American Express 2001 Annual Report Download - page 63

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 ❚CUMULATIVE QUARTERLY INCOME PREFERRED SHARES
In 1998, American Express Company Capital Trust I, a wholly-owned subsidiary of the company, established as a Delaware statu-
tory business trust (the Trust), completed a public offering of 20 million shares (carrying value of $500 million) of 7.0% Cumula-
tive Quarterly Income Preferred Shares Series I (QUIPS) (liquidation preference of $25 per share). Proceeds of the issue were
invested in Junior Subordinated Debentures (the Debentures) issued by the company due 2028, which represent the sole assets of
the Trust. The QUIPS are subject to mandatory redemption upon repayment of the Debentures at maturity or their earlier redemp-
tion. The company has the option to redeem the Debentures, in whole or in part, at any time on or after July 16, 2003, which will
result in the redemption of a corresponding amount of QUIPS.
The company has unconditionally guaranteed all distributions required to be made by the Trust, but only to the extent the Trust
has funds legally available for such distributions. The only source of funds for the Trust is the company’s interest payments on the
Debentures. The company has the right to defer such interest payments up to 20 consecutive quarters; as a consequence, quarterly
dividend payments on the QUIPS can be deferred by the Trust during any such interest payment period. If the company defers
any interest payments, the company may not, among other things, pay any dividends on its capital stock until all interest in arrears
is paid to the Trust. Distributions on the QUIPS are reported as Interest Expense in the Consolidated Statements of Income.
Note 9 ❚COMMON AND PREFERRED SHARES
In September 1998, the company’s Board of Directors authorized the company to repurchase up to 120 million additional common
shares over the subsequent two to three years, subject to market conditions. The company has repurchased approximately 357 mil-
lion shares since 1994 pursuant to several authorizations, including 57 million under the current authorization (including the 8 mil-
lion shares delivered to the company during 2001 as a result of the prepayment discussed below). These plans are designed to allow
the company to purchase shares, both to offset the issuance of new shares as part of employee compensation plans and to reduce
shares outstanding.
Of the common shares authorized but unissued at December 31, 2001, 164 million shares were reserved for issuance for employee
stock, employee benefit and dividend reinvestment plans, as well as stock purchase agreements.
In 1999 and 2000, the company entered into agreements under which a third party purchased 29 million company common shares
at an average purchase price of $50.41 per share. These agreements, which partially offset the company’s exposure from its stock
option program, are separate from the company’s previously authorized share repurchase program. During the term of these agree-
ments, the company will periodically issue shares to or receive shares from the third party so that the value of the shares held by
the third party equals the original purchase price for the shares. At maturity in five years, the company is required to deliver to the
third party an amount equal to such original purchase price. The company may elect to settle this amount (i) physically, by paying
cash against delivery of the shares held by the third party or (ii) on a net cash or net share basis. The company may also prepay out-
standing amounts at any time prior to the end of the five-year term. In 2001, the company elected to prepay $350 million of the
aggregate outstanding amount, which resulted in 8 million shares being delivered to the company. Net settlements under these
agreements resulted in the company issuing 12 million shares in 2001 and receiving 2 million shares in 2000.
Common shares activity for each of the last three years ended December 31 was:
(Millions) 2001 2000 1999
Shares outstanding at beginning of year 1,326 1,341 1,351
Repurchases of common shares (14) (25) (27)
Net settlements pursuant to third party share purchase agreements 12 (2) —
Other, primarily employee benefit plans 712 17
Shares outstanding at end of year 1,331 1,326 1,341
The Board of Directors is authorized to permit the company to issue up to 20 million preferred shares without further shareholder
approval.