from our international operations, and some of the revenue we generate outside the United States is subject to unpredictable and indeterminate fluctuations if the values of other currencies change relative to the U.S. dollar. Resulting exchange gains and losses are included in our net income. Furthermore, we may become subject to exchange control regulations that might restrict or prohibit the conversion of our other revenue currencies into U.S. dollars. The occurrence of any of these events or circumstances could decrease the revenues we receive from our international operations and have a material adverse effect on our business.

Our access to financing, including securitizations, may be limited.

In general, the amount, type and cost of our funding, including financing from other financial institutions and the capital markets, directly impacts our expense in operating our business and growing our assets and therefore, can positively or negatively affect our financial results.

A number of factors could make such financing more difficult, more expensive or unavailable on any terms both domestically and internationally (where funding transactions may be on terms more or less favorable than in the United States), including, but not limited to, financial results and losses, changes within our organization, specific events that adversely impact our reputation, changes in the activities of our business partners, disruptions in the capital markets, specific events that adversely impact the financial services industry, counter-party availability, changes affecting our assets, our corporate and regulatory structure, interest rate fluctuations, ratings agencies’ actions, general economic conditions and the legal, regulatory, accounting and tax environments governing our funding transactions. Our ability to raise funds is strongly affected by the general state of the

 

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United States and world economies, and may become increasingly difficult due to economic and other factors. Also, we compete for funding with other financial institutions, some of which are publicly traded. Competition from these institutions may increase our cost of funds.

In addition, we periodically securitize Cardmember receivables and loans arising from our Card business. Securitization involves the legal sale of beneficial interests in Cardmember receivables and loan balances to a trust, which in turn issues securities to third-party investors collateralized by the transferred receivables and loans, and our receipt of the proceeds from the issuance of such securities. Although the markets for securitized credit and charge card receivables and loans is large and well-established, if these markets experience difficulties, we may be unable to securitize our receivables or to do so at favorable pricing levels. If we were

unable to continue to securitize our loan receivables at desired levels, we would use alternative funding sources to meet our liquidity needs. If we were unable to find cost-effective and stable alternatives, it could negatively impact our liquidity and potentially subject us to certain risks. These risks would include an increase in our cost of funds, an increase in the allowance for loan losses and the provision for possible credit losses as more loans would remain on our consolidated balance sheet, and lower loan growth.

In addition, the occurrence of certain events may cause the securitization transactions to amortize earlier than scheduled, which would accelerate the need for an alternate source of funding.

For a further discussion of our liquidity and funding needs, see “Financial Review–Funding Programs” on pages 43-48 in our 2007 Annual Report to Shareholders.

If we are not able to protect our intellectual property, and invest successfully in, and compete at the leading edge of, technological developments across all our businesses, our revenue and profitability could be negatively affected.

Our industry is subject to rapid and significant technological changes. In order to compete in our industry, we need to continue to invest in business process and technology advances across all areas of our business, including in transaction processing, data management, customer interactions and communications, travel reservations systems, prepaid products, alternative payment mechanisms and risk management and compliance systems. We rely in part on third parties, including some of our competitors and potential competitors, for the development of and access to new technologies. We expect that new technologies applicable to the payments industry will continue to emerge, and these new technologies may be superior to, or render obsolete, the technologies we currently use in our Cards, networks and other services. Our ability to develop, acquire, or access competitive technologies or business processes on acceptable terms may be limited by patent rights that third parties, including competitors and potential competitors, may assert. In addition, our ability to adopt new technologies that we develop may be inhibited by a need for industry-wide standards or by resistance from Cardmembers or merchants to such changes.

We rely on a variety of measures to protect our intellectual property and proprietary information, including copyrights, trademarks, patents and controls on access and distribution. These measures may not prevent misappropriation or infringement of our intellectual property or proprietary information and a resulting loss of competitive advantage. In addition, competitors or other third parties may allege that our systems, processes or technologies infringe their intellectual property rights. Given the complex, rapidly changing and competitive technological and business environment in which we operate and the potential risks and uncertainties of intellectual property related litigation, we cannot assure you that a future assertion of an infringement claim against us will not cause us to lose significant revenues, incur significant license, royalty or technology development expenses, or pay significant monetary damages.

 

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Banks, card issuers and card network operators generally are the subject of increasing global regulatory focus, which may impose costly new compliance burdens on our company and lead to decreased transaction volumes and revenues through our network.

We are subject to regulations that affect banks and the payments industry in the many countries in which our charge and credit Cards are used and where we conduct banking and Card activities. In particular, we are subject to numerous regulations applicable to financial institutions in the United States and abroad. We are also subject to regulations as a provider of services to financial institutions. Regulation of the payments industry has increased significantly in recent years. For example, we are subject to the regulatory requirements of the Patriot Act, which substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States. The Patriot Act requires us to create and implement comprehensive anti-money laundering programs that meet certain standards, including expanded reporting and enhanced information gathering and record-keeping requirements, as well as to perform due diligence on the third party institutions that issue Cards and/or acquire merchants on our network. Increased regulatory focus in this area could result in additional obligations or restrictions with respect to the types of products and services that we may offer to consumers, the countries in which our charge and credit Cards may be used, and the types of cardholders and merchants who can obtain or accept our charge and credit Cards. In addition, the European Union has adopted a new legislative directive for electronic payment services, including cards, that will put in place a common legal framework for licensing and supervision of payment services providers, including card issuers and merchant acquirers, and for their conduct of business.

The U.S. Congress is also presently considering, or may consider, legislative initiatives in the area of Internet transactions, such as Internet prescription drug purchases and copyright and trademark infringement, among others, that could impose additional compliance burdens on our Company, for example, imposing requirements aimed at preventing the use of payment cards to unlawfully purchase prescription drugs over the Internet. Federal and state law enforcement authorities have also contacted payment companies concerning these issues. If implemented, these initiatives may require us to monitor, filter, restrict, or otherwise oversee various categories of charge and credit card transactions, thereby increasing our costs or decreasing our transaction volumes. Various regulatory agencies and legislatures are also considering regulations covering identity theft, account management guidelines, disclosure rules, security, and marketing that would impact us directly, in part due to increased scrutiny of our underwriting standards. These new requirements may restrict our ability to issue charge and credit cards or partner with other financial institutions, which could decrease our transaction volumes. In some circumstances, new regulations could have the effect of limiting our ability to offer new types of charge or credit cards or restricting our ability to offer existing Cards, such as stored value cards, which could materially and adversely reduce our revenues and revenue growth.

In recent years, regulators in several countries outside the United States have focused on the fees involved in the operation of card networks, including the fees merchants are charged to accept cards. Regulators in the United Kingdom, Poland, Germany, Spain, Hungary, the European Union (EU), Australia, Mexico, and Switzerland, among others, have conducted investigations into the way bankcard network members collectively set the “interchange,” which is the fee paid by the bankcard merchant acquirer to the card issuing bank in “four-party” payment networks, like Visa and MasterCard. The interchange fee is generally the largest component of the merchant service charge charged to merchants for bankcard debit and credit charges in these systems. By contrast, the American Express network does not have collectively-set interchange fees. Although the regulators’ focus has primarily been on Visa and MasterCard as the dominant card networks and their operations on a multilateral basis, antitrust actions and government regulation of the bankcard associations’ pricing could ultimately affect all networks. Lower interchange and/or merchant discount revenue may lead card issuers to look for other sources of revenue such as higher annual card fees and interest charges, as well as to reduce costs by scaling back or eliminating rewards programs.

In certain countries where antitrust actions or regulations have led our competitors to lower their fees, we have made adjustments to our pricing to merchants to reflect local competitive trends.

 

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In the United States, the Board of Governors of the Federal Reserve System and various Federal Reserve Banks have been following developments on interchange and have held several conferences focused on interchange rates. While the Federal Reserve has expressed interest in monitoring this issue, it has not indicated the need to regulate interchange rates in the United States. In Congress, there have been several hearings on Visa/MasterCard interchange over the last two years, and at the request of Congress, the Government Accountability Office undertook a study of the cost of credit card acceptance to federal agencies. During 2007, there were also a number of bills proposed in individual state legislatures seeking to impose caps on credit card interchange or to prohibit card companies from charging merchant discount on the state tax portion of credit card purchases. Other proposals were aimed at increasing the transparency of card network rules for merchants. In addition, a number of bills were proposed to establish merchant liability for the costs of a data security breach of a merchant’s system or require merchants to adopt technical safeguards to protect sensitive card holder payment information. It is expected that Congressional hearings and similar proposed state legislation will continue during 2008. It is possible that some of these proposals could surface at the federal level as well. In the event that governmental or regulatory activity to limit interchange or merchant fees continues or increases, or state data security legislation is adopted, our revenues and profitability could be adversely affected.

Regulators and Congress are continuing their scrutiny of our industry’s pricing, finance charges and practices relating to its customers, including increases in APRs and fees. Any legislative or regulatory restrictions on our ability to price our services and manage our business practices freely could materially and adversely affect our transaction volume and revenues.

Increased regulatory focus on our Company, such as in connection with the matters discussed above, may increase our compliance costs or result in a reduction of transactions processed on our networks or merchant discount revenues from such transactions, which could materially and adversely impact our financial performance.

Regulation in the areas of consumer privacy, data use and security could increase our costs and decrease the number of charge and credit cards issued.

We are also subject to regulations related to privacy and data use and security in the jurisdictions in which we do business, and we could be negatively impacted by these regulations. For example, in the United States, we are subject to the Federal Trade Commission’s information safeguards rule under the Gramm-Leach-Bliley Act. The rule requires that each financial institution develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities, and the sensitivity of any customer information at issue. The heightened legislative and regulatory focus on data security, including requiring consumer notification in the event of a data breach, continues. In the United States, there are a number of bills pending in Congress and there have been several Congressional hearings to address these issues. Congress will likely consider data security/data breach legislation in 2008 that, if implemented, could affect us.

In addition, approximately 38 states, Puerto Rico and the District of Columbia have enacted security breach legislation, requiring varying levels of consumer notification in the event of a security breach, and several other states are considering similar legislation. In addition, several states are considering legislation requiring certain data security standards that could result in higher technology costs for the Company. In 1995, the European Parliament and Council passed European Directive 95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data (commonly referred to as the Data Protection Directive), which obligates the controller of an individual’s personal data to take the necessary technical and organizational measures to protect personal data. The Data Protection Directive has been implemented through local laws regulating data protection in European Union Member States.

Regulation of privacy, data use and security may materially increase our costs and may decrease the number of our cards that we issue, or restrict our ability to fully exploit our closed loop capability, which could materially

 

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and adversely affect our profitability. Our failure to comply with the privacy and data use and security laws and regulations to which we are subject could result in fines, sanctions and damage to our global reputation and our brand.

If our global network systems are disrupted or we are unable to process transactions efficiently or at all, our revenue or profitability would be materially reduced.

Our transaction authorization, clearing and settlement systems may experience service interruptions as a result of fire, natural disasters, power loss, disruptions in long distance or local telecommunications access, fraud, terrorism or accident. A natural disaster or other problem at our facilities could interrupt our services. Additionally, we rely on third-party service providers for the timely transmission of information across our global network. If a service provider fails to provide the communications capacity or services we require, as a result of natural disaster, operational disruption, terrorism or any other reason, the failure could interrupt our services, adversely affect the perception of our brands’ reliability and materially reduce our revenue or profitability.

We rely on third-party providers of various computer systems and other services integral to the operations of our businesses. These third parties may act in ways that could harm our business.

We operate a service network around the world. In order to achieve cost and operational efficiencies, we outsource to third party vendors many of the computer systems and other services that are integral to the operations of our global businesses. A significant amount of this outsourcing occurs in developing countries. We are subject to the risk that certain decisions are subject to the control of our third-party service providers and that these decisions may adversely affect our activities. In addition, the management of multiple third-party vendors increases our operational complexity and decreases our control. It is also possible that the cost efficiencies of certain outsourcings will decrease as the demand for these services increases around the world.

Special Note About Forward-Looking Statements

We have made various statements in this report that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be made in our other reports filed with or furnished to the SEC, in our press releases and in other documents. In addition, from time to time, we, through our management, may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties, including those identified above, which could cause actual results to differ materially from such statements. The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely” and similar expressions are intended to identify forward-looking statements. We caution you that the risk factors described above are not exclusive. There may also be other risks that we are unable to predict at this time that may cause actual results to differ materially from those in 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. We undertake no obligation to update publicly or revise any forward-looking statements.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 2. PROPERTIES

Our principal executive offices are in a 51-story, 2.2 million square foot building located in lower Manhattan. This building, which is on land leased from the Battery Park City Authority for a term expiring in 2069, is one of four office buildings in a complex known as the World Financial Center. We have a 49%

 

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ownership interest in the building. Brookfield Financial Properties owns the remaining 51% interest in the building. We also lease space in the building from Brookfield.

Other owned or leased principal locations include: the American Express Service Centers in Fort Lauderdale, Florida; Phoenix, Arizona; Greensboro, North Carolina; and Salt Lake City, Utah; the American Express Data Centers in Phoenix, Arizona and in Minneapolis, Minnesota; the American Express Finance Center in Phoenix, Arizona; and the Amex Canada Inc. headquarters in Markham, Ontario, Canada; and service centers located in Mexico City, Mexico; Sydney, Australia; Gurgaon, India and Brighton, United Kingdom.

During 2004 and 2005, we engaged in several sale-leaseback transactions pursuant to which we sold various owned properties to third parties and leased back the properties under long-term net leases whereby each American Express entity that leases back the property is responsible for all costs and expenses relating to the property (including maintenance, repair, utilities, operating expenses and insurance costs) in addition to annual rent. The sale-leaseback transactions have not materially impacted our financial results in any year. Gains resulting from completed sale and leaseback transactions are amortized over the initial ten-year lease periods. We continue to consider whether sale-leaseback transactions are appropriate for other properties that we currently own.

In February 2000, we entered into a ten-year agreement with CB Richard Ellis, Inc., formerly known as Trammell Crow Corporate Services, Inc., for facilities, project and transaction management and other related services. The agreement covers North and South America and parts of Europe and Asia.

Generally, we and our subsidiaries lease the premises we occupy in other locations. We believe that the facilities we own or occupy suit our needs and are well maintained.

 

ITEM 3. LEGAL PROCEEDINGS

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 proceeding could have a material impact on results of operations in any particular reporting period as the proceedings are resolved. Certain legal proceedings involving the Company are described below.

Corporate Matters

Beginning in mid-July 2002, 12 putative class action lawsuits were filed in the United States District Court for the Southern District of New York. In October 2002, these cases were consolidated under the caption In re American Express Company Securities Litigation. These lawsuits allege violations of the federal securities laws and the common law in connection with alleged misstatements regarding certain investments in high-yield bonds and write-downs in the 2000-2001 timeframe. The purported class covers the period from July 26, 1999 to July 17, 2001. The actions seek unspecified compensatory damages as well as disgorgement, punitive damages, attorneys’ fees and costs, and interest. On March 31, 2004, the Court granted the Company’s motion to dismiss the lawsuit. Plaintiffs appealed the dismissal to the United States Court of Appeals for the Second Circuit. In August 2006, the Court of Appeals, without expressing any views whatsoever on the merits of the cases, vacated the District Court’s judgment and remanded all claims to the District Court for further proceedings. More particularly, the Court of Appeals reversed the District Court’s ruling that two of the plaintiff’s claims in an amended complaint did not “relate back” to the original complaint and were thus time-barred under the statute of

 

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limitations period. As a result, the Court of Appeals decided that it was prudent to remand all claims back to the District Court so that plaintiffs could file a new amended complaint. Plaintiffs filed their amended complaint on January 5, 2007. On or about March 6, 2007, the Company filed a motion to strike the amended complaint, which the District Court denied on July 24, 2007. The Company subsequently filed a motion to dismiss the amended complaint, which motion has been fully briefed and is pending before the District Court.

On November 26, 2003, American Express Travel Related Services Company, Inc. was named as a defendant in a shareholder derivative action purportedly filed on behalf of InfoSpace Inc. The action, captioned Dreiling v. American Express Travel Related Services Company, Inc., was filed in the U.S. District Court for the Western District of Washington. The complaint alleges that the Company violated the “short swing” liability provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, in connection with its sale of InfoSpace common stock. The plaintiff seeks disgorgement of profits from the sale of the InfoSpace shares, as well as fees, expenses and interest. In June 2004, the Court granted American Express’ motion to dismiss the complaint without American Express’ ever having answered the complaint. In August 2006, the U.S. Court of Appeals for the Ninth Circuit reinstated the action because of certain unresolved factual disputes. The Company, while not admitting liability, has agreed to resolve this matter for a total payment of $1.95 million to InfoSpace, with plaintiff’s attorneys’ fees to be paid out of those funds. This settlement has been approved by the Court and the case has been dismissed with prejudice.

In January 2006, a purported class action captioned Paula Kritzman, individually and on behalf of all others similarly situated v. American Express Retirement Plan et al. was filed in the U.S. District Court for the Southern District of New York. The plaintiff alleges that when the American Express Retirement Plan (the “AXP Plan”) was amended effective July 1, 1995, to convert from a final average pay formula to a “cash balance” formula for the calculation of benefits, the terms of the amended AXP Plan violated the Employee Retirement Income Security Act, as amended (“ERISA”), in at least the following ways: (i) the AXP Plan violated ERISA’s prohibition on reducing rates of benefit accrual due to the increasing age of a plan participant; (ii) the AXP Plan violated ERISA’s prohibition on forfeiture of accrued benefits; and (iii) the AXP Plan violated ERISA’s present value calculation rules. The plaintiff seeks, among other remedies, injunctive relief entitling the plaintiff and the purported class to benefits that are the greater of (x) the benefits to which the members of the class would have been entitled without regard to the conversion of the benefit payout formula of the AXP Plan to a cash balance formula and (y) the benefits under the AXP Plan with regard to the cash balance formula. The plaintiff also seeks pre- and post-judgment interest and attorneys fees and expenses. The Company has filed a motion with the Court seeking to dismiss the complaint.

In November 2004, the Company filed a lawsuit captioned American Express Travel Related Services Company, Inc. v. Visa USA Inc., MasterCard International, Inc. et al. in the U.S. District Court for the Southern District of New York. The lawsuit seeks unspecified monetary damages against Visa, MasterCard and eight major banks that are or were members of the two card associations for the business lost as a result of the illegal, anticompetitive practices of the card associations that effectively locked the Company out of the bank-issued card business in the United States. The lawsuit follows the U.S. Supreme Court’s October 2004 decision not to hear an appeal from Visa and MasterCard that sought to overturn a lower court ruling that found the two card associations in violation of U.S. antitrust laws. Since filing the action through September 30, 2007, TRS had voluntarily dismissed its claims against the following bank defendants: Bank of America, N.A., Bank of America Corporation (including its subsidiaries Fleet Bank (RI), N.A. and Fleet National Bank), Household Bank, N.A., Household International, Inc. and USAA Federal Savings Bank. On November 7, 2007, the Company announced that it had entered into an agreement with Visa Inc., Visa USA and Visa International to drop Visa as a defendant in the lawsuit. Under the terms of the settlement agreement, American Express has also agreed to voluntarily dismiss its claims against the following individual banks and financial institutions: Capital One F.S.B., Capital One Bank, Capital One Financial Corp., Chase Bank USA, N.A., JPMorgan Chase & Co., New American Capital, Inc., Washington Mutual Bank, U.S. Bank, N.A., U.S. Bancorp, Wells Fargo & Co. and Wells Fargo Bank, N.A., as well as any other Visa member bank. In addition, under the terms of the agreement, Visa has agreed to pay a maximum amount of $2.25 billion to the Company, consisting of (i) $1.13 billion is required to

 

47


be paid by Visa not later than March 31, 2008 and (ii) 16 additional quarterly payments of up to $70 million per quarter commencing with quarter ending March 31, 2008. The quarterly payments are subject to the achievement of certain quarterly performance criteria by the Company’s U.S. Global Network Services business. The settlement agreement with Visa has been approved by Visa USA’s member banks. As a result of the settlement with Visa and the various individual bank defendants, MasterCard is the sole remaining defendant in the lawsuit. Fact discovery that was conducted in connection with the lawsuit concluded on May 31, 2007, and the Court has set a trial date of September 9, 2008, with the interim period being devoted to discovery with respect to expert witnesses followed by motions asking the Court to resolve certain legal issues prior to trial.

U.S. Card Services and Global Merchant Services Matters

The Company has been named in a number of purported class actions in which the plaintiffs allege an unlawful antitrust tying arrangement between the Company’s charge cards, credit cards and debit cards in violation of various state and federal laws, including the following: (i) Cohen Rese Gallery et al. v. American Express Company et al., U.S. District Court for the Northern District of California (filed July 2003); (ii) Italian Colors Restaurant v. American Express Company et al., U.S. District Court for the Northern District of California (filed August 2003); (iii) DRF Jeweler Corp. v. American Express Company et al., U.S. District Court for the Southern District of New York (filed December 2003); (iv) Hayama Inc. v. American Express Company et al., Superior Court of California, Los Angeles County (filed December 2003); (v) Chez Noelle Restaurant v. American Express Company et al., U.S. District Court for the Southern District of New York (filed January 2004); (vi) Mascari Enterprises d/b/a Sound Stations v. American Express Company et al., U.S. District Court for the Southern District of New York (filed January 2004); (vii) Mims Restaurant v. American Express Company et al., U.S. District Court for the Southern District of New York (filed February 2004); and (viii) The Marcus Corporation v. American Express Company et al., U.S. District Court for the Southern District of New York (filed July 2004). The plaintiffs in these actions seek injunctive relief and an unspecified amount of damages. Upon motion to the Court by the Company, the venue of the Cohen Rese and Italian Colors actions was moved to the U.S. District Court for the Southern District of New York (“SDNY”) in December 2003. Each of the above-listed actions (except for Hayama) is now pending in the SDNY, consolidated as “In re American Express Merchants’ Litigation”. On April 30, 2004, the Company filed a motion to dismiss all the actions filed prior to such date that were pending in the SDNY, and on March 15, 2006, such motion was granted, with the Court finding the claims of the plaintiffs to be subject to arbitration. Plaintiffs asked the Court to reconsider its dismissal. That request was denied. The plaintiffs have appealed the Court’s arbitration ruling. In addition, during the pendency of the motion in the SDNY, the Company had asked the California Superior Court hearing the Hayama action referenced above to stay that action pending resolution of such motion. The Company also filed a motion to dismiss the action filed by the Marcus Corporation, which was denied in July 2005. On October 1, 2007, plaintiffs filed a motion seeking certification of a class. The Company has opposed plaintiffs’ motion for class certification.

In January 2006, in a matter captioned Hoffman, et al. v. American Express Travel Related Services Company, Inc., No. 2001-02281, Superior Court of the State of California, County of Alameda, the Court certified a class action against TRS. Two classes were certified: (1) all persons who held American Express charge cards governed by New York law with billing addresses in California who purchased American Express’ fee-based travel-related insurance plans from September 6, 1995, through a date to be determined; and (2) all persons who held American Express charge cards governed by New York law with billing addresses in states other than California and who purchased American Express fee-based travel-related insurance plans from September 6, 1995, through a date to be determined. The Court did not certify a class to pursue claims on behalf of persons who held American Express credit cards governed by Utah law. Plaintiffs allege that American Express violated California and New York law by allegedly billing customers for flight and baggage insurance that they did not receive. American Express denies the allegations and filed an interlocutory appeal (known as a petition for a writ of mandate) of the class certification order. In June 2006, the appellate court denied jurisdiction over that interlocutory appeal. American Express also appealed the denial of its motion to compel individual arbitration of all non-California class members. In July 2007, the appellate court affirmed the denial of

 

48


the motion to compel arbitration. The Company’s request for a rehearing on that issue was denied by the appellate court. The Company filed a petition for review to the California Supreme Court, which was denied in late October 2007. The Court has set the Hoffman matter for trial in June 2008. In February 2008, the Company filed a summary judgment motion with the Court asking that the complaint be dismissed as a matter of law. In February 2008, the plaintiff filed a motion with the Court asking that the class be expanded to include persons who hold American Express credit cards governed by Utah law. In the U.S. District Court for the Eastern District of New York a matter making related allegations to those raised in Hoffman is pending. That matter, captioned Environment Law Enforcement Systems v. American Express et al., had effectively been stayed pending the proceedings in the Hoffman action. In October 2006, the Court in the Environment Law action entered an order scheduling a pre-motion conference on American Express’ anticipated motion to compel arbitration for January 31, 2007. That date was extended pending the decision by the California appellate court in the Hoffman matter. The Company advised the Court in the Environment Law matter of the California appellate court’s decision in the Hoffman matter and requested that the stay of the Environment Law matter remain in effect until the Company’s petition for review of the California decision by the California Supreme Court could be considered. With the California Supreme Court now having denied the Company’s petition for review as described above, the parties expect to report to the Court on the status of the matter.

The Company has been named in several purported class actions in various state courts alleging that the Company violated the respective state’s laws by wrongfully collecting amounts assessed on converting transactions made in foreign currencies to U.S. dollars and/or failing to properly disclose the existence of such amounts in its Cardmember agreements and billing statements. The plaintiffs in the actions seek, among other remedies, injunctive relief, money damages and/or attorneys’ fees on their own behalf and on behalf of the putative class of persons similarly situated. In December 2005, the U.S. District Court for the Southern District of Florida granted final approval of a nationwide class action settlement to resolve all lawsuits and allegations with respect to the Company’s collection and disclosure of fees assessed on transactions made in foreign currencies in the case captioned Lipuma v. American Express Bank, American Express Travel Related Services Company, Inc. and American Express Centurion Bank (filed in August 2003). The settlement approved by the Court calls for the Company to (a) deposit $75 million into a fund that will be used to reimburse class members with valid claims, make certain contributions to charitable organizations to be identified later and pay attorneys’ fees and (b) make certain changes to the disclosures in its Cardmember agreements and billing statements regarding its foreign currency conversion practices (which it has already done). The Company had previously established reserves to cover the payment that will be made to reimburse class members and pay attorneys’ fees. The Court’s approval order enjoins all other proceedings that make related allegations pending a final approval hearing including, but not limited to the following cases: (i) Environmental Law Foundation, et al. v. American Express Company, et al., Superior Court of Alameda County, California (filed March 2003); (ii) Rubin v. American Express Company and American Express Travel Related Services Company, Inc., Circuit Court of Madison County, Illinois (filed April 2003); (iii) Angie Arambula, et al. v. American Express Company, et al., District Court of Cameron County, Texas, 103rd Judicial District (filed May 2003); (iv) Fuentes v. American Express Travel Related Services Company, Inc. and American Express Company, District Court of Hidalgo County, Texas (filed May 2003); (v) Wick v. American Express Company, et al., Circuit Court of Cook County, Illinois (filed May 2003); (vi) Bernd Bildstein v. American Express Company, et al., Supreme Court of Queens County, New York (filed June 2003); (vii) Janowitz v. American Express Company, et al., Circuit Court of Cook County, Illinois (filed September 2003); (viii) Paul v. American Express Company, et al., Superior Court of Orange County, California (filed January 2004); and (ix) Ball v. American Express, et al., Superior Court of San Joaquin, California (filed August 2004). With the Company having reached a resolution with several objectors who had appealed to the U.S. Court of Appeals for the Eleventh Circuit, that appeal has been dismissed and the settlement is now final.

In June 2006, a putative class action captioned Homa v. American Express Company et al. was filed in the U.S. District Court for the District of New Jersey. The case alleges, generally, misleading and fraudulent advertising of the “tiered” “up to 5%” cash rebates with the Blue Cash card. The complaint initially sought certification of a nationwide class consisting of “all persons who applied for and received an American Express

 

49


Blue Cash card during the period from September 30, 2003 to the present and who did not get the rebate or rebates provided for in the offer.” On December 1, 2006, however, plaintiff filed a First Amended Complaint dropping the nationwide class claims and asserting claims only on behalf of New Jersey residents who “while so residing in New Jersey, applied for and received an American Express Blue Cash card during the period from September 30, 2003 to the present.” The plaintiff seeks unspecified damages and other unspecified relief that the Court deems appropriate. In May 2007, the Court granted the Company’s motion to compel individual arbitration and dismissed the complaint. Plaintiff has filed a Notice of Appeal of that decision with the U.S. Court of Appeals for the Third Circuit, and the parties are in the process of submitting their briefs in the appeal.

In August 2005, a purported class action captioned Performance Labs Inc. v. American Express Travel Related Services Company, Inc. (“TRS”), MasterCard International Incorporated, Visa USA, Inc. et al. was filed in the U. S. District Court for the District of New Jersey. The action was then transferred to the U.S. District Court for the Eastern District of New York. The complaint alleged that the Company’s policy prohibiting merchants from imposing restrictions on the use of American Express® Cards that are not imposed equally on other forms of payment violates U.S. antitrust laws. The suit sought injunctive relief. TRS moved to dismiss the complaint. In addition, the Company learned that two additional purported class actions that made allegations similar to those made in the Performance Labs action had also been filed: 518 Restaurant Corp. v. American Express Travel Related Services Company, Inc., MasterCard International Incorporated, Visa USA, Inc. et al. (filed in August 2005 in the United States District Court for the Eastern District of Pennsylvania) and Lepkowski v. American Express Travel Related Services Company, Inc., MasterCard International Incorporated, Visa USA, Inc. et al. (filed in October 2005 in the U.S. District Court for the Eastern District of New York). The plaintiffs in these actions sought injunctive relief. The 518 Restaurant Corp. action was voluntarily withdrawn without TRS ever having been served with the complaint. The complaint in the Lepkowski action was also never served. The Lepkowski and Performance Labs cases were consolidated in the U.S. District Court for the Eastern District of New York for pre-trial purposes in a larger multi-district litigation involving other named defendants not affiliated with the Company, and all proceedings in the consolidated action were stayed pending the filing of a consolidated amended complaint. Such consolidated amended complaint was filed on April 24, 2006, but the Company was not named in that action. Other defendants, not affiliated with the Company, were named. However, on April 18, 2006, Performance Labs, Inc., Joseph Lepkowski, DDS d/b/a Oak Park Dental Studio, and Jasa Inc. filed an action in the SDNY against American Express Company and American Express Travel Related Services Company, Inc. This complaint challenges the Company’s “Anti-Steering” rules as unlawful under the antitrust laws. As alleged by plaintiffs, these rules prevent merchants from offering consumers incentives to use alternative forms of payments when consumers wish to use an American Express-branded card. Originally plaintiffs sought only injunctive relief but have since amended their complaint to also seek unspecified damages. These plaintiffs have agreed that a stay would be imposed with regard to their respective actions pending the appeal of the Court’s arbitration ruling discussed above.

In July 2004, a purported class action captioned Ross, et al. v. American Express Company, American Express Travel Related Services and American Express Centurion Bank was filed in the United States District Court for the Southern District of New York. The complaint alleges that AMEX conspired with Visa, MasterCard and Diners Club in the setting of foreign conversion rates and in the inclusion of arbitration clauses in certain of their cardmember agreements. The suit seeks injunctive relief and unspecified damages. The class is defined as “all Visa, MasterCard and Diners Club general purpose cardholders who used cards issued by any of the MDL Defendant Banks....” American Express cardholders are not part of the class. In September 2005, the Court denied the Company’s motion to dismiss the action and preliminarily certified an injunction class of Visa and MasterCard cardholders to determine the validity of Visa’s and MasterCard’s cardmember arbitration clauses. American Express filed a motion for reconsideration with the Court, which motion was denied in September 2006. The Company has filed an appeal from the District Court’s order denying its motion to compel arbitration. On February 13, 2007, the United States Court of Appeals for the Second Circuit denied plaintiffs motion to dismiss such appeal. That appeal is pending. The Company had also asked the appellate court to entertain an interlocutory appeal of the District Court’s certification of an injunction class. On December 19, 2006, that appellate court denied that request.

 

50


International Matters

In May 2006, in a matter captioned Marcotte v. Bank of Montreal et al., filed in the Superior Court of Quebec, District of Montreal (originally filed in April 2003) the Court authorized a class action against Amex Bank of Canada, Bank of Montreal, Toronto-Dominion Bank, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Scotiabank, National Bank of Canada, Laurentian Bank of Canada and Citibank Canada. The action alleges that conversion commissions made on foreign currency transactions are credit charges under the Quebec Consumer Protection Act (the “QCPA”) and cannot be charged prior to the 21-day grace period under the QCPA. The class includes all persons holding a credit card issued by one of the defendants to whom fees were charged since April 17, 2000, for transactions made in foreign currency before expiration of the period of 21 days following the statement of account. The class claims reimbursement of all foreign currency conversions, CDN $400 per class member for trouble, inconvenience and punitive damages, interest and fees and costs. The trial is scheduled to commence September 2008.

In March 2006, a motion to authorize a class action captioned Jasmin v. Amex Bank of Canada, was filed in the Superior Court of Quebec, District of Montreal. The motion purports to claim, on behalf of a Canada-wide class of persons who were holders of an American Express Credit Card who paid their credit card account at the counter or at an automatic banking machine of an authorized financial institution, and who obtained a grace period that was less than that appearing on their statement of account and/or who were charged interest under a three- to five-day processing delay contrary to their contracts, the law respecting banks and the Civil Code of Quebec. A claim is also being made of an alleged violation of the Charter of Human Rights and Freedoms for depriving the class members of their use of property. The class claims reimbursement per class member of finance charges in the amount of CDN $75, CDN $100 in punitive damages and CDN $25 for having to pay their account early and being deprived of the use of their money, interest, fees and costs. The claim in Jasmin has been withdrawn as part of the settlement in Ptack, below. Amex Bank of Canada will pay a nominal amount for the costs of the withdrawal.

In March 2006, in a matter captioned Ptack v. Amex Bank of Canada, filed in the Superior Court of Quebec, District of Montreal (originally filed in March 2004), the Court authorized a class action against Amex Bank of Canada. The class includes all persons who were holders of an American Express Credit Card who paid their credit card account via Internet, telephone and/or automatic banking machine, on or before the due date and incurred a finance charge as a result of the alleged payment processing policy of Amex Bank. The class claims reimbursement per class member of finance charges, CDN $100 in punitive damages and CDN $100 for waste of time, interest and fees and costs. A settlement agreement has been entered into by the parties, and that settlement agreement was approved by the Court on February 18, 2008. Under the settlement agreement terms Amex Bank of Canada will pay attorneys’ fees of approximately CDN $200,000 and make certain changes to the Cardmember billing statements regarding timing of payment processing. No payments will be made to class members.

In November 2006, in a matter captioned Option Consommateurs and Benoit Fortin v. Amex Bank of Canada et al. filed in the Superior Court of Quebec, District of Montreal (originally filed in July 2003), the Court authorized a class action against Amex Bank of Canada, Citibank Canada, MBNA Canada, Diners Club International, Capital One and Royal Bank of Canada. The plaintiff alleges that the defendants have violated the Quebec Consumer Protection Act (“QCPA”) by imposing finance charges on credit card transactions prior to 21 days following the receipt of the statement containing the charge. It is alleged that the QCPA provisions which require a 21-day grace period prior to imposing finance charges applies to credit cards issued by Amex Bank of Canada in Quebec and that finance charges imposed prior to this grace period violate the Act. The class seeks reimbursement of all finance charges imposed in violation of the Act, CDN$200 in punitive damages per class member, interest and fees and costs.

In November 2006, in a matter captioned Sylvan Adams v. Amex Bank of Canada filed in the Superior Court of Quebec, District of Montreal (originally filed in November 2004), the Court authorized a class action against Amex Bank of Canada. The plaintiff alleges that prior to December 2003, Amex Bank of Canada charged

 

51


a foreign currency conversion commission on transactions to purchase goods and services in currencies other than Canadian dollars and failed to disclose the commissions in monthly billing statements or solicitations directed to prospective cardmembers. The class, consisting of all Cardmembers in Quebec that purchased goods or services in a foreign currency prior to December 2003, claims reimbursement of all foreign currency conversion commissions, CDN$1,000 in punitive damages per class member, interest and fees and costs.

In May 2005, Amex Bank of Canada was added as a defendant to a motion to authorize a class action captioned Option Consommateurs and Joel-Christian St-Pierre v. Bank of Montreal et al. filed in the Superior Court of Quebec, District of Quebec. The motion, which also names as defendants Royal Bank of Canada, Toronto-Dominion Bank, HSBC Bank of Canada, among others, alleges that the defendants violated QCPA by imposing finance charges on credit card transactions prior to 21 days following the receipt of the statement containing the charge. It is alleged that the QCPA provisions, which require a 21-day grace period prior to imposing finance charges, applies to credit cards issued by Amex Bank of Canada in Quebec and that finance charges imposed prior to this grace period violate the QCPA. The proposed class seeks reimbursement of all finance charges imposed in violation of the QCPA, CDN$100 in punitive damages per class member, interest and fees and costs.

Other Matters

As described above, U.S. and foreign regulatory authorities, together with international organizations, have raised increasing concerns over the ability of criminal organizations and corrupt persons to use global financial intermediaries to facilitate money laundering. Compliance efforts to combat money laundering remain a high priority for the Company and its subsidiaries, including AEBL and American Express Travel Related Services Company, Inc. (“TRS”), and they have increased their efforts to address evolving regulatory and supervisory standards and requirements in jurisdictions in which they do business.

As previously disclosed, in early 2004, American Express Bank International (“AEBI”), a subsidiary of AEBL headquartered in Miami, received subpoenas from the Department of Justice (“DOJ”) relating to certain customer accounts and anti-money laundering (“AML”) compliance programs. In September 2006, the DOJ informed AEBI of concerns relating to its AML compliance program. In addition, in 2007, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Financial Crimes Enforcement Network (“FinCEN”) of the Department of Treasury informed AEBI of potential enforcement actions relating to its AML programs. Also, in June 2007, FinCEN informed TRS that it separately had concerns relating to TRS’s compliance with the provisions of the Bank Secrecy Act regarding the filing of Suspicious Activity Reports in connection with its travelers check business.

During the first quarter of 2007, the Company established a reserve in the amount of $60 million for regulatory and legal matters at AEBI. The Company increased the reserve during the second quarter of 2007 for the resolution of the matters.

On August 6, 2007, AEBI entered into a settlement with the DOJ, the Federal Reserve and FinCEN relating to deficiencies in its AML program. As part of the settlement, AEBI entered into a Deferred Prosecution Agreement with the DOJ, a Cease and Desist Order with the Federal Reserve and a Consent Order with FinCEN, each of which provides for a money penalty. The Consent Order with FinCEN also resolves FinCEN’s determination that TRS did not file timely, accurate and complete Suspicious Activity Reports.

The Company has paid a total of $65 million in settlement of all these matters. Of the amount paid, $60 million is attributable to the matters involving AEBI and $5 million is attributable to the matter involving TRS. The DOJ assessed a $55 million payment under the Deferred Prosecution Agreement. FinCEN assessed a civil money penalty in the amount of $25 million under its Consent Order, $15 million of which is concurrent with the DOJ payment and is therefore deemed satisfied by the payment made to the DOJ, with the remaining $10 million assessed under the FinCEN Consent Order paid to the Department of the Treasury. The Federal Reserve assessed

 

52


a civil money penalty in the amount of $20 million under its Cease and Desist Order, which is concurrent with the penalty assessed by the DOJ and FinCEN and is likewise therefore deemed satisfied by the payments to the DOJ and the Department of the Treasury.

Under the Deferred Prosecution Agreement, the DOJ filed an information in the U.S. District Court for the Southern District of Florida charging AEBI with violating the Bank Secrecy Act by failing to maintain an effective anti-money laundering program. This charge will be deferred, and absent a breach of the agreement, will be dismissed after 12 months or such earlier time as described in the Deferred Prosecution Agreement, and no further prosecution relating to these matters will be brought. The Federal Reserve’s Cease and Desist Order also requires that AEBI implement certain remedial measures, which are presently underway.

Also on August 6, 2007, AEBL entered into a Written Agreement with the New York State Banking Department, the primary regulator of AEBL, under which AEBL has agreed to implement certain enhancements and remedial measures to its AML compliance program. There is no monetary fine or penalty associated with this Agreement.

In addition to resolving each of the above proceedings, the Company has committed to its consolidated supervisor, the Office of Thrift Supervision (“OTS”), that it will complete its efforts to develop and implement an enterprise-wide AML compliance program that will govern compliance throughout the American Express organization, and will ensure that each of its subsidiaries is provided with resources adequate to meet its legal and regulatory obligations. The Company will report periodically on its progress to the OTS.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matters to a vote of our security holders during the last quarter of our fiscal year ended December 31, 2007.

 

53


PART II

 

ITEM 5. MARKET FOR COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) Our common stock trades principally on The New York Stock Exchange under the trading symbol AXP. As of December 31, 2007, we had 50,216 common shareholders of record. You can find price and dividend information concerning our common stock in Note 22 to our Consolidated Financial Statements, which can be found on page 111 of our 2007 Annual Report to Shareholders, which Note is incorporated herein by reference. You can find information on securities authorized for issuance under our equity compensation plans under the captions “Executive Compensation—Share Plans,” and “Executive Compensation—Equity Compensation Plan Information” to be contained in the Company’s definitive 2008 proxy statement for our Annual Meeting of Shareholders, which is scheduled to be held on April 28, 2008. The information to be found under such captions is incorporated herein by reference. Our definitive 2008 proxy statement for our Annual Meeting of Shareholders is expected to be filed with the SEC in March 2008 (and, in any event, not later than 120 days of the close of our most recently completed fiscal year).

(b) Not applicable.

(c) The table below sets forth the information with respect to purchases of our common stock made by or on behalf of the Company during the quarter ended December 31, 2007.

 

Period

   Total Number
of Shares
Purchased
   Average Price
Paid Per Share
   Total Number of
Shares
Purchased as

Part of Publicly
Announced
Plans or
Programs (3)
   Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or

Programs

October 1-31, 2007

    Repurchase program (1)

    Employee transactions (2)

   2,280,300

9,719

   $

$

59.19

60.08

   2,280,300

N/A

   116,077,023

N/A

November 1-30, 2007

    Repurchase program (1)

    Employee transactions (2)

   10,801,055

2,786

   $

$

57.28

58.81

   10,801,055

N/A

   105,275,968

N/A

December 1-31, 2007

    Repurchase program (1)

    Employee transactions (2)

   525,000

19,690

   $

$

57.53

53.44

   525,000

N/A

   104,750,968

N/A

               

Total

    Repurchase program (1)

    Employee transactions (2)

   13,606,355

32,195

   $

$

57.61

55.91

   13,606,355

N/A

  

 

(1) The Company has approximately 104.8 million shares remaining under the total authorization. Such authorization does not have an expiration date, and at present, there is no intention to modify or otherwise rescind such authorization. Since September 1994, the Company has acquired 665.2 million shares under various Board authorizations to repurchase up to an aggregate of 770 million shares, including purchases made under agreements with third parties.

 

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(2) Includes: (a) shares delivered by or deducted from holders of employee stock options who exercised options (granted under the Company’s incentive compensation plans) in satisfaction of the exercise price and/or tax withholding obligation of such holders and (b) restricted shares withheld (under the terms of grants under the Company’s incentive compensation plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares. The Company’s incentive compensation plans provide that the value of the shares delivered or attested to, or withheld, shall be the average of the high and low price of the Company’s common stock on the date the relevant transaction occurs.

 

(3) Share purchases under publicly announced programs are made pursuant to open market purchases or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Company deems appropriate.

 

ITEM 6. SELECTED FINANCIAL DATA

The “Consolidated Five-Year Summary of Selected Financial Data” appearing on page 113 of our 2007 Annual Report to Shareholders is incorporated herein by reference.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The information set forth under the heading “Financial Review” appearing on pages 26-64 of our 2007 Annual Report to Shareholders is incorporated herein by reference.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth under the heading “Risk Management” appearing on pages 49-52 and in Note 12 to our Consolidated Financial Statements on pages 94-95 of our 2007 Annual Report to Shareholders is incorporated herein by reference.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The “Report of Independent Registered Public Accounting Firm” (PricewaterhouseCoopers LLP), the “Consolidated Financial Statements” and the “Notes to Consolidated Financial Statements” appearing on pages 66-112 of our 2007 Annual Report to Shareholders are incorporated herein by reference.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

 

ITEM 9A. CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’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, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

There have not been any changes in the Company’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 the Company’s fourth quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

55


“Management’s Report on Internal Control over Financial Reporting,” which sets forth management’s evaluation of internal control over financial reporting, and the “Report of Independent Registered Public Accounting Firm” on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, appearing on pages 65-66 of our 2007 Annual Report to Shareholders, are incorporated herein by reference.

 

ITEM 9B. OTHER INFORMATION

Not applicable.

 

56


PART III

 

ITEMS 10, 11, 12 and 13. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS; CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

We expect to file with the SEC, in March 2008 (and, in any event, not later than 120 days after the close of our last fiscal year), a definitive proxy statement, pursuant to Regulation 14A of the SEC in connection with our Annual Meeting of Shareholders to be held April 28, 2008, which involves the election of directors. The following information to be included in such proxy statement is incorporated herein by reference:

 

   

information included under the caption “Corporate Governance—Summary of the Company’s Corporate Governance Principles—Independence of Directors;”

 

   

information included in the table under the caption “Corporate Governance—Membership on Board Committees;”

 

   

information under the captions “Corporate Governance—Compensation and Benefits Committee—Compensation Committee Interlocks and Insider Participation” and “Report of the Compensation and Benefits Committee;”

 

   

information included under the caption “Corporate Governance—Audit Committee;”

 

   

information included under the caption “Compensation of Directors;”

 

   

information included under the caption “Ownership of Our Common Shares;”

 

   

information included under the caption “Items to be Voted on by Shareholders—Item 1—Election of Directors;”

 

   

information included under the caption “Executive Compensation;”

 

   

information under the caption “Certain Relationships and Transactions;” and

 

   

information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”

In addition, the information regarding executive officers called for by Item 401(b) of Regulation S-K may be found under the caption “Executive Officers of the Company” in this report.

We have adopted a set of Corporate Governance Principles, which together with the charters of the five standing committees of the Board of Directors (Audit; Compensation and Benefits; Executive; Nominating and Governance; and Public Responsibility), our Code of Conduct (which constitutes the Company’s code of ethics), and the Code of Business Conduct for the Members of the Board of Directors provide the framework for the governance of the Company. A complete copy of our Corporate Governance Principles, the charters of each of the Board committees, the Code of Conduct (which applies not only to our Chief Executive Officer, Chief Financial Officer and Comptroller, but also to all other employees of the Company) and the Code of Business Conduct for the Members of the Board of Directors may be found by clicking on the “Corporate Governance” link found on our Investor Relations Web site at http://ir.americanexpress.com. You may also access our Investor Relations Web site through the Company’s main Web site at www.americanexpress.com by clicking on the “About American Express” link, which is located at the bottom of the Company’s homepage. (Information from such sites is not incorporated by reference into this report.) You may also obtain free copies of these materials by writing to our Secretary at the Company’s headquarters.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information set forth under the heading “Item 2—Ratification of the Appointment of Independent Registered Public Accounting Firm—Audit Fees;” “—Audit-Related Fees;” “—Tax Fees;” “—All Other Fees;” and “—Policy on Pre-Approval of Services Provided by Independent Registered Public Accounting Firm,” which will appear in the Company’s definitive proxy statement in connection with our Annual Meeting of Shareholders to be held April 28, 2008, is incorporated herein by reference.

 

57


PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

1. Financial Statements:

The financial statements filed as a part of this report are listed on page F-1 hereof under “Index to Financial Statements Covered by Reports of Independent Registered Public Accounting Firm,” which is incorporated herein by reference.

2. Financial Statement Schedule:

The financial statement schedule required to be filed in this report is listed on page F-1 hereof under “Index to Financial Statements Covered by Reports of Independent Registered Public Accounting Firm,” which is incorporated herein by reference.

3. Exhibits:

The list of exhibits required to be filed as exhibits to this report are listed on pages E-1 through E-5 hereof under “Exhibit Index,” which is incorporated herein by reference.

 

58


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  AMERICAN EXPRESS COMPANY
February 28, 2008  

/s/    DANIEL T. HENRY        

 

Daniel T. Henry

Executive Vice President and

Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.

 

/s/    KENNETH I. CHENAULT        

  

/s/    JAN LESCHLY        

Kenneth I. Chenault

Chairman, Chief Executive Officer and

Director

  

Jan Leschly

Director

/s/    DANIEL T. HENRY        

  

/s/    RICHARD C. LEVIN        

Daniel T. Henry

Executive Vice President and

Chief Financial Officer

  

Richard C. Levin

Director

/s/    JOAN C. AMBLE        

  

/s/    RICHARD A. MCGINN        

Joan C. Amble

Executive Vice President and

Comptroller

  

Richard A. McGinn

Director

/s/    DANIEL F. AKERSON        

  

/s/    EDWARD D. MILLER        

Daniel F. Akerson

Director

  

Edward D. Miller

Director

/s/    CHARLENE BARSHEFSKY        

  

/s/    FRANK P. POPOFF        

Charlene Barshefsky

Director

  

Frank P. Popoff

Director

/s/    URSULA M. BURNS        

  

/s/    STEVEN S REINEMUND        

Ursula M. Burns

Director

  

Steven S Reinemund

Director

/s/    PETER CHERNIN        

  

/s/    ROBERT D. WALTER        

Peter Chernin

Director

  

Robert D. Walter

Director

/s/    VERNON E. JORDAN, JR.        

  

/s/    RONALD A. WILLIAMS        

Vernon E. Jordan, Jr.

Director

  

Ronald A. Williams

Director

February 28, 2008

 

59


AMERICAN EXPRESS COMPANY

INDEX TO FINANCIAL STATEMENTS

COVERED BY REPORTS OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

(Items 15(a)(1) and 15(a)(2) of Form 10-K)

 

     Form 10-K    Annual Report
to Shareholders
(Page)

American Express Company and Subsidiaries:

     

Data incorporated by reference from 2007 Annual Report to Shareholders:

     

Management’s report on internal control over financial reporting

      65

Report of independent registered public accounting firm (PricewaterhouseCoopers LLP)

      66

Consolidated statements of income for each of the three years in the period ended December 31, 2007

      68

Consolidated balance sheets at December 31, 2007 and 2006

      69

Consolidated statements of cash flows for each of the three years in the period ended December 31, 2007

      70

Consolidated statements of shareholders’ equity for each of the three years in the period ended December 31, 2007

      71

Notes to consolidated financial statements

      72 –112

Consent of independent registered public accounting firm

   F-2   

Schedules:

     

Report of independent registered public accounting firm on financial statement schedule

   F-3   

I—Condensed financial information of the Company

   F-4 – F-7   

All other schedules for American Express Company and subsidiaries have been 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 respective financial statements or notes thereto. Refer to Notes 3 and 5 to the Consolidated Financial Statements in our 2007 Annual Report to Shareholders for information on accounts receivable reserves and loan reserves, respectively.

*            *            *

The Consolidated Financial Statements of American Express Company (including the reports of independent registered public accounting firm) listed in the above index, which are included in our 2007 Annual Report to Shareholders, are hereby incorporated by reference. With the exception of the pages listed in the above index, unless otherwise incorporated by reference elsewhere in this Annual Report on Form 10-K, our 2007 Annual Report to Shareholders is not to be deemed filed as part of this report.

 

F-1


Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements (Form S-8 No. 2-46918, No. 2-59230, No. 2-64285, No. 2-73954, No. 2-89680, No. 33-01771, No. 33-02980, No. 33-28721, No. 33-33552, No. 33-36442, No. 33-48629, No. 33-62124, No. 33-65008, No. 33-53801, No. 333-12683, No. 333-41779, No. 333-52699, No. 333-73111, No. 333-38238, No. 333-98479; and No. 333-142710; Form S-3 No. 2-89469, No. 33-43268, No. 33-50997, No. 333-32525, No. 333-45445, No. 333-47085, No. 333-55761, No. 333-51828, No. 333-113768, No. 333-117835 and No. 333-138032) of American Express Company of our report dated February 25, 2008, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 25, 2008, relating to the financial statement schedule, which appears in this Form 10-K.

 

/s/ PricewaterhouseCoopers LLP

New York, New York

February 25, 2008

 

F-2


Report of Independent Registered Public Accounting Firm

on

Financial Statement Schedule

To the Board of Directors and Shareholders

of American Express Company:

Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 25, 2008 appearing in the 2007 Annual Report to Shareholders of American Express Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule as of December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007, listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

 

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

New York, New York

February 25, 2008

 

F-3


AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES

SCHEDULE ICONDENSED FINANCIAL INFORMATION OF THE COMPANY

CONDENSED STATEMENTS OF INCOME

(Parent Company Only)

(millions)

 

     Years Ended December 31,  
     2007     2006     2005  

Revenues net of interest expense

   $ (89 )   $ (47 )   $ (153 )
                        

Expenses

      

Human resources

     132       136       145  

Other

     160       173       198  
                        

Total

     292       309       343  
                        

Pretax loss

     (381 )     (356 )     (496 )

Income tax benefit

     (182 )     (187 )     (195 )
                        

Net loss before equity in net income of subsidiaries and affiliates

     (199 )     (169 )     (301 )

Equity in net income of subsidiaries and affiliates

     4,247       3,780       3,363  
                        

Income from continuing operations

     4,048       3,611       3,062  

(Loss) Income from discontinued operations, net of tax

     (36 )     96       672  
                        

Net income

   $ 4,012     $ 3,707     $ 3,734  
                        

 

 

See Notes to Condensed Financial Information of the Parent Company on page F-7.

 

F-4


AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES

SCHEDULE ICONDENSED FINANCIAL INFORMATION OF THE COMPANY

CONDENSED BALANCE SHEETS

(Parent Company Only)

(millions, except share amounts)

 

     December 31,  
     2007     2006  
ASSETS     

Cash and cash equivalents

   $ 3     $ 3  

Investments

     50       50  

Equity in net assets of subsidiaries and affiliates of continuing operations

     11,588       10,550  

Accounts receivable, less reserves

     2       20  

Land, buildings and equipment — at cost, less accumulated depreciation: 2007, $27;
2006, $22

     38       33  

Due from subsidiaries

     5,025       5,093  

Other assets

     1,222       881  

Equity in net assets of subsidiaries and affiliates of discontinued operations

     519       467  
                

Total assets

   $ 18,447     $ 17,097  
                
LIABILITIES AND SHAREHOLDERS EQUITY     

Accounts payable and other liabilities

   $ 672     $ 592  

Long-term debt

     6,746       5,994  
                

Total liabilities

     7,418       6,586  

Shareholders’ equity

    

Common shares, $.20 par value, authorized 3.6 billion shares; issued and outstanding 1,158 million shares in 2007 and 1,199 million shares in 2006

     232       240  

Additional paid-in capital

     10,164       9,638  

Retained earnings

     1,075       1,153  

Accumulated other comprehensive (loss) income, net of tax:

    

Net unrealized securities gains

     12       92  

Net unrealized derivatives (losses) gains

     (71 )     27  

Foreign currency translation adjustments

     (255 )     (222 )

Net unrealized pension and other postretirement benefit costs

     (128 )     (417 )
                

Total accumulated other comprehensive loss

     (442 )     (520 )
                

Total shareholders’ equity

     11,029       10,511  
                

Total liabilities and shareholders’ equity

   $ 18,447     $ 17,097  
                

 

See Notes to Condensed Financial Information of the Parent Company on page F-7.

 

F-5


AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES

SCHEDULE ICONDENSED FINANCIAL INFORMATION OF THE COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

(Parent Company Only)

(millions)

 

     Years Ended December 31,  
     2007     2006     2005  

Cash Flows from Operating Activities

    Net income

   $ 4,012     $ 3,707     $ 3,734  

Adjustments to reconcile net income to cash provided by operating activities

      

Equity in net (income) loss of subsidiaries and affiliates:

      

– continuing operations

     (4,247 )     (3,780 )     (3,363 )

– discontinued operations

     36       (96 )     (672 )

Dividends received from subsidiaries and affiliates

     3,708       3,479       2,474  

Other operating activities, primarily with subsidiaries

     (267 )     (279 )     (316 )
                        

Net cash provided by operating activities

     3,242       3,031       1,857  
                        

Cash Flows from Investing Activities

      

Purchase of investments

     —         (20 )     (30 )

Purchase of land, buildings and equipment

     (10 )     (10 )     (8 )

Acquisition

     —         (200 )     —    

Investments in subsidiaries and affiliates

     (550 )     —         —    
                        

Net cash used in investing activities

     (560 )     (230 )     (38 )
                        

Cash Flows from Financing Activities

      

Issuance of debt

     1,500       1,750       —    

Principal payment of debt

     (750 )     (1,000 )     (498 )

Issuance of American Express common shares and other

     852       1,203       1,129  

Repurchase of American Express common shares

     (3,572 )     (4,093 )     (1,853 )

Dividends paid

     (712 )     (661 )     (597 )
                        

Net cash used in financing activities

     (2,682 )     (2,801 )     (1,819 )
                        

Net change in cash and cash equivalents

     —         —         —    

Cash and cash equivalents at beginning of year

     3       3       3  
                        

Cash and cash equivalents at end of year

   $ 3     $ 3     $ 3  
                        

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid for interest (net of amounts capitalized) in 2007, 2006, and 2005 was $319 million, $190 million, and $246 million, respectively. Net cash received for income taxes in 2007, 2006, and 2005 was $75 million, $216 million, and $160 million, respectively.

See Notes to Condensed Financial Information of the Parent Company on page F-7.

 

F-6


AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES

SCHEDULE ICONDENSED FINANCIAL INFORMATION OF THE COMPANY

NOTES TO CONDENSED FINANCIAL INFORMATION OF THE COMPANY

(Parent Company Only)

1. Principles of Consolidation

The accompanying condensed financial statements include the accounts of American Express Company (the “Parent Company”) and, on an equity basis, its subsidiaries and affiliates. Parent Company revenues and expenses, other than human resources expenses and interest expense on long-term debt, are primarily related to intercompany transactions with subsidiaries and affiliates. These financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes thereto of American Express Company and its subsidiaries (the “Company”). Certain reclassifications of prior period amounts have been made to conform to the current presentation.

On September 18, 2007, the Company entered into an agreement to sell its international banking subsidiary, American Express Bank Ltd. (“AEB”) and American Express International Deposit Company (“AEIDC”), a subsidiary that issues investment certificates to AEB’s customers, to Standard Chartered PLC (“Standard Chartered”). AEIDC was contracted to be sold to Standard Chartered, 18 months after the close of the AEB sale, through a put/call agreement. For 2007 and all prior periods presented, the operating results, assets and liabilities, and cash flows of AEB (except for certain components of AEB that are not being sold) have been reflected as discontinued operations in the condensed financial information. AEIDC will continue to be included in continuing operations until such time as AEIDC qualifies for classification as a discontinued operation which will occur approximately one year prior to its transfer to Standard Chartered.

On September 30, 2005, the Company completed the spin-off of Ameriprise Financial, Inc. (Ameriprise), formerly known as American Express Financial Corporation, the Company’s financial planning and financial services business. In addition, during the third quarter of 2005, the Company completed certain dispositions including the sale of its tax, accounting and consulting business, American Express Tax and Business Services, Inc. (“TBS”). The operating results and cash flows related to Ameriprise and certain dispositions (including TBS) have been reflected as discontinued operations in the condensed financial information.

2. Long-term debt consists of (millions):

 

     December 31,
     2007    2006

5.40% Fixed and Floating Rate Senior Notes due 2009-2033 (a)

     5,996      5,244

6.80% Subordinated Debentures due 2036 (b)

     750      750
             
   $ 6,746    $ 5,994
             

 

(a) For floating rate debt issuances, the stated rate is based on the floating rates in effect at December 31, 2007.
(b) The maturity date will automatically be extended to September 1, 2066, except in the case of (1) prior redemption or (2) default related to the debentures.

Aggregate annual maturities of long-term debt for the five years ending December 31, 2012, are as follows (millions): 2008, $0; 2009, $500; 2010, $0; 2011, $400; 2012, $0 and thereafter, $5,846.

 

F-7


EXHIBIT INDEX

The following exhibits are filed as part of this Annual Report. The exhibit numbers preceded by an asterisk (*) indicate exhibits electronically filed herewith. All other exhibit numbers indicate exhibits previously filed and are hereby incorporated herein by reference. Exhibits numbered 10.1 through 10.30, 10.32 through 10.43 and 10.46 through 10.48 are management contracts or compensatory plans or arrangements.

 

  3.1    Company’s Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-3, dated July 31, 1997 (Commission File No. 333-32525)).
  3.2    Company’s Certificate of Amendment of the Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31, 2000).
  3.3    Company’s By-Laws, as amended through September 27, 2006 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated September 27, 2006 (filed September 29, 2006)).
  4    The instruments defining the rights of holders of long-term debt securities of the Company and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company hereby agrees to furnish copies of these instruments to the SEC upon request.
10.1    American Express Company 1989 Long-Term Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31, 1996).
10.2    American Express Company 1989 Long-Term Incentive Compensation Plan Master Agreement, dated February 27, 1995 (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated November 22, 2004 (filed January 28, 2005)).
10.3    Amendment, dated February 28, 2000, of American Express Company 1989 Long-Term Incentive Compensation Plan Master Agreement, dated February 27, 1995 (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31, 2000).
10.4    American Express Company 1998 Incentive Compensation Plan, as amended through July 25, 2005 (incorporated by reference to Exhibit 10.4 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2005).
10.5    American Express Company 1998 Incentive Compensation Plan Master Agreement, dated April 27, 1998 (for awards made prior to January 22, 2007) (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended September 30, 2004).
10.6    Amendment of American Express Company 1998 Incentive Compensation Plan Master Agreement, dated April 27, 1998 (for awards made prior to January 22, 2007) (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31, 2000).
10.7    American Express Company 1998 Incentive Compensation Plan Master Agreement, dated January 22, 2007 (for awards made on or after such date) (incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2006).

 

E-1


  10.8    Form of award agreement for executive officers in connection with Performance Grant awards (a/k/a Incentive Award) under the American Express Company 1998 Incentive Compensation Plan, as amended. (Incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2006).
  10.9    Form of award agreement for executive officers in connection with Portfolio Grants under the American Express Company 1998 Incentive Compensation Plan, as amended (for awards made prior to January 22, 2007) (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2005).
  10.10    Form of award agreement for executive officers in connection with Portfolio Grants under the American Express Company 1998 Incentive Compensation Plan, as amended (for awards made after January 22, 2007) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated January 22, 2007 (filed January 26, 2007)).
  10.11    American Express Company 2007 Incentive Compensation Plan, (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated April 23, 2007 (filed April 27, 2007)).
  10.12    American Express Company 2007 Incentive Compensation Plan Master Agreement, dated April 27, 2007 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated April 23, 2007 (filed April 27, 2007)).
*10.13    Form of award agreement for executive officers in connection with Portfolio Grants under the American Express Company 2007 Incentive Compensation Plan.
*10.14    Form of award agreement for executive officers in connection with Performance Grant awards (a/k/a Incentive Award) under the American Express Company 2007 Incentive Compensation Plan.
  10.15    Description of Compensation Payable to Non-Management Directors (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated November 21, 2005 (filed January 13, 2006)).
  10.16    American Express Company Deferred Compensation Plan for Directors, as amended through July 28, 2003 (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated November 22, 2004 (filed January 28, 2005).
  10.17    American Express Company 2007 Pay-for-Performance Deferral Program Document (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated November 20, 2006 (filed November 22, 2006)).
  10.18    Description of amendments to 1994 – 2006 Pay-for-Performance Deferral Programs (incorporated by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2006).
  10.19    American Express Company 2006 Pay-for-Performance Deferral Program Guide (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated November 21, 2005 (filed November 23, 2005)).
  10.20    American Express Company 2005 Pay-for-Performance Deferral Program Guide (incorporated by reference to Exhibit 10.10 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2004).
  10.21    Description of American Express Company Pay-for-Performance Deferral Program (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (Commission File No. l-7657), dated November 22, 2004 (filed January 28, 2005)).
  10.22    American Express Company Retirement Plan for Non-Employee Directors, as amended (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 1988).

 

E-2


10.23    Certificate of Amendment of the American Express Company Retirement Plan for Non-Employee Directors dated March 21, 1996 (incorporated by reference to Exhibit 10.11 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 1995).
10.24    American Express Key Executive Life Insurance Plan, as amended (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal year ended December 31, 1991).
10.25    Amendment to American Express Company Key Executive Life Insurance Plan (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended September 30, 1994).
10.26    Amendment to American Express Company Key Executive Life Insurance Plan, effective as of January 22, 2007 (incorporated by reference to Exhibit 10.22 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2006).
10.27    American Express Key Employee Charitable Award Program for Education (incorporated by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 1990).
10.28    American Express Directors’ Charitable Award Program (incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 1990).
10.29    American Express Company Salary/Bonus Deferral Plan (incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 1988).
10.30    Amendment to American Express Company Salary/Bonus Deferral Plan (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended September 30, 1994).
10.31    Tax Allocation Agreement, dated May 27, 1994, between Lehman Brothers Holdings Inc. and the Company (incorporated by reference to Exhibit 10.2 of Lehman Brothers Holdings Inc.’s Transition Report on Form 10-K (Commission File No. 1-9466) for the transition period from January 1, 1994 to November 30, 1994).
10.32    American Express Company 1993 Directors’ Stock Option Plan, as amended (incorporated by reference to Exhibit 10.11 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31, 2000).
10.33    American Express Senior Executive Severance Plan Effective January 1, 1994 (as amended and restated through May 1, 2000) (incorporated by reference to Exhibit 10.10 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31, 2000).
10.34    Amendments to the American Express Senior Executive Severance Plan, effective November 26, 2001 (incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2001).
10.35    Amendments to the American Express Senior Executive Severance Plan, effective January 22, 2007 (incorporated by reference to Exhibit 10.31 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2006).
10.36    Amendment of Long-Term Incentive Awards under the American Express Company 1979 and 1989 Long-Term Incentive Plans (incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended September 30, 1994).

 

E-3


10.37    Amendments of (i) Long-Term Incentive Awards under the American Express Company 1979 and 1989 Long-Term Incentive Plans, (ii) the American Express Senior Executive Severance Plan, (iii) the American Express Supplemental Retirement Plan, (iv) the American Express Salary/Bonus Deferral Plan, (v) the American Express Key Executive Life Insurance Plan and (vi) the IDS Current Service Deferred Compensation Plan (incorporated by reference to Exhibit 10.37 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 1997).
10.38    American Express Supplemental Retirement Plan Amended and Restated Effective March 1, 1995 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended September 30, 1999).
10.39    American Express Supplemental Retirement Plan (as amended and restated effective July 1, 2007) (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated January 22, 2007 (filed January 26, 2007)).
10.40    American Express Directors’ Stock Plan (incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-8, dated December 9, 1997 (Commission File No. 333-41779)).
10.41    American Express Annual Incentive Award Plan (incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31, 2000).
10.42    Amendment to American Express Annual Incentive Award Plan, effective January 22, 2007 (incorporated by reference to Exhibit 10.38 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2006).
10.43    Agreement dated February 27, 1995 between the Company and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 10.43 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 1994).
10.44    Agreement dated July 20, 1995 between the Company and Berkshire Hathaway Inc. and its subsidiaries (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended September 30, 1995).
10.45    Amendment dated September 8, 2000 to the agreement dated February 27, 1995 between the Company and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 99.3 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657) dated January 22, 2001).
10.46    Description of a special grant of a stock option and restricted stock award to Kenneth I. Chenault, the Company’s President and Chief Operating Officer (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended June 30, 1999).
10.47    American Express Company 2003 Share Equivalent Unit Plan for Directors, as adopted and effective April 28, 2003 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended March 31, 2003).
10.48    Description of 2007 Base Salaries of Named Executive Officers (incorporated by reference to Exhibit 10.44 of the Company’s Annual Report on Form 10-K (Commission File No. 1-7657) for the year ended December 31, 2006).
10.49    Separation and Distribution Agreement between American Express Company and Ameriprise Financial, Inc., dated August 24, 2005 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated August 24, 2005 (filed August 30, 2005)).
10.50    Employee Benefits Agreement, dated as of September 30, 2005, by and between American Express Company and Ameriprise Financial, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated October 6, 2005).

 

E-4


  10.51    Tax Allocation Agreement, dated as of September 30, 2005, by and between American Express Company and Ameriprise Financial, Inc. (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated October 6, 2005).
*12    Computation in Support of Ratio of Earnings to Fixed Charges.
*13    Portions of the Company’s 2007 Annual Report to Shareholders that are incorporated herein by reference.
*21    Subsidiaries of the Company.
*23.1    Consent of PricewaterhouseCoopers LLP (contained on page F-2 of this Annual Report on Form 10-K).
*31.1    Certification of Kenneth I. Chenault, Chief Executive Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
*31.2    Certification of Daniel T. Henry, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
*32.1    Certification of Kenneth I. Chenault, Chief Executive Officer, and Daniel T. Henry, 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


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2007   Commission File No. 1-7657

 

 

American Express Company

(Exact name of Company as specified in charter)

EXHIBITS

(Back To Top)

Section 2: EX-10.13 (FORM OF AWARD AGREEMENT FOR EXECUTIVE OFFICERS)


      
                                                        EXHIBIT 10.13
                           AMERICAN EXPRESS COMPANY
                       2007 INCENTIVE COMPENSATION PLAN
                           PORTFOLIO GRANT 2008-2010
                                      TO


          ----------------------------------------------------------
                               Name of Employee



------------------------------                ---------------------------------
         Award Date                            Expiration Date of Award Period


                                       $
          ----------------------------------------------------------
                              Total Target Value


         We are pleased to inform you that, pursuant to the Company's 2007
Incentive Compensation Plan, as amended (the "Plan"), the Compensation and
Benefits Committee (the "Committee") of the Board of Directors (the "Board")
of American Express Company (the "Company"), made an award of a portfolio
grant to you as hereinafter set forth (the "Award") under the Plan as of the
award date specified above (the "Award Date"). The Award is subject to the
Detrimental Conduct Provisions established by the Committee, and as from time
to time amended.

1. GENERAL. You have been granted the Award subject to the provisions of the
Plan and the terms, conditions and restrictions set forth in this agreement
(this "Agreement"). The Total Target Value of the Award consists of the Target
Values of four components: the Target Value of the Average Annual EPS
Incentive Component (the "Average Annual EPS Target Value"); the Target Value
of the Average Annual Net Revenue Incentive Component (the "Average Annual Net
Revenue Target Value"); the Target Value of the Average Annual ROE Incentive
Component (the "Average Annual ROE Target Value"); and the Target Value of the
Relative Total Shareholder Return Component (the "Relative TSR Target Value").
Each component's Target Value is 25% of the Total Target Value. The period
beginning January 1, 20__ and ending on the expiration date specified above
(the "Expiration Date") is the "Award Period." The Total Target Value, or any
of its components, may be reduced by the Committee in its sole discretion,
which may include but need not be limited to, situations where on the last day
of the Award Period you are engaged in Related Employment, as that term is
defined in the Plan. The Schedule A Value (as that term is defined below), if
any, of each component will be determined as specified in Paragraph 3.

2. REQUIREMENT OF EMPLOYMENT. Except as otherwise provided in Paragraphs 4 and
6, your rights to the Cash Value and the Number of Restricted Shares or
Restricted Stock Units, if any (as those terms are defined below) under
Paragraph 5 shall be provisional and shall be canceled in whole or in part, as
determined by the Committee in its sole discretion if your continuous
employment with the Company and its Affiliates (as that term is defined in the
Plan) or your Related Employment (as that term is defined in the Plan)
(hereinafter collectively referred to as "employment with the American Express
companies"), terminates for any reason on or before the Payment Date set forth
in Paragraph 5. Whether and as of what date your employment with the American
Express companies shall terminate if you are granted a leave of absence or
commence any other break in employment intended by your employer to be
temporary, shall be determined by the Committee in its sole discretion.

                                  Page 1 of 12
3. DETERMINATION OF THE SCHEDULE A VALUES, INITIAL VALUE, FINAL VALUE, CASH
VALUE AND THE NUMBER OF RESTRICTED SHARES OR RESTRICTED STOCK UNITS.

(a) Except as otherwise provided in this Paragraph 3 and in Paragraphs 2,
4 and 6, there shall be paid to you in accordance with Paragraph 5, the sum,
as may be adjusted by the Committee pursuant to Subparagraph 3(i), of:

               (i) the Schedule A Value of the Average Annual EPS Incentive
          Component (the "Average Annual EPS Schedule A Value") as of the last
          day of the Award Period, if any, as provided in Subparagraph 3(b);

               (ii) the Schedule A Value of the Average Annual Net Revenue
          Incentive Component (the "Average Annual Net Revenue Schedule A
          Value") as of the last day of the Award Period, if any, as provided
          in Subparagraph 3(c);

               (iii) the Schedule A Value of the Average Annual ROE Incentive
          Component (the "Average Annual ROE Schedule A Value") as of the last
          day of the Award Period, if any, as provided in Subparagraph 3(d);
          and

               (iv) the Schedule A Value of the Relative Total Shareholder
          Return Component (the "Relative TSR Schedule A Value") as of the
          last day of the Award Period, if any, as provided in Subparagraph
          3(e).

(b) AVERAGE ANNUAL EPS SCHEDULE A VALUE. Except as otherwise provided in this
Paragraph 3, the Average Annual EPS Schedule A Value as of the last day of the
Award Period will be equal to (Xb) times (Yb), where (Xb) equals the Average
Annual EPS Incentive Payout Percentage, if any, determined by the Committee in
its sole discretion based on the Average Annual EPS (as that term is defined
below) of the Company or of a unit of the Company, as the case may be,
pursuant to the formula provided in Schedule A to this Agreement, and where
(Yb) is the Average Annual EPS Target Value. However, in no event will (Xb) be
greater than the Maximum Average Annual EPS Value, which equals the maximum
Average Annual EPS Incentive Payout Percentage set forth in Schedule A to this
Agreement, times the Average Annual EPS Target Value.

(c) AVERAGE ANNUAL NET REVENUE SCHEDULE A VALUE. Except as otherwise provided
in this Paragraph 3, the Average Annual Net Revenue Schedule A Value as of the
last day of the Award Period will be equal to (Xc) times (Yc), where (Xc)
equals the Average Annual Net Revenue Incentive Payout Percentage, if any,
determined by the Committee in its sole discretion based on the Average Annual
Net Revenue (as that term is defined below) of the Company or of a unit of the
Company, as the case may be, pursuant to the formula provided in Schedule A to
this Agreement, and where (Yc) is the Average Annual Net Revenue Target Value.
However, in no event will (Xc) be greater than the Maximum Average Annual Net
Revenue Value, which equals the maximum Average Annual Net Revenue Incentive
Payout Percentage set forth in Schedule A to this Agreement, times the Average
Annual Net Revenue Target Value.


                                 Page 2 of 12

(d) AVERAGE ANNUAL ROE SCHEDULE A VALUE. Except as otherwise provided in this
Paragraph 3, the Average Annual ROE Schedule A Value as of the last day of the
Award Period will be equal to (Xd) times (Yd), where (Xd) equals the Average
Annual ROE Incentive Payout Percentage, if any, determined by the Committee in
its sole discretion based on the Average Annual ROE (as that term is defined
below) of the Company or of a unit of the Company, as the case may be,
pursuant to the formula provided in Schedule A to this Agreement, and where
(Yd) is the Average Annual ROE Target Value. However, in no event will (Xd) be
greater than the Maximum Average Annual ROE Value, which equals the maximum
Average Annual ROE Incentive Payout Percentage set forth in Schedule A to this
Agreement, times the Average Annual ROE Target Value.

(e) RELATIVE TSR SCHEDULE A VALUE. Except as otherwise provided in this
Paragraph 3, the Relative TSR Schedule A Value as of the last day of the Award
Period will be equal to (Xe) times (Ye), where (Xe) equals the Relative TSR
Incentive Payout Percentage, if any, determined by the Committee in its sole
discretion based on a comparison of the Amex TSR and the S&P 500 TSR, pursuant
to the formula provided in Schedule A to this Agreement, and where (Ye) is the
Relative TSR Target Value. However, in no event will (Xe) be greater than the
Maximum TSR Value, which equals the maximum Relative TSR Incentive Payout
Percentage set forth in Schedule A to this Agreement, times the Relative TSR
Target Value.

(f) CALCULATION. In the application of Schedule A to this Agreement after the
end of the Award Period for purposes of determining the Schedule A Values
pursuant to Subparagraphs 3(b), (c), (d) and (e):

               (i) if the Average Annual EPS is less than the level needed to
          have some Average Annual EPS Schedule A Value, there shall be no
          Average Annual EPS Schedule A Value; and if the Average Annual EPS
          is equal to or greater than the level to have some Average Annual
          EPS Schedule A Value, but less than or equal to the maximum level,
          and the Average Annual EPS actually attained is not represented in
          the table set forth on Schedule A, then the Average Annual EPS
          Schedule A Value shall be determined by straight-line interpolation
          from the amounts specified in such table immediately less than and
          greater than the Average Annual EPS actually attained;

               (ii) if the Average Annual Net Revenue is less than the level
          needed to have some Average Annual Net Revenue Schedule A Value,
          there shall be no Average Annual Net Revenue Schedule A Value; and
          if the Average Annual Net Revenue is equal to or greater than the
          level to have some Average Annual Net Revenue Schedule A Value, but
          less than or equal to the maximum level, and the Average Annual Net
          Revenue actually attained is not represented in the table set forth
          on Schedule A, then the Average Annual Net Revenue Schedule A Value
          shall be determined by straight-line interpolation from the amounts
          specified in such table immediately less than and greater than the
          Average Annual Net Revenue actually attained;

               (iii) if the Average Annual ROE is less than the level needed
          to have some Average Annual ROE Schedule A Value, there shall be no
          Average Annual ROE Schedule A Value; and if the Average Annual ROE
          is equal to or greater than the level to have some Average Annual
          ROE Schedule A Value, but less than or equal to the maximum level,
          and the Average Annual ROE actually attained is not represented in
          the table set forth on Schedule A, then the Average Annual ROE
          Schedule A Value shall be determined by straight-line interpolation
          from the amounts specified in such table immediately less than and
          greater than the Average Annual ROE actually attained; and

                                 Page 3 of 12


               (iv) if the difference between the Amex TSR and the S&P 500 TSR
          is less than the level needed to have some Relative TSR Schedule A
          Value, there shall be no Relative TSR Schedule A Value; and if the
          difference between the Amex TSR and the S&P 500 TSR is equal to or
          greater than the level to have some Relative TSR Schedule A Value,
          but less than or equal to the maximum level, and the actual
          difference between the Amex TSR and the S&P 500 TSR is not
          represented in the table set forth on Schedule A, then the Relative
          TSR Schedule A Value shall be determined by straight-line
          interpolation from the amounts specified in such table immediately
          less than and greater than the actual difference between the Amex
          TSR and the S&P 500 TSR.

(g) DEFINITIONS. For purposes of this Award, the following terms shall have
the following meanings (which will take into account, in each case, the
expenses and other financial effect for the applicable year(s) of portfolio
grants under the Plan except as adjusted by the application of Subparagraphs
3(h) and 3(i)).

               (i) "Net Revenue" means, for any given year, the total revenues
          of the Company or of a segment or other part of the Company, as the
          case may be, for such year, as reported by the Company.

               (ii) "Average Annual Net Revenue" means, for the Award Period,
          the sum of the Net Revenue for every year during the Award Period,
          divided by 3.

               (iii) "Net Income" means, for any given year, the after-tax net
          income (or loss) of the Company or of a segment or other part of the
          Company, as the case may be, for such year as adjusted below, as
          reported by the Company. The calculation of Net Income for any given
          year will be adjusted to exclude:

                o reported cumulative effect of accounting changes;
                o reported income and losses from discontinued operations; and

                o reported extraordinary gains and losses as determined under
                  generally accepted accounting principles.

               (iv) "Earnings Per Share" means, for any given year, the
          diluted earnings (or loss) per share of the Company for such year,
          as determined by the Company. The calculation of Earnings Per Share,
          for any given year, will be adjusted in the same fashion as Net
          Income for such year.

               (v) "Average Annual EPS" means, for the Award Period, the sum
          of the Earnings Per Share for every year during the Award Period,
          divided by 3.

                                 Page 4 of 12

               (vi) "Average Annual Shareholders' Equity" means, for any given
          year, the sum of the total shareholders' equity of the Company or of
          a segment or other part of the Company, as the case may be, as of
          the first day of such year and as of the end of each month during
          such period (each as reported by the Company), divided by 13.

               (vii) "Annual Return on Equity" means, for any given year, the
          Net Income for such year divided by the Average Annual Shareholders'
          Equity for such year.

               (viii) "Average Annual ROE" means, for the Award Period, the
          sum of the Annual Return on Equity for every year during the Award
          Period, divided by 3.

               (ix) "Amex Total Shareholder Return" or "Amex TSR" means the
          compound annual growth rate, expressed as a percentage with one
          decimal point, in the value of a share of common stock in the
          Company due to stock appreciation and dividends, assuming dividends
          are reinvested, during the Award Period. For this purpose, the
          "Beginning Stock Price" shall mean the average closing sales prices
          of the Company's common stock on the New York Stock Exchange
          Composite Transaction Tape for the trading days in the month of
          December immediately preceding the beginning of the Award Period;
          and, the "Ending Stock Price" shall mean the average closing sales
          prices of the Company's common stock on the New York Stock Exchange
          Composite Transaction Tape for the trading days in the month of
          December immediately preceding the Expiration Date. Where "Y" is the
          number of fractional Shares resulting from the deemed reinvestment
          of dividends paid during the Award Period, the Amex TSR is
          calculated as follows:

                        ((ENDING STOCK PRICE x (1 + Y))  1
                        ((----------------------------) --- )  -1
                        ((BEGINNING STOCK PRICE       )  3  )

               (x) "S&P 500 Total Shareholder Return" or "S&P 500 TSR" means
          the compound annual growth rate, expressed as a percentage with one
          decimal point, in the value of the S&P 500 Index during the Award
          Period, as determined from information publicly reported by Standard
          & Poors Company (or the entity that publishes such other index, as
          the case may be).

(h) To the extent permissible for purposes of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), in the event of any change in
the corporate capitalization of the Company, such as by reason of any stock
split, or a material corporate transaction, such as any merger of the Company
into another corporation, any consolidation of the Company and one or more
corporations into another corporation, any separation of the Company
(including a spin-off or other distribution of stock or property by the
Company), any reorganization of the Company (whether or not such
reorganization comes within the definition of such term in Section 368 of the
Code), or any partial or complete liquidation by the Company, other than a
normal cash dividend, if the Committee shall determine that such a change
equitably requires an adjustment in the calculation or terms of the Average
Annual ROE, the Average Annual Net Revenue, the Average Annual EPS or the
Relative Total Shareholder Return Component under this Award, on the grounds
that any such change would produce an unreasonable value, such equitable
adjustment will be made by the Committee. Any such determination by the
Committee under this Subparagraph 3(h) shall be final, binding and conclusive.

                                 Page 5 of 12


               (i) As soon as practicable after the last day of the Award
          Period, the Committee may determine, in its sole discretion, that
          the sum of the Schedule A Values (as initially determined in
          Subparagraphs 3(b), (c), (d) and (e)) may be adjusted downward (that
          is, to a value of zero), but in no event upward, as follows:

                    (i) YOUR UNIT'S RESULTS. Downward by a percentage (ranging
               from 0-100%) of such initially determined sum, based on such
               criteria as the Committee shall deem appropriate relating to
               your unit's results, with such resultant sum being the "Initial
               Value"; provided that any such determination by the Committee
               need not be made in a uniform manner and may be made
               selectively among holders of awards of portfolio grants in your
               unit, whether or not such award holders are similarly situated.

                    (ii) YOUR INDIVIDUAL RESULTS. The Initial Value may be
               adjusted further downward by a percentage (ranging from 0-100%)
               of such Initial Value after the application of Subparagraph
               3(k)(i), based on such criteria as the Committee shall deem
               appropriate relating to your individual results, with such
               final resultant sum being the "Final Value" (except as
               otherwise provided by Paragraph 8); provided that any such
               determination by the Committee need not be made in a uniform
               manner and may be made selectively among holders of awards of
               portfolio grants, whether or not such award holders are
               similarly situated.

In no event may the Committee amend any provision hereof so as to increase or
otherwise adjust upward the Schedule A Value of any component.

(j) Subject to the limitations set forth in Paragraph 8, the Committee shall
determine the Schedule A Values, the Initial Value and the Final Value
pursuant to this Agreement, and such determinations by the Committee shall be
final, binding and conclusive upon you and all persons claiming under or
through you.

(k) The Committee shall determine in its own discretion what portion of the
Final Value, if any, shall be payable in cash (the "Cash Value"), and what
portion shall be denominated in Restricted Shares or Restricted Stock Units of
the Company ("the RSA" or "the RSU"), in accordance with Paragraph 5 below.
The RSA or the RSU shall have the terms substantially as set forth in the form
of Restricted Share or Restricted Stock Unit awards granted generally under
the Plan, or its successor, except that the RSA or the RSU shall vest pursuant
to a period determined in the Committee's discretion, except that such vesting
period shall not be less than one year from date of grant, and be
forfeitable only if your employment with the American Express companies
terminates by reason of voluntary resignation or terminates for cause (that
is, violation of the Code of Conduct as in effect from time to time) prior to
the applicable vesting dates. The number of restricted shares or restricted
stock units of the Company comprising the RSA or the RSU (the "Number of
Restricted Shares" or the "Number of Restricted Stock Units") shall be
determined by dividing such portion of the Final Value so designated by the
Committee, if any, by the closing price of the shares on the date that the
Committee approves payout of the Awards, and shall be payable in the form of
an RSA or an RSU in accordance with Paragraph 5 below.

                                 Page 6 of 12


4. DEATH, DISABILITY OR RETIREMENT.

(a) If, on or before the Payment Date set forth in Subparagraph 5(b), but
during a period when you have been in continuous employment with the American
Express companies since the Award Date, you terminate your employment with the
American Express companies by reason of disability (as that term is defined in
the Plan) at any time following the Award Date or you die at any time
following the Award Date, you will be entitled to that proportion of the Final
Value as the number of full months which have elapsed between January 1, 2008
and the end of the month in which your termination of employment by reason of
death or such disability occurs (not to exceed 36) bears to 36, and for this
purpose, to the extent not otherwise previously determined by the Committee,
in the event of your disability or death, the Final Value shall be calculated
by applying the rate at which the expense for the Award was being accrued for
purposes of the Company's annual audited financial statement at the end of the
last completed calendar quarter prior to your disability or death, as
applicable. Such amount, if any, shall be payable as soon as practicable
thereafter, unless otherwise determined by the Committee, in cash, common
shares of the Company, or other property, or any combination thereof, and you
and all others claiming under or through you shall not be entitled to receive
any other amounts under this Award.

(b) If, on or before the Payment Date set forth in Subparagraph 5(b) but
during a period when you have been in continuous employment with the American
Express companies since the Award Date, you terminate your employment with the
American Express companies by reason of retirement (as that term is defined by
the Committee), and such event occurs more than one year after the Award Date,
you generally will be entitled to receive that proportion of the Final Value
as the number of full months which have elapsed between January 1, 2008 and
the end of the month in which your termination of employment by reason of such
retirement occurs (not to exceed 36) bears to 36, unless such termination
occurs following the attainment of age 60, in which case you will be entitled
to receive 50% of the Final Value you would otherwise forfeit under the above
formula, or, unless such termination occurs following attainment of age 62, in
which case you will be entitled to 100% of the Final Value. The Final Value
for this purpose shall be determined after the last day of the Award Period in
the normal course in accordance with Paragraph 3. Such amount, if any, shall
be payable in cash, Restricted Shares or Restricted Stock Units, as described
in Paragraph 3(k) above, or other property, or any combination thereof, after
the Award Period in accordance with Paragraphs 5 and 6, and you and all others
claiming under or through you shall not be entitled to receive any other
amounts under this Award.

5. PAYMENT OF AWARD.

(a) As soon as practicable after the last day of the Award Period, or the
earlier date your continuous employment with American Express companies
terminates by reason of disability or death in accordance with Paragraph 4,
but prior to payment in respect of the Award, the Committee shall determine
whether the conditions of Paragraph 2, and Paragraph 3 or 4, have been met
and, if so, shall ascertain the Final Value, Cash Value and the Number of
Restricted Shares or the Number of Restricted Stock Units, if any, in
accordance with Paragraph 3 or 4, as the case may be.

                                 Page 7 of 12

(b) If the Committee determines that there is no Average Annual EPS Schedule A
Value, no Average Annual Net Revenue Schedule A Value, no Average Annual ROE
Schedule A Value and no Relative TSR Schedule A Value, then this Award will be
canceled. If the Committee determines that there is some Average Annual EPS
Schedule A Value, Average Annual Net Revenue Schedule A Value, Average Annual
ROE Schedule A Value or Relative TSR Schedule A Value, however, the Cash Value
as determined pursuant to Paragraph 3 shall become payable to you in cash, and
the Number of Restricted Shares or the Number of Restricted Stock Units shall
be issued to you in the form of a Restricted Share or Restricted Stock Unit
award under the Plan, or its successor, except that the RSA or the RSU shall
vest pursuant to a period determined in the Committee's discretion, and such
vesting period shall not be less than one year from date of grant, or other
property, or any combination thereof, as soon as practicable following
_______ __, 20__, but in no event later than 90 days thereafter (or at such
other time or times as the Committee shall determine as provided in Paragraph
7) (the "Payment Date").

6. TERMINATION OF EMPLOYMENT AFTER THE AWARD PERIOD BUT ON OR BEFORE THE
PAYMENT DATE. If, after the last day of the Award Period and on or before the
Payment Date specified in Subparagraph 5(b), but during a period when you have
been in continuous employment with the American Express companies since the
Award Date, your employment terminates with the American Express companies for
any reason other than death, disability or retirement as set forth in
Paragraph 4, then you and all others claiming under or through you shall not
be entitled to receive any amounts under this Award, except as otherwise
determined by the Committee in its sole discretion.

7. DEFERRAL OR ACCELERATION OF PAYMENT OF AWARD. Any payments to be made under
this Award may be deferred or accelerated in such manner as the Committee
shall determine; provided, however, that any such deferral or acceleration
must comply with the applicable requirements of Section 409A of the Code. As
to such a deferral of payment, any amount paid in excess of the amount that
was originally payable to you under this Agreement will be based on a
reasonable interest rate as determined by the Committee, and as to such an
acceleration of payment to you under this Agreement, any amount so paid will
be discounted to reasonably reflect the time value of money as determined by
the Committee.

8. CHANGE IN CONTROL.

                  (a) Notwithstanding anything in this Agreement to the
contrary (except for the provision dealing with a limitation under Section
280G of the Code, and except as otherwise provided by Paragraph 8(b) below),
if there is a Change in Control (as defined below) prior to the payment of the
Award under the Agreement, your Final Value of the Award determined under
Section 3(i)(ii) of the Agreement may not be less than the Total Target Value
of the Award multiplied by the Average Payout Percentage (as defined below).

                  (b) Notwithstanding anything in this Agreement to the
contrary (except for the provision dealing with a limitation under Section
280G of the Code), if you have not received payment under the Agreement and,
within two years after the date of a Change in Control (as defined below), you
experience a termination of employment that would otherwise entitle you to
receive the payment of severance benefits under the provisions of the
severance plan that is in effect and in which you participate as of the date
of such Change in Control, (i) you shall immediately be 100% vested in the
Award; (ii) the Final Value of the Award will equal the Total Target Value of
the Award multiplied by the Average Payout Percentage (as defined below), but
prorated based on (a) the total number of full and partial months of the Award
Period which have elapsed between (X) January 1, 20__, and (Y) the date of
such termination of employment (not to exceed 36), divided by (b) the total
number of months in the Award Period; and (iii) such value of the Award shall
be paid to you in cash within five days after the date of such termination of
employment.

                                 Page 8 of 12

                  (c) "Average Payout Percentage" means the average of the
payout percentages for your unit under the two portfolio grant awards that
were paid by the Company immediately preceding the date of such Change in
Control.

                  (d) A "Change in Control" has that meaning as defined in
American Express Senior Executive Severance Plan, as amended from time to
time.

                  (e) The Committee may not amend or delete this Paragraph 8
of this Agreement in a manner that is detrimental to you, without your written
consent.

9. TAX WITHHOLDING AND FURNISHING OF INFORMATION. There shall be withheld from
any payment of cash or vesting of restricted shares or restricted stock units
under this Award, such amount, if any, as the Company and/or your employer
determines is required by law, including, but not limited to, U.S. federal,
state, local or foreign income, employment or other taxes incurred by reason
of making of the Award or of such payment. It shall be a condition to the
obligation of the Company to make payments under this Award that you (or those
claiming under or through you) promptly provide the Company and/or your
employer with all forms, documents or other information reasonably required by
the Company and/or your employer in connection with the Award.

10. RIGHTS NOT ASSIGNABLE. Except as otherwise determined by the Committee in
its sole discretion, your rights and interests under the Award and the Plan
may not be sold, assigned, transferred, or otherwise disposed of, or made
subject to any encumbrance, pledge, hypothecation or charge of any nature,
except that you may designate a beneficiary pursuant to Paragraph 11. If you
(or those claiming under or through you) attempt to violate this Paragraph 10,
such attempted violation shall be null and void and without effect, and the
Company's obligation to make any further payments to you (or those claiming
under or through you) hereunder shall terminate.

11. BENEFICIARY DESIGNATION. Subject to the provisions of the Plan, you may,
by completing a form acceptable to the Company and returning it to the
Corporate Secretary's Office, at 200 Vesey Street, New York, New York 10285,
name a beneficiary or beneficiaries to receive any payment to which you may
become entitled under this Agreement in the event of your death. You may
change your beneficiary or beneficiaries from time to time by submitting a new
form to the Corporate Secretary's Office at the same address. If you do not
designate a beneficiary, or if no designated beneficiary is living on the date
any amount becomes payable under this Agreement, such payment will be made to
the legal representatives of your estate, which will be deemed to be your
designated beneficiary under this Agreement.

                                 Page 9 of 12

12. ADMINISTRATION. Any action taken or decision made by the Company, the
Board or the Committee or its delegates arising out of or in connection with
the construction, administration, interpretation or effect of the Plan or this
Agreement shall lie within its sole and absolute discretion, as the case may
be, and shall be final, conclusive and binding upon you and all persons
claiming under or through you. By accepting this Award or other benefit under
the Plan, you and each person claiming under or through you shall be
conclusively deemed to have indicated acceptance and ratification of, and
consent to, any action taken or decision made under the Plan by the Company,
the Board or the Committee or its delegates.

13. CHANGE IN CONTROL PAYMENTS. This Paragraph shall apply in the event of
Change in Control (as defined in the American Express Senior Executive
Severance Plan, as amended from time to time).

                  (a) In the event that any payment or benefit received or to
be received by you hereunder in connection with a Change in Control or
termination of your employment (such payments and benefits, excluding Gross-Up
Payment (as hereinafter defined), being hereinafter referred to collectively
as the "Payments"), will be subject to the excise tax referred to in Section
4999 of the Code (the "Excise Tax"), then (i) in the case you are classified
in Band 70 (or its equivalent) or above immediately prior to such Change in
Control (a "Tier 1 Employee"), the Company shall pay to you, within five days
after receipt by you of the written statement referred to in Subparagraph (e),
an additional amount (the "Gross-Up Payment") such that the net amount
retained by you, after deduction of any Excise Tax on the Payments and any
federal, state and local income and employment taxes and Excise Tax upon the
Gross-Up Payment, shall be equal to the Payments and (ii) in the case you are
other than a Tier 1 Employee, the Payments shall be reduced to the extent
necessary so that no portion of the Payments is subject to the Excise Tax but
only if (A) the net amount of all Total Payments (as hereinafter defined), as
so reduced (and after subtracting the net amount of federal, state and local
income and employment taxes on such reduced Total Payments), is greater than
or equal to (B) the net amount of such Total Payments without any such
reduction (but after subtracting the net amount of federal, state and local
income and employment taxes on such Total Payments and the amount of Excise
Tax to which you would be subject in respect of such unreduced Total
Payments); provided, however, that you may elect in writing to have other
components of your Total Payments reduced prior to any reduction in the
Payments hereunder.

                  (b) For purposes of determining whether the Payments will be
subject to the Excise Tax, the amount of such Excise Tax and whether any
Payments are to be reduced hereunder: (i) all payments and benefits received
or to be received by you in connection with such Change in Control or the
termination of your employment, whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
Person (as such term is defined in the Company's Senior Executive Severance
Plan) whose actions result in such Change in Control or any Person affiliated
with the Company or such Person (all such payments and benefits, excluding the
Gross-Up Payment and any similar gross-up payment to which a Tier 1 Employee
may be entitled under any such other plan, arrangement or agreement, being
hereinafter referred to as the "Total Payments"), shall be treated as
"parachute payments" (within the meaning of Section 280G(b)(2) of the Code)
unless, in the opinion of the firm serving, immediately prior to the Change in
Control, as the Company's independent auditors, or if that firm refuses to
serve, by another qualified firm, whether or not serving as independent
auditors, designated by the Administration Committee under the American

                                Page 10 of 12

Express Senior Executive Severance Plan (the "Firm"), such payments or
benefits (in whole or in part) do not constitute parachute payments, including
by reason of Section 280G(b)(2)(A) or Section 280G(b)(4)(A) of the Code; (ii)
no portion of the Total Payments the receipt or enjoyment of which you shall
have waived at such time and in such manner as not to constitute a "payment"
within the meaning of Section 280G(b) of the Code shall be taken into account;
(iii) all "excess parachute payments" within the meaning of Section 280G(b)(l)
of the Code shall be treated as subject to the Excise Tax unless, in the
opinion of the Firm, such excess parachute payments (in whole or in part)
represent reasonable compensation for services actually rendered (within the
meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount
(within the meaning of Section 280G(b)(3) of the Code) allocable to such
reasonable compensation, or are otherwise not subject to the Excise Tax; and
(iv) the value of any noncash benefits or any deferred payment or benefit
shall be determined by the Firm in accordance with the principles of Sections
280G(d)(3) and (4) of the Code and regulations or other guidance thereunder.
For purposes of determining the amount of your Gross-Up Payment and whether
your Payments shall be reduced, you shall be deemed to pay federal income tax
at the highest marginal rate of federal income taxation (and state and local
income taxes at the highest marginal rate of taxation in the state and
locality of your residence, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and local taxes) in
the calendar year in which the Gross-Up Payment is to be made (if you are a
Tier 1 Employee) or in which the Payments are made (if you are other than a
Tier 1 Employee). The Firm will be paid reasonable compensation by the Company
for its services.

                  (c) In the event that the Excise Tax is finally determined
to be less than the amount taken into account hereunder in calculating the
Gross-Up Payment, then you will be required to repay to the Company on the
fifth business day after demand an amount equal to the excess of the earlier
payment over the redetermined amount (the "Excess Amount"), together with
interest on such amount at the lowest applicable federal rate (as defined in
Section 1274(d) of the Code or any successor provision thereto), compounded
semi-annually (the "Section 1274 Rate"), from the date of your receipt of such
Excess Amount until the date of such repayment (or such lesser rate (including
zero) as may be designated by the Firm such that the Excess Amount and such
interest will not be treated as a parachute payment as previously defined). In
the event that the Excise Tax is finally determined to exceed the amount taken
into account hereunder in calculating the Gross-Up Payment (including by
reason of any payment the existence or amount of which cannot be determined at
the time of the Gross-Up Payment), within five business days of such
determination, the Company will pay to you an additional amount, together with
interest thereon from the date such additional amount should have been paid to
the date of such payment, at the Section 1274 Rate (or such lesser rate
(including zero) as may be designated by the Firm such that the amount of such
deficiency and such interest will not be treated as a parachute payment as
previously defined). You and the Company shall each reasonably cooperate with
the other in connection with any administrative or judicial proceedings
concerning the amount of any Gross-Up Payment.

                  (d) As soon as practicable following a Change in Control,
the Company shall provide to you if you are a Tier 1 Employee or it is
proposed that your Payments be reduced, a written statement setting forth the
manner in which your Total Payments were calculated and the basis for such
calculations, including, without limitation, any opinions or other advice the
Company has received from the Firm or other advisors or consultants (and any
such opinions or advice which are in writing shall be attached to the
statement).

                                Page 11 of 12

14. MISCELLANEOUS. Neither you nor any person claiming under or through you
shall have any right or interest, whether vested or otherwise, in the Plan or
the Award, unless and until all of the terms, conditions and provisions of the
Plan and this Agreement shall have been complied with. In addition, neither
the adoption of the Plan nor the execution of this Agreement shall in any way
affect the rights and powers of any person to dismiss or discharge you at any
time from employment with the American Express companies. Notwithstanding
anything herein to the contrary, neither the Company nor any of its Affiliates
(as that term is defined in the Plan) nor their respective officers,
directors, employees or agents shall have any liability to you (or those
claiming under or through you) under the Plan, this Agreement or otherwise on
account of any action taken, or decision not to take any action made, by any
of the foregoing persons with respect to the business or operations of the
Company or any of its Affiliates (as that term is defined in the Plan),
despite the fact that any such action or decision may adversely affect in any
way whatsoever Average Annual Shareholders' Equity, Earnings Per Share, Net
Income or other financial measures or amounts which are accrued or payable or
any of your other rights or interests under this Agreement.

15. GOVERNING LAW. The validity, construction, interpretation, administration
and effect of this Agreement shall be governed by the substantive laws, but
not the choice of law rules, of the State of New York.

                            AMERICAN EXPRESS COMPANY
                            By the Compensation and
                            Benefits Committee of the
                            Board of Directors:




                            By      ---------------------------




NOTWITHSTANDING ANY CONTRARY PROVISION IN THE AMERICAN EXPRESS COMPANY 2007
INCENTIVE COMPENSATION PLAN MASTER AGREEMENT, THE COMPANY RESERVES THE RIGHT
TO CORRECT NONMATERIAL CLERICAL ERRORS IN, AND MAKE SUBSEQUENT NONMATERIAL
CLARIFICATIONS TO, ANY AWARD AGREEMENT IN THE FUTURE, WITHOUT PRIOR
NOTIFICATION TO PARTICIPANTS.

                                                                    SCHEDULE A
                                                                    Page 1 of 2

                 AXP PORTFOLIO GRANT PERFORMANCE/PAYOUT GRID
                            FOR EXECUTIVE OFFICERS
                                    GRID 1
      (subject to award agreement and discretionary downward adjustment)
       
         
------------------------------------------------------------------------------------------------------------------------
    AXP AVERAGE ANNUAL $                 AXP AVERAGE ANNUAL $ NET REVENUE              AXP AVERAGE ANNUAL RETURN
 EARNINGS PER SHARE (DILUTED)                       ($ BILLION)                                ON EQUITY
        (25% weight)                                (25% weight)                              (25% weight)
------------------------------------------------------------------------------------------------------------------------
                                                                                                        
20__-20__ Perform.  Max. Value %(a)    20__-20__ Perform.  Max. Value %(a)        20__-20__ Perform.  Max. Value %(a)
------------------------------------------------------------------------------------------------------------------------
   $____ Or More         %                $__ or More             %                        __% Or More       %
------------------------------------------------------------------------------------------------------------------------
   $                     %                $                       %                        %                 %
------------------------------------------------------------------------------------------------------------------------
   $                     %                $                       %                        %                 %
------------------------------------------------------------------------------------------------------------------------
   $                     %                $                       %                        %                 %
------------------------------------------------------------------------------------------------------------------------
   $                     %                $                       %                        %                 %
------------------------------------------------------------------------------------------------------------------------
   Less Than $           0                Less than ___           0                        Less than __%     0
------------------------------------------------------------------------------------------------------------------------
        

---------------------------
    Note:  Straight-line interpolation would apply for any actual performance
           level that falls between two performance levels shown on the grid.


    (a)  "%" = percent of the executive's dollar Target Value allocated to the
          applicable performance factor.


                                                                    SCHEDULE A
                                                                    Page 2 of 2

                  AXP PORTFOLIO GRANT PERFORMANCE/PAYOUT GRID
                            FOR EXECUTIVE OFFICERS
                                    GRID 2
      (subject to award agreement and discretionary downward adjustment)


------------------------------------------------------------------------
                 AXP TOTAL SHAREHOLDER RETURN (TSR) %
                              VS. S&P 500
                             (25% WEIGHT)
------------------------------------------------------------------------
       20__-20__ Performance
(percentage points AXP is higher or
               lower)                         Max. Value % (a)
------------------------------------------------------------------------
           +__% Or Higher                                 %
             +__%                                         %
             +__%                                         %
             +__%                                         %
             +__%                                         %
             +__%                                         %
             +__%                                         %
             +__%                                         %
             +__%                                         %
             +__%                                         %
             +__%                                         %
             +__%                                         %
             +__%                                         %
                0%                                        %
             -__%                                         %
 Lower than -__%                                          0%
------------------------------------------------------------------------


---------------------------
Note:  Straight-line interpolation would apply for any actual performance level
       that falls between two performance levels shown on the grid.

(a) = % percent of the executive's dollar Target Value allocated to the
    applicable performance factor.

                                Page 12 of 12

(Back To Top)

Section 3: EX-10.14 (FORM OF AWARD AGREEMENT FOR EXECUTIVE OFFICERS)


      
                                                                EXHIBIT 10.14
                           AMERICAN EXPRESS COMPANY
                       2007 INCENTIVE COMPENSATION PLAN
                               PERFORMANCE GRANT
                   (ALSO KNOWN AS THE 20__ INCENTIVE AWARD)
                                      TO



                           -------------------------
                               Name of Employee



-------------------------                 -----------------------------------
       Award Date                           Expiration Date of Award Period


         We are pleased to inform you that, pursuant to the Company's 2007
Incentive Compensation Plan, as amended (the "Plan"), the Compensation and
Benefits Committee (the "Committee") of the Board of Directors (the "Board")
of American Express Company (the "Company"), made an award of a performance
grant (also known as the 20__ Incentive Award) to you as hereinafter set forth
(the "Award") under the Plan as of the award date specified above (the "Award
Date"). This Award is subject to the Detrimental Conduct Provisions
established by the Committee, and as from time to time amended.

1. GENERAL. You have been granted the Award subject to the provisions of the
Plan and the terms, conditions and restrictions set forth in this agreement
(this "Agreement"). The period beginning on the first day of the fiscal year
of the Company in which the Award Date occurs and ending on the Expiration
Date specified above being the "Award Period." The Schedule A Value (as that
term is defined below in Subparagraph 3(b)), if any, will be determined as
specified in Paragraph 3.

2. REQUIREMENT OF EMPLOYMENT. Your rights to the Cash Value and the Number of
Restricted Shares or Restricted Stock Units, if any (as those terms are
defined below) under Subparagraph 4(b) hereof, shall be provisional and shall
be canceled if your continuous employment with the Company and its Affiliates
or your Related (as that term is defined in the Plan) (hereinafter
collectively referred to as "employment with the American Express companies"),
terminates for any reason on or before the payment date as set forth in
Subparagraph 4(b). Whether and as of what date your employment with the
American Express companies shall terminate if you are granted a leave of
absence or commence any other break in employment intended by the Company to
be temporary, shall be determined by the Committee.

3. DETERMINATION OF THE SCHEDULE A VALUE, CASH VALUE AND THE NUMBER OF
RESTRICTED SHARES OR RESTRICTED STOCK UNITS.

(a) Except as otherwise provided below in this Paragraph 3 and in Paragraphs 2
and 5 hereof, there shall be paid to you in accordance with Paragraph 4
hereof, the Schedule A Value as of the last day of the Award Period, if any,
as provided in Subparagraph 3(b).


                                 Page 1 of 8

(b) SCHEDULE A VALUE.

          (i) Except as otherwise provided in this Paragraph 3, the Schedule A
     Value as of the last day of the Award Period will be equal to the amount,
     if any, determined by the Committee based on the performance (i.e., 20__
     Return on Equity and 20__ Earnings Per Share) of the Company, pursuant to
     Schedule A to this Agreement. However, in no event will the Schedule A
     Value be greater than the maximum value as set forth in Schedule A to
     this Agreement.

          (ii) In the application of Schedule A to this Agreement after the
     end of the Award Period for purposes of determining the Schedule A Value
     pursuant to this Subparagraph 3(b), (A) if the 20__ Return on Equity or
     the 20__ Earnings Per Share is less than the level needed to have some
     Schedule A Value, there shall be no Schedule A Value, and (B) if the 20__
     Return on Equity and the 20__ Earnings Per Share are equal to or greater
     than those levels needed to have some Schedule A Value and less than or
     equal to the maximum specified levels and are not represented on the
     table, the Schedule A Value shall be determined by straight-line
     interpolation from the amounts specified in such table immediately less
     than and greater than the amounts actually attained.

          (iii) The Committee shall determine in its own discretion what
     portion of the Schedule A Value, if any (as adjusted in accordance with
     Subparagraph 3(c) below), shall be payable in cash (the "Cash Value"),
     and what portion shall be denominated in restricted shares or restricted
     stock units of the Company ("the RSA" or "the RSU"), in accordance with
     Paragraph 4 below. The RSA or the RSU shall have the terms substantially
     as set forth in the form of restricted stock or restricted stock unit
     award granted generally under the Plan, or its successor, except that the
     RSA or the RSU shall vest pursuant to a period determined in the
     Committee's discretion, except that such vesting period shall not be less
     than one year from date of grant, and (B) be forfeitable only if your
     employment with the American Express companies terminates by reason of
     voluntary resignation or terminates for cause (that is, violation of the
     Code of Conduct as in effect from time to time) prior to the applicable
     vesting dates. The number of restricted shares or restricted stock units
     of the Company comprising the RSA or the RSU (the "Number of Restricted
     Shares" or the "Number of Restricted Stock Units") shall be determined by
     dividing such portion of the Schedule A value so designated by the
     Committee, if any, by the closing price of the shares on the date that
     the Committee approves payout of the Awards, and shall be payable in the
     form of an RSA or an RSU in accordance with Paragraph 4 below.

          (iv) For purposes of this Award, all accounting terms are defined in
     accordance with generally accepted accounting principles as set forth in
     the Company's annual audited financial statements, except as otherwise
     provided below (which will take into account, in each case, the expenses
     and other financial effect for the applicable year(s) of performance
     grants under the Plan):

               (A) "Net Income" means, for any given year, the after-tax net
          income (or loss) of the Company or of a segment or other part of the
          Company, as the case may be, for such year as adjusted below, as
          reported by the Company. The calculation of Net Income, for any
          given year, will be adjusted to exclude:

                 o reported cumulative effect of accounting changes;
                 o reported income and losses from discontinued operations; and
                 o reported extraordinary gains and losses as determined under
                   generally accepted accounting principles.

                                 Page 2 of 8


               (B) "Average Annual Shareholders' Equity" means, for any given
          year, the sum of the total shareholders' equity of the Company or of
          a segment or other part of the Company, as the case may be, as of the
          first day of such year and as of the end of each month during such
          period (each as reported by the Company), divided by 13.

               (C) "Return on Equity" means, for any given year, the Net Income
          for such year divided by the Average Annual Shareholders' Equity for
          such year.

               (D) "Earnings Per Share" means, for any given year, the diluted
          earnings (or loss) per share of the Company for such year, as
          reported by the Company. The calculation of Earnings Per Share, for
          any given year, will be adjusted in the same fashion as Net Income for
          such year.

          (v) To the extent permissible for purposes of Section 162(m) of the
     Internal Revenue Code of 1986, as amended (the "Code"), in the event of
     any change in the corporate capitalization of the Company, such as by
     reason of any stock split, or a material corporate transaction, such as
     any merger of the Company into another corporation, any consolidation of
     the Company and one or more corporations into another corporation, any
     separation of the Company (including a spin-off or other distribution of
     stock or property by the Company), any reorganization of the Company
     (whether or not such reorganization comes within the definition of such
     term in Section 368 of the Code), or any partial or complete liquidation
     by the Company, other than a normal cash dividend, if the Committee shall
     determine that such a change equitably requires an adjustment in the
     calculation or terms of Return on Equity and/or Earnings Per Share, on
     the grounds that any such change would produce an unreasonable value,
     such equitable adjustment will be made by the Committee. Any such
     determination by the Committee to reflect such change under this
     Subparagraph 3(b)(v) shall be final, binding and conclusive.

(c) As soon as practicable after the last day of the Award Period, the
Committee may determine, in its sole discretion, that the Schedule A Value, if
any (as determined above in Subparagraph 3(b)), may be adjusted downward, but
in no event upward, by a percentage from 0-100% (that is, to a value of zero).
In no event may the Committee amend any provision hereof so as to increase or
otherwise adjust upward the Schedule A Value. In exercising its discretion to
make a downward adjustment, the Committee may take into account factors such
as the increase in shareholder value (as indicated, for example, by
shareholder return, earnings growth and return on equity), customer
satisfaction (as indicated, for example, by customer satisfaction measures,
client retention and growth in products and services), employee satisfaction
(as indicated, for example, by the employee values survey results),
implementation of AEQL initiatives (as indicated, for example, by process
changes that achieve significant results), achievement of reengineering
initiatives (as indicated, for example, by cost savings), and such other
factors deemed relevant by the Committee; provided that any such determination
by the Committee need not be made in a uniform manner and may be made
selectively among holders of awards of performance grants, whether or not such
award holders are similarly situated.

                                 Page 3 of 8


(d) The Committee's determinations as to the Schedule A Value, the Cash Value
and the Number of Restricted Shares or the Number of Restricted Stock Units
pursuant to this Agreement shall be final, binding and conclusive upon you and
all persons claiming under or through you.

4. PAYMENT OF AWARD.

(a) As soon as practicable after the last day of the Award Period, the
Committee shall determine whether the conditions of Paragraphs 2 and 3 hereof
have been met and, if so, shall ascertain the Schedule A Value (and any
negative adjustment thereto), Cash Value and the Number of Restricted Shares
or the Number of Restricted Stock Units, if any, in accordance with Paragraph
3 hereof.

(b) If the Committee determines that there is no Schedule A Value, this Award
will be canceled. If the Committee determines that there is some Schedule A
Value, however, the Cash Value as determined pursuant to Paragraph 3 hereof
shall become payable to you in cash, and the Number of Restricted Shares or
the Number of Restricted Stock Units shall be issued to you in the form of a
restricted stock or restricted stock unit award under the Plan, within fifteen
business days following the regularly scheduled payroll payment date of the
applicable pay period beginning after January 31 of the year following the
Award Period, but in no event later than 90 days after January 31 of the year
following the Award Period (or at such other time or times as the Committee
shall determine as provided in Paragraph 6 below).

5. TERMINATION OF EMPLOYMENT AFTER THE AWARD PERIOD BUT ON OR BEFORE THE
PAYMENT DATE. If, after the last day of the Award Period and on or before the
date specified above in Subparagraph 4(b), but during a period when you have
been in continuous employment with the American Express companies since the
Award Date, you terminate your employment with the American Express companies
for any reason, then you and all others claiming under or through you shall
not be entitled to receive any amounts or awards under this Award, except as
otherwise determined by the Committee in its sole discretion.

6. DEFERRAL OR ACCELERATION OF PAYMENT OF AWARD. Any payments to be made under
this Award may be deferred or accelerated in such manner as the Committee
shall determine; provided, however, that any such deferral or acceleration
must comply with the applicable requirements of Section 409A of the Code. As
to such a deferral of payment, any such payment in excess of the amount that
was originally payable to you under this Agreement will be based on a
reasonable interest rate or on one or more predetermined actual investments
(whether or not assets associated with the amount are actually invested
therein) as determined by the Committee, and as to such an acceleration of
payment to you under this Agreement, any such payment will be discounted to
reasonably reflect the time value of money as determined by the Committee.

7. CHANGE IN CONTROL.

(a) Notwithstanding anything in this Award to the contrary, if you have not
received payment under this Award as discussed in Subparagraph 4(b) above, and
within two years following a Change in Control, as that term is defined in the
Company's Senior Executive Severance Plan, you experience a termination of
employment that would otherwise entitle you to receive the payment of severance
benefits under the provisions of the severance plan that you participate in as
of the date of such termination of employment, then you shall be paid under
this Award, within five days after the date of such termination of employment,
a cash payment under this Award equal to the value of (i) (A) the average award
paid or payable to you under the 2006 and 2007

                                 Page 4 of 8

Annual Incentive Award or such other annual incentive award program of the
Company or one of its subsidiaries that you participated in at the time of
such prior payment for the two years prior to the Change in Control, or (B) if
you have not received two such awards, the most recent award paid or payable
(or guideline amount payable, if you have not previously received any such
award) to you under the applicable annual incentive award program of the
Company or one of its subsidiaries at the time of such prior payment),
multiplied by (ii) the number of full or partial months that have elapsed
during the Award Period at the time of such termination of employment divided
by 12.

(b) The Committee reserves the right to amend or delete this Paragraph 7 in
whole or in part at any time and from time to time; provided, that upon and
following the occurrence of a Change in Control, the Committee may not amend
this Paragraph 7 in a manner that is detrimental to your rights without your
express written consent. Any amendment of the definition of "Change in Control"
in the Senior Executive Severance Plan will be deemed to be an amendment
permitted under this Paragraph.

8. TAX WITHHOLDING AND FURNISHING OF INFORMATION. There shall be withheld from
any payment of cash or vesting of any restricted shares or restricted stock
units under this Award, such amount, if any, as the Company determines is
required by law, including, but not limited to, U.S. federal, state, local or
foreign income, employment or other taxes incurred by reason of making of the
Award or of such payment. It shall be a condition precedent to the obligation
of the Company to make payments under this Award that you (or those claiming
under or through you) promptly provide the Company with all forms, documents
or other information reasonably required by the Company in connection with the
Award.

9. RIGHTS NOT ASSIGNABLE. Your rights and interests under the Award and the
Plan may not be sold, assigned, transferred, or otherwise disposed of, or made
subject to any encumbrance, pledge, hypothecation or charge of any nature,
except that you may designate a beneficiary pursuant to Paragraph 10 hereof.
If you (or those claiming under or through you) attempt to violate this
Paragraph 9, such attempted violation shall be null and void and without
effect, and the Company's obligation to make any further payments to you (or
those claiming under or through you) hereunder shall terminate.

10. BENEFICIARY DESIGNATION. Subject to the provisions of the Plan, you may,
by completing a form acceptable to the Company and returning it to the
Corporate Secretary's Office, at 200 Vesey Street, New York, New York 10285,
name a beneficiary or beneficiaries to receive any payment to which you may
become entitled under this Agreement in the event of your death. You may
change your beneficiary or beneficiaries from time to time by submitting a new
form to the Corporate Secretary's Office at the same address. If you do not
designate a beneficiary, or if no designated beneficiary is living on the date
any amount or award becomes payable under this Agreement, such payment will be
made to the legal representatives of your estate, which will be deemed to be
your designated beneficiary under this Agreement.

11. ADMINISTRATION. Any action taken or decision made by the Company, the
Board or the Committee or its delegates arising out of or in connection with
the construction, administration, interpretation or effect of the Plan or this
Agreement shall lie within its sole and absolute discretion, as the case may
be, and shall be final, conclusive and binding upon you and all persons
claiming under or through you. By accepting this Award or other benefit under
the Plan, you and each person claiming under or through you shall be
conclusively deemed to have indicated acceptance and ratification of, and
consent to, any action taken or decision made under the Plan by the Company,
the Board or the Committee or its delegates.

                                 Page 5 of 8

12. CHANGE IN CONTROL PAYMENTS. This Paragraph shall apply in the event of
Change in Control (as defined in the American Express Senior Executive
Severance Plan, as amended from time to time).

                  (a) In the event that any payment or benefit received or to
be received by you hereunder in connection with a Change in Control or
termination of your employment (such payments and benefits, excluding Gross-Up
Payment (as hereinafter defined), being hereinafter referred to collectively
as the "Payments"), will be subject to the excise tax referred to in Section
4999 of the Code (the "Excise Tax"), then (i) if you are classified in Band 70
(or its equivalent) or above immediately prior to such Change in Control (a
"Tier 1 Employee"), the Company shall pay to such Tier 1 Employee, within five
days after receipt by such Tier 1 Employee of the written statement referred
to in Subparagraph (e) below, an additional amount (the "Gross-Up Payment")
such that the net amount retained by such Tier 1 Employee, after deduction of
any Excise Tax on the Payments and any federal, state and local income and
employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to
the Payments and (ii) if you are other than a Tier 1 Employee, the Payments
shall be reduced to the extent necessary so that no portion of the Payments is
subject to the Excise Tax but only if (A) the net amount of all Total Payments
(as hereinafter defined), as so reduced (and after subtracting the net amount
of federal, state and local income and employment taxes on such reduced Total
Payments), is greater than or equal to (B) the net amount of such Total
Payments without any such reduction (but after subtracting the net amount of
federal, state and local income and employment taxes on such Total Payments
and the amount of Excise Tax to which you would be subject in respect of such
unreduced Total Payments); provided, however, that you may elect in writing to
have other components of your Total Payments reduced prior to any reduction in
the Payments hereunder.

                  (b) For purposes of determining whether the Payments will be
subject to the Excise Tax, the amount of such Excise Tax and whether any
Payments are to be reduced hereunder: (i) all payments and benefits received
or to be received by you in connection with such Change in Control or the
termination of your employment, whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
Person (as such term is defined in the Company's Senior Executive Severance
Plan) whose actions result in such Change in Control or any Person affiliated
with the Company or such Person (all such payments and benefits, excluding the
Gross-Up Payment and any similar gross-up payment to which a Tier 1 Employee
may be entitled under any such other plan, arrangement or agreement, being
hereinafter referred to as the "Total Payments"), shall be treated as
"parachute payments" (within the meaning of Section 280G(b)(2) of the Code)
unless, in the opinion of the firm serving, immediately prior to the Change in
Control, as the Company's independent auditors, or if that firm refuses to
serve, by another qualified firm, whether or not serving as independent
auditors, designated by the Administration Committee under the American
Express Senior Executive Severance Plan (the "Firm"), such payments or
benefits (in whole or in part) do not constitute parachute payments, including
by reason of Section 280G(b)(2)(A) or Section 280G(b)(4)(A) of the Code; (ii)
no portion of the Total Payments the receipt or enjoyment of which you shall
have waived at such time and in such manner as not to constitute a "payment"
within the meaning of Section 280G(b) of the Code shall be taken into account;
(iii) all "excess parachute payments" within the meaning of Section 280G(b)(l)
of the Code shall be treated as subject to the Excise Tax unless, in the
opinion of the Firm, such excess parachute payments (in whole or in part)
represent reasonable compensation for services actually rendered (within the
meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount
(within the meaning of Section 280G(b)(3) of the Code) allocable to such
reasonable compensation, or are otherwise not subject to the Excise Tax; and


                                 Page 6 of 8

(iv) the value of any noncash benefits or any deferred payment or benefit
shall be determined by the Firm, in accordance with the principles of Sections
280G(d)(3) and (4) of the Code and regulations or other guidance thereunder.
For purposes of determining the amount of the Gross-Up Payment in respect of a
Tier 1 Employee and whether any Payments in respect of a Participant (other
than a Tier 1 Employee) shall be reduced, shall be deemed to pay federal
income tax at the highest marginal rate of federal income taxation (and state
and local income taxes at the highest marginal rate of taxation in the state
and locality of your residence, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and local taxes) in
the calendar year in which the Gross-Up Payment is to be made (in the case of
a Tier 1 Employee) or in which the Payments are made (if you are other than a
Tier 1 Employee). The Firm will be paid reasonable compensation by the Company
for its services.

                  (c) In the event that the Excise Tax is finally determined
to be less than the amount taken into account hereunder in calculating the
Gross-Up Payment, then the Tier 1 Employee will be required to repay to the
Company on the fifth business day after demand an amount equal to the excess
of the earlier payment over the redetermined amount (the "Excess Amount"),
together with interest on such amount at the lowest applicable federal rate
(as defined in Section 1274(d) of the Code or any successor provision
thereto), compounded semi-annually (the "Section 1274 Rate"), from the date of
the Tier 1 Employee's receipt of such Excess Amount until the date of such
repayment (or such lesser rate (including zero) as may be designated by the
Firm such that the Excess Amount and such interest will not be treated as a
parachute payment as previously defined). In the event that the Excise Tax is
finally determined to exceed the amount taken into account hereunder in
calculating the Gross-Up Payment (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), within five business days of such determination, the Company will
pay to the Tier 1 Employee an additional amount, together with interest
thereon from the date such additional amount should have been paid to the date
of such payment, at the Section 1274 Rate (or such lesser rate (including
zero) as may be designated by the Firm such that the amount of such deficiency
and such interest will not be treated as a parachute payment as previously
defined). The Tier 1 Employee and the Company shall each reasonably cooperate
with the other in connection with any administrative or judicial proceedings
concerning the amount of any Gross-Up Payment.

                  (d) As soon as practicable following a Change in Control,
the Company shall provide to each Tier 1 Employee and to each other
Participant with respect to whom it is proposed that Payments be reduced, a
written statement setting forth the manner in which the Total Payments in
respect of such Tier 1 Employee or other Participant were calculated and the
basis for such calculations, including, without limitation, any opinions or
other advice the Company has received from the Firm or other advisors or
consultants (and any such opinions or advice which are in writing shall be
attached to the statement).

13. MISCELLANEOUS. Neither you nor any person claiming under or through you
shall have any right or interest, whether vested or otherwise, in the Plan or

                                 Page 7 of 8

the Award, unless and until all of the terms, conditions and provisions of the
Plan and this Agreement shall have been complied with. In addition, neither
the adoption of the Plan nor the execution of this Agreement shall in any way
affect the rights and powers of any person to dismiss or discharge you at any
time from employment with the American Express companies. Notwithstanding
anything herein to the contrary, neither the Company nor any of its Affiliates
(as that term is defined in the Plan) nor their respective officers,
directors, employees or agents shall have any liability to you (or those
claiming under or through you) under the Plan, this Agreement or otherwise on
account of any action taken, or decision not to take any action made, by any
of the foregoing persons with respect to the business or operations of the
Company or any of its Affiliates (as that term is defined in the Plan),
despite the fact that any such action or decision may adversely affect in any
way whatsoever Average Annual Shareholders' Equity, Earnings Per Share, Net
Income or other financial measures or amounts which are accrued or payable or
any of your other rights or interests under this Agreement.

14. GOVERNING LAW. The validity, construction, interpretation, administration
and effect of this Agreement shall be governed by the substantive laws, but
not the choice of law rules, of the State of New York.


                                    AMERICAN EXPRESS COMPANY
                                    By the Compensation and
                                    Benefits Committee of the
                                    Board of Directors:



                                    By
                                        -----------------------------









NOTWITHSTANDING ANY CONTRARY PROVISION IN THE AMERICAN EXPRESS COMPANY 2007
INCENTIVE COMPENSATION PLAN MASTER AGREEMENT, THE COMPANY RESERVES THE RIGHT
TO CORRECT NONMATERIAL CLERICAL ERRORS IN, AND MAKE SUBSEQUENT NONMATERIAL
CLARIFICATIONS TO, ANY AWARD AGREEMENT IN THE FUTURE, WITHOUT PRIOR
NOTIFICATION TO PARTICIPANTS.

                                 Page 8 of 8
                                                                      SCHEDULE A

  20__ Incentive Awards: Proposed AXP Earnings Per Share/Return on Equity Grid
                       for Determining Maximum Award Value

       (subject to award agreement and discretionary downward adjustment)

       
         
                                              20__ AXP EARNINGS PER SHARE (DILUTED)
   20__ AXP         LESS THAN $____      $____         $____         $____         $____       $____ OR MORE
RETURN ON EQUITY        Value          Max. Value    Max. Value    Max. Value    Max. Value      Max. Value
                                                                                                  
  __% OR MORE             $0                $            $             $             $               $
        %                  0                $            $             $             $               $
        %                  0                $            $             $             $               $
        %                  0                $            $             $             $               $
        %                  0                $            $             $             $               $
  LESS THAN __%            0                0            0             0             0               0
        

Note: Straight-line interpolation would apply for any actual performance level
that falls between two performance levels shown on the grid.

(Back To Top)

Section 4: EX-12 (COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES)

Computation in Support of Ratio of Earnings to Fixed Charges

EXHIBIT 12

AMERICAN EXPRESS COMPANY

COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES

(Dollars in millions)

 

     Years Ended December 31,
      2007    2006    2005    2004    2003

Earnings:

              

Pretax income from continuing operations

   $ 5,566    $ 5,139    $ 4,053    $ 3,745    $ 3,315

Interest expense

     4,327      3,132      2,324      1,830      1,728

Other adjustments

     143      139      150      151      154
                                  

Total earnings (a)

   $ 10,036    $ 8,410    $ 6,527    $ 5,726    $ 5,197
                                  

Fixed charges:

              

Interest expense

   $ 4,327    $ 3,132    $ 2,324    $ 1,830    $ 1,728

Other adjustments

     106      106      151      145      139
                                  

Total fixed charges (b)

   $ 4,433    $ 3,238    $ 2,475    $ 1,975    $ 1,867
                                  

Ratio of earnings to fixed charges (a/b)

     2.26      2.60      2.64      2.90      2.78

Included in interest expense in the above computation is interest expense related to the cardmember lending activities, international banking operations, and charge card and other activities in the Consolidated Statements of Income. Interest expense does not include interest on liabilities recorded under Financial Accounting Standards Board (FASB) Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” The Company’s policy is to classify such interest in income tax provision in the Consolidated Statements of Income.

For purposes of the “earnings” computation, “other adjustments” include adding the amortization of capitalized interest, the net loss of affiliates accounted for under the equity method whose debt is not guaranteed by the Company, the minority interest in the earnings of majority-owned subsidiaries with fixed charges, and the interest component of rental expense and subtracting undistributed net income of affiliates accounted for under the equity method.

For purposes of the “fixed charges” computation, “other adjustments” include capitalized interest costs and the interest component of rental expense.

(Back To Top)

Section 5: EX-13 (PORTIONS OF THE COMPANY'S 2007 ANNUAL REPORT TO SHAREHOLDERS)

Portions of the Company's 2007 Annual Report to Shareholders
Table of Contents

EXHIBIT 13

PORTIONS OF 2007 ANNUAL REPORT TO SHAREHOLDERS

 

 

 

 

 

 

 

 

 

 

 

 

26  FINANCIAL REVIEW 
65  MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 
66  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
67  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
68  CONSOLIDATED FINANCIAL STATEMENTS 
72  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
113      CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA 


Table of Contents

2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY

FINANCIAL REVIEW

The financial section of American Express Company’s (the Company) Annual Report consists of this Financial Review, the Consolidated Financial Statements and the related notes that follow. The following discussion is designed to provide perspective and understanding to the Company’s consolidated financial condition and results of operations. Certain key terms are defined in the Glossary of Selected Terminology, which begins on page 62.

EXECUTIVE OVERVIEW
American Express Company is a leading global payments and travel company. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Company’s businesses are organized into two customer-focused groups, the Global Consumer Group and the Global Business-to-Business Group. The Global Consumer Group offers a range of products and services including charge and lending (i.e., credit) card products; consumer travel services; and stored value products such as Travelers Cheques and prepaid products. The Business-to-Business Group offers business travel, corporate cards and other expense management products and services; network services and merchant acquisition and merchant processing for the Company’s network partners and proprietary payments businesses; and point-of-sale, back-office, and marketing products and services for merchants. The Company’s various products and services are sold globally to diverse customer groups, including consumers, small businesses, middle-market companies, and large corporations. These products and services are sold through various channels including direct mail, on-line applications, targeted sales forces, and direct response advertising. 
     The Company’s products and services generate the following types of revenue for the Company:

In addition to funding and operating costs associated with these types of revenue, other major expense categories are related to marketing and reward programs that add new cardmembers and promote cardmember loyalty and spending, and provisions for anticipated cardmember credit and fraud losses. 
     The Company believes that its “spend-centric” business model (which focuses on generating revenues primarily by driving spending on its cards and secondarily by generating finance charges and fees) has significant competitive advantages. Average spending per cardmember, which is substantially higher for the Company versus its competitors, represents greater value to merchants in the form of loyal customers and higher sales. This enables the Company to earn a premium discount rate and thereby invest in greater value-added services for merchants and cardmembers. As a result of the higher revenues generated from higher spending, the Company has the flexibility to offer more attractive rewards, other incentives to cardmembers, and targeted marketing programs to merchants, which in turn create an incentive to spend more on their cards.
     The Company creates shareholder value by focusing on the following elements:

Overall, it is management’s priority to increase shareholder value over the moderate to long term by achieving the following long-term financial targets, on average and over time:

The ROE target reflects the success of the Company’s spend-centric business model and its effectiveness in capturing high spending consumer, small business, and corporate cardmembers.

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY

     For 2007, 2006, and 2005, the Company met or exceeded management’s targets for revenues net of interest, earnings per share, and ROE, illustrating the success of investments made over the past few years. Reported ROE was 37 percent, 35 percent and 25 percent (prior to the completion of the Ameriprise spin-off discussed below, the Company’s ROE target was 18-20 percent) for 2007, 2006, and 2005, respectively. Refer to page 41 for discussion of the Company’s outlook for 2008.

REPORTABLE OPERATING SEGMENTS
During 2007, the Company’s segments were realigned within the two major customer groups. Accordingly, U.S. Card Services (USCS) and International Card Services (ICS) are aligned within the Global Consumer Group and Global Commercial Services (GCS) and Global Network & Merchant Services (GNMS) are aligned within the Global Business-to-Business Group. The Company has reclassified the prior period amounts to be consistent with the new reportable operating segments.
     U.S. Card Services issues a wide range of card products and services to consumers and small businesses in the United States, and provides consumer travel services to cardmembers and other consumers.
     International Card Services issues proprietary consumer and small business cards outside the United States.
     Global Commercial Services offers global corporate payment and travel-related products and services to large and mid-sized companies.
     Global Network & Merchant Services segment operates a global general-purpose charge and credit card network, which includes both proprietary cards and cards issued under network partnership agreements. It also manages merchant services globally, which includes signing merchants to accept cards as well as processing and settling card transactions for those merchants. This segment also offers merchants point-of-sale and back-office products, services and marketing programs.
     Corporate & Other consists of corporate functions and auxiliary businesses, including the Company’s publishing businesses, Travelers Cheques and other prepaid products, American Express International Deposit Company, and the continuing portions of American Express Bank Ltd. not being sold to Standard Chartered PLC as discussed below.

VISA SETTLEMENT
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 settlement agreement with Visa 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) related to the settlement. 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.

DIVESTITURES AND ACQUISITIONS
The Company announced or completed the following divestitures during 2007, 2006, and 2005.

AEB and AEIDC
On September 18, 2007, the Company entered into an agreement to sell its international banking subsidiary, American Express Bank Ltd. (AEB) and American Express International Deposit Company (AEIDC), a subsidiary that issues investment certificates to AEB’s customers, to Standard Chartered PLC (Standard Chartered) for the approximate value of $1.1 billion, subject to certain regulatory approvals. Standard Chartered will pay the Company an amount equal to the net asset value of the AEB businesses that are being sold at the closing date plus $300 million. At December 31, 2007, this would have amounted to approximately $819 million. The Company also expects to realize an additional amount representing the net asset value of AEIDC, which was also contracted to be sold to Standard Chartered 18 months after the close of the AEB sale, through a put/call agreement. As of December 31, 2007, the net asset value of that business was $232 million. This value is expected to be realized through (1) dividends from the subsidiary to the Company and (2) a subsequent payment from Standard Chartered based on the net asset value of AEIDC on the date the business is transferred to them.
     For 2007 and all prior periods presented, the operating results, assets and liabilities, and cash flows of AEB (except for certain components of AEB that are not being sold) have been removed from the Corporate & Other segment and reported

27


Table of Contents

2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY

within the discontinued operations captions in the Company’s Consolidated Financial Statements. AEIDC will continue to be included in continuing operations within the Corporate & Other segment until such time as AEIDC qualifies for classification as a discontinued operation, which will occur approximately one year prior to its transfer to Standard Chartered. Beginning with the third quarter of 2007, AEIDC’s investment portfolio was reclassified to Trading from Available-for-Sale due to the impact on the holding period of AEIDC’s investments as a result of the related AEB sale agreement.
     This Financial Review and the Notes to the Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted. Refer to Note 2 for further discussion of AEB as a discontinued operation.

Divestitures with GNS Network Arrangements
On May 31, 2007, the Company completed the sale of its merchant-related activities in Russia to Russian Standard Bank (RSB), for approximately $27 million ($18 million after-tax) net gain in the Global Network & Merchant Services segment. $23 million ($15 million after-tax) of the gain relates to the merchant-related activities sold and is reported as a reduction to other, net expenses in the Company’s continuing operations. $4 million ($3 million after-tax) of the gain relates to the issuance of the GNS license and is reported as other revenue in the Company’s continuing operations. 
     During the third quarter of 2006, the Company completed the sale of its card and merchant-related activities in Malaysia to Maybank, and its card and merchant-related activities in Indonesia to Bank Danamon for combined proceeds of $94 million. The transactions generated a gain of $33 million ($24 million after-tax), and are reported as a reduction to other, net expenses in the Company’s continuing operations ($23 million in the International Card Services segment and $10 million in the Global Commercial Services segment).
     On June 30, 2006, the Company completed the sale of its card and merchant-related activities and international banking activities in Brazil to Banco Bradesco S.A. (Bradesco), for approximately $470 million. The transaction generated a net after-tax gain of $109 million. $144 million ($131 million after-tax) of the gain relates to the card and merchant-related activities sold and is reported as a reduction to other, net expenses in the Company’s continuing operations ($91 million in the International Card Services segment, $28 million in the Global Commercial Services segment, and $25 million in the Global Network & Merchant Services segment). A $48 million ($22 million after-tax) loss related to the sale of the Company’s international banking activities to Bradesco is reported in discontinued operations for banking activities the Company exited in Brazil. 
     The Company will continue to maintain its presence in the merchant-related businesses within Russia and in the card and merchant-related businesses within Malaysia, Indonesia, and Brazil through its Global Network Services arrangements with the acquirers and its retention of agreements with multinational merchants.

Ameriprise, TBS and Other Divestitures
On September 30, 2005, the Company completed the spin-off of Ameriprise Financial, Inc. (Ameriprise), previously known as American Express Financial Corporation, the Company’s former financial planning and financial services business. In addition, the Company completed certain dispositions including the sale of its tax, accounting, and consulting business, American Express Tax and Business Services, Inc. (TBS). The operating results, assets and liabilities, and cash flows related to Ameriprise and certain dispositions (including TBS) have been reflected as discontinued operations in the Consolidated Financial Statements.

Acquisitions and Other Transactions
On September 30, 2007, the Company purchased all the outstanding common shares of AMEX Assurance Company (AAC), a subsidiary of Ameriprise, for $115 million. During the third quarter of 2005, the Company recorded a $115 million liability related to the share purchase agreement with Ameriprise to purchase all of the shares of AAC, within a period not to exceed two years from the spin-off date of September 30, 2005. The Company had previously consolidated AAC as a variable interest entity within the U.S. Card Services segment since the spin-off of Ameriprise and therefore there is no impact on the Company’s Consolidated Financial Statements from this 2007 acquisition.
     On December 31, 2006, the Company acquired Harbor Payments, Inc. (Harbor Payments) for approximately $150 million, which was paid primarily in the Company’s common stock. Harbor Payments is a technology provider that specializes in electronic invoice and payment capabilities. The acquisition is reflected in the Global Commercial Services segment.

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Table of Contents

2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY

FINANCIAL SUMMARY
A summary of the Company’s recent financial performance follows:

                    Percent
Years Ended December 31,                 Increase
(Millions, except per share amounts and ratio data)       2007       2006       (Decrease)
Revenues net of interest expense   $ 27,731   $ 25,154   10 %
Expenses   $ 17,824   $ 16,989   5
Provisions for losses and benefits   $ 4,341   $ 3,026   43
Income from continuing operations   $ 4,048   $ 3,611   12
Net income   $ 4,012   $ 3,707   8
Earnings per common share from continuing operations — diluted   $ 3.39   $ 2.92   16
Earnings per common share — diluted   $ 3.36   $ 2.99   12
Return on average equity(a)     37.3 %     34.7 %      

(a)     Calculated based on $4.0 billion and $3.7 billion of net income for 2007 and 2006, respectively, and $10.8 billion and $10.7 billion of average shareholders’ equity for the trailing 12 months ending December 31, 2007 and 2006, respectively.

See Consolidated Results of Operations, beginning on page 34, for discussion of the Company’s results.
     The Company follows U.S. generally accepted accounting principles (GAAP). In addition to information provided on a GAAP basis, the Company discloses certain data on a “managed basis.” This information, which should be read only as a supplement to GAAP information, assumes, in the Consolidated Selected Statistical Information and U.S. Card Services segment, there have been no cardmember lending securitization transactions. These managed basis adjustments, and management’s rationale for such presentation, are discussed further in the U.S. Card Services section below under “Differences between GAAP and Managed Basis Presentation.” 
     Certain reclassifications of prior period amounts have been made to conform to the current presentation throughout this Annual Report.
     Certain of the statements in this Annual Report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See Forward-Looking Statements at the end of this discussion.

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The following chart provides information about four critical accounting policies that are important to the Consolidated Financial Statements and that require significant management assumptions and judgments.

RESERVES FOR CARDMEMBER LOSSES

         Effect if Actual Results Differ 
Description         Assumptions/Approach Used        from Assumptions 

Reserves for losses relating to cardmember loans and receivables represent management’s best estimate of the losses inherent in the Company’s outstanding portfolio of loans and receivables.

 

Reserves for these losses are primarily based upon models that analyze specific portfolio statistics, 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. Cardmember loans and receivables are generally written off when they are past due 180 and 360 days, respectively. Also, these reserves reflect management’s judgment regarding overall adequacy. Management considers whether to adjust reserves that are calculated by the analytic models based on other factors, such as the level of coverage of past-due accounts, as well as leading economic and market indicators, such as the unemployment rate, the consumer confidence index, the purchasing manager’s index, bankruptcy filings, concentration of credit risk based on tenure, industry or geographic regions, and the legal and regulatory environment.
 

 

To the extent historical credit experience updated for emerging market trends in credit are not indicative of future performance, actual losses could differ significantly from management’s judgments and expectations, resulting in either higher or lower future provisions for losses, as applicable.
     As of December 31, 2007, an increase in write-offs equivalent to 20 basis points of cardmember loan and receivable balances at such date would increase the provision for cardmember losses by approximately $189 million. This sensitivity analysis does not represent management’s expectations of the deterioration in write-offs but is provided as a hypothetical scenario to assess the sensitivity of the provision for cardmember losses to changes in key inputs.
     The process of determining the reserve for cardmember losses requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions.
 


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AMERICAN EXPRESS COMPANY

RESERVES FOR MEMBERSHIP REWARDS COSTS

         Effect if Actual Results Differ 
Description         Assumptions/Approach Used        from Assumptions 

The Membership Rewards program is the largest card-based rewards program in the industry. Eligible cardmembers can earn points for purchases charged and many of the Company’s card products offer the ability to earn bonus points for certain types of purchases. Membership Rewards points are redeemable for a broad variety of rewards, including travel, entertainment, retail certificates and merchandise. Points generally do not expire and there is no limit on the number of points a cardmember may earn. A large majority of spending by eligible cardmembers earns points under the program. While cardmember spend, redemption rates, and the related expense have been increasing, the Company benefits through higher revenues, lower cardmember attrition and credit losses and more timely payments.
     The Company establishes balance sheet reserves that represent the estimated cost of points earned to date that are ultimately expected to be redeemed. Also, these reserves reflect management’s judgment regarding overall adequacy. The provision for the cost of Membership Rewards is included in marketing, promotion, rewards and cardmember services expenses.
 

 

A weighted average cost per point redeemed during the previous 12 months is used to approximate future redemption costs and is affected by the mix of rewards redeemed. Management uses models to estimate ultimate redemption rates based on historical redemption statistics, card product type, year of program enrollment, enrollment tenure and card spend levels. During 2007, management enhanced the ultimate redemption rate models by incorporating more sophisticated statistical and actuarial techniques to better estimate ultimate redemption rates of points earned to date by current cardmembers given redemption trends and projected future redemption behavior. The global ultimate redemption rate for current participants increased to approximately 90 percent.
     The Company continually evaluates its reserve methodology and assumptions based on developments in redemption patterns, cost per point redeemed, and other factors.

 

The balance sheet reserve for the estimated cost of points expected to be redeemed is impacted over time by enrollment levels, the number of points earned and redeemed, and the weighted-average cost per point, which is influenced by redemption choices made by cardmembers, reward offerings by partners and other Membership Rewards program changes. The reserve is most sensitive to changes in the estimated ultimate redemption rate. This rate is based on the expectation that a large majority of all points earned will eventually be redeemed.
     As of December 31, 2007, if the ultimate redemption rate of current enrollees changed by 100 basis points, the balance sheet reserve would change by approximately $200 million.

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AMERICAN EXPRESS COMPANY

ASSET SECURITIZATIONS

        Effect if Actual Results Differ
Description       Assumptions/Approach Used       from Assumptions

When the Company securitizes cardmember loans, it retains certain subordinated interests in securitized cardmember loans, which may include one or more investments in tranches of the securitization (subordinated securities) and an interest-only strip. Certain estimates and assumptions are required to determine the fair value of the Company’s interest-only strip, and gains recorded at the time of the sale.
     The subordinated securities are accounted for at fair value as Available-for-Sale investment securities and are reported in investments on the Company’s Consolidated Balance Sheets with unrealized gains (losses) recorded in accumulated other comprehensive (loss) income. 
     The interest-only strip is accounted for at fair value and is reported in other assets on the Company’s Consolidated Balance Sheets. Commencing January 1, 2007, the Company records any changes in the fair value of the interest-only strip in securitization income, net in the Consolidated Statements of Income. Prior to January 1, 2007, the Company accounted for the changes in the fair value of the interest-only strip in other comprehensive (loss) income.

 
 

Management estimates fair value of the subordinated securities using models, where the inputs to the model are based on observable market inputs.
     Management uses models to determine the fair value of the interest-only strip and gain on sale at the time of a cardmember securitization. The models are based on projections of finance charges and fees paid related to the securitized assets, coupon payments to investors, expected credit losses, average loan life (i.e., monthly payment rate), contractual fees to service the securitized assets, and a discount rate applied to the cash flows from the interest-only strip that is commensurate with the inherent risk.

 
 

As of December 31, 2007, the total fair value of subordinated securities and the interest-only strip was $78 million and $223 million, respectively. 
     Fair value of the subordinated securities is impacted by external market factors including LIBOR forward rates.
     Fair value of the interest-only strip and gain or loss from the sale of securitization is impacted by changes in the estimates and assumptions used in the valuation models. The three key economic assumptions and the sensitivity of the current year’s fair value of the interest-only strip to immediate 10 percent and 20 percent adverse changes in these assumptions are as follows:
 

                    Cash
                    Flows from
                    Interest-
        Monthly   Expected   only Strips
    (Millions, except   Payment   Credit   Discounted
    rates per annum)       Rate       Losses       at
    Assumption     24.7 %     4.3 %     12.0 %
    10% adverse                  
         change   $ (14 )   $ (22 )   $ (0.4 )
    20% adverse                  
         change   $ (28 )   $ (43 )   $ (0.9 )
                       
   

     This sensitivity analysis does not represent management’s expectations of adverse changes in these assumptions but is provided as a hypothetical scenario to assess the sensitivity of the fair value of the interest-only strip to changes in key inputs. Management cannot extrapolate changes in fair value based on a 10 percent or 20 percent change in all key assumptions simultaneously in part because the relationship of the change in one assumption on the fair value of the retained interest is calculated independent from any change in another assumption. Changes in one factor may cause changes in another, which could magnify or offset the sensitivities.
 

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AMERICAN EXPRESS COMPANY

INCOME TAXES

        Effect if Actual Results Differ 
Description        Assumptions/Approach Used        from Assumptions 

The Company is subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. In establishing a provision for income tax expense, the Company must make judgments about the application of these inherently complex tax laws. The Company establishes a liability for unrecognized tax benefits, which are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized in the financial statements.
     Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using the enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax asset will not be realized.

 

In establishing a liability for an unrecognized tax benefit, assumptions may be made in determining whether a tax position is more likely than not to be sustained upon examination by the taxing authority and also in determining the ultimate amount that is likely to be realized. A tax position is recognized when, based on management’s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of tax benefit recognized is based on the Company’s assessment of the most likely outcome on ultimate settlement with the taxing authority. This measurement is based on many factors, including whether a tax dispute may be settled through negotiation with the taxing authority or is only subject to review in the courts. As new information becomes available, the Company evaluates its tax positions, and adjusts its unrecognized tax benefits, as appropriate.
     Since deferred taxes measure the future tax effects of items recognized in the financial statements, certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, management analyzes and estimates the impact of future taxable income, reversing temporary differences and available tax planning strategies. These assessments are performed quarterly, taking into account any new information.
 

 

If the tax benefit ultimately realized differs from the amount previously recognized in the income tax provision, the Company recognizes an adjustment to the provision.
     Should a change in facts or circumstances lead to a change in judgment about the ultimate realizability of a deferred tax asset, the Company records or adjusts the related valuation allowance in the period that the change in facts or circumstances occurs, along with a corresponding increase or decrease to the income tax provision.


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AMERICAN EXPRESS COMPANY

AMERICAN EXPRESS COMPANY
CONSOLIDATED RESULTS OF OPERATIONS

SUMMARY OF THE COMPANY’S FINANCIAL PERFORMANCE

Years Ended December 31,                    
(Millions, except per share amounts and ratio data)       2007       2006       2005
Revenues net of interest expense   $ 27,731   $ 25,154   $ 22,425
Expenses   $ 17,824   $ 16,989   $ 15,614
Provisions for losses and benefits   $ 4,341   $ 3,026   $ 2,758
Income from continuing operations   $ 4,048   $ 3,611   $ 3,062
Net income   $ 4,012   $ 3,707   $ 3,734
Earnings per common share from continuing operations — diluted   $ 3.39   $ 2.92   $ 2.43
Earnings per common share — diluted   $ 3.36   $ 2.99   $ 2.97
Return on average equity(a)     37.3 %     34.7 %     25.4 %

(a)    Calculated based on $4.0 billion, $3.7 billion, and $3.7 billion of net income, and $10.8 billion, $10.7 billion, and $14.7 billion of average shareholders’ equity for the trailing 12 months ending December 31, 2007, 2006, and 2005, respectively. The increase in the ROE from 2005 to 2006 reflected the impact of the Ameriprise spin-off in 2005.

SELECTED STATISTICAL INFORMATION

Years Ended December 31,                    
(Billions, except percentages and where indicated)       2007       2006       2005
Card billed business(a):                  
United States   $ 459.3   $ 406.8   $ 354.6
Outside the United States     188.0     154.7     129.8
Total   $ 647.3   $ 561.5   $ 484.4
Total cards-in-force (millions)(b):                  
United States     52.3     48.1     43.0
Outside the United States     34.1     29.9     28.0
Total     86.4     78.0     71.0
Basic cards-in-force (millions)(b):                  
United States     40.9     37.1     32.8
Outside the United States     29.2     25.4     23.2
Total     70.1     62.5     56.0
Average discount rate(c)     2.56 %     2.57 %     2.58 %
Average basic cardmember spending (dollars)(d)   $ 12,106   $ 11,201   $ 10,445
Average fee per card (dollars)(d)   $ 32     $ 32     $ 35  

(a)    Card billed business includes activities (including cash advances) related to proprietary cards, cards issued under network partnership agreements, and certain insurance fees charged on proprietary cards. Card billed business is reflected in the United States or outside the United States based on where the cardmember is domiciled.
  
(b) Total cards-in-force represents the number of cards that are issued and outstanding. Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner and does not include additional supplemental cards issued on that account. Proprietary basic small business and corporate cards-in-force include basic and supplemental cards issued to employee cardmembers. Non-proprietary basic cards-in-force includes all cards that are issued and outstanding under network partnership agreements.
  
(c) This calculation is designed to approximate merchant pricing. It represents the percentage of billed business (both proprietary and Global Network Services) retained by the Company from merchants it acquires, prior to payments to third parties unrelated to merchant acceptance.
  
(d) Average basic cardmember spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees including the amortization of deferred direct acquisition costs (which beginning prospectively as of July 1, 2006, was reclassified from other, net expense to a reduction in net card fees), divided by average worldwide proprietary cards-in-force. The adjusted average fee per card is computed in the same manner, but excludes amortization of deferred direct acquisition costs. The adjusted average fee per card was $36 and $35, in 2007 and 2006, respectively, and the amount of amortization excluded was $288 million and $147 million for 2007 and 2006, respectively. In 2005, the average fee per card in the table above was greater than in 2007 and 2006 as 2005 was prior to the reclassification discussed above. The Company presents adjusted average fee per card because management believes that this metric presents a better picture of card fee pricing across a range of its proprietary card products.

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AMERICAN EXPRESS COMPANY

AMERICAN EXPRESS COMPANY

SELECTED STATISTICAL INFORMATION (CONTINUED)

Years Ended December 31,                    
(Billions, except percentages and where indicated)            2007            2006            2005  
Worldwide cardmember receivables:                  
Total receivables $ 40.1   $ 37.4   $ 34.2  
90 days past due as a % of total   3.0 %     2.8 %   2.8 %
Loss reserves (millions): $ 1,149   $ 981   $ 942  
     % of receivables   2.9 %   2.6 %     2.8 %
     % of 90 days past due   95 %   95 %     97 %
Net loss ratio as a % of charge volume   0.24 %   0.24 %     0.26 %
Worldwide cardmember lending — owned basis(a):                  
Total loans $ 54.5   $ 43.3   $ 33.1  
30 days past due as a % of total   3.4 %     2.7 %     2.5 %
Loss reserves (millions):                  
Beginning balance $ 1,171   $ 996   $ 972  
     Provision   2,615     1,507     1,227  
     Net write-offs   (1,990 )   (1,359 )   (1,155 )
     Other   35     27     (48 )
Ending balance $ 1,831   $ 1,171   $ 996  
% of loans   3.4 %   2.7 %   3.0 %
% of past due   100 %   98 %   122 %
Average loans $ 47.2   $ 36.5   $ 28.3  
Net write-off rate   4.2 %   3.7 %     4.1 %
Net finance revenue(b)/average loans   9.4 %   9.3 %     8.9 %
Worldwide cardmember lending — managed basis(c):                  
Total loans $ 77.2   $ 63.5   $ 54.3  
30 days past due as a % of total   3.2 %   2.6 %     2.4 %
Loss reserves (millions):                  
Beginning balance $ 1,622   $ 1,469   $ 1,475  
     Provision   3,726     1,991     2,097  
     Net write-offs   (2,799 )   (1,933 )   (2,055 )
     Other   32     95     (48 )
Ending balance $ 2,581   $ 1,622   $ 1,469  
% of loans   3.3 %     2.6 %     2.7 %
% of past due   106 %     97 %     114 %
     Average loans $ 68.3   $ 56.9   $ 48.9  
     Net write-off rate   4.1 %     3.4 %     4.2 %
     Net finance revenue(b)/average loans     9.4 %     9.3 %     9.2 %

(a)    “Owned,” a GAAP basis measurement, reflects only cardmember loans included on the Company’s Consolidated Balance Sheets.
 
(b) Net finance revenue represents cardmember lending finance revenue less cardmember lending interest expense.
 
(c) Includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. The difference between the “owned basis” (GAAP) information and “managed basis” information is attributable to the effects of securitization activities. See the U.S. Card Services segment for additional information on managed basis presentation.

* * *

The following discussions regarding Consolidated Results of Operations and Consolidated Liquidity and Capital Resources are presented on a basis consistent with GAAP unless otherwise noted.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2007
The Company’s 2007 consolidated income from continuing operations rose $437 million or 12 percent to $4.0 billion and diluted earnings per share (EPS) from continuing operations rose $0.47 or 16 percent to $3.39. Consolidated income from continuing operations for 2006 increased $549 million or 18 percent from 2005 and diluted EPS from continuing operations for 2006 increased $0.49 or 20 percent from 2005.
     The Company’s 2007 consolidated net income increased $305 million or 8 percent to $4.0 billion, and diluted EPS increased $0.37 or 12 percent to $3.36. Consolidated net income for 2006 and 2005 was $3.7 billion. Net income for 2007 included a loss of $36 million from discontinued operations compared to $96 million and $672 million of income from discontinued operations in 2006 and 2005, respectively.
     The Company’s revenues and expenses, including provisions for losses and benefits, are affected by changes in the relative values of non-U.S. currencies to the U.S. dollar. The currency rate changes increased the growth rates of revenues net of interest expense, total expenses, and provisions for losses and benefits by approximately 2 percent in 2007 and 1 percent in 2006.
     Results from continuing operations for 2007 included:

  • A $1.13 billion ($700 million after-tax) gain for the initial payment due March 31, 2008, from Visa as part of the litigation settlement;
     
  • $140 million of tax benefits primarily related to the resolution of prior years’ tax items and the treatment of prior years’ card fee income;
     
  • An $80 million ($50 million after-tax) gain in connection with the initial adoption of Statement of Financial Accounting Standards (SFAS) No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (SFAS No. 155);
     
  • A $63 million ($39 million after-tax) gain relating to amendments to the Company’s U.S. pension plans, effective July 1, 2007, that reduced projected pension obligations to plan participants;
     
  • A $685 million ($430 million after-tax) charge related to enhancements to the method of estimating Membership Rewards liability;
     
  • A $438 million ($274 million after-tax) credit-related charge due to experienced deterioration of credit indicators in the latter part of 2007. This fourth quarter charge was split between U.S. Card Services’ cardmember lending

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AMERICAN EXPRESS COMPANY

and cardmember receivables of $288 million and $96 million, respectively, and included $54 million relating to a reduction in the fair market value of the Company’s retained subordinated interest in securitized cardmember loans;

  • $211 million ($131 million after-tax) of incremental business-building costs;
     
  • $81 million ($41 million after-tax) third quarter 2007 initial charge related to the sale of certain AEIDC securities and the reclassification of the AEIDC investment portfolio from Available-for-Sale to the Trading investment category as a result of the related AEB sale agreement’s impact on the holding period for these investments;
     
  • $74 million ($46 million after-tax) of Visa litigation-related costs; and
     
  • A $50 million ($31 million after-tax) contribution to the American Express Charitable Fund.

Also included in the 2007 results, were $66 million ($43 million after-tax) of reengineering costs related to the Company’s business travel, prepaid services, international payments business and technology areas.

     Results from continuing operations for 2006 included:

  • $177 million ($155 million after-tax) of gains related to the sales of the Company’s card and merchant-related activities in Brazil, Malaysia, and Indonesia;

  • $68 million ($42 million after-tax) of gains related to a rebalancing program in the fourth quarter of 2006 to better align the maturity profile of the Travelers Cheque and Gift Card investment portfolio with its business liquidity needs;

  • $174 million ($113 million after-tax) of charges associated with certain adjustments made to the Membership Rewards reserve models in the U.S. and outside the U.S.; and

  • A $72 million ($47 million after-tax) reduction in cardmember lending finance revenue, and securitization income, net related to higher than anticipated cardmember completion of consumer debt repayment programs and certain associated payment waivers.

Also included in the 2006 results, were $152 million ($99 million after-tax) of reengineering costs related to business travel, operations, finance and technology areas and a favorable impact from lower early credit write-offs, primarily related to bankruptcy legislation enacted in October 2005 and lower than expected costs associated with Hurricane Katrina that were provided for in 2005, partially offset by a higher provision for losses in Taiwan due primarily to the impact of industry-wide credit issues.

     Results from continuing operations for 2005 included:

  • Tax benefits of $239 million resulting from the resolution of previous years’ tax items and the finalization of state tax returns;
     
  • A $112 million ($73 million after-tax) benefit from the recovery of September 11, 2001-related insurance claims; and
     
  • A $49 million ($32 million after-tax) provision to reflect the estimated costs related to Hurricane Katrina.

Also included in the 2005 results were $273 million ($174 million after-tax) of reengineering costs related to business travel, operations, finance and technology areas and an increase in the provisions for losses related to increased bankruptcy filings resulting from the change in bankruptcy legislation.

Revenues Net of Interest Expense
Consolidated revenues net of interest expense for 2007 of $27.7 billion were up $2.6 billion or 10 percent from 2006 primarily due to increased interest income, higher discount revenue, greater net card fees, and higher securitization income, net, partially offset by increased interest expense and lower other revenues in 2007. Consolidated revenues net of interest expense of $25.2 billion for 2006 were $2.7 billion or 12 percent higher than 2005 due to increased discount revenue, greater interest income, higher other revenues, and increased securitization income, net, partially offset by greater interest expense. Consolidated revenues net of interest expense in 2006 also included a $72 million reduction in cardmember lending finance revenue and securitization income, net related to higher than anticipated cardmember completion of consumer debt repayment programs and certain associated payment waivers as well as a reclassification of certain card acquisition-related costs, beginning prospectively July 1, 2006, from other expenses to a reduction in net card fees.
     Discount revenue for 2007 rose $1.6 billion or 12 percent as compared to 2006 to $14.6 billion as a result of a 15 percent increase in worldwide billed business. The slower growth in discount revenue compared to billed business growth reflected the relatively faster growth in billed business related to GNS where the Company shares the discount revenue with third-party card issuing partners, and higher cash-back rewards costs and corporate incentive payments which are reported as reductions to revenue (contra-revenue). The 15 percent increase in worldwide billed business in 2007 reflected increases in average spending per proprietary basic card, growth in basic cards-in-force and a 49 percent increase in billed business related to GNS from 2006. The average discount rate was 2.56 percent, 2.57 percent, and 2.58 percent for 2007, 2006, and 2005, respectively. Over time, selective repricing initiatives, changes in the mix of business, and volume-related pricing

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AMERICAN EXPRESS COMPANY

discounts for merchants acquired by the Company likely will result in some erosion of the average discount rate.
     U.S. billed business and billed business outside the United States were up 13 percent and 22 percent, respectively, in 2007, due to an increase in average spending per proprietary basic card and growth in basic cards-in-force. The growth in the billed business both within the U.S. and outside the U.S. reflected increases within the Company’s consumer card business, small business spending, Corporate Services volumes and the increase in GNS business.
     The table below summarizes selected statistics for which increases in 2007 have resulted in discount revenue growth:

  Percentage
Increase
Assuming
No Changes
in Foreign
Percentage Exchange
     Increase      Rates
Worldwide(a)
Billed business 15 % 13 %
Average spending per proprietary basic card 8 6
Basic cards-in-force 12
United States(a)
Billed business 13
Average spending per proprietary basic card 4
Basic cards-in-force 10
Proprietary consumer card billed business(b) 12
Proprietary small business billed business(b) 15
Proprietary Corporate Services billed business(c) 10
Outside the United States(a)
Billed business 22 14
Average spending per proprietary basic card 18 10
Basic cards-in-force 15
Proprietary consumer and small business billed business(d) 14 6
Proprietary Corporate Services billed business(c) 22 13

(a)    Captions in the table above not designated as “proprietary” include both proprietary and Global Network Services data.
 
(b) Included in the U.S. Card Services segment.
 
(c) Included in the Global Commercial Services segment.
 
(d) Included in the International Card Services segment.

Assuming no changes in foreign exchange rates, total billed business outside the United States reflected low double-digit proprietary growth in Europe and Canada, high single-digit growth in Asia Pacific, and a small decline in Latin America. Assuming no changes in foreign exchange rates and excluding the impact of the sales in Brazil, Malaysia, and Indonesia during 2006, Asia Pacific and Latin America also exhibited double-digit proprietary growth, and total proprietary growth outside the United States was 11 percent.
     The increase in 2007 in overall cards-in-force within both proprietary and GNS reflected continued strong card acquisitions as well as continued favorable average customer retention levels. In 2007, 8.4 million cards were added in the U.S. and non-U.S. businesses combined. During 2006, discount revenue rose $1.5 billion or 13 percent to $13.0 billion compared to 2005 as a result of a 16 percent increase in worldwide billed business, partially offset by a lower average discount rate, relatively faster growth in billed business related to GNS, and higher cash-back rewards costs. The 16 percent increase in worldwide billed business in 2006 reflected increases in average spending per proprietary basic card, growth in cards-in-force, and a 48 percent increase in billed business related to GNS from 2005.
     Travel commissions and fees increased $148 million or 8 percent to $1.9 billion in 2007 reflecting a 13 percent increase in worldwide travel sales primarily driven by higher airline ticket prices. Travel commissions and fees in 2006 of $1.8 billion were unchanged from 2005 as a 6 percent increase in travel sales was offset by a moderately reduced level of transactions and lower average revenue per transaction, due in part to increased online bookings.
     Other commissions and fees increased $184 million or 8 percent to $2.4 billion in 2007 and $127 million or 6 percent in 2006 to $2.2 billion due to higher assessments, increases in foreign exchange conversion fees, and other service fees.
     Net card fees increased $56 million or 3 percent to $2.1 billion in 2007 due to card growth partially offset by the reclassification of certain card acquisition-related costs beginning July 1, 2006, from operating expenses to a reduction in net card fees. In 2006, net card fees decreased $39 million or 2 percent to $2.0 billion as the benefit of card growth was offset by the reclassification of certain card acquisition-related costs as mentioned above.
     Securitization income, net increased $18 million or 1 percent to $1.5 billion in 2007 due to a larger average balance of securitized loans, higher net gains from securitization, the $80 million impact of the initial adoption of SFAS No. 155 previously discussed, and a reduction in revenue a year ago from higher than anticipated cardmember completion of consumer debt repayment programs and certain associated payment waivers. These favorable impacts were partially offset by an increase in write-offs, a $54 million reduction in the fair market value of the Company’s retained subordinated interests in securitized cardmember loans, and greater interest expense due to a higher coupon rate paid to certificate holders. Securitization income, net increased $229 million or 18 percent to $1.5 billion in 2006 as a higher trust portfolio yield and a decrease in trust portfolio write-offs were partially offset by

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AMERICAN EXPRESS COMPANY

greater interest expense due to a higher coupon rate paid to certificate holders, a lower average securitization balance, and the impact of higher than anticipated cardmember completion of consumer debt repayment programs and certain associated payment waivers. 
     Other revenues in 2007 decreased $44 million or 3 percent to $1.6 billion as higher network, merchant, publishing, and insurance-related revenues were more than offset by the $105 million of charges recorded in the third and fourth quarters of 2007, related to the reclassification of AEIDC’s investment portfolio as previously mentioned and a positive impact in 2006 related to the rebalancing of the Company’s Travelers Cheque and Gift Card investment portfolio. Other revenues increased $372 million or 28 percent to $1.7 billion in 2006 primarily due to $68 million of gains related to the rebalancing of the Company’s Travelers Cheque and Gift Card investment portfolio as discussed previously, fees associated with transition services agreements with Ameriprise as well as higher network partner-related fees.
     Interest income rose $1.7 billion or 29 percent to $7.4 billion in 2007 primarily reflecting an increase in cardmember lending finance revenue, which grew $1.6 billion or 34 percent due to a 29 percent increase in average worldwide cardmember lending balances primarily reflecting spending growth on lending products and new cardmembers acquired, as well as a higher portfolio yield. During 2006, interest income increased $1.3 billion or 30 percent to $5.7 billion, reflecting an increase in cardmember lending finance revenue due to growth in average worldwide lending balances and a higher portfolio yield.
     Interest expense increased $1.1 billion or 40 percent to $3.8 billion in 2007, reflecting a $544 million or 35 percent increase in charge card and other interest expense and a $542 million or 45 percent increase in cardmember lending interest expense due to increased debt funding levels in support of growth in receivable and loan balances, respectively, and a higher effective cost of funds. Interest expense of $2.7 billion in 2006 was $761 million or 38 percent higher than 2005 reflecting a higher effective cost of funds and increased debt funding levels in support of growth in loans and receivable balances.

Expenses
Consolidated expenses for 2007 were $17.8 billion, up $835 million or 5 percent from $17.0 billion in 2006. The increase in 2007 was primarily driven by increased marketing, promotion, rewards and cardmember services expenses and higher human resources expenses, partially offset by lower other, net expenses. Consolidated expenses for 2006 were $17.0 billion, up $1.4 billion or 9 percent from $15.6 billion in 2005. The increase in 2006 was driven primarily by higher marketing, promotion, rewards and cardmember services expenses, increased human resources expenses, and greater professional services expenses. Consolidated expenses in 2007, 2006, and 2005 also included $66 million, $152 million and $273 million, respectively, of reengineering costs primarily within the Company’s business travel, prepaid services, international consumer and small business services, and technology areas in 2007 and within the business travel, operations, finance, and technology areas in 2006 and 2005.
     Marketing, promotion, rewards and cardmember services expenses increased $1.3 billion or 20 percent to $7.8 billion in 2007, reflecting a $685 million charge related to the Membership Rewards liability due to enhancements to the method of liability estimation as discussed above, a higher redemption rate, higher volume-related rewards costs, and incremental marketing and promotion and business-building costs, partially offset by the impact of charges in 2006 associated with adjustments made to the Membership Rewards reserve models.
     Marketing, promotion, rewards and cardmember services expenses increased $681 million or 12 percent to $6.5 billion in 2006 reflecting greater rewards costs and higher marketing and promotion expenses. The higher rewards costs continued to reflect volume growth, a higher redemption rate, and strong cardmember loyalty program participation. Rewards costs in 2006 included $174 million of charges related to certain adjustments made to the Membership Rewards reserve model in the United States and outside the United States. Marketing expenses reflected relatively high levels of spending related to various business-building initiatives, but lower costs versus 2005 related to the Company’s ongoing global “MyLife, MyCard(SM)” advertising campaign, which was in a more active phase during 2005.
     Human resources expenses increased $398 million or 8 percent to $5.4 billion in 2007 due to a higher level of employees and merit increases, partially offset by the $63 million pension-related gain previously discussed and lower severance-related costs compared to 2006. The increased level of employees primarily reflected employee additions related to customer service volumes and initiatives and the acquisition of Harbor Payments, Inc. on December 31, 2006, and the acquisition of a travel services business in 2007. Human resources expenses in 2006 increased $295 million or 6 percent to $5.0 billion compared to 2005 due to merit increases and larger benefit-related costs, partially offset by a relatively flat level of employees and lower severance-related costs compared to 2005. Reengineering costs in 2007, 2006, and 2005, included $49 million, $111 million, and $195 million, respectively, of severance, of which $34 million, $89 million, and $159 million was restructuring-related and is included within human resources expenses. 
     Professional services expenses remained flat in 2007 compared to 2006 and increased $283 million or 14 percent in 2006 due to higher technology service fees, greater business and service-related volumes and increased credit and collection costs.

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     Other, net expenses in 2007 decreased $969 million or 71 percent to $389 million compared to 2006 driven by a gain of $1.13 billion related to the settlement of litigation with Visa, and the reclassification of certain card-acquisition costs to card fee revenue beginning July 1, 2006, partially offset by the $177 million gain related to the sale of the Company’s card and merchant-related activities in Brazil, Malaysia, and Indonesia in 2006, litigation expenses of $74 million related to settlement with Visa, and a $50 million contribution to the American Express Charitable Fund. Other, net expenses in 2006 increased $55 million or 4 percent to $1.4 billion compared to 2005 due to the September 11, 2001-related insurance settlement in 2005 and higher volume and technology-related costs in 2006 offset by the reclassification of certain card-acquisition costs to card fee revenue beginning July 1, 2006, and the 2006 gains on the sales of the Company’s card and merchant-related activities in Brazil, Malaysia, and Indonesia.

Provisions for Losses and Benefits
Consolidated provisions for losses and benefits in 2007 increased $1.3 billion or 43 percent over last year to $4.3 billion reflecting a $1.1 billion or 70 percent increase in the cardmember lending provision and a $205 million or 22 percent increase in the charge card provision. The increase in cardmember lending provision for losses was due to higher write-off and delinquency rates, increased loan volumes, and the charge for credit-related trends previously discussed. The increase in charge card provision was due to the additional charge for credit-related trends previously discussed and higher business volumes.
     Consolidated provisions for losses and benefits in 2006 increased $268 million or 10 percent over 2005 to $3.0 billion as the cardmember lending and other (including investment certificates) provisions growth of $274 million or 20 percent and $97 million or 26 percent, respectively, was partially offset by a $103 million or 10 percent decline in the charge card provision. The increase in the lending provision was driven by increased loan volumes globally and higher loss rates outside the United States, primarily in Taiwan, partially offset by the favorable impact of lower bankruptcy-related charge-offs and strong credit quality in the United States, and lower than expected costs related to Hurricane Katrina losses that were provided for in 2005. The other provision (including investment certificates) rose due to higher interest rates on larger investment certificate balances and increased merchant-related reserves. Compared to 2005, the charge provision reflected the lower loss rate, lower than expected costs for Hurricane Katrina losses that were provided for in 2005, and improved results from collection activities.

Income Taxes
The effective tax rate was 27 percent in 2007 compared to 30 percent in 2006 and 24 percent in 2005. The effective tax rate in 2007 as compared to 2006 included tax benefits of $140 million from Internal Revenue Service (IRS) settlements and resolution of prior years’ tax items and lower tax rates applied to the earnings of the Company’s non-U.S. subsidiaries, partially offset by an increase in state and local income tax. The effective tax rate in 2006 as compared to 2005 reflected higher state and local income taxes in 2006, and 2005 included the benefit related to the resolution of IRS audits of previous years’ tax returns.

Discontinued Operations
(Loss) Income from discontinued operations, net of tax, was ($36) million, $96 million and $672 million in 2007, 2006, and 2005, respectively. Loss from discontinued operations, net of tax, during 2007, primarily related to AEB’s results from operations, which included $71 million ($45 million after-tax) compliance-related remediation costs and $60 million pretax and after-tax of regulatory and legal expense, as well as businesses disposed of in previous years. Income from discontinued operations, net of tax, during 2006, reflected AEB results from operations, including an $88 million ($40 million after-tax) gain from the sale of its investment in Egyptian American Bank and a $48 million ($22 million after-tax) loss related to the sale of its international banking activities in Brazil, as well as a tax benefit related to Ameriprise upon finalization of the Company’s 2005 U.S. federal tax return and costs related to businesses disposed of in previous years. 2005 results from discontinued operations included the results of Ameriprise and certain other dispositions (primarily TBS) through September 30, 2005.

Impact of Credit and Capital Market Environment
Overview
In December, the Company began to feel the effects of the weakening U.S. economy as cardmember spending slowed and past-due and write-off rates in U.S. Card Services increased. In the latter part of 2007, there was also significant volatility in the capital markets, particularly for the valuations of mortgage-backed and other asset-backed structured products as well as in the issuance cost and availability of short-term, asset-backed debt for certain issuers.

U.S. Card Services cardmember lending and receivables
While overall cardmember spending for U.S. Card Services continued to be relatively strong and the Company benefited from a focus on the affluent sector of the market, the Company saw negative credit trends among U.S. consumers in the latter part of 2007, particularly in certain parts of California, Florida and other regions of the country most affected by the

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housing downturn as well as with U.S. small businesses. As a result, the Company recorded a $438 million credit-related charge in the fourth quarter. The credit-related charge was comprised of additional provision for losses for U.S. Card Service’s cardmember lending and cardmember receivables of $288 million and $96 million, respectively, and a $54 million charge relating to a reduction in the fair market value of the Company’s retained subordinated interest in securitized cardmember loans. 
     In managing risk, the Company’s objective is to protect its profitability, but also protect, to the extent it can, the Company’s ongoing relationship with the cardmember and their experience. With this in mind, the following actions have been taken by the Company across the U.S. Card Services portfolios:

  • The Company has implemented a reduction of cardmember lines of credit for specific segments of the cardmember portfolio representing the greatest risk. These segments include cardmembers holding sub-prime mortgages and small businesses, in particular those operating in specific industries, such as mortgage companies, home builders and construction related businesses.

  • The Company has adjusted its risk management models to reflect the higher probability of default that exists during a weaker economy, and in geographies that have been most impacted by home price declines.

  • To improve recoveries, the Company has increased its staffing levels in credit and collection.

Investment Portfolios
The Company’s investment portfolios support specific businesses such as the AEIDC certificate business within international banking services, Travelers Cheques business, and the contingent liquidity investment portfolio (as discussed below). The Company’s objective is to manage the type and mix of assets as well as their maturity profile to ensure that the cash and liquidity needs of the respective business or portfolio can be met without relying on the sale of investments prior to maturity. As a result, the Company generally holds its investments until their maturity. However, management may sell securities prior to maturity due to changes in Company-specific business goals, liquidity needs, and the credit and capital market environment.
     The Company reviews and evaluates its investments at least quarterly and more often as market conditions may require, to identify investments that have indications of other-than-temporary impairments. The determination of other-than-temporary impairments is a subjective process, requiring the use of assumptions and application of judgment. In addition to its impairment evaluation, the Company corroborates the prices provided by its pricing vendors to test the accuracy of the fair values.
     The Company did not experience any defaults or event of defaults, or determine it would not receive timely contractual payments of interest and repayment of principal, on any of its holdings in its investment portfolios in 2007.
     At December 31, 2007, the Company owned approximately $2.5 billion of asset-backed securities, including mortgage-backed securities. 99 percent of these asset-backed securities were rated AAA at December 31, 2007. $1.6 billion of these asset-backed securities are classified as Trading securities and support the AEIDC certificate business. Unrealized holding gains and losses on Trading securities are recorded in earnings. The remaining asset-backed securities are classified as Available-for-Sale. Unrealized holding gains and losses on Available-for-Sale securities are included in accumulated other comprehensive (loss) income until disposition of the investments. $838 million of the asset-backed securities owned by the Company that are classified as Available-for-Sale are included in Assets of Discontinued Operations on the Company’s balance sheet. Total gross unrealized losses remaining in accumulated other comprehensive (loss) income at December 31, 2007, related to the asset-backed securities classified as Available-for-Sale amounted to $11 million ($10 million related to discontinued operations). 
     The Company owns state and municipal securities that primarily support the Travelers Cheques business and are classified as Available-for-Sale. Approximately 73 percent of state and municipal investments owned by the Company are insured by financial guarantors that guarantee timely payment of interest and ultimate payment of principal on insured obligations. Certain financial guarantors have recently experienced credit downgrades and difficulty obtaining cost effective capital due to the insurers’ exposure to mortgage-related securities guarantees. As of December 31, 2007, approximately 98 percent of the Company’s state and municipal investments insured by financial guarantors were rated AAA, the remaining were rated AA. The ratings of these securities will depend in part on the ratings of the financial guarantors as well as in part on the underlying issuers’ ratings without respect to the guaranty, among other factors. The Company has not, to date, incurred any significant losses in the value of its holdings as a result of the financial guarantors’ credit problems. Continued deterioration in the ratings and investor confidence in the claims-paying abilities of the financial guarantors, or their inability to pay guaranty claims, could result in declines in the values of these securities. During 2007, the Company sold certain investments insured by financial guarantors that it considered to be most at risk to lose their investment grade credit rating.
     The current credit market environment had a small positive impact on the values of U.S. Treasury and government sponsored entities (Fannie Mae and Freddie Mac) securities included in the Company’s contingent liquidity portfolio (as discussed below).

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     Valuations of securities held within the Company’s investment portfolio will continue to be subject to changes in external market factors including default rates, rating agency actions, and the prices at which observable market transactions occur. The Company’s future results may be impacted by the valuation adjustments applied to these holdings.

Other Assets
As discussed in Note 6 of the Consolidated Financial Statements, other assets include an interest only-strip, which represents a retained interest in securitized cardmember loans. The Company records any change in the fair value of the interest-only strip in securitization income, net. As previously discussed in the Critical Accounting Policies section, the value of the interest-only strip may be impacted by changes in certain key assumptions including expected credit losses and the discount rate.

Liquidity
As discussed in more detail below, the Company’s reliance on diverse sources of funding, with wide ranges of maturities, and its contingent liquidity strategy allow for the continued funding of business operations through difficult economic, financial market and business conditions when access to regular funding sources could become diminished or interrupted. 
     While the credit market environment that began to emerge in the second half of 2007 included disruptions in the capital markets, the Company had access to sufficient financing through its existing funding sources to meet its business needs in 2007. Disruptions in the financial markets, however, resulted in a change of the Company’s debt funding mix in the second half of 2007, particularly considering maturity and floating rate versus fixed rate profiles. (See the Market Risk Management section for further discussion regarding the mix of floating and fixed rate funding.)
     Continued disruptions in 2008 in the financial markets could result in further changes in the funding mix. Specifically, a lack of investor demand in sectors of the debt capital market, such as for 1-to-5 year unsecured floating rate debt or the A-rated and BBB-rated tranches of the card securitization market, could alter the Company’s funding mix. In such cases, the Company
would increase its issuance of longer-term unsecured debt or issue the AAA-rated tranches of its securitizations, where investor demand has been stronger. Through February in 2008, the Company issued approximately $3.7 billion of AAA-rated securitization certificates. It retained approximately $235 million of related A-rated securities and approximately $275 million of BBB-rated securities, as the Company had more cost-effective alternative sources of financing for these amounts. The Company will continue to evaluate its alternative sources of funding and seek the mix that achieves cost-efficiency consistent with its funding and liquidity strategies. 
     Credit ratings have a significant impact on the borrowing costs of the Company. There have been no changes in the Company’s credit ratings during 2007.

Outlook
In early January 2008, as the Company saw clear signs that the U.S. economy was weakening, the Company announced its expectations for slower growth in cardmember spending and weaker credit trends in the year ahead, and that these factors would lead to slower growth in earnings per share in 2008 than the Company has generated in recent years. The Company’s planning assumptions were based on a moderate downturn in the U.S. economy and a more cautious view of the business environment in the coming year. However, the situation is fluid and any significant change in the economic and credit environment could alter the Company’s 2008 outlook.

CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY

CAPITAL STRATEGY
The Company generates equity capital primarily through net income to fund current needs and future business growth and to maintain a targeted debt rating. The maintenance of a solid equity capital base provides the Company with a strong and stable debt rating, which facilitates uninterrupted access to diversified sources of financing to fund asset growth. The Company also has a contingency funding plan to help ensure adequate sources of financing in difficult economic or market environments and, in certain circumstances, adverse events affecting the Company.
     The Company believes allocating capital to growing businesses with a return on risk-adjusted equity in excess of its cost of capital will generate shareholder value. The Company retains sufficient earnings and other capital generated to satisfy growth objectives and maintain a solid equity capital base. To the extent capital exceeds business, regulatory, and rating agency requirements, the Company returns excess capital to shareholders through dividends and the share repurchase programs. 
     Assuming the Company achieves its financial objectives of 12 to 15 percent EPS growth, 33 to 36 percent ROE and at least 8 percent revenue growth, on average and over time, it will seek to return to shareholders an average of 65 percent of capital generated, subject to business mix, acquisitions and rating agency requirements.
     Important factors relating to ROE include the Company’s margins, the amount and type of receivables and other assets needed to generate revenue, the level of capital required to support its assets, and the mix between shareholders’ equity and other forms of financial capital that it holds as a result of its financing activities.

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     During 2007, the Company met its ROE target. In keeping with the Company’s objectives, regarding the return of excess capital to shareholders, the Board of Directors of the Company approved a 20 percent increase in the quarterly dividend on the Company’s common stock from $0.15 to $0.18 per share, paid February 8, 2008, to shareholders of record on January 4, 2008. During 2007, through dividends and share repurchases, the Company returned approximately 88 percent of total capital generated to shareholders in the form of $740 million in dividends and $3.6 billion of share repurchases. The Company was able to return a high percentage of its earnings and capital generated to shareholders during 2007 due in part to its balance sheet management activities that seek to optimize the level of shareholders’ equity required to support its growth.
     The Company maintains flexibility to shift capital across its businesses as appropriate. For example, the Company may infuse additional capital into subsidiaries to maintain capital at targeted levels, considering debt ratings and regulatory requirements. These infused amounts can affect both the capital and liquidity levels for American Express’ parent company (Parent Company). The Company maintains discretion to manage these effects, by issuing debt and reducing projected common share buybacks. Additionally, the Company may transfer short-term funds within the Company to meet liquidity needs, subject to and in compliance with various contractual and regulatory constraints.

SHARE REPURCHASES
The Company has a share repurchase program to return equity capital in excess of business needs to shareholders. These share repurchases both offset the issuance of new shares as part of employee compensation plans and reduce shares outstanding. The Company repurchases its common shares primarily by open market purchases. 
     Approximately 71 percent of capital generated has been returned to shareholders since inception of the share repurchase program in 1994. During 2007, the Company purchased 60 million common shares at an average price of $59.42. At December 31, 2007, there were approximately 105 million shares remaining under authorizations to repurchase shares approved by the Company’s Board of Directors.

CASH FLOWS

Cash Flows from Operating Activities
In 2007 and 2006, net cash provided by operating activities exceeded net income, primarily due to provisions for losses and benefits, which do not require cash at the time of provision. Similarly, depreciation and amortization represent non-cash expenses. In addition, net cash was provided by fluctuations in other operating assets and liabilities (including the Membership Rewards liability). These accounts vary significantly in the normal course of business due to the amount and timing of various payments. 
     For the year ended December 31, 2007, net cash provided by operating activities of $8.5 billion decreased compared to 2006. The decrease was primarily due to an outflow of cash resulting from fluctuations in the Company’s operating assets and liabilities offset by higher net income.
     Net cash provided by operating activities was higher in 2006 than 2005 due to fluctuations in other operating assets and liabilities. 
     Management believes cash flows from operations, available cash balances and short-term borrowings will be sufficient to fund the Company’s operating liquidity needs.

Cash Flows from Investing Activities
The Company’s investing activities primarily include funding cardmember loans and receivables, securitizations of cardmember loans and receivables, and the Company’s Available-for-Sale investment portfolio. 
     For the year ended December 31, 2007, net cash used in investing activities of $17.1 billion increased compared to 2006, primarily due to net increases in cardmember receivables and loans and cash used in investing activities attributable to discontinued operations offset by an increase in proceeds from loan and receivable securitizations.
     In 2006, net cash used in investing activities decreased from 2005 primarily as a result of cash retained by Ameriprise after the spin-off.

Cash Flows from Financing Activities
The Company’s financing activities primarily include issuing debt and taking customer deposits in addition to the sale and redemption of investment certificates. The Company also regularly repurchases its common shares. 
     In 2007, net cash provided by financing activities of $15.5 billion increased compared to 2006, primarily due to a net increase in debt and the net change in customers’ deposits, partially offset by a decrease in the issuance of shares and an increase in dividends paid.
     In 2006, financing activities provided net cash greater than in 2005 primarily due to a net increase in debt partially offset by an increase in share repurchases.

FINANCING ACTIVITIES
The Company is committed to maintaining cost-effective, well-diversified funding programs to support current and future asset growth in its global businesses. The Company’s funding plan is structured to meet expected and changing business needs to fund asset balances efficiently and cost-effectively. The Company relies on diverse funding sources, to help

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ensure the availability of financing in unexpected periods of stress and to manage interest rate exposures. In addition to the funding plan described below, the Company has a contingent funding strategy to allow for the continued funding of business operations through difficult economic, financial market and business conditions when access to regular funding sources could become diminished or interrupted. In 2007 and 2006, the Company had uninterrupted access to the money and capital markets.
     The Company’s proprietary card businesses are the primary asset-generating businesses, with significant assets in both domestic and international cardmember receivable and lending activities. Accordingly, the Company’s most significant borrowing and liquidity needs are associated with its proprietary card businesses. The Company generally pays merchants for card transactions prior to reimbursement by cardmembers. The Company funds merchant payments during the period cardmember loans and receivables are outstanding. The Company also has additional borrowing needs associated with general corporate purposes.
     The following discussion includes information on both a GAAP and managed basis. The managed basis presentation includes debt issued in connection with the Company’s lending securitization activities, which are off-balance sheet. For a discussion of managed basis and management’s rationale for such presentation, refer to the U.S. Card Services discussion below.

FUNDING PROGRAMS
The Company’s funding activities and liquidity planning are integrated into its asset-liability management activities. The Company’s assets and growth have been financed principally through the following sources: Long-term sources:

  • Senior unsecured debentures,
     
  • Asset securitizations,
     
  • Long-term committed bank borrowing facilities in selected non-U.S. markets, and

Short-term sources:

  • Commercial paper, and
     
  • Bank notes, customers’ deposits, institutional certificates of deposit, and Fed Funds.

The Company’s current funding strategy is to maintain short-term debt outstanding to meet seasonal and other working capital needs, as well as to replace maturing long-term debt and finance business growth primarily through long-term unsecured debt and asset securitization issuances. During 2008, the Company has $11.8 billion of unsecured long-term debt and $4.7 billion of asset securitizations that will mature. The Company has, to date and over time, financed approximately one-third of its U.S. consumer and small business lending receivables through asset securitizations and a smaller proportion of its U.S. consumer, small business, and corporate charge card receivables through asset securitizations. The Company’s 2008 long-term issuance plan provides for the refinancing of maturities and funding business growth through a broad and globally diversified mix of maturities, markets, securities, and currencies, including issuance from both lending and charge receivables trusts. (Refer to the discussion above for a discussion of how the credit market environment could affect the mix of debt issuances.) 
     The Company’s short-term funding programs are used primarily to meet working capital needs, such as managing seasonal variations in receivables balances, and have not, on average, grown in size with its business growth. The ultimate amount and mix issued will depend on the Company’s needs and market conditions.
     General corporate purpose funding is primarily through the Parent Company and American Express Travel Related Services Company, Inc. (TRS). The Company funds its cardmember receivables and loans primarily through five entities. American Express Credit Corporation (Credco) finances the vast majority of worldwide cardmember receivables, while American Express Centurion Bank (Centurion Bank) and American Express Bank, FSB (FSB) principally fund cardmember loans originated from the Company’s U.S. lending activities. Two trusts are used by the Company in connection with the securitization and sale of U.S. receivables and loans generated in the ordinary course of the Company’s proprietary card businesses.
     The Asset/Liability Committees of Centurion Bank and FSB provide management oversight with respect to formulating and ratifying funding strategy and to ensure that all funding policies and requirements of the two banks are met.
     The Company’s debt offerings are placed either directly to investors, as in the case of its commercial paper program through Credco, or through securities brokers or underwriters. In certain international markets, bank borrowings are used to partially fund cardmember receivables and loans.

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     Diversity of funding sources by type of debt instrument, by maturity and by investor base provides additional insulation from unforeseen events in the debt market. The Company had the following consolidated debt, on both a GAAP and managed basis, and customer deposits outstanding at December 31:

(Billions)         2007       2006
Short-term debt  $ 17.8  $ 15.2
Long-term debt   55.3   42.7
Total debt (GAAP basis)   73.1 57.9
Off-balance sheet securitizations   22.7   20.2
Total debt (managed basis)   95.8 78.1
Customers’ deposits   15.4   12.0
Total debt (managed) and customers’ deposits    $ 111.2    $ 90.1

Short-term debt is defined as any debt with an original maturity of 12 months or less. Credco’s commercial paper is a widely recognized name among short-term investors and is a principal source of short-term debt for the Company. Centurion Bank and FSB raise short-term debt through various instruments. The Company had the following short-term debt outstanding at December 31:

(Billions)             2007       2006
Credco:         
     Commercial Paper  $ 10.5  $ 5.8
     Other 0.6 0.1
Centurion Bank and FSB:         
     Bank Notes   2.9 6.0
     Fed Funds 2.4 1.8
Other          1.4    1.5
     Total     $ 17.8     $ 15.2

Average commercial paper outstanding was $7.8 billion in 2007 and 2006. Credco currently manages the level of short-term debt outstanding such that its back-up liquidity, including available bank credit facilities and term liquidity portfolio investment securities, is not less than 100 percent of net short-term debt. Net short-term debt, which consists of commercial paper and certain other short-term borrowings less cash and cash equivalents, was $7.9 billion at December 31, 2007. Based on the maximum available borrowings under bank credit facilities and term liquidity portfolio investment securities, Credco’s total back-up liquidity coverage of net short-term debt was 140 percent and 212 percent at December 31, 2007 and 2006, respectively. 
     The Company had short-term debt as a percentage of total debt at December 31 as follows:

        2007         2006  
Short-term debt percentage of total debt (GAAP basis)    24.3 %    26.3 %

Centurion Bank and FSB also raise customer deposits through the issuance of certificates of deposit to retail and institutional customers. As of December 31, 2007, Centurion Bank and FSB held $14.7 billion in customer deposits. 
     
In 2007, debt with maturities primarily ranging from 2 to 10 years was issued in the U.S. and international markets. The Company’s 2007 offerings, which include those made by the Parent Company, Credco, Centurion Bank, FSB, American Express Receivables Financing Corporation LLC V (the Charge Trust) and the American Express Credit Account Master Trust (the Lending Trust) are presented in the following table on both a GAAP and managed basis:

(Billions)     Amount
American Express Company  
     (Parent Company only)(a):  
          Fixed Rate Senior Notes  $  1.5
American Express Credit Corporation:  
          Fixed and Floating Rate Senior Notes 3.1
          Borrowings under Bank Credit Facilities 0.4
American Express Centurion Bank:  
          Fixed and Floating Rate Senior Notes 7.2
American Express Bank, FSB:  
          Fixed and Floating Rate Senior Notes 6.7
American Express Receivables Financing Corporation LLC V:  
          Floating Rate Senior Notes and  
               Subordinated Notes   2.0
GAAP Basis 20.9
American Express Credit Account Master Trust:  
          Trust Investor Certificates (off-balance sheet)        6.0
Managed Basis    $  26.9

(a)    The table above excludes the remarketing of the Convertible Senior Debentures as Senior Notes described below.

The Company continues to issue debt with a wide range of maturities to reduce and spread out the refinancing requirement in future periods. The Company expects that its planned funding during 2008 will be met through a combination of similar sources to those on which it currently relies. However, the Company continues to assess its needs and investor demand and may change the mix of its existing sources as well as seek to add new sources to its funding mix. The Company’s funding plan is subject to various risks and uncertainties, such as disruption of financial markets, market capacity and demand for securities offered by the Company, regulatory changes, ability to sell receivables and the performance of receivables previously sold in securitization transactions. Many of these risks and uncertainties are beyond the Company’s control.
     At December 31, 2007, the Parent Company had an unspecified amount of debt or equity securities and Credco had

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an unspecified amount of debt available for issuance under shelf registrations filed with the SEC. In addition, TRS, Centurion Bank, FSB, Credco, and American Express Overseas Credit Corporation Limited, a wholly-owned subsidiary of Credco, 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 cannot exceed $10 billion.
     The Company’s equity capital and funding strategies are designed to maintain high and stable debt ratings from the major credit rating agencies, Moody’s, Standard & Poor’s and Fitch Ratings. Maintenance of high and stable debt ratings is critical to ensuring the Company has continuous access to the capital and credit markets. It also enables the Company to reduce its overall borrowing costs. At December 31, 2007, the Parent Company debt ratings were as follows:

             Standard        Fitch
             Moody’s            & Poor’s            Ratings
Short-term   P-1      A-1        F1
Senior unsecured   A1   A+   A+

The Company actively manages the risk of liquidity and cost of funds resulting from the Company’s financing activities. A downgrade of the Company’s debt ratings would increase its borrowing costs. Management believes a decline in the Company’s long-term credit rating by two levels would result in the Company having to significantly reduce its commercial paper and other short-term borrowings. Remaining borrowing requirements would be addressed through other means such as the issuance of long-term debt, additional securitizations, increased deposit taking, and the sale of investment securities or drawing on existing credit lines. This would result also in higher interest expense on the Company’s commercial paper and other debt, as well as higher fees related to unused lines of credit. The Company believes a two-level downgrade is highly unlikely due to its capital position and the strength of its franchise.

Asset Securitizations
The Company periodically securitizes cardmember receivables and loans arising from its card business. The securitization market provides the Company with cost-effective funding. Securitization of cardmember receivables and loans is accomplished through the transfer of those assets to a trust, which in turn issues certificates or notes (securities) to third-party investors collateralized by the transferred assets. The proceeds from issuance are distributed to the Company, through its wholly-owned subsidiaries, as consideration for the transferred assets. Securitization transactions are accounted for as either a sale or secured borrowing, based upon the structure of the transaction. 
     Securitization of cardmember receivables generated under designated consumer charge card and small business charge card accounts is accomplished through the transfer of cardmember receivables to the American Express Issuance Trust (Charge Trust). Securitizations of these receivables are accounted for as secured borrowings because the Charge Trust is not a qualifying special purpose entity (QSPE). Accordingly, the related assets being securitized are not accounted for as sold and continue to be reported as owned assets on the Company’s Consolidated Balance Sheets. The related securities issued to third-party investors are reported as long-term debt on the Company’s Consolidated Balance Sheets. At December 31, the Charge Trust held total assets of:

(Billions)              2007        2006
Total assets   $ 9.0     $ 9.6
Long-term debt     $ 3.1     $ 1.2

Securitization of the Company’s cardmember loans generated under designated consumer lending accounts is accomplished through the transfer of cardmember loans to a QSPE, the Lending Trust. In a securitization structure like the Lending Trust (a revolving master trust), credit card accounts are selected and the rights to the current cardmember loans, as well as future cash flows related to the corresponding accounts, are transferred to the trust for the life of the accounts. In consideration for the transfer of these rights, the Company, through its wholly-owned subsidiaries, receives an undivided, pro rata interest in the trust referred to as the “seller’s interest,” which is reflected on balance sheet as a component of cardmember loans. The seller’s interest is required to be maintained at a minimum level of 7 percent of the outstanding securities in the Lending Trust. As of December 31, 2007, the amount of seller’s interest was approximately 56 percent of outstanding securities, above the minimum requirement. When the Lending Trust issues a security to a third party, a new investor interest is created. The Company removes the corresponding cardmember loans from its Consolidated Balance Sheets, recognizes a gain on sale and release of credit reserves, and records an interest-only strip. From time to time, the Company may record other retained interests as well. The total investors’ interest outstanding will change through new issuances or maturities. The seller’s interest will change as a result of new trust issuances or maturities as well as new account additions, new charges on securitized accounts, and collections. As seller’s interest changes each period, the related allowance for loss will change as well. When a security matures, the trust uses a portion of the collections to repay the security, and as a result the investors’ interest decreases. In the monthly period that contains a maturity, new charges on securitized accounts have historically been greater than the portion of the collections required to repay the maturing security, and therefore, seller’s interest has increased in an amount greater than or equal to the decrease in investors’ interest.

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     The Company’s continued involvement with the securitized cardmember loans includes the process of managing and servicing the securitized loans through its subsidiary, TRS, for which it earns a fee. Any billed finance charges related to the transferred cardmember loans are reported as other receivables on the Company’s Consolidated Balance Sheets. At December 31, the Lending Trust held total assets of:

(Billions)         2007        2006
Investors’ interest   $ 22.7     $ 20.2
Seller’s interest     13.5 14.4
Lending Trust total assets     $ 36.2     $ 34.6

At December 31, the fair value of the interest-only strip and other retained interests were as follows:

(Millions)          2007        2006
Interest-only strip   $ 223     $ 266
Subordinated securities      78  
Total     $ 301     $ 266

See the Consolidated Liquidity and Capital Resources section and Note 6 to the Consolidated Financial Statements for details regarding the Company’s securitization trusts.
     Under the respective terms of the Lending Trust and the Charge Trust agreements, the occurrence of certain events could  result in either trust being required to pay down the investor certificates and notes before their expected payment dates over an early amortization period. An example of such an event is, for either trust, the failure of the securitized assets to generate specified yields over a defined period of time. 
     No such events have occurred during 2007 and 2006, and the Company does not expect an early amortization trigger event to occur prospectively. In the event of a paydown of the Lending Trust, $22.7 billion of assets would revert to the balance sheet and an alternate source of funding of a commensurate amount would have to be obtained. Had a total paydown of the Lending Trust hypothetically occurred at a single point in time at December 31, 2007, the cumulative negative effect on results of operations would have been approximately $973 million pretax to re-establish reserves and to derecognize the retained interests related to these securitizations that would have resulted when the securitized loans reverted back onto the balance sheet. 
     Virtually no financial statement impact would occur from a paydown of the Charge Trust, but an alternate source of funding for the $3.1 billion of securities outstanding at December 31, 2007 would have to be obtained. 
     With respect to both the Lending Trust and the Charge Trust, a decline in the actual or implied short-term credit rating of TRS below A-1/P-1 will trigger a requirement that TRS, as servicer, transfer collections on the securitized assets to investors on a daily, rather than a monthly, basis or make alternative arrangements with the rating agencies to allow TRS to continue to transfer collections on a monthly basis. Such alternative arrangements include obtaining appropriate guarantees for the performance of the payment and deposit obligations of TRS, as servicer. No such events have occurred during 2007 and 2006. 
     No officer, director, or employee holds any equity interest in the trusts or receives any direct or indirect compensation from the trusts. The trusts in the Company’s securitization programs do not own stock of the Company or the stock of any affiliate. Investors in the securities issued by the trusts have no recourse against the Company if cash flows generated from the securitized assets are inadequate to service the obligations of the trusts.

Parent Company Funding
Parent Company long-term debt outstanding was $6.7 billion and $6.0 billion at December 31, 2007 and 2006, respectively. During 2007, the Parent Company issued $1.5 billion of 6.15 percent fixed-rate Senior Notes due 2017.
     The Parent Company is authorized to issue commercial paper. This program is supported by a $1.2 billion multi-purpose committed bank credit facility. The credit facility will expire in 2010 and 2012 in the amounts of $500 million and $750 million, respectively. There was no Parent Company commercial paper outstanding during 2007 and 2006, and no borrowings have been made under its bank credit facility.

CONTINGENT LIQUIDITY STRATEGY
The Company seeks to ensure that it has adequate liquidity, that is cash and equivalents on hand, as well as access to cash and equivalents to continuously meet its business needs and satisfy its obligations. Liquidity is managed through the breadth of sources of its funding programs, as well as through the quality and liquidity of its funded assets.
     The Company 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 event. The Company considers various factors in determining the amount of liquidity it holds, such as economic and financial market conditions, seasonality in business operations, growth in its businesses, cost and availability of alternative liquidity sources, and regulatory and credit rating agency considerations. 
     The Company has developed a contingent liquidity plan that enables it to continuously meet its daily obligations when access to unsecured funds in the debt capital markets becomes impaired or they become inaccessible. This plan is designed to ensure that the Company and all of its main operating entities could continuously maintain normal business operations for a 12-month period in which its access to unsecured debt financing is interrupted. The hypothetical 12-month liquidity

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crisis is assumed to occur as a sudden and unexpected event that temporarily impairs access to or makes unavailable financing in the unsecured debt markets. In addition, the Company maintains substantial flexibility to reduce its operating cash uses, such as through its share repurchase program, and the delay or deferral of certain operating expenses.
     The contingent liquidity plan includes access to diverse sources of alternative funding. Such sources include, but are not limited to, the Company’s liquidity investment portfolio, sale of consumer, commercial card, and small business loans and cardmember receivables through its existing securitization programs, committed bank credit facilities, intercompany borrowings, and sale of other eligible receivables. The Company estimates that, under a worst case liquidity crisis scenario, it has identified over $40 billion in alternate funding sources in a liquidity crisis.

Liquidity Investment 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 high credit quality, highly liquid short-term instruments. In addition, the Company’s contingent liquidity plan includes access to a continuing liquidity portfolio in which proceeds raised from funding activities are invested in longer term, highly liquid instruments, such as U.S. Treasury securities and government sponsored entity debt. The invested amounts of the liquidity portfolio provide back-up liquidity, primarily for the commercial paper program at Credco, and also flexibility for other short-term funding programs at Centurion Bank and FSB. Instruments held within this portfolio will be of the highest credit quality and most liquid of investment instruments available. The Company can sell these securities or enter into sale/repurchase agreements to immediately raise cash proceeds to meet liquidity needs. At December 31, 2007, the Company held $5.1 billion of such securities under this program.
     Credco entered into securities lending agreements in June 2006 with other financial institutions to enhance investment income. At December 31, 2007, the liquidity investment portfolio included approximately $970 million of investment securities loaned under these agreements.

Contingent Securitization Capacity
A key source in the Company’s contingent liquidity plan is asset securitization. Approximately $25 billion of additional consumer loans, commercial card loans, small business loans and cardmember receivables could be sold over time to investors through the existing securitization trust in the event a liquidity crisis has occurred. The Company has added, through the establishment of the Charge Trust, the capabilities to sell a wider variety of cardmember receivable portfolios to further enhance the Company’s flexibility in accessing diverse funding sources on a contingency basis.
     The Company believes that the securitized financing would be available through many adverse conditions due to the structure and size of the card securitization market. Its liquidity plans expect that pricing, investor demand, and structural subordination levels for card securitizations would change under adverse conditions. Proceeds from secured financings completed during a liquidity crisis could be used to meet current obligations, to reduce or retire other contingent liquidity sources such as bank credit lines, or a combination of the two. However, other factors affect the Company’s ability to securitize loans and receivables, such as credit quality of the assets and the legal, accounting, regulatory, and tax environment for securitization transactions. Material changes in any of these factors may potentially limit the Company’s ability to securitize its loans and receivables and could introduce certain risks to the Company’s ability to meet its financial obligations. In such a case, the use of investment securities, asset dispositions, asset monetization strategies, and flexibility to reduce operating cash needs could be utilized to meet its liquidity needs.

Committed Bank Credit Facilities
The Company maintained committed bank credit facilities at December 31, 2007 as follows:

          Parent            Centurion      
(Billions)       Total      Company      Credco      Bank      FSB
Committed(a)           $ 12.4          $ 1.2       $ 10.4 (b)        $ 0.4         $ 0.4
Outstanding    $ 3.5   $   $ 3.5     $   $

(a)    Committed lines supported by 37 financial institutions.
 
(b) Credco has the right to borrow a maximum amount of $11.6 billion with a commensurate maximum $1.2 billion reduction in the amount available to Parent Company.

The Company’s committed facilities expire as follows:

(Billions)           
2008   $ 0.3
2010   2.0
2011   3.4
2012   6.7
Total   $ 12.4

The availability of the credit lines is subject to the Company’s compliance with certain financial covenants, including the maintenance by the Company of consolidated tangible net worth of at least $4.1 billion, the maintenance by Credco of a 1.25 ratio of combined earnings and fixed charges to fixed charges, and the compliance by Centurion Bank and FSB with applicable regulatory capital adequacy guidelines. At December 31, 2007, the Company’s consolidated tangible net worth was approximately $9.6 billion, Credco’s ratio of combined earnings and fixed charges to fixed charges was 1.38 and Centurion Bank and FSB each exceeded their regulatory capital adequacy guidelines.

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     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 the Company’s credit rating.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company has identified both on- and off-balance sheet transactions, arrangements, obligations, and other relationships that may have a material current or future effect on its financial condition, changes in financial condition, results of operations, or liquidity and capital resources.

CONTRACTUAL OBLIGATIONS
The table below identifies on- and off-balance sheet transactions that represent contractually committed future obligations of the Company. Purchase obligations include agreements to purchase goods and services that are enforceable and legally binding on the Company and that specify significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction.

    Payments due by year
          2013 and
(Millions)       Total      2008      2009–2010      2011–2012      thereafter
On-Balance Sheet(a):        
     Long-term debt $  55,285   $  11,815        $  22,323         $  12,206        $  8,941
     Interest payments on long-term debt(b)    12,965 2,604 3,355 2,010 4,996
     Other long-term liabilities(c)    291 114 44 30 103
Off-Balance Sheet:        
     Lease obligations 2,678 247 431 312 1,688
     Purchase obligations(d)    3,182   1,037   1,223   842   80
Total   $ 74,401   $ 15,817   27,376   15,400   15,808

(a)     The above table excludes approximately $1.1 billion of tax liabilities that have been recorded in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” as inherent complexities and the number of tax years currently open for examination in multiple jurisdictions do not permit reasonable estimates of payments, if any, to be made over a range of years.
 
(b) Estimated interest payments were calculated using the effective interest rate in place at December 31, 2007, and reflects the effect of existing interest rate swaps. Actual cash flows may differ from estimated payments.
 
(c) At December 31, 2007, there were no minimum required contributions, and no contributions are currently planned, for the U.S. American Express Retirement Plan. For the U.S. and non-U.S. defined benefit pension and postretirement benefit plans, contributions in 2008 are anticipated to be approximately $41 million, and this amount has been included within other long-term liabilities. Remaining obligations under defined benefit pension and postretirement benefit plans aggregating $465 million have not been included in the table above as the timing of such obligations is not determinable. Additionally, other long-term liabilities do not include $4.8 billion of Membership Rewards liabilities as the Company does not consider these to be long-term obligations. In previous years, Membership Reward obligations were included in the table above.
 
(d) The purchase obligation amounts include expected spending by period under contracts that were in effect at December 31, 2007. Minimum contractual payments associated with purchase obligations, including termination payments, were $528 million.

The Company also has certain 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.
     In addition to the off-balance sheet contractual obligations noted above, the Company has off-balance sheet arrangements that include guarantees, retained interests in structured investments, unconsolidated variable interest entities and other off-balance sheet arrangements as more fully described below.

GUARANTEES
The Company’s principal guarantees are associated with cardmember services to enhance the value of owning an American Express card. At December 31, 2007, the Company had guarantees totaling approximately $77 billion related to cardmember protection plans, as well as other guarantees in the ordinary course of business that are within the scope of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45).
     See Note 13 to the Consolidated Financial Statements for further discussion regarding the Company’s guarantees.

CERTAIN OTHER OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2007, the Company had approximately $265 billion of unused credit available to cardmembers as part of established lending product agreements. Total unused credit available to cardmembers does not represent potential future cash requirements, as a significant portion of this unused credit will likely not be drawn. The Company’s charge card products have no pre-set limit and, therefore, are not reflected

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in unused credit available to cardmembers. As discussed in the Consolidated Liquidity and Capital Resources section, the Company’s securitizations of cardmember loans are also off-balance sheet. The Company’s cardmember receivables securitizations remain on the Consolidated Balance Sheets.
     See Note 14 to the Consolidated Financial Statements for discussion regarding the Company’s other off-balance sheet arrangements.

RISK MANAGEMENT

INTRODUCTION
The key objective of risk management at American Express is to drive profitable growth and provide exceptional customer experiences, while limiting the exposure to adverse financial impacts. By building analytical and technological capabilities, creating transparent limits on risk exposures, optimizing investment decision-making, and identifying unacceptable risks, risk management contributes to the Company’s efforts to create shareholder and customer value.
     In addition to business risk, the Company recognizes four fundamental sources of risk:

  • Credit Risk;
     
  • Market Risk;
     
  • Liquidity Risk; and
     
  • Operational Risk.

These risk types, which are described below, are interrelated and span the Company’s business units and geographic locations. Because of their nature and scope, the Company believes in managing and monitoring these risks centrally at the enterprise-wide level and/or at the business unit level, as appropriate. Further, management has adopted well-defined risk-taking principles to guide the Company’s business strategy, achieve long-term shareholder objectives and deliver outstanding customer experience.

PRINCIPLES
The Company’s risk management is based on the following three principles:

  • Independence of risk management oversight;
     
  • Management of risk exposures through Board-approved risk limits; and
     
  • Ultimate business ownership for risk-return decision-making.

The Company’s risk management leaders partner with business unit managers in making risk-return decisions using standardized risk metrics with predictable outcomes. The measurement and reporting of these risks are performed independently by risk management leaders. Both risk and business unit managers remain jointly accountable for the outcome of risk-return decisions within the Board approved limits.

GOVERNANCE
The Company’s risk management governance begins with the Board oversight of risk management parameters. The Audit Committee of the Board approves the Company’s Enterprise-wide Risk Management Policy, which defines risk management objectives, tolerance, limits, and the governance structure. The Enterprise-wide Risk Management Committee (ERMC), supports the Board in its oversight function and works closely with the Operating Committee, composed of the Company’s most senior executives, to ensure that the Board-approved risk management objectives are fully implemented in all businesses across the Company. The ERMC leads the Company’s overall risk management activities and ensures compliance with the Enterprise-wide Risk Management policy by measuring and monitoring enterprise-wide risk, establishing subordinate risk policies and overseeing risk practices and risk committees across the Company.
     Daily risk management occurs at the business unit level where the processes and infrastructure necessary to measure and manage risk are integrated into business unit goals. Business unit managers, in partnership with independent risk management leaders, make decisions on how to optimize risk-return decisions and contain risk within established limits.
     The Company has also developed a process that provides increased scrutiny throughout the risk management governance structure and requires higher levels of approval for exposures above defined risk thresholds. The escalation process is designed to ensure that the large majority of transactions and initiatives can proceed within the existing business unit risk management processes, while risks that are either large or with enterprise-wide implications receive enhanced scrutiny.

ROLES AND RESPONSIBILITIES
The ERMC is chaired by the Company’s Chief Risk Officer. Given the key role of credit risk in the Company business model, the Chief Risk Officer directly supervises officers responsible for (1) credit risk management, (2) the centralized functional tasks of worldwide card fraud and information management, and (3) banking services. In addition, as the Chair of the ERMC, the Chief Risk Officer is responsible for monitoring and reporting on the Company’s risk profile, initiating appropriate actions to ensure adherence to the approved risk tolerance and escalation guidelines, as well as promoting best-in-class approaches to risk management throughout the Company.
     In addition to the Chief Risk Officer, the ERMC is composed of:

  • The Chief Market Risk Officer;
     
  • The Chief Operational Risk Officer;

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  • The Chief Credit Officers representing all operating segments of the Company; and
     
  • The enterprise-wide leaders of compliance, controllership, and information security.

As the most senior risk management entity, the ERMC draws on its significant expertise to analyze risk comprehensively and determine acceptable risk thresholds across the Company.
     In order to enhance its enterprise-wide risk assessment, the ERMC continues to upgrade risk management capabilities that help the Company make better business and investment decisions as well as strengthen measuring, managing and transparent reporting of risk. The ERMC also launches focused risk management initiatives to assess the sources of significant exposures.
     Under the ERMC leadership, committees governing each risk type are established. These committees are responsible for translating the ERMC guidance and enterprise-wide risk policies into policies and procedures for their corresponding risk types, managing and monitoring those risks, and strengthening risk capabilities.

CREDIT RISK MANAGEMENT PROCESS
Credit risk is defined as the risk of loss from obligor or counterparty default. Leadership for overall credit risk management at the Company rests with the Chief Risk Officer. Credit risks in the Company can be divided into two broad categories, each with distinct risk management tools and metrics: consumer credit risk and institutional credit risk.

CONSUMER CREDIT RISK
Consumer credit risk arises principally from the Company’s portfolio of consumer and small business charge cards, credit cards, lines of credit, and loans. Since such portfolio consists of millions of borrowers across multiple geographies, occupations, and social segments, its risk is substantially reduced through diversification. In addition, the Company benefits from the fact that the typical credit profile of its cardmembers is better than that of its many competitors, which is a combined result of brand positioning, underwriting, and customer management policies, premium customer servicing, and product reward features. The level of consumer credit risk losses is more driven by general economic and legal conditions than by borrower-specific events.
     General principles and the overall framework for managing consumer credit risk across the Company are defined in the Individual Credit Risk Policy approved by the ERMC. This policy is further supported by a highly organized structure of subordinate policies covering all facets of consumer credit extension, including prospecting, approvals, authorizations, line management, collections, and fraud prevention. These policies ensure consistent application of credit management principles and standardized reporting of asset quality and loss recognition. Moreover, consumer credit risk management is supported by sophisticated proprietary scoring and decision-making models.
     Credit underwriting decisions are made based on sophisticated evaluation of product economics and customer behavior predictions. The Company has developed unique decision logic for each customer interaction, including prospect targeting, new accounts, line assignment, balance transfer, cross sell, and account management. Each decision benefits from sophisticated modeling capability that uses the most up-to-date proprietary information on customers, including payment history, purchase data, as well as insights from data feeds from credit bureaus.
     In addition to the impact of improved risk management processes, the Company’s overall consumer credit performance has also benefited from the shifting mix of the portfolio towards products that reward the customer for spending. Rewards attract higher spending from premium customers, which in turn leads to lower credit loss rates.
     However, the Company’s objective of driving profitable growth may be accomplished by the launch of new products or of existing products in new markets, which may exhibit higher loss rates. Also, the consumer credit performance is impacted by external factors, such as general economic conditions, changes in legal environment, and competitive actions.

INSTITUTIONAL CREDIT RISK
Institutional credit risk arises principally within the Company’s corporate card services, merchant services, network services, and from the Company’s investment activities. Unlike consumer credit risk, institutional credit risk is characterized by a lower loss frequency but higher severity. It is affected both by general economic conditions and by borrower-specific events. The Company’s senior risk officers recognize that the absence of large losses in any given year or over several years is not necessarily representative of the risk of institutional portfolios, given the infrequency of loss events in such portfolios.
     General principles and the overall framework for managing institutional credit risk across the Company are defined in the Institutional Credit Risk Policy approved by the ERMC. The Institutional Risk Management Committee (IRMC) is responsible for implementation and enforcement of this policy and for providing guidance to the credit officers of each business unit with substantial institutional credit risk exposures, who in turn make investment decisions in core risk capabilities, ensure proper implementation of the underwriting standards and contractual rights of risk mitigation, monitor risk exposures, and determine risk mitigation actions. The IRMC formally reviews large institutional exposures to ensure compliance with ERMC guidelines and procedures. At the same time, the IRMC provides continuous guidance to business unit risk teams to optimize risk-adjusted returns on capital. A company-wide risk rating utility and a specialized airline risk group provide independent risk assessment of institutional obligors.

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MARKET RISK MANAGEMENT PROCESS
Market risk is the risk to earnings or value resulting from movements in market prices. The Company’s market risk exposure is primarily generated by:

  • Interest rate risk in its card, insurance, and certificate businesses; and
     
  • Foreign exchange risk in its international operations.

General principles and the overall framework for managing market risk across the Company are defined in the Market Risk Policy approved by the ERMC. Market risk is centrally managed by the Market Risk Committee, chaired by the Chief Market Risk Officer of the Company. Within each business, market risk exposures are monitored and managed by various asset/liability committees, guided by Board-approved policies covering derivative financial instruments, funding and investments. Derivative financial instruments derive their value from an underlying variable or multiple variables, including interest rate, foreign exchange, and equity indices or prices. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of the Company’s market risk and related asset/liability management strategy and processes. Use of derivative financial instruments is incorporated into the discussion below as well as Note 12 to the Consolidated Financial Statements.
     Market exposure is a byproduct of the delivery of products and services to cardmembers. Interest rate risk is primarily generated by funding cardmember charges and fixed-rate loans with variable rate borrowings. These assets and liabilities generally do not create naturally offsetting positions with respect to basis, re-pricing, or maturity characteristics.
     For the Company’s charge card and fixed-rate lending products, interest rate exposure is managed by shifting the mix of funding toward fixed-rate debt and by using derivative instruments, with an emphasis on interest rate swaps, which effectively fix interest expense for the length of the swap. The Company’s strategy is to lengthen the maturity of interest rate hedges in periods of low interest rates and to shorten their maturity in periods of high interest rates. Based on the expected 2008 debt funding requirements for worldwide charge card and fixed rate lending receivables, approximately 29 percent have been funded with fixed rate debt or hedged as of December 31, 2007. The Company may change the amount hedged and the hedge percentage may change based on changes in business volumes and mix, among other factors. For the majority of its cardmember loans, which are linked to a floating rate base and generally reprice each month, the Company uses floating rate funding. The Company regularly reviews its strategy and may modify it. Non-trading interest rate derivative financial instruments, primarily interest rate swaps, with notional amounts of approximately $18 billion and $11 billion were outstanding at December 31, 2007 and 2006, respectively. These derivatives generally qualify for hedge accounting. A portion of these derivatives outstanding as of December 31, 2007, extend to 2017.
     The detrimental effect on the Company’s pretax earnings of a hypothetical 100 basis point increase in interest rates would be approximately $227 million ($205 million related to the U.S. dollar), based on the 2007 year-end positions. This effect, which is calculated using a static asset liability gapping model, is primarily determined by the volume of variable rate funding of charge card and fixed-rate lending products for which the interest rate exposure is not managed by derivative financial instruments.
     Foreign exchange risk is generated by cardmember cross-currency charges, foreign currency denominated balance sheet exposures, translation exposure of foreign operations, and foreign currency earnings in international units. The Company’s foreign exchange risk is managed primarily by entering into agreements to buy and sell currencies on a spot basis or by hedging this market exposure to the extent it is economically justified through various means, including the use of derivative financial instruments such as foreign exchange forward, options, and cross-currency swap contracts, which can help “lock in” the value of the Company’s exposure to specific currencies.
     At December 31, 2007 and 2006, foreign currency products with total notional amounts of approximately $15 billion and $10 billion, respectively, were outstanding. Derivative hedging activities related to cross-currency charges, balance sheet exposures, and foreign currency earnings generally do not qualify for hedge accounting; however, derivative hedging activities related to translation exposure of foreign operations generally do.
     With respect to cross-currency charges and balance sheet exposures, including related foreign exchange forward contracts outstanding, the effect on the Company’s earnings of a hypothetical 10 percent change in the value of the U.S. dollar would be immaterial as of December 31, 2007. With respect to foreign currency earnings, the adverse impact on pretax income of a 10 percent strengthening of the U.S. dollar related to anticipated overseas operating results for the next 12 months, including any related foreign exchange forward contracts entered into in January 2008, would hypothetically be $115 million as of December 31, 2007. With respect to translation exposure of foreign operations, including related foreign exchange forward contracts outstanding, a 10 percent strengthening in the U.S. dollar would result in an immaterial reduction in equity as of December 31, 2007.

LIQUIDITY RISK MANAGEMENT PROCESS
Liquidity risk is defined as the inability to access cash and equivalents needed to meet business requirements and satisfy the Company’s obligations. General principles and the overall framework for managing liquidity risk across the Company are defined in the Liquidity Risk Policy approved by the ERMC. The Company balances the trade-offs between maintaining too much liquidity, which can be costly and limit financial flexibility, with having inadequate liquidity, which may result in financial distress during a liquidity event. Liquidity risk is centrally

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managed by the Funding and Liquidity Committee, chaired by the Corporate Treasurer. The Company has developed a contingent funding plan that enables it to meet its daily cash obligations when access to unsecured funds in the debt capital markets is impaired or unavailable. This plan is designed to ensure that the Company and all of its main operating entities could continuously maintain business operations for a 12-month period in which its access to unsecured financing is interrupted. The hypothetical 12-month liquidity crisis is assumed to occur as a sudden and unexpected event that temporarily impairs access to or makes unavailable financing in the unsecured debt markets.
     Liquidity risk is managed both at an aggregate Company level and at the major legal entities in order to ensure that sufficient funding and contingent liquidity resources are available in the amount and in the location needed in a stress event. The Funding and Liquidity Committee manages the forecasts of the Company’s aggregate and subsidiary cash positions and financing requirements, the funding plans designed to satisfy those requirements under normal conditions, establishes guidelines to identify the amount of contingent liquidity resources required, and monitors positions and determines any actions to be taken. Contingent liquidity planning also takes into account operating cash flexibilities.

OPERATIONAL RISK MANAGEMENT PROCESS
The Company defines operational risk as the risk of not achieving business objectives due to inadequate or failed processes or information systems, human error or the external environment (e.g., natural disasters) including losses due to failures to comply with laws and regulations. Operational risk is inherent in all business activities and can impact an organization through direct or indirect financial loss, brand damage, customer dissatisfaction, or legal or regulatory penalties.
     General principles and the overall framework for managing operational risk across the Company are defined in the Operational Risk Policy approved by the ERMC. The Operational Risk Management Committee provides governance for the operational risk framework including related policies and is chaired by the Chief Operational Risk Officer with member representation from business units and support groups. The business units have the responsibility for implementing the framework as well as for the day-to-day management of operational risk.
     Managing operational risk is an important priority for the Company. To mitigate such risk, the Company has developed a comprehensive multi-year program to identify, measure, monitor, and report inherent and emerging operational risks through the process and entity-level risk self-assessments. The process risk self-assessment methodology is used to facilitate compliance with Section 404 of the Sarbanes-Oxley Act, and is also used for non-financial operational risk self assessments. The Company also has a reporting process that provides business unit leaders with operational risk information on a quarterly basis to help them assess the overall operational risks of their business units. These initiatives have resulted in improved operational risk intelligence and a heightened level of preparedness to manage risk events and conditions that may adversely impact the Company’s operations.

BUSINESS SEGMENT RESULTS
The Company’s businesses are organized into two customer-focused groups, the Global Consumer Group and the Global Business-to-Business Group. During 2007, the Company’s segments were realigned within the two major customer groups. Accordingly, U.S. Card Services and International Card Services are aligned within the Global Consumer Group and Global Commercial Services and Global Network & Merchant Services are aligned within the Global Business-to-Business Group. The Company has reclassified the prior period amounts to be consistent with the new reportable operating segments.
     The Company considers a combination of factors when evaluating the composition of its reportable operating segments, including the results reviewed by the chief operating decision maker, economic characteristics, products and services offered, classes of customers, product distribution channels, geographic considerations (primarily U.S. versus international), and regulatory environment considerations.
     Results of the business segments essentially treat each segment as a stand-alone business. The management reporting process that derives these results allocates income and expense using various methodologies as described below.

REVENUES NET OF INTEREST EXPENSE
The Company allocates discount revenue and certain other revenues among segments using a transfer pricing methodology. Segments earn discount revenue based on the volume of merchant business generated by cardmembers. Within the U.S. Card Services, International Card Services, and Global Commercial Services segments, discount revenue reflects the issuer component of the overall discount rate; within the Global Network & Merchant Services segment, discount revenue reflects the network and merchant component of the overall discount rate. Cardmember lending finance revenue and net card fees are directly attributable to the segment in which they are reported.

EXPENSES
Marketing, promotion, rewards and cardmember services expenses are reflected in each segment based on actual expenses incurred, with the exception of brand advertising, which is reflected in the Global Network & Merchant Services segment.

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     Human resources and other operating expenses, such as professional services, occupancy and equipment and communications, reflect expenses incurred directly within each segment. In addition, expenses related to the Company’s support services, such as technology costs, are allocated to each segment based on support service activities directly attributable to the segment. Other overhead expenses, such as staff group support functions, are allocated to segments based on each segment’s level of pretax income. Financing requirements are managed on a consolidated basis. Funding costs are allocated based on segment funding requirements.

PROVISIONS FOR LOSSES AND BENEFITS
The provisions for losses and benefits include credit-related expenses and interest credited on investment certificates directly attributable to the segment in which they are reported.

CAPITAL
Each business segment is allocated capital based on established business model operating requirements, risk measures, and regulatory capital requirements. Business model operating requirements include capital needed to support operations and specific balance sheet items. The risk measures include considerations for credit, market, and operational risk.

INCOME TAXES
Income tax provision (benefit) is allocated to each business segment based on the effective tax rates applicable to various businesses that make up the segment.

U.S. CARD SERVICES        
 
SELECTED INCOME STATEMENT DATA
GAAP BASIS PRESENTATION
       
 
Years Ended December 31,        
(Millions)        2007       2006       2005
Revenues        
Discount revenue, net card fees and other $ 10,435   $ 9,421   $ 8,451
Cardmember lending finance revenue 4,762   3,434   2,408
Securitization income:          
Excess spread, net (excluding servicing fees)(a)  1,025   1,055   811
Servicing fees 425   407   412
Gains on sales from securitizations(b)   57   27   37
     Securitization income, net   1,507   1,489   1,260
Total revenues   16,704   14,344   12,119
Interest expense        
Cardmember lending 1,518   957   616
Charge card and other   964   767   529
Revenues net of interest expense   14,222   12,620   10,974
Expenses        
Marketing, promotion, rewards and cardmember services 5,140   4,445   3,831
Human resources and other operating expenses   3,354   3,227   2,810
     Total   8,494   7,672   6,641
Provisions for losses   2,998   1,625   1,658
Pretax segment income 2,730   3,323   2,675
Income tax provision   907   1,171   938
Segment income   $ 1,823   $ 2,152   $ 1,737

(a)     Excess spread is the net positive cash flow from interest and fee collections allocated to the investor’s interests after deducting the interest paid on investor certificates, credit losses, contractual servicing fees, other expenses, and the changes in the fair value of the interest-only strip in 2007.
 
(b) Excludes $144 million and $(84) million in 2007, $83 million and $(104) million in 2006, and $144 million and $(118) million in 2005, of impact from cardmember loan sales and maturities, respectively, reflected in provisions for losses.

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AMERICAN EXPRESS COMPANY

SELECTED STATISTICAL INFORMATION    
   
Years Ended December 31,       
(Billions, except percentages and where indicated)             2007             2006             2005
Card billed business  $  375.2 $  333.4   $ 292.8
Total cards-in-force (millions)    43.3   40.7   37.5
Basic cards-in-force (millions)    32.3   30.1   27.7
Average basic cardmember spending (dollars)  $  12,011 $  11,521 $ 10,996
U.S. Consumer Travel:       
     Travel sales  $  3.0 $  2.4 $ 1.9
     Travel commissions and fees/sales    8.0 %   8.4 %   8.7 %
Total segment assets  $  82.3 $  71.0 $