Sonic 2006 Annual Report Download - page 51

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assumptions that were used to estimate the fair value of stock option grants in the respective periods are listed in the
table below:
2006 2005 2004
Expected term (years) 4.5 5.1 5.8
Expected volatility 34% 41% 46%
Risk-free interest rate 4.7% 4.0% 3.8%
Expected dividend yield 0% 0% 0%
The company estimates expected volatility based on historical daily price changes of the company’s common
stock for a period equal to the current expected term of the options.The risk-free interest rate is based on the United
States treasury yields in effect at the time of grant corresponding with the expected term of the options.The expected
option term is the number of years the company estimates that options will be outstanding prior to exercise
considering vesting schedules and our historical exercise patterns.The estimate of expected term for options granted
in April 2006 was adjusted to consider the reduced contractual term from 10 years to 7 years, resulting in a lower
expected term.
SFAS 123R requires the cash flows resulting from the tax benefits for tax deductions in excess of the
compensation expense recorded for those options (excess tax benefits) to be classified as financing cash flows. These
excess tax benefits were $4,645 for the year ended August 31, 2006 and are classified as a financing cash inflow in the
company’s Consolidated Statements of Cash Flows.
A summary of stock option activity under the company’s share-based compensation plans for the year ended
August 31, 2006 is presented in the following table:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Life (Yrs.) Value
Outstanding-beginning of year 7,826 $9.91
Granted 965 22.08
Exercised (1,339) 5.97
Forfeited or expired (221) 19.13
Outstanding August 31, 2006 7,230 $ 11.98 5.42 $ 72,656
Exercisable August 31, 2006 5,415 $ 9.10 4.64 $ 69,445
The total intrinsic value of options exercised during the years ended August 31, 2006, 2005 and 2004 was $19,567,
$20,923 and $12,617, respectively. At August 31, 2006, total remaining unrecognized compensation cost related to
unvested stock-based arrangements was $12,441 and is expected to be recognized over a weighted average period
of 1.6 years.
Stockholder Rights Plan
The company has a stockholder rights plan which is designed to deter coercive takeover tactics and to prevent a
potential acquirer from gaining control of the company without offering a fair price to all of the company’s stockholders.
The plan provided for the issuance of one common stock purchase right for each outstanding share of the
company’s common stock. Each right initially entitles stockholders to buy one unit of a share of preferred stock for
$85.The rights will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the
company’s common stock or commences a tender or exchange offer upon consummation of which such person or
group would beneficially own 15% or more of the company’s common stock. At August 31, 2006, 1,000 shares of
preferred stock have been reserved for issuance upon exercise of these rights.
Sonic Corp. 2006 Annual Report
49
Notes to Consolidated
Financial Statements
August 31, 2006, 2005 and 2004
(In thousands, except per share data)