KENNAMETAL INC.  / AR 2002 53 Under SFAS No. 133, the carrying value equals the fair value for these contracts at June 30, 2002 and 2001. Fair value was estimated based on the mark-to-market value of the contracts which closely approximates the amount that we would receive or pay to terminate the agreements at year end. Concentrations of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. By policy, we make temporary cash investments with high credit quality financial institutions. With respect to trade receivables, concentrations of credit risk are significantly reduced because we serve numerous customers in many industries and geographic areas. We are exposed to counterparty credit risk for nonperformance of derivatives and, in the unlikely event of nonperformance, to market risk for changes in interest and currency rates. We manage exposure to counterparty credit risk through credit standards, diversification of counterparties and procedures  to monitor concentrations of credit risk. We do not anticipate nonperformance by any of the counterparties. As of June 30, 2002 and 2001, we had no significant concentrations of credit risk. Note 14 Stock Options, Awards and Purchase Plan Stock options generally are granted to eligible employees at fair market value at the date of grant. Options are exercisable under specified conditions for up to 10 years from the date of grant. We have four plans under which options may be granted: the 1992 plan, the 1996 plan and two 1999 plans. No options may be granted under the 1992 plan after October 2002, no options may be granted under the 1996 plan after October 2006 and no options may be granted under the 1999 plans after April and October 2009. No charges to income have resulted from grants under any of the plans. Under provisions of the plans, participants may deliver our stock, owned by the holder for at least six months, in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. The fair value of shares delivered in each of 2002 and 2001 was $0.2 million. Shares delivered in 2000 were not significant. We measure compensation expense related to stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, at the time options are granted, no compensation expense was recognized in the accompanying consolidated financial statements due to the option strike price being greater than or equal to the market value of the stock on the grant date. If compensation expense was determined based on the estimated fair value  of options granted in 2002, 2001 and 2000, consistent with the methodology in SFAS No. 123, “Accounting for Stock Based Compensation,” our 2002, 2001 and 2000 net income and earnings per share would be reduced to the pro forma amounts indicated below: The fair values of the options granted were estimated on the date of their grant using the Black-Scholes option-pricing model based on the following weighted average assumptions: (in thousands, except per share data) 2002 2001 2000  Net (loss) income:  As reported $ (211,908) $ 53,288 $ 51,710  Pro forma (215,511) 50,802 50,287  Basic (loss) earnings per share:  As reported (6.80) 1.74 1.71 Pro forma (6.91) 1.66 1.66  Diluted (loss) earnings per share: As reported (6.70) 1.73 1.70  Pro forma (6.86) 1.65 1.66  2002 2001 2000  Risk-free interest rate 4.6% 5.9% 6.6% Expected life (years) 5 5 5 Expected volatility 34.0% 33.2% 31.1% Expected dividend yield 1.8% 2.4% 2.5%