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fair value based method for expense recognition of employee awards resulted in $26 (net of tax of nil) of stock option expense
during 2003.
Stock-based awards that are settled or may be settled in cash or shares purchased on the open market at the option of employees or
directors are recorded as liabilities. The measurement of the liability and compensation cost for these awards is based on the
intrinsic value of the award and is recorded in net earnings (loss) over the vesting period of the award. Changes in Nortel Networks
payment obligation subsequent to vesting of the award and prior to the settlement date are recorded in net earnings (loss) in the
period incurred. The payment amount is established for Stock Appreciation Rights (“SARs”) on the date of exercise of the award by
the employee, for Restricted Stock Units (“RSUs”) on the vesting date of the award and for Deferred Stock Units (“DSUs”) on the
later of the date of termination of employment and/or directorship. Stock-based awards which are substantively discretionary in
nature are recorded in the period that the issuance and settlement of the award is approved.
Nortel Networks has stock purchase plans for eligible employees in eligible countries, and a stock purchase plan for eligible
unionized employees in Canada (collectively, the “ESPPs”), to facilitate the acquisition of the common shares of Nortel Networks
Corporation at a discount. Nortel Networks contribution to the ESPPs is recorded as compensation expense on a quarterly basis as
the obligation to contribute is incurred.
Had Nortel Networks applied the fair value based method to all stock-based awards in all periods, reported net earnings (loss) and
earnings (loss) per common share would have been adjusted to the pro forma amounts indicated below for the following years
ended December 31:
2003 2002 2001
Net earnings (loss) — reported $ 434 $ (2,994) $ (25,722)
Stock-based compensation — reported
(a)
55 18 15
Deferred stock option compensation — reported
(b)
16 79 151
Stock-based compensation — pro forma
(c)
(481) (1,149) (1,766)
Net earnin
g
s (loss)
—
p
ro forma $ 24 $ (4,046) $ (27,322)
Basic earnings (loss) per common share:
Reported $ 0.10 $ (0.78) $ (8.08)
Pro forma $0.01 $(1.06) $(8.58)
Diluted earnings (loss) per common share:
Reported $0.10 $(0.78) $(8.08)
Pro forma $ 0.01 $ (1.06) $ (8.58)
(a) Stoc
k
-based compensation — reported, included, for the years ended December 31, 2003, 2002 and 2001:
i. Stock option expense of $26, nil and nil, respectively, which was net of tax of nil in each period;
ii. Employer portion of ESPPs contributions expense of $6, $6 and $12, respectively, which was net of tax of nil, $2 and $6,
respectively;
iii. RSUs expense of $19, $5 and $4, respectively, which was net of tax of nil, $1 and $2, respectively; and
iv. DSUs expense of $4, $7 and $(1), respectively, which was net of tax of nil, $3 and nil, respectively.
(b) Deferred stock option compensation — reported, represented the amortization of deferred stock option compensation related
primarily to unvested stock options held by employees of companies acquired in a purchase acquisition. For the years ended
December 31, 2003, 2002 and 2001, the amounts were net of tax of nil, $31 and $97, respectively. In 2001, amortization of deferred
stock option compensation of $4 was included within discontinued operations.
(c) Stock-based compensation — pro forma expense for the years ended December 31, 2003, 2002 and 2001 was net of tax of nil, $170
and $484, respectively.
The following weighted-average assumptions were used in computing the fair value of stock options for purposes of expense recognition
and pro forma disclosures, as applicable, for the following periods:
2003 2002 2001
Black-Scholes weighted-average assumptions
Expected dividend yield 0.00% 0.00% 0.00%
Ex
p
ected volatilit
y
92.49% 71.33% 70.64%
Risk-free interest rate 2.81% 4.49% 4.74%
Expected option life in years 4 4 4
Weighted-average stock option fair value per option granted
$1.57 $3.50 $8.38