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## Notes to Consolidated Financial Statements 

Changes in the fair value of derivatives that are highly effec- tive and that are designated and qualify as cash flow hedges are recorded in other comprehensive income until earnings are affected by the variability in cash flows of the designated hedged item. Where applicable, we discontinue hedge accounting pro- spectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item or the derivative is terminated. Any changes in the fair value of a derivative where hedge accounting has been discontinued or is ineffective are recognized immediately in earnings. Cash flows related to derivatives are included in operating activities. 

## Pre-Opening Expenses 

Non-capital expenditures associated with opening new restaurants are expensed as incurred. 

## Advertising 

Production costs of commercials are charged to operations in the fiscal period the advertising is first aired. The costs of programming and other advertising, promotion, and marketing programs are charged to operations in the fiscal period incurred. Advertising expense amounted to $210,989, $200,020, and $184,163, in fiscal 2004, 2003, and 2002, respectively. 

## Stock-Based Compensation 

SFAS No. 123, “Accounting for Stock-Based Compensation,” encourages the use of a fair-value method of accounting for stock- based awards under which the fair value of stock options is deter- mined on the date of grant and expensed over the vesting period. As allowed by SFAS No. 123, we have elected to account for our stock-based compensation plans under an intrinsic value method that requires compensation expense to be recorded only if, on the date of grant, the current market price of our common stock exceeds the exercise price the employee must pay for the stock. Our policy is to grant stock options at the fair market value of our underlying stock on the date of grant. Accordingly, no compensa- tion expense has been recognized for stock options granted under any of our stock plans because the exercise price of all options granted was equal to the current market value of our stock on the grant date. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation.” SFAS No. 148 pro- vides alternative methods of transition for voluntary change to the fair value method of accounting for stock-based compensation. 

In addition, SFAS No. 148 requires more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. 

Had we determined compensation expense for our stock options based on the fair value at the grant date as prescribed under SFAS No. 123, our net earnings and net earnings per share would have been reduced to the pro forma amounts indicated below: 

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To determine pro forma net earnings, reported net earnings have been adjusted for compensation expense associated with stock options granted that are expected to eventually vest. The preceding pro forma results were determined using the Black Scholes option- pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, expected dividend payments, and the risk-free inter- est rate over the expected life of the option. The dividend yield was calculated by dividing the current annualized dividend by the option exercise price for each grant. The expected volatility was determined considering stock prices for the fiscal year the grant occurred and prior fiscal years, as well as considering industry volatility data. The risk-free interest rate was the rate available on zero coupon U.S. government obligations with a term equal to the expected life of each grant. The expected life of the option was esti- mated based on the exercise history from previous grants. 

