Sonic 2007 Annual Report Download - page 39

State net operating loss carryforwards expire generally beginning in 2010. Management
does not believe the company will be able to realize the state net operating loss carryforwards
and therefore has provided a valuation allowance as of August 31, 2007 and 2006.
The company has capital loss carryovers of approximately $4.4 million which expire
beginning in fiscal year 2011. Management believes the company will realize these carryovers
before they expire.
12. Stockholders’ Equity
On April 6, 2006, the company’s board of directors authorized a three-for-two stock split
in the form of a stock dividend. A total of 38,219 shares of common stock were issued in
connection with the split, and an aggregate amount equal to the par value of the common
stock issued of $382 was reclassified from paid-in capital to common stock.
Stock Purchase Plan
The company has an employee stock purchase plan for all full-time regular employees.
Employees are eligible to purchase shares of common stock each year through a payroll
deduction not in excess of the lesser of 10% of compensation or $25. The aggregate amount
of stock that employees may purchase under this plan is limited to 759,375 shares. The
purchase price will be between 85% and 100% of the stock’s fair market value and will be
determined by the company’s board of directors.
Stock-Based Compensation
The Sonic Corp. 2006 Long-Term Incentive Plan (the “2006 Plan”) provides flexibility to
award various forms of equity compensation, such as stock options, stock appreciation rights,
performance shares, restricted stock and other stock-based awards. At August 31, 2007, 4,871
shares were available for grant under the 2006 Plan. The company has historically granted
only stock options with an exercise price equal to the market price of the company’s stock at
the date of grant, a contractual term of seven to ten years, and a vesting period of three years.
The company’s policy is to recognize compensation cost for these options on a straight-line
basis over the requisite service period for the entire award. Additionally, the company’s policy
is to issue new shares of common stock to satisfy stock option exercises.
The company measures the compensation cost associated with share-based payments by
estimating the fair value of stock options as of the grant date using the Black-Scholes option
pricing model. The company believes that the valuation technique and the approach utilized
to develop the underlying assumptions are appropriate in calculating the fair values of the
company’s stock options granted during 2007, 2006 and 2005. Estimates of fair value are not
intended to predict actual future events or the value ultimately realized by the employees
who receive equity awards.
The per share weighted average fair value of stock options granted during 2007, 2006
and 2005 was $7.10, $7.90 and $8.94, respectively. In addition to the exercise and grant date
prices of the awards, certain weighted average assumptions that were used to estimate the
fair value of stock option grants in the respective periods are listed in the table below:
2007 2006 2005
Expected term (years) 4.5 4.5 5.1
Expected volatility 28% 34% 41%
Risk-free interest rate 4.6% 4.7% 4.0%
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.
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 $4,117, $4,645 and $4,595
for the years ended August 31, 2007, 2006 and 2005, respectively, and are classified as a
financing cash inflow in the company’s Consolidated Statements of Cash Flows. The proceeds
from exercises of stock options are also classified as cash flows from financing activities and
totaled $7,732, $7,194 and $10,546 for each of the years ended August 31, 2007, 2006 and
2005, respectively.
A summary of stock option activity under the company’s share-based compensation plans
for the year ended August 31, 2007, is presented in the following table:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Life (Yrs.) Value
Outstanding-beginning of year 7,230 $ 11.98
Granted 1,259 22.36
Exercised (1,234) 6.91
Forfeited or expired (132) 21.18
Outstanding August 31, 2007 7,123 $ 14.53 5.08 $ 53,436
Exercisable August 31, 2007 5,054 $ 11.40 4.45 $ 52,895
The total intrinsic value of options exercised during the years ended August 31, 2007,
2006 and 2005 was $19,408, $19,567 and $20,923, respectively. At August 31, 2007, total
remaining unrecognized compensation cost related to unvested stock-based arrangements
was $12,893 and is expected to be recognized over a weighted average period of 1.6 years.
Stockholder Rights Plan
The company had a stockholder rights plan 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. This plan expired by its terms on June 16, 2007.
Pg. 37
Sonic Corp. 2007 Annual Report
Notes to Consolidated Financial Statements
August 31, 2007, 2006 and 2005 (In thousands, except per share data)