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provision adjust once every six years. The periodic adjustment of these contracts can either increase or decrease the guaranteed amount though not below the amount invested adjusted for withdrawals. When market values of the customer’s accounts decline, the death benefit payable on a contract with a GMDB may exceed the accumulated contract value. Currently, the amount paid in excess of contract value is expensed when payable. Amounts expensed in 2002, 2001 and 2000 were $37 million, $16 million and $1 million, respectively. 

## Membership Rewards 

The company’s Membership Rewards loyalty program allows enrolled cardmembers to earn points that can be redeemed for a broad range of travel rewards, retail merchandise and gourmet gifts. The company makes payments to its reward partners when cardmembers redeem their points and establishes reserves to cover the cost of future reward redemptions. The provision for the cost of Membership Rewards is based upon points awarded which are ultimately expected to be redeemed by cardmem- bers and the current weighted average cost per point of redemption. The ultimate points to be redeemed are estimated based on many factors, including a review of past behavior of cardmembers segmented by product, year of enrollment in the program, spend level and duration in the program. Past behavior is used to predict when current enrollees will attrite and their ultimate redemtpion rate. In addition, the cumulative balance sheet liability for unredeemed points is adjusted over time based on actual redemption and cost experience as well as current trends with respect to redemptions. 

## Stock Options 

At December 31, 2002, the company has two stock-based employee compensation plans, which are described in more detail in Note 14. Effective January 1, 2003, the company has adopted the fair value recognition provisions of SFAS No. 123, “Account- ing for Stock-Based Compensation,” prospectively for all stock options granted after January 1, 2003. Prior to 2003, the company accounted for those plans under the recognition and measurement provisions of Accounting Principles Board Opin- ion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No employee compensation cost is reflected in net income for stock options granted, since all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and EPS assuming the company had followed the fair value recognition provisions of SFAS No. 123 for stock options for the years ended December 31, 2002, 2001 and 2000. 

<img src='content_image/44619.jpg'>

## Recently Issued Accounting Standards 

Effective January 1, 2002, the company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which established new accounting and reporting standards for goodwill and other intangible assets. Under the new rules, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but are instead subject to annual impairment tests. Management has completed goodwill impairment tests as of the date of initial adoption, and again during 2002. Such tests did not indicate impairment. See Note 5 for further discussion of the company’s goodwill and other intangibles. 

