Cogeco 2002 Annual Report Download - page 35

34 Cogeco Cable Inc.
12. Capital stock (continued)
Because the method of accounting under CICA Handbook section 3870 has not been applied to options
granted prior to September 1, 2001, the pro forma compensation cost may not be representative of
compensation cost to be expected in future years.
The fair value of each option granted was estimated on the grant date for purposes of the pro forma
disclosures using the Binomial option pricing model based on the following assumptions:
Expected dividend yield 1.27%
Expected volatility 35%
Risk-free interest rate 4.13%
Expected life in years 3.8
The fair value of stock options granted for the year ended August 31, 2002, was $7.40 per option.
For the purpose of pro forma disclosures, stock-based compensation is amortized to expense on a straight-line
basis over the vesting period, which is four years.
The Binomial option pricing model was developed for use in estimating the fair value of traded options, which
have no vesting restrictions and are fully transferable. In addition, option pricing models require the use of
highly subjective assumptions including the expected stock price volatility. Because the Corporation’s
employee stock options have characteristics significantly different from those of traded options, and because
changes in the subjective assumptions can have a material effect on the fair value estimate, in management’s
opinion, the existing option pricing models do not necessarily provide a reliable single measure of the fair value
of its employee stock options.
The Corporation has also adopted a perf o rmance unit plan for key employees. The value of a perf o rm a n c e
unit granted is equal to the closing price of the subordinate voting shares of the Corporation on the To ro n t o
Stock Exchange on the trading day preceding the date of grant of the unit. The units credited to the
participant’s account will become vested to the participant on the third anniversary of the date of grant of
the said perf o rmance units. The units will be redeemed only at the termination of the participant’s
employment or in case of re t i rement or death. Each unit credited gives the right to a Dividend Equivalent
equal to the amount of dividend per share paid on the subordinate voting shares of the Corporation. The
Dividend Equivalent is converted into additional units. The units do not confer on the participant the right to
a c q u i re shares or other securities of the Corporation under any circumstances, and the participant shall not,
by holding units or otherwise, be considered a shareholder of the Corporation nor have any rights to become
a shareholder as a result. An amount of $118,000 has been recorded as a reduction of expenses related to this
plan. In 2001, an expense amounting to $103,000 was re c o rd e d .
13. Earnings per share
The following table provides a reconciliation between basic and diluted earnings per share:
2002 2001
Net income $ 3,788 $ 5,818
Weighted average number of multiple voting and
subordinate voting shares outstanding 39,871,601 38,812,879
Effect of dilutive stock options 14,578 38,381
Weighted average number of diluted multiple voting and
subordinate voting shares outstanding 39,886,179 38,851,260
Earnings per share
Basic $ 0.10 $ 0.15
Diluted 0.09 0.15
14. Financial instruments
Fair value
The Corporation uses the following methods and assumptions to evaluate fair market value of financial instruments:
Accounts receivable, accounts payable and accrued liabilities
The carrying amount in the consolidated balance sheets approximates fair value because of the short-term
nature of these instruments.