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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: 

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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 

