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Note 1—Summary of Significant Accounting Policies
Organization. Visa Inc. (“Visa” or the “Company”) is a global payments technology company that connects consumers, businesses, banks and governments around the world, enabling them to use digital currency instead of cash and checks. Visa and its consolidated subsidiaries, including Visa U.S.A. Inc. (“Visa U.S.A.”), Visa International Service Association (“Visa International”), Visa Worldwide Pte. Limited (“VWPL”), Visa Canada Corporation (“Visa Canada”) and Inovant LLC (“Inovant”), operate the world’s largest retail electronic payments network. The Company provides financial institutions with payment processing platforms that encompass consumer credit, debit, prepaid and commercial payments, and facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. The Company does not issue cards, set fees, or determine the interest rates consumers will be charged on Visa-branded cards, which are the independent responsibility of the Company’s issuing customers.
Consolidation and basis of presentation. The accompanying unaudited consolidated financial statements include the accounts of Visa Inc. and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company consolidates all entities that are controlled by ownership of a majority voting interest as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany accounts and transactions are eliminated in consolidation. Certain reclassifications, not affecting net income attributable to Visa, have been made to prior period information to conform to the current period presentation format, including reclassification of $20 million and $64 million of contractor expense, which was previously reported in professional and consulting fees, to personnel for the three and nine months ended June 30, 2009, respectively.
The Company began to report non-controlling interest (previously referred to as minority interest) as a component of equity in the first quarter of fiscal 2010 and for all comparable periods presented as required under Accounting Standards Codification (“ASC”) 810. The reporting of non-controlling interest has an impact on financial statement presentation only.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q and, consequently, do not include all of the annual disclosures required by GAAP. Reference should be made to the Visa Inc. Annual Report on Form 10-K for the year ended September 30, 2009 for additional disclosures, including a summary of the Company’s significant accounting policies.
Recently issued accounting pronouncements. In September 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-12, Fair Value Measurements and Disclosures – Investments in Certain Entities That Calculate Net Asset Value per Share. ASU 2009-12 allows companies that have investments that are within the scope of this ASU to use net asset value per share as a fair value measurement without further adjustment as a practical expedient. The Company adopted this standard in the first quarter of fiscal 2010. The adoption did not have a material impact on the consolidated financial statements. Additional disclosures required under this ASU are not presented because the related investments are not material to the overall consolidated financial statements.
In October 2009, the FASB issued ASU 2009-13, Revenue Recognition – Multiple-Deliverable Revenue Arrangements, which addresses the accounting for multiple-deliverable revenue arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. The Company will adopt ASU 2009-13 effective October 1, 2010. The adoption is not expected to have a material impact on the consolidated financial statements.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements, which requires new disclosures for fair value measurements including significant transfers into and out of Level 1 and Level 2 of the fair value hierarchy. The ASU also requires additional information in the roll-forward of Level 3 assets and liabilities including the presentation of purchases, sales, issuances and settlements on a gross basis. Further clarification for existing disclosure requirements provides for the disaggregation of assets and liabilities presented, and the enhancement of disclosures around inputs and valuation techniques. This ASU impacts disclosures only. The Company adopted the ASU in the second quarter of fiscal 2010, with the exception of the additional information in the roll-forward of Level 3 assets and liabilities, which will be effective in the second quarter of fiscal 2011. There was no transfer into or out of Level 1 or 2 of the fair value hierarchy during the nine months ended June 30, 2010. See Note 3 – Fair Value Measurements.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements, which amends the disclosure requirements related to subsequent events. Effective immediately, the ASU retracts the requirement to disclose the date through which subsequent events have been evaluated for a SEC filer. The Company adopted this ASU in the second quarter of fiscal 2010.
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Note 2—Retrospective Responsibility Plan
The Company has established several related mechanisms, including the retrospective responsibility plan, or the plan, designed to address settled liability and potential liability under certain litigation, referred to as the covered litigation. In accordance with the plan, the Company established a litigation escrow account, or the escrow account, from which settlements of, or judgments in, the covered litigation will be paid. Under the terms of the plan, when the Company funds the escrow account, the shares of class B common stock are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock.
On May 20, 2010, the Company’s board of directors approved a $500 million deposit into the escrow account, which was funded on May 28, 2010. On an as-converted basis, the funding had the effect of a repurchase by the Company of approximately 7 million shares of class A common stock at approximately $74.22 per share by reducing the as-converted class B common stock share count from approximately 143 million to approximately 136 million and reducing the conversion rate applicable to the Company’s class B common stock from 0.5824 to 0.5550. The deposit and price per share calculations were calculated using the volume-weighted average price of the Company’s class A common stock for the 6-day pricing period from May 20, 2010, through May 27, 2010, in accordance with the Company’s certificate of incorporation.
The following table sets forth the changes in the escrow account during the nine months ended June 30, 2010.
| (in millions) | ||||
|
Balance at October 1, 2009 |
$ | 1,715 | ||
|
Additional funding under the plan |
500 | |||
|
American Express settlement payments |
(210 | ) | ||
|
Balance at June 30, 2010 |
$ | 2,005 | ||
|
Less: Current portion of escrow account |
1,865 | |||
|
Long-term portion of escrow account |
$ | 140 | ||
An accrual for the covered litigation is recorded when loss is deemed to be probable and reasonably estimable. In making this determination, the Company evaluates available information, including funding decisions made by the litigation committee. The accrual related to the covered litigation could be either higher or lower than the escrow account. The Company did not record an additional accrual for covered litigation during the nine months ended June 30, 2010.
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Note 3—Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
| Fair Value Measurements Using Inputs Considered as |
||||||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||||
| June 30, 2010 |
September 30, 2009 |
June 30, 2010 |
September 30, 2009 |
June 30, 2010 |
September 30, 2009 |
|||||||||||||
| (in millions) | ||||||||||||||||||
|
Assets |
||||||||||||||||||
|
Cash equivalents and restricted cash |
||||||||||||||||||
|
Money market funds and time deposits |
$ | 6,883 | $ | 5,977 | ||||||||||||||
|
Investment securities |
||||||||||||||||||
|
U.S. government-sponsored agency debt securities |
$ | 136 | $ | 169 | ||||||||||||||
|
Canadian government debt securities |
— | 7 | ||||||||||||||||
|
Equity securities |
56 | 73 | ||||||||||||||||
|
Corporate debt securities |
$ | 1 | $ | 10 | ||||||||||||||
|
Mortgage backed securities |
4 | 6 | ||||||||||||||||
|
Other asset backed securities |
3 | 5 | ||||||||||||||||
|
Auction rate securities |
13 | 13 | ||||||||||||||||
|
Derivative financial instruments |
||||||||||||||||||
|
Foreign exchange derivative instruments |
14 | 16 | ||||||||||||||||
| 6,939 | $ | 6,050 | 150 | $ | 192 | 21 | $ | 34 | ||||||||||
|
Liabilities |
||||||||||||||||||
|
Other liabilities |
||||||||||||||||||
|
Visa Europe put option |
$ | 346 | $ | 346 | ||||||||||||||
|
Foreign exchange derivative instruments |
$ | 35 | $ | 96 | ||||||||||||||
Level 2 assets and liabilities measured at fair value on a recurring basis. Government-sponsored debt securities and foreign exchange derivative instruments are classified as Level 2 within the fair value hierarchy. The fair value of the government-sponsored debt securities is based on quoted prices in active markets for similar assets. Foreign exchange derivative instruments are valued using inputs that are observable in the market or can be derived principally from or corroborated with observable market data. There was no change to the valuation techniques and related inputs used to measure fair value during the nine months ended June 30, 2010.
Level 3 assets and liabilities measured at fair value on a recurring basis. Corporate debt securities, mortgage backed securities, other asset backed securities and auction rate securities are classified as Level 3 due to a lack of trading in active markets and a lack of observable inputs in measuring fair value. There was no change to the valuation techniques and related inputs used to measure fair value during the nine months ended June 30, 2010.
Visa Europe put option agreement. The Company has granted Visa Europe a perpetual put option which, if exercised, will require Visa Inc. to purchase all of the outstanding shares of capital stock of Visa Europe from its members. The purchase price of the Visa Europe shares under the put option is based upon a formula that, subject to certain adjustments, applies Visa Inc.’s forward price-to-earnings multiple, or the P/E ratio (as defined in the option agreement), at the time the option is exercised to Visa Europe’s projected sustainable adjusted net operating income for the forward 12-month period, or the adjusted sustainable income. Visa Europe’s adjusted sustainable income is calculated under the terms of the put option agreement and includes potentially material adjustments for cost synergies and other negotiated items.
At June 30, 2010, and September 30, 2009, the Company determined the fair value of the put option to be approximately $346 million. While this amount represents the fair value of the put option at June 30, 2010, it does not represent the actual purchase price that the Company may be required to pay if the option is exercised, which could be several billion dollars or more. The fair value of the put option represents the value of Visa Europe’s option, which under certain conditions could obligate the Company to purchase its member equity interest for an amount above fair value. While the put option is in fact non-transferable, its fair value represents the Company’s estimate of the amount the Company would be required to pay a third-party market participant to transfer the potential obligation in an orderly transaction.
In determining the fair value of the put option at June 30, 2010, the Company assumed a 40% probability of exercise by Visa Europe at some point in the future and an estimated long-term P/E differential at the time of exercise of 5.3x. These assumptions are consistent with those used in the valuation of the put option at September 30, 2009. At June 30, 2010, the P/E ratio was 15.0 and the P/E differential, the difference between this ratio and the estimated ratio applicable to Visa Europe, was 2.4x. These ratios are for reference purposes only and are not necessarily indicative of the ratio or differential that could be applicable if the put option were exercised at any point in the future.
The put option is exercisable at any time at the sole discretion of Visa Europe. As such, the put option liability is included in accrued liabilities on our consolidated balance sheet at June 30, 2010. Classification in current liabilities is not an indication of management’s expectation of exercise and simply reflects the fact that the obligation resulting from the exercise of the instrument could become payable within 12 months. The liability is classified within Level 3 as the assumed probability that Visa Europe will elect to exercise its option, the estimated P/E differential and other inputs used to value the put option are unobservable. Changes in fair value are included in the Company’s consolidated statement of operations. There was no change in the fair value of the put option during the nine months ended June 30, 2010.
The tables below provide a roll-forward of Level 3 investments which are measured at fair value on a recurring basis for the nine months ended June 30, 2010 and 2009.
| Fair Value of Financial Assets Using Significant Unobservable
Inputs (Level 3) |
|||||||||||||||||||
| Corporate Debt Securities |
Mortgage Backed Securities |
Other Asset Backed Securities |
Auction Rate Securities |
Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
|
Balances at October 1, 2009 |
$ | 10 | $ | 6 | $ | 5 | $ | 13 | $ | 34 | |||||||||
|
Other-than-temporary impairment included in investment income, net |
— | — | — | — | — | ||||||||||||||
|
Maturities and principal payments |
(9 | ) | (2 | ) | (2 | ) | — | (13 | ) | ||||||||||
|
Transfers in (out) of Level 3 |
— | — | — | — | — | ||||||||||||||
|
Balances at June 30, 2010 |
$ | 1 | $ | 4 | $ | 3 | $ | 13 | $ | 21 | |||||||||
| Fair Value of Financial Assets Using Significant Unobservable
Inputs (Level 3) |
|||||||||||||||||||
| Corporate Debt Securities |
Mortgage Backed Securities |
Other Asset Backed Securities |
Auction Rate Securities |
Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
|
Balances at October 1, 2008 |
$ | 45 | $ | 22 | $ | 23 | $ | 13 | $ | 103 | |||||||||
|
Other-than-temporary impairment included in investment income, net |
(3 | ) | (4 | ) | (1 | ) | — | (8 | ) | ||||||||||
|
Maturities and principal payments |
(29 | ) | (5 | ) | (12 | ) | — | (46 | ) | ||||||||||
|
Transfers in (out) of Level 3 |
— | — | — | — | — | ||||||||||||||
|
Balances at June 30, 2009 |
$ | 13 | $ | 13 | $ | 10 | $ | 13 | $ | 49 | |||||||||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain financial assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables above.
Non-marketable equity investments. The Company’s strategic investments are accounted for under the cost and equity methods and are classified as Level 3 assets due to the absence of quoted market prices, inherent lack of liquidity and the fact that inputs used to measure the fair value are unobservable and require management judgment. Certain events and circumstances triggered impairment analyses for certain non-marketable equity securities which resulted in recognized losses of $2 million and $3 million during the three and nine months ended June 30, 2010, and $4 million and $7 million during the three and nine months ended June 30, 2009, respectively.
Due to a change in the investment relationship with one of its investees during the three months ended June 30, 2010, the Company reclassified equity securities accounted for as available-for-sale investments with a cost basis of $9 million to an equity method investment. As a result, the Company also reversed net unrealized gains of $15 million, pre-tax, from accumulated other comprehensive income and recorded a loss of $3 million in equity in earnings of unconsolidated affiliates.
At June 30, 2010, and September 30, 2009, non-marketable equity investments totaled $105 million and $102 million in other assets on the consolidated balance sheet, respectively.
Reserve Primary Fund. The Company’s investment in the Reserve Primary Fund, or the Fund, was accounted for under the cost method and considered a Level 3 asset. In October 2009, the Company received a $19 million distribution from the Fund. An additional distribution of $66 million was received in January 2010, which substantially represented the Company’s remaining pro-rata ownership in the Fund. The distribution in January was in excess of the carrying value of the investment in the Fund resulting in the recognition of a pre-tax gain of $16 million in investment income, net during the second quarter of fiscal 2010.
Debt. The estimated fair value of the Company’s debt at June 30, 2010, and September 30, 2009 was $54 million and $64 million, respectively, based on credit ratings for similar notes.
Non-financial assets and liabilities. In the first quarter of fiscal 2010, the Company adopted the accounting and disclosure provisions related to the measurement of non-financial assets and non-financial liabilities at fair value. Long-lived assets such as goodwill, finite-lived intangible assets, and property, equipment and technology are considered non-financial assets, and are measured at fair value only when impairment indicators exist. The Company does not have any significant non-financial liabilities. During the nine months ended June 30, 2010, there was no indication that the Company’s long-lived assets were impaired, and accordingly, measurement at fair value was not required.
|
|||
Note 4—Pension and Other Postretirement Benefits
The Company sponsors various qualified and non-qualified defined benefit pension and other postretirement benefit plans which provide retirement and health benefits for substantially all employees residing in the United States.
On January 12, 2010, the Company approved an amendment to the U.S. pension plan to conform the plan to the Pension Protection Act of 2006. A remeasurement of the U.S. pension plan’s funded position was performed in the second quarter of fiscal 2010. The remeasurement reduced accumulated other comprehensive loss, net, by $70 million pre-tax and reduces net periodic pension cost by $11 million in fiscal 2010.
Additionally, the completion of the annual census data update resulted in a reduction to our overall pension obligation in the second quarter of fiscal 2010. The census update reduced accumulated other comprehensive loss, net by $26 million pre-tax and reduces net periodic pension cost by $8 million in fiscal 2010.
The components of net periodic benefit cost are as follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||
| 3 months ended June 30, |
9 months ended June 30, |
3 months ended June 30, |
9 months ended June 30, |
|||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
|
Service cost |
$ | 11 | $ | 13 | $ | 34 | $ | 38 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
Interest cost |
10 | 11 | 30 | 34 | — | 1 | 1 | 2 | ||||||||||||||||||||||||
|
Expected return on assets |
(13 | ) | (12 | ) | (38 | ) | (34 | ) | — | — | — | — | ||||||||||||||||||||
|
Amortization of: |
||||||||||||||||||||||||||||||||
|
Prior service cost (credit) |
(2 | ) | (2 | ) | (6 | ) | (6 | ) | — | (1 | ) | (2 | ) | (3 | ) | |||||||||||||||||
|
Actuarial loss |
4 | 4 | 13 | 11 | (1 | ) | — | (1 | ) | — | ||||||||||||||||||||||
|
Total net periodic pension cost |
$ | 10 | $ | 14 | $ | 33 | $ | 43 | $ | (1 | ) | $ | — | $ | (2 | ) | $ | (1 | ) | |||||||||||||
|
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Note 5—Settlement Guarantee Management
The indemnification for settlement losses that Visa provides to its customers creates settlement risk for the Company due to the difference in timing between the date of a payment transaction and the date of subsequent settlement. The term and amount of the indemnification are unlimited. The Company requires certain customers that do not meet its credit standards to post collateral. The Company’s estimated maximum settlement exposure was approximately $44.1 billion at June 30, 2010 compared to $41.8 billion at September 30, 2009. Of these amounts, approximately $3.7 billion at each June 30, 2010 and September 30, 2009, were covered by collateral. The total available collateral balances presented below are greater than the settlement exposure covered by customer collateral held due to instances in which the available collateral exceeds the total settlement exposure for certain financial institutions at each date presented.
Cash equivalents collateral is reflected in customer collateral as both an asset and an offsetting liability on the consolidated balance sheet, as it is held in escrow in the Company’s name. All other collateral is excluded from the consolidated balance sheet. Pledged securities are held by third parties in trust for the Company and its customers. Guarantees are provided primarily by parent financial institutions to secure the obligations of their subsidiaries, and the Company routinely evaluates the financial viability of institutions providing the guarantees.
The Company maintained collateral as follows:
| June 30, 2010 |
September 30, 2009 |
|||||
| (in millions) | ||||||
|
Cash equivalents |
$ | 869 | $ | 812 | ||
|
Pledged securities at market value |
469 | 243 | ||||
|
Letters of credit |
848 | 703 | ||||
|
Guarantees |
2,362 | 2,644 | ||||
|
Total |
$ | 4,548 | $ | 4,402 | ||
The fair value of the settlement risk guarantee is estimated based on a proprietary probability-weighted model and was less than $1 million at June 30, 2010 and September 30, 2009. These amounts are reflected in accrued liabilities on the consolidated balance sheets.
|
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Note 6—Stockholders’ Equity
Funding of the Litigation Escrow Account. On May 28, 2010, the Company funded the escrow account with $500 million, which, on an as-converted basis, had the effect of a repurchase of approximately 7 million shares of class A common stock and reduced the conversion rate applicable to Visa’s class B common stock outstanding from 0.5824 to 0.5550. See Note 2—Retrospective Responsibility Plan.
The number of shares of each class and the number of shares of class A common stock outstanding on an as-converted basis at June 30, 2010 are as follows:
| (in millions) | Shares Outstanding at June 30, 2010 |
Conversion Rate Into class A Common Stock |
As Converted(1) | |||
|
Class A common stock |
496 | — | 496 | |||
|
Class B common stock |
245 | 0.5550 | 136 | |||
|
Class C common stock |
98 | 1.0000 | 98 | |||
|
Total class A common stock as-converted |
731 | |||||
| (1) |
Figures may not sum due to rounding. As-converted class A common stock count calculated based on whole numbers. |
Accelerated class C share release programs. On January 21, 2010, the Company announced a second program to accelerate the share release of class C common stock. Under this program, the number of shares released from transfer restrictions for any class C shareholder was the greater of (a) 50% (fifty percent) of the restricted shares of class C common stock held by that shareholder as of March 1, 2010, and (b) 5,000 (five thousand) shares of class C common stock (or in the case of shareholders with fewer than 5,000 shares of class C common stock, all of their shares). Shareholder application was not required. Under this program, 56 million shares of class C common stock were released from transfer restrictions during the second quarter of fiscal 2010. In fiscal 2009, the Company released 40 million shares of class C common stock as part of the 2009 accelerated release program. The release of the shares of class C common stock did not increase the number of outstanding shares on an as-converted basis, and there were no dilutive effects to the outstanding class A common stock share count on an as-converted basis from these transactions.
Of the 96 million shares of class C common stock released from transfer restrictions, 53 million shares have been converted from class C common stock to class A common stock upon the sale or transfer by the class C shareholders into the public market through June 30, 2010. Approximately 2 million and 33 million of those shares were converted during the three and nine months ended June 30, 2010, respectively. Additionally, 55 million shares of class C common stock continue to be subject to the general transfer restrictions that expire on March 25, 2011, under Visa’s certificate of incorporation.
Share repurchase plan. In October 2009, the Company’s board of directors authorized a $1 billion share repurchase plan. The authorization will be in place through September 30, 2010, and is subject to extension or expansion at the determination of the Company’s board of directors. The Company did not repurchase any shares under this plan during the three months ended June 30, 2010. During the first half of fiscal 2010, the Company repurchased 8.3 million shares of its class A common stock at an average price of $80.40 per share for a total cost of $664 million. Repurchased shares have been retired and constitute authorized but unissued shares. At June 30, 2010, the share repurchase plan has remaining authorized funds of $336 million.
Dividends. On July 21, 2010, the Company’s board of directors declared a dividend in the amount of $0.125 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis) which will be paid on September 1, 2010, to all holders of record of the Company’s class A, class B and class C common stock as of August 13, 2010. The Company paid $278 million in dividends during the nine months ended June 30, 2010.
Special IPO cash and stock dividends received from cost method investees, net of tax. During the first quarter of fiscal 2010, the Company retired the 24,449 shares of treasury stock received from cost method investees in the first half of fiscal 2009. The Company has no class C common treasury stock outstanding at June 30, 2010.
During the second quarter of fiscal 2010, the Company received $1 million of special cash dividends from cost method investees which were also holders of class C common stock. These special cash dividends are recorded as an increase in additional paid-in capital, net of tax, and are not recorded as income in the consolidated statements of operations as they represent proceeds from the sale of shares issued by the Company as part of the reorganization. The cash dividends are the result of appreciation in the Company’s own stock, and are therefore not recorded as income.
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Note 9—Income Taxes
The effective income tax rates were 36% for the three and nine months ended June 30, 2010, and 44% and 41% for the three and nine months ended June 30, 2009, respectively. The rates for the three and nine months ended June 30, 2010 were lower than the rates for the comparable periods in the prior year primarily due to changes in the geographic mix of the Company’s global income, the benefit of Singapore tax incentives and the absence of additional foreign tax related to the sale of the Company’s investment in VisaNet do Brasil in the third quarter of fiscal 2009.
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Note 10—Legal Matters
The Company is party to various legal and regulatory proceedings. Some of these proceedings involve complex claims that are subject to substantial uncertainties and unascertainable damages. Accordingly, except as disclosed, the Company has not established reserves or ranges of possible loss related to these proceedings, as at this time in the proceedings, the matters do not relate to a probable loss and/or amounts are not reasonably estimable. Although the Company believes that it has strong defenses for the litigation and regulatory proceedings described below, it could in the future incur judgments or fines or enter into settlements of claims that could have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows. From time to time, the Company may engage in settlement discussions or mediations with respect to one or more of its outstanding litigation matters, either on its own behalf or collectively with other parties.
The Company’s litigation provision was less than $1 million and approximately ($41 million) for the three and nine months ended June 30, 2010, respectively, and approximately $1 million for the three and nine months ended June 30, 2009. The credit to the provision in the nine months ended June 30, 2010 was primarily the result of a $41 million pre-tax gain recognized related to the prepayment of the remaining obligations under the Retailers’ litigation (discussed in Other Litigation below). The litigation accrual is an estimate and is based on management’s understanding of its litigation profile, the specifics of each case, advice of counsel to the extent appropriate and management’s best estimate of incurred loss at the balance sheet date.
The following table summarizes the activity related to accrued litigation for both covered and other non-covered litigation for the nine months ended June 30:
| Fiscal 2010 |
Fiscal 2009 |
|||||||
| (in millions) | ||||||||
|
Balance at October 1 |
$ | 1,717 | $ | 3,758 | ||||
|
Provision for settled legal matters(1) |
(41 | ) | (1 | ) | ||||
|
Provision for unsettled legal matters |
— | 2 | ||||||
|
Settlement obligation refunded by Morgan Stanley(2) |
— | 65 | ||||||
|
Interest accretion on settled matters |
23 | 71 | ||||||
|
Payments on settled matters(3) |
(897 | ) | (1,642 | ) | ||||
|
Balance at June 30 |
$ | 802 | $ | 2,253 | ||||
| (1) |
This amount includes the reduction to the provision for the $41 million pre-tax gain recognized related to the prepayment of the remaining obligations under the Retailers’ litigation. There was no other significant provision activity during the three and nine months ended June 30, 2010. |
| (2) |
This balance represents the amount of a settlement refunded to the Company during fiscal 2009 by Morgan Stanley under a separate agreement. |
| (3) |
This amount includes the Company’s October 2009 prepayment of its remaining $800 million in payment obligations in the Retailers’ litigation at a discounted amount of $682 million. |
Covered Litigation
Visa Inc., Visa U.S.A. and Visa International are parties to certain legal proceedings discussed below that are subject to the retrospective responsibility plan, which the Company refers to as the covered litigation. See Note 2—Retrospective Responsibility Plan. An accrual for covered litigation is recorded when loss is deemed to be probable and reasonably estimable. In making this determination the Company evaluates available information, including funding decisions made by the litigation committee. The accrual related to covered litigation could be either higher or lower than the escrow account balance. The Company did not record an additional accrual for covered litigation during the nine months ended June 30, 2010.
The Attridge litigation. In the separate California “Indirect Purchaser” Credit/Debit Card Tying Cases also pending in California state court, Visa entered into a settlement agreement on September 14, 2009. That settlement agreement, which was subsequently amended and is subject to the approval of the court in those cases, also could potentially have the effect of releasing the claims asserted in the Attridge case, subject to the ruling of the Attridge court.
The Interchange litigation – Multidistrict Litigation Proceedings (MDL). The parties have exchanged expert reports and expert discovery is scheduled to close in September 2010.
Other Litigation
Retailers’ litigation. On October 2, 2009, the court entered a final order approving the prepayment agreement, and Visa made the $682 million prepayment pursuant to the agreement’s terms on October 5, 2009. Pursuant to its terms, the prepayment agreement became final after no appeals to the approval order were filed within the 30-day appeal period.
“Indirect Purchaser” actions. In California (Credit/Debit Card Tying Cases), after the parties amended the settlement agreement in certain respects, the court entered an order preliminarily approving the settlement on January 5, 2010 and scheduled a final approval hearing for July 16, 2010, which was later rescheduled for August 6, 2010.
In New Mexico, the court granted Visa U.S.A.’s motion to dismiss at a hearing on May 14, 2010, and entered an order and judgment dismissing the case on June 9, 2010. The plaintiff filed a notice of appeal from that order and judgment on June 14, 2010.
Currency conversion litigation. Various appeals have been filed with the U.S. Court of Appeals for the Second Circuit challenging the district court’s approval of the settlement. The issuance of refund checks for valid, timely claims will not commence until after the appeals are resolved (in favor of the court-approved settlement) and the settlement administrator has validated the claims.
Morgan Stanley Dean Witter/Discover litigation. A hearing on Visa International and Visa Europe’s appeal before the General Court (formerly known as the Court of First Instance) was held on May 20, 2010. No ruling has been issued.
U.S. Department of Justice civil investigative demands. On October 10, 2008, the Division issued a CID to Visa U.S.A. that seeks information regarding a potential violation of Section 1 or 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. The CID seeks documents, data and narrative responses to several interrogatories and document requests, which focus on certain merchant acceptance practices, including major payment network rules regarding merchant surcharging and merchants’ ability to steer customers to other forms of payment.
Since the October 2008 CID was issued, Visa has met with the Division on numerous occasions, including in recent months. During those meetings, the Division has focused on major payment network rules prohibiting surcharging and network discrimination. The Division recently indicated to Visa that it is considering filing a civil lawsuit to challenge rules prohibiting surcharging on credit and network discrimination (but not, at this time, the setting of default interchange) under the federal antitrust laws. Similar issues are included among the claims asserted in the merchant interchange litigation. See—Covered Litigation—The Interchange Litigation—Multidistrict Litigation Proceedings. Visa is engaged in constructive negotiations with the Division regarding potential resolutions of its concerns as they relate to Visa, but at this time the outcome of those discussions is uncertain. Intervening federal legislative events may also bear on the ultimate resolution.
State investigative demands. The Office of the Attorney General of Texas issued a Civil Investigative Demand, or “CID”, to Visa Inc. on October 9, 2009 seeking information regarding a potential violation of Sections 15.05 of the Texas Free Enterprise and Antitrust Act of 1983, Texas’s antitrust law. The CID seeks narrative responses to interrogatories that focus on certain Visa U.S.A. policies relating to merchant acceptance practices, including Visa U.S.A.’s policies regarding merchant surcharging and merchants’ ability to steer customers to other forms of payment.
On January 7, 2010, the Attorney General of the State of Missouri issued a CID to Visa requiring Visa to produce the same documents sought by the Ohio Investigative Demand. Visa Inc. is cooperating with the state Attorneys General in connection with these requests.
European interchange proceedings. On April 26, 2010, Visa Europe announced an agreement with the European Commission, subject to public consultation, to end the proceedings initiated by the Statement of Objections issued April 3, 2009, with respect to Visa Europe’s immediate debit interchange fees.
Brazilian competition authority proceedings. On December 16, 2009, Visa International and Visa do Brasil reached an agreement with Conselho Administrativo de Defesa Economica (CADE), the Brazilian competition authority, for the immediate suspension of the investigation and its eventual closure without fines if certain conditions are met. The terms of the settlement are not considered material to the consolidated financial statements.
The Reserve Primary Fund. On November 25, 2009, the court accepted most aspects of the SEC plan and ordered that the remaining assets in the Fund, with the exception of a reserve for ongoing expenses and claims, be returned to investors on a pro-rata basis. On January 29, 2010, Visa U.S.A. received a further distribution from the Fund of $66 million. Together with interim distributions, Visa U.S.A. has received to date, a total payout of 99% of Visa U.S.A.’s original investment and any further recovery will also likely be pursuant to the SEC plan. Consequently, Visa U.S.A. voluntarily dismissed its case without prejudice on March 31, 2010.
CyberSource securities litigation. On April 29, 2010, an individual named Carol Ann Peters filed a putative class action lawsuit against CyberSource Corporation (“CyberSource”), certain of its directors, and Visa Inc. in California Superior Court in connection with the proposed merger of CyberSource and Visa. The complaint asserts claims of breach of fiduciary duty against the CyberSource directors and aiding and abetting breaches of fiduciary duty against CyberSource and Visa. Plaintiff later added Market Street Corp., a wholly-owned subsidiary of Visa Inc., as a defendant, and seeks declaratory and injunctive relief and attorneys’ fees. A similar lawsuit was filed on May 4, 2010, by the Inter-Local Pension Fund of the Graphic Communications Conference of the International Brotherhood of Teamsters in the Chancery Court of the State of Delaware. The Delaware complaint was voluntarily dismissed and re-filed in California Superior Court on June 1, 2010, adding allegations of inadequate disclosure in CyberSource’s preliminary proxy statement concerning the merger. On June 9, 2010, the California court consolidated the two suits, now captioned In re CyberSource Shareholder Litigation.
On June 29, 2010, the parties reached an agreement in principle to settle the litigation. The agreement requires CyberSource to make certain additional disclosures related to the proposed merger, which were made in CyberSource’s definitive proxy statement filed with the SEC on June 11, 2010, but does not require any defendant to pay money damages. A notice of settlement, which is subject to confirmatory discovery and Court approval, was filed on July 13, 2010. The agreement is not considered material to the Company’s consolidated financial statements.
New Zealand Dynamic Currency Conversion investigation. In July 2010, the Commerce Commission, New Zealand’s competition regulator, informed Visa that it had initiated an investigation into Visa policies relating to the provision of Dynamic Currency Conversion (DCC) services in New Zealand. Pursuant to the investigation, the Commerce Commission has requested certain information relating to Visa’s DCC policies. Visa is cooperating with the Commerce Commission’s investigation.
Gift Card Litigation
Visa is a party to various lawsuits involving prepaid gift cards. Pursuant to existing agreements, Visa may be indemnified by the issuer of the gift card in question for liability associated with some or all of the claims asserted in these suits.
Loiseau/Barclay. On November 24, 2009, Loiseau filed his third amended complaint. Both Visa and Metabank moved to dismiss that complaint. The court granted Visa’s motion and dismissed the complaint with prejudice on February 10, 2010.
On December 1, 2009, represented by the same counsel as Mr. Loiseau, William Barclay filed a putative class action against Visa U.S.A. and Metabank making similar allegations as in the Loiseau case. On December 31, 2009, Metabank removed the Barclay action to the U.S. District Court for the Southern District of California and filed a notice of relatedness between the two cases. Both Visa and Metabank moved to dismiss the Barclay complaint. Ultimately, Barclay agreed to dismiss Visa from the case and, on February 25, 2010, Visa was dismissed from the case with prejudice.
Matalas. On May 27, 2010, Diane Matalas filed a class action lawsuit against Wells Fargo Bank and Visa Inc. in California Superior Court asserting claims under California’s gift card act and other consumer laws. Among other things, Matalas alleges that certain authorization practices for gift cards used at restaurants are unlawful. On July 14, 2010, Wells Fargo Bank removed the case to U.S. District Court for the Central District of California.
Intellectual Property Litigation
Vale Canjeable. On December 10, 2009, the Commercial Chamber of the Supreme Court in Venezuela (the “Supreme Court”) decided in Visa’s favor on the appeal Visa previously filed, and referred the matter to a lower court for re-consideration. The appeal overturned a preliminary injunction against Visa International which prevented Visa from using the Visa Vale trademark in Venezuela.
On February 11, 2010, in a separate action on the merits, the First Instance court dismissed in its entirety the plaintiff’s claim against Visa International and other defendants for damages based on trademark infringement. The plaintiff is appealing the decision.
TQP Development, LLC—data encryption. On December 21, 2009, the parties executed an agreement to settle the litigation, and the case was dismissed with prejudice on January 4, 2010. The settlement amount is not considered material to the consolidated financial statements.
Actus, LLC—prepaid cards. On April 21, 2010, the parties executed an agreement to settle the litigation, and on April 30, 2010, the court dismissed the claims against Visa with prejudice. The settlement amount is not considered material to the consolidated financial statements.
Restricted Spending Solutions, LLC—prepaid and commercial cards. On November 19, 2009, Visa U.S.A. filed its First Amended Answer and Counterclaim to the plaintiff’s complaint. On February 5, 2010, the defendants filed a motion for summary judgment of invalidity based on Visa’s U.S. Patent 5,500,513.
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Note 11—Subsequent Events
On July 21, 2010, Visa completed the acquisition of CyberSource Corporation, a leading provider of electronic payment, risk management and payment security solutions to online merchants, at a price of $26.00 per share. The total purchase consideration was approximately $2.0 billion, paid with cash on hand.
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Organization. Visa Inc. (“Visa” or the “Company”) is a global payments technology company that connects consumers, businesses, banks and governments around the world, enabling them to use digital currency instead of cash and checks. Visa and its consolidated subsidiaries, including Visa U.S.A. Inc. (“Visa U.S.A.”), Visa International Service Association (“Visa International”), Visa Worldwide Pte. Limited (“VWPL”), Visa Canada Corporation (“Visa Canada”) and Inovant LLC (“Inovant”), operate the world’s largest retail electronic payments network. The Company provides financial institutions with payment processing platforms that encompass consumer credit, debit, prepaid and commercial payments, and facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. The Company does not issue cards, set fees, or determine the interest rates consumers will be charged on Visa-branded cards, which are the independent responsibility of the Company’s issuing customers.
Consolidation and basis of presentation. The accompanying unaudited consolidated financial statements include the accounts of Visa Inc. and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company consolidates all entities that are controlled by ownership of a majority voting interest as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany accounts and transactions are eliminated in consolidation. Certain reclassifications, not affecting net income attributable to Visa, have been made to prior period information to conform to the current period presentation format, including reclassification of $20 million and $64 million of contractor expense, which was previously reported in professional and consulting fees, to personnel for the three and nine months ended June 30, 2009, respectively.
The Company began to report non-controlling interest (previously referred to as minority interest) as a component of equity in the first quarter of fiscal 2010 and for all comparable periods presented as required under Accounting Standards Codification (“ASC”) 810. The reporting of non-controlling interest has an impact on financial statement presentation only.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q and, consequently, do not include all of the annual disclosures required by GAAP. Reference should be made to the Visa Inc. Annual Report on Form 10-K for the year ended September 30, 2009 for additional disclosures, including a summary of the Company’s significant accounting policies.
The Company consolidates all entities that are controlled by ownership of a majority voting interest as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany accounts and transactions are eliminated in consolidation. Certain reclassifications, not affecting net income attributable to Visa, have been made to prior period information to conform to the current period presentation format, including reclassification of $20 million and $64 million of contractor expense, which was previously reported in professional and consulting fees, to personnel for the three and nine months ended June 30, 2009, respectively.
Recently issued accounting pronouncements. In September 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-12, Fair Value Measurements and Disclosures – Investments in Certain Entities That Calculate Net Asset Value per Share. ASU 2009-12 allows companies that have investments that are within the scope of this ASU to use net asset value per share as a fair value measurement without further adjustment as a practical expedient. The Company adopted this standard in the first quarter of fiscal 2010. The adoption did not have a material impact on the consolidated financial statements. Additional disclosures required under this ASU are not presented because the related investments are not material to the overall consolidated financial statements.
In October 2009, the FASB issued ASU 2009-13, Revenue Recognition – Multiple-Deliverable Revenue Arrangements, which addresses the accounting for multiple-deliverable revenue arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. The Company will adopt ASU 2009-13 effective October 1, 2010. The adoption is not expected to have a material impact on the consolidated financial statements.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements, which requires new disclosures for fair value measurements including significant transfers into and out of Level 1 and Level 2 of the fair value hierarchy. The ASU also requires additional information in the roll-forward of Level 3 assets and liabilities including the presentation of purchases, sales, issuances and settlements on a gross basis. Further clarification for existing disclosure requirements provides for the disaggregation of assets and liabilities presented, and the enhancement of disclosures around inputs and valuation techniques. This ASU impacts disclosures only. The Company adopted the ASU in the second quarter of fiscal 2010, with the exception of the additional information in the roll-forward of Level 3 assets and liabilities, which will be effective in the second quarter of fiscal 2011. There was no transfer into or out of Level 1 or 2 of the fair value hierarchy during the nine months ended June 30, 2010. See Note 3 – Fair Value Measurements.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements, which amends the disclosure requirements related to subsequent events. Effective immediately, the ASU retracts the requirement to disclose the date through which subsequent events have been evaluated for a SEC filer. The Company adopted this ASU in the second quarter of fiscal 2010.
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The following table sets forth the changes in the escrow account during the nine months ended June 30, 2010.
| (in millions) | ||||
|
Balance at October 1, 2009 |
$ | 1,715 | ||
|
Additional funding under the plan |
500 | |||
|
American Express settlement payments |
(210 | ) | ||
|
Balance at June 30, 2010 |
$ | 2,005 | ||
|
Less: Current portion of escrow account |
1,865 | |||
|
Long-term portion of escrow account |
$ | 140 | ||
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
| Fair Value Measurements Using Inputs Considered as |
||||||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||||
| June 30, 2010 |
September 30, 2009 |
June 30, 2010 |
September 30, 2009 |
June 30, 2010 |
September 30, 2009 |
|||||||||||||
| (in millions) | ||||||||||||||||||
|
Assets |
||||||||||||||||||
|
Cash equivalents and restricted cash |
||||||||||||||||||
|
Money market funds and time deposits |
$ | 6,883 | $ | 5,977 | ||||||||||||||
|
Investment securities |
||||||||||||||||||
|
U.S. government-sponsored agency debt securities |
$ | 136 | $ | 169 | ||||||||||||||
|
Canadian government debt securities |
— | 7 | ||||||||||||||||
|
Equity securities |
56 | 73 | ||||||||||||||||
|
Corporate debt securities |
$ | 1 | $ | 10 | ||||||||||||||
|
Mortgage backed securities |
4 | 6 | ||||||||||||||||
|
Other asset backed securities |
3 | 5 | ||||||||||||||||
|
Auction rate securities |
13 | 13 | ||||||||||||||||
|
Derivative financial instruments |
||||||||||||||||||
|
Foreign exchange derivative instruments |
14 | 16 | ||||||||||||||||
| 6,939 | $ | 6,050 | 150 | $ | 192 | 21 | $ | 34 | ||||||||||
|
Liabilities |
||||||||||||||||||
|
Other liabilities |
||||||||||||||||||
|
Visa Europe put option |
$ | 346 | $ | 346 | ||||||||||||||
|
Foreign exchange derivative instruments |
$ | 35 | $ | 96 | ||||||||||||||
The tables below provide a roll-forward of Level 3 investments which are measured at fair value on a recurring basis for the nine months ended June 30, 2010 and 2009.
| Fair Value of Financial Assets Using Significant Unobservable
Inputs (Level 3) |
|||||||||||||||||||
| Corporate Debt Securities |
Mortgage Backed Securities |
Other Asset Backed Securities |
Auction Rate Securities |
Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
|
Balances at October 1, 2009 |
$ | 10 | $ | 6 | $ | 5 | $ | 13 | $ | 34 | |||||||||
|
Other-than-temporary impairment included in investment income, net |
— | — | — | — | — | ||||||||||||||
|
Maturities and principal payments |
(9 | ) | (2 | ) | (2 | ) | — | (13 | ) | ||||||||||
|
Transfers in (out) of Level 3 |
— | — | — | — | — | ||||||||||||||
|
Balances at June 30, 2010 |
$ | 1 | $ | 4 | $ | 3 | $ | 13 | $ | 21 | |||||||||
| Fair Value of Financial Assets Using Significant Unobservable
Inputs (Level 3) |
|||||||||||||||||||
| Corporate Debt Securities |
Mortgage Backed Securities |
Other Asset Backed Securities |
Auction Rate Securities |
Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
|
Balances at October 1, 2008 |
$ | 45 | $ | 22 | $ | 23 | $ | 13 | $ | 103 | |||||||||
|
Other-than-temporary impairment included in investment income, net |
(3 | ) | (4 | ) | (1 | ) | — | (8 | ) | ||||||||||
|
Maturities and principal payments |
(29 | ) | (5 | ) | (12 | ) | — | (46 | ) | ||||||||||
|
Transfers in (out) of Level 3 |
— | — | — | — | — | ||||||||||||||
|
Balances at June 30, 2009 |
$ | 13 | $ | 13 | $ | 10 | $ | 13 | $ | 49 | |||||||||
|
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The components of net periodic benefit cost are as follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||
| 3 months ended June 30, |
9 months ended June 30, |
3 months ended June 30, |
9 months ended June 30, |
|||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
|
Service cost |
$ | 11 | $ | 13 | $ | 34 | $ | 38 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
Interest cost |
10 | 11 | 30 | 34 | — | 1 | 1 | 2 | ||||||||||||||||||||||||
|
Expected return on assets |
(13 | ) | (12 | ) | (38 | ) | (34 | ) | — | — | — | — | ||||||||||||||||||||
|
Amortization of: |
||||||||||||||||||||||||||||||||
|
Prior service cost (credit) |
(2 | ) | (2 | ) | (6 | ) | (6 | ) | — | (1 | ) | (2 | ) | (3 | ) | |||||||||||||||||
|
Actuarial loss |
4 | 4 | 13 | 11 | (1 | ) | — | (1 | ) | — | ||||||||||||||||||||||
|
Total net periodic pension cost |
$ | 10 | $ | 14 | $ | 33 | $ | 43 | $ | (1 | ) | $ | — | $ | (2 | ) | $ | (1 | ) | |||||||||||||
|
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The Company maintained collateral as follows:
| June 30, 2010 |
September 30, 2009 |
|||||
| (in millions) | ||||||
|
Cash equivalents |
$ | 869 | $ | 812 | ||
|
Pledged securities at market value |
469 | 243 | ||||
|
Letters of credit |
848 | 703 | ||||
|
Guarantees |
2,362 | 2,644 | ||||
|
Total |
$ | 4,548 | $ | 4,402 | ||
|
|||
The number of shares of each class and the number of shares of class A common stock outstanding on an as-converted basis at June 30, 2010 are as follows:
| (in millions) | Shares Outstanding at June 30, 2010 |
Conversion Rate Into class A Common Stock |
As Converted(1) | |||
|
Class A common stock |
496 | — | 496 | |||
|
Class B common stock |
245 | 0.5550 | 136 | |||
|
Class C common stock |
98 | 1.0000 | 98 | |||
|
Total class A common stock as-converted |
731 | |||||
| (1) |
Figures may not sum due to rounding. As-converted class A common stock count calculated based on whole numbers. |
|
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The following table summarizes the activity related to accrued litigation for both covered and other non-covered litigation for the nine months ended June 30:
| Fiscal 2010 |
Fiscal 2009 |
|||||||
| (in millions) | ||||||||
|
Balance at October 1 |
$ | 1,717 | $ | 3,758 | ||||
|
Provision for settled legal matters(1) |
(41 | ) | (1 | ) | ||||
|
Provision for unsettled legal matters |
— | 2 | ||||||
|
Settlement obligation refunded by Morgan Stanley(2) |
— | 65 | ||||||
|
Interest accretion on settled matters |
23 | 71 | ||||||
|
Payments on settled matters(3) |
(897 | ) | (1,642 | ) | ||||
|
Balance at June 30 |
$ | 802 | $ | 2,253 | ||||
| (1) |
This amount includes the reduction to the provision for the $41 million pre-tax gain recognized related to the prepayment of the remaining obligations under the Retailers’ litigation. There was no other significant provision activity during the three and nine months ended June 30, 2010. |
| (2) |
This balance represents the amount of a settlement refunded to the Company during fiscal 2009 by Morgan Stanley under a separate agreement. |
| (3) |
This amount includes the Company’s October 2009 prepayment of its remaining $800 million in payment obligations in the Retailers’ litigation at a discounted amount of $682 million. |
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