American Express 2003 Annual Report Download - page 95

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approximately 426.1 million shares pursuant to several authorizations. Included in the total repurchased amount are 39.3
million shares delivered to the Company during the three years ended December 31, 2003 as a result of the prepayments
discussed below.
Of the common shares authorized but unissued at December 31, 2003, 187.7 million shares were reserved for issuance for
employee stock, employee benefit and dividend reinvestment plans, as well as convertible securities.
In 1999 and 2000, the Company entered into agreements under which a financial institution purchased an aggregate
29.5 million Company common shares at an average purchase price of $50.41 per share. These agreements were entered into
to partially offset the Company’s exposure to the effect on diluted earnings per share of outstanding in-the-money stock
options issued under the Company’s stock option program. Each of the agreements provided that upon their termination,
the Company was required to deliver an amount equal to the original purchase price for the shares. The Company could
elect to settle this amount at any time (i) physically, by paying cash against delivery of the shares held by the financial insti-
tution or (ii) on a net cash or net share basis. During the term of the agreements, the Company, on a monthly basis, would
either receive from or issue to the financial institution a quantity of shares so that the value of the remaining shares held by
the financial institution was equal to the original aggregate purchase price.
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 was recorded in equity as long as the contracts continued to meet the requirements of
EITF Issue 00-19. Net settlements under the agreements resulted in the Company issuing 0.4 million shares in both 2003
and 2002. The Company had the right to terminate these agreements at any time upon full settlement. The Company could
prepay outstanding amounts at any time prior to the end of the five-year term, and from time to time, could make such pre-
payments 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. During 2001 and 2002, the Company
elected to prepay $950 million of the aggregate outstanding amount. In 2003, the Company elected to prepay the remain-
ing $535 million of aggregate outstanding amount and terminated the agreements.
(Millions) 2003 2002 2001
Shares outstanding at beginning of year 1,305 1,331 1,326
Repurchases of common shares:
Open market/purchases from Incentive Savings Plan (21) (16) (6)
Prepayments under share purchase agreements (15) (17) (8)
Net settlements pursuant to share purchase agreements ——12
Other, primarily employee benefit plans 15 77
Shares outstanding at end of year 1,284 1,305 1,331
The Board of Directors is authorized to permit the Company to issue up to 20 million preferred shares without further
shareholder 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 deriv-
ative 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
(p.93_axp_ notes to consolidated financial statements)