AIG 2010 Annual Report Download - page 348

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and no shares have been purchased since the second quarter of 2008, except for the purchase of a total of
5,336,981 shares from AIA and ALICO prior to their divestiture, which had been reported as treasury shares.
In May 2008, AIG sold 9,835,526 shares of AIG Common Stock at a price per share of $760 for gross proceeds
of $7.47 billion and 78.4 million equity units (the Equity Units) at a price per unit of $75 for gross proceeds of
$5.88 billion. The Equity Units, the key terms of which are summarized below, are recorded as long-term debt in
the Consolidated Balance Sheet.
Equity Units
In May 2008, AIG sold 78.4 million equity units (the Equity Units) at a price per unit of $75 for gross proceeds
of $5.88 billion. Each Equity Unit has an initial stated amount of $75 and consists of a stock purchase contract
issued by AIG and, initially, a 1/40th, or 2.5 percent, undivided beneficial ownership interest in three series of
junior subordinated debentures (Series B-1, B-2 and B-3), each with a principal amount of $1,000.
The Equity Units also include a stock purchase contract obligating the holder of an Equity Unit to purchase,
and obligating AIG to sell, a variable number of shares of AIG Common Stock for $25 in cash on each of
February 15, 2011, May 1, 2011 and August 1, 2011. The number of shares that AIG is obligated to deliver on
each stock purchase date is set forth in the chart below (where the ‘‘applicable market value’’ is an average of the
trading prices of AIG Common Stock over the 20-trading-day period ending on the third business day prior to the
relevant stock purchase date).
If the applicable market value is: then AIG is obligated to issue:
• Greater than or equal to $912 • 0.02741 shares per stock purchase contract
• Between $912 and $760 • Shares equal to $25 divided by the applicable market
value
• Less than or equal to $760 • 0.03289 shares per stock purchase contract
AIG is obligated to pay quarterly contract adjustment payments to the holders of the stock purchase contracts,
at an initial annual rate of 2.71 percent applied to the stated amount. The present value of the contract
adjustment payments, $431 million, was recognized at inception as a liability (a component of Other liabilities),
and was recorded as a reduction to Additional paid-in capital.
In addition to the stock purchase contracts, as part of the Equity Units, AIG issued $1.96 billion of each of the
Series B-1, B-2 and B-3 junior subordinated debentures, which initially pay interest at rates of 5.67 percent,
5.82 percent and 5.89 percent, respectively. AIG allocated the proceeds of the Equity Units between the stock
purchase contracts and the junior subordinated debentures on a relative fair value basis. AIG determined that the
fair value of the stock purchase contract at issuance was zero, and therefore all of the proceeds were allocated to
the junior subordinated debentures.
The junior subordinated debentures are recorded as Other long-term debt in the Consolidated Balance Sheet.
The principal amount owed by AIG on the subordinated debentures is equal to the amount owed to AIG under
the related stock purchase contract.
On November 23, 2010, AIG commenced an offer to exchange up to 74,480,000 of its Equity Units for
consideration per Equity Unit equal to 0.09867 share of AIG Common Stock plus $3.2702 in cash (the ‘‘Exchange
Offer’’). The stock and cash received will be the result of netting payments from two separate transactions, a
repurchase of the subordinated debentures and a cancellation of the stock purchase contracts.
On November 29, 2010, holders of 49,474,600 Equity Units accepted the Exchange Offer and their units were
tendered in exchange for 4,881,667 shares of AIG Common Stock and $162 million in cash. The consideration
offered per Equity Unit exchanged is the same number of shares and the same cumulative amount of cash per
Equity Unit that a holder would receive if the holder did not tender into the Exchange Offer and instead held
332 AIG 2010 Form 10-K