Sonic 2003 Annual Report Download - page 35

p.33
Notes to Consolidated Financial Statements
August 31, 2003, 2002 and 2001 (In thousands, except share data)
and the company acts with limited agency in the administration of these funds. Accordingly, neither the revenues and
expenses nor the assets and liabilities of the advertising cooperatives, the Sonic Advertising Fund, or the System Marketing
Fund are included in the company’s consolidated financial statements. However, all advertising contributions by
company-owned restaurants are recorded as expense on the company’s financial statements.
Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of three months or less from date of purchase.
Stock-Based Compensation
The company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) and related interpretations in accounting for its stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123, “Accounting for Stock-Based
Compensation,” requires the use of option valuation models that were not developed for use in valuing such stock
options. Under APB 25, because the exercise price of the company’s stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and net income per share is required by Statement 123, which also
requires that the information be determined as if the company has accounted for its stock options granted subsequent to
August 31, 1995 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 with the following weighted average assumptions:
Year of Risk-Free Expected Expected Expected Life
Grant Interest Rate Dividend Yield Volatility (years)
2003 3.2% 0.0% 46.3% 5.7
2002 4.4 0.0 46.3 5.3
2001 5.0 0.0 48.5 5.2
The Black-Scholes option valuation 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 valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because the company’s 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 its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the
options’ vesting period. The following table illustrates the effect on net income and earnings per share if the company had
applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for
Stock-Based Compensation,” to stock-based employee compensation:
2003 2002 2001
Net income, as reported $ 52,261 $ 47,692 $ 38,956
Less stock-based compensation expense using the fair value
method, net of related tax effects (4,460) (3,828) (3,094)
Pro forma net income $ 47,801 $ 43,864 $ 35,862
Net income per share:
Basic:
As reported $ 1.34 $ 1.19 $ .98
Pro forma $ 1.23 $ 1.09 $ .90
Diluted:
As reported $ 1.29 $ 1.13 $ .93
Pro forma $1.18 $ 1.04 $ .86