Papa Johns 2001 Annual Report Download - page 59

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15. Stock Options
In accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), we have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related Interpretations in accounting for our
employee stock options because, as discussed below, the alternative fair value accounting provided for
under SFAS 123 requires the use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of our employee stock options equals
or exceeds the market price of the underlying stock on the date of grant, no compensation expense is
recognized.
We award stock options from time to time under the Papa John’s International, Inc. 1993 Stock
Ownership Incentive Plan (the “1993 Plan”), the Papa John’s International, Inc. 1993 Non-Employee
Directors Stock Option Plan (the “Directors Plan”) and the Papa John’s International, Inc. 1999 Team
Member Stock Ownership Plan (the “1999 Plan”). Shares of common stock authorized for issuance are
6,400,000 under the 1993 Plan, 370,000 under the Directors Plan and 1,000,000 under the 1999 Plan.
Options granted under all plans generally expire ten years from the date of grant and vest over one-to
five-year periods, except for certain options awarded under a previous, multi-year operations
compensation program that vested immediately upon grant.
Pro forma information regarding net income and earnings per share is required by SFAS 123, which also
requires that the information be determined as if we have accounted for our employee stock options
granted subsequent to December 25, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes option pricing model, which
was developed for use in estimating the fair value of traded options which have no vesting restrictions and
are fully transferable. Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management’s opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of our employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over
the options’ vesting period. Our pro forma information follows, along with the indicated weighted
average assumptions used:
2001 2000 1999
Pro forma net income (in thousands) 46,453$ 25,806$ 39,349$
Pro forma earnings per share:
Basic 2.06$ 1.04$ 1.30$
Assuming dilution 2.04$ 1.04$ 1.27$
Assumptions (weighted average):
Risk-free interest rate 2.5% 5.3% 6.0%
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 0.48 0.49 0.47
Expected life (in years) 5.2 4.6 4.0
Because SFAS 123 is applicable only to options granted subsequent to December 25, 1994, our pro forma
effect was not fully reflected until 2000 when the complete five years of vesting occurred for 1995 option
awards.