American Express 2002 Annual Report Download - page 72

Download and view the complete annual report

Please find page 72 of the 2002 American Express annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 92

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92

I70 AXP INOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The contracts were initially recorded at their fair value within equity on the company’s balance sheet in accordance with EITF
Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”
Subsequent activity is recorded in equity as long as the contracts continue to meet the requirements of EITF Issue 00-19. Net
settlements under the agreements resulted in the company issuing 0.4 million shares and 12.3 million shares in 2002 and 2001,
respectively. The company has the right to terminate these agreements at any time upon full settlement. The company may pre-
pay outstanding amounts at any time prior to the end of the five-year term, and from time to time, may make such prepayments
in lieu of, or in addition to, its share repurchase program, which either or together would be expected to have the same effect on
outstanding shares as a purchase under the share repurchase program. In 2001, the company elected to prepay $350 million of
the aggregate outstanding amount. In addition, in 2002, the company elected to prepay $600 million of the aggregate outstand-
ing amount. At December 31, 2002, 15.3 million shares of the company’s common stock continued to be held by the financial
institution in support of the remaining balance of approximately $535 million.
To the extent that the price of the company’s common stock declines to levels substantially lower than current levels for a
sustained period of time, thereby resulting in significant net issuances of shares under these agreements, there could be an
adverse impact on basic and diluted earnings per share. The maximum number of company common shares that could
potentially be distributed pursuant to the agreements would not exceed 62 million shares as adjusted for shares delivered by
the company and shares delivered to the company.
Common shares activity for each of the last three years ended December 31 was:
(Millions) 2002 2001 2000
Shares outstanding at beginning of year 1,331 1,326 1,341
Repurchases of common shares:
Open market/purchases from Incentive Savings Plan (16) (6) (25)
Prepayments under share purchase agreements (17)(8) —
Net settlements pursuant to share purchase agreements —12 (2)
Other, primarily employee benefit plans 7712
Shares outstanding at end of year 1,305 1,331 1,326
The Board of Directors is authorized to permit the company to issue up to 20 million preferred shares without further share-
holder approval.
Note 9 DERIVATIVES AND HEDGING ACTIVITIES
As prescribed by SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” derivative instruments that
are designated and qualify as hedging instruments are further classified as either a cash flow hedge, a fair value hedge or a
hedge of a net investment in a foreign operation, based upon the exposure being hedged.
For derivative instruments that are designated and qualify as a cash flow hedge, the portion of the gain or loss on the derivative
instrument effective at offsetting changes in the hedged item is reported as a component of other comprehensive income (loss)
and reclassified into earnings when the hedged transaction affects earnings. Any ineffective portion of the gain or loss on the
derivative instrument is recognized currently in earnings. For derivative instruments that are designated and qualify as a fair
value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to
the hedged risk is recognized in current earnings during the period of the change in fair values. For derivative instruments that
are designated and qualify as a hedge of a net investment in a foreign operation, the effective portion of the gain or loss on the
derivative is reported in other comprehensive income (loss) as part of the cumulative translation adjustment. For derivative
instruments not designated as hedging instruments, the gain or loss is recognized currently in earnings.
Cash Flow Hedges
The company uses interest rate products, primarily swaps, to manage funding costs related to TRS’ charge card business, as
well as AEFA’s investment certificate business. For its charge card products, TRS uses interest rate swaps to achieve a targeted
mix of fixed and floating rate funding. These interest rate swaps are used to protect the company from the interest rate risk