H O N I N D U S T R I E S I n c . a n d S U B S I D I A R I E S PRODUCT DEVELOPMENT COSTS EARNINGS PER SHARE STOCK-BASED COMPENSATION USE OF ESTIMATES SELF-INSURANCE RECENT ACCOUNTING PRONOUNCEMENTS INCOME TAXES Product development costs relating to the development of new prod- ucts and processes, including significant improvements and refinements  to existing products, are expensed as incurred. These costs include sala- ries, contractor fees, building costs, utilities, and administrative fees.  The amounts charged against income were $25,791,000 in 2003,  $25,849,000 in 2002, and $21,415,000 in 2001.  bility approach that requires the recognition of deferred tax assets and  liabilities for the expected future tax consequences of events that have  been recognized in the Company’s financial statements or tax returns.  Deferred income taxes are provided to reflect the differences between  the tax bases of assets and liabilities and their reported amounts in the  financial statements. Basic earnings per share are based on the weighted-average number of  common shares outstanding during the year. Shares potentially issu- able under options and deferred restricted stock have been considered  outstanding for purposes of the diluted earnings per share calculation. The Company accounts for its stock option plan using Accounting  Principles Board Opinion No. 25, “Accounting for Stock Issued to  Employees,” whereby stock-based employee compensation is reflected  in net income as all options granted under the plan had an exercise  price equal to the market value of the underlying common stock  on the date of grant. SFAS No. 123, “Accounting for Stock-Based  Compensation” issued subsequent to APB No. 25 and amended by  SFAS No. 148, “Accounting for Stock-Based Compensation — Trans- ition and Disclosure” defines a fair value-based method of accounting  for employees’ stock options but allows companies to continue to  measure compensation cost for employee stock options using the  intrinsic value-based method described in APB No. 25. The following table illustrates the effect on net income  and earnings per share if the Company had applied the fair value  recognition provisions of SFAS No. 123, “Accounting for Stock-Based  Compensation,” as amended by SFAS No. 148 “Accounting for Stock- Based Compensation — Transition and Disclosure,” to stock-based  employee compensation. The Company is partially self-insured for general and product liability,  workers’ compensation, and certain employee health benefits. The gen- eral, product, and workers’ compensation liabilities are managed using  a wholly owned insurance captive; the related liabilities are included in  the accompanying consolidated financial statements. The Company’s  policy is to accrue amounts in accordance with the actuarially deter- mined liabilities. The actuarial valuations are based on historical  information along with certain assumptions about future events.  Changes in assumptions for such matters as legal actions, medical  costs, and changes in actual experience could cause these estimates to  change in the near term. In December 2003, the Financial Accounting Standards Board issued  Interpretation 46R (FIN 46R), a revision to Interpretation 46 (FIN 46),  “Consolidation of Variable Interest Entities.” Fin 46R clarifies some of the  provisions of FIN 46 and exempts certain entities from its requirements.  The Company accounts for income taxes under SFAS No. 109,  “Accounting for Income Taxes.” This Statement uses an asset and lia- Increase in expense in 2003 is due to accelerated vesting upon the  retirement of plan participants. The preparation of financial statements in conformity with accounting  principles generally accepted in the United States requires manage- ment to make estimates and assumptions that affect the amounts  reported in the financial statements and accompanying notes. The  more significant areas requiring the use of management estimates  relate to allowance for doubtful accounts, inventory reserves, market- ing program accruals, warranty accruals, accruals for self-insured  medical claims, workers’ compensation, legal contingencies, general  liability and auto insurance claims, and useful lives for depreciation  and amortization. Actual results could differ from those estimates. 45 (In thousands) 2003 2002  2001  Net income, as reported $ 98.1 $ 91.4  $ 74.4 Deduct: Total stock-based  employee compensation  expense determined under fair  value-based method for all  awards, net of related tax effects  (3.0) (2.2)  (1.4) Pro forma net income $ 95.1 $ 89.2  $ 73.0  Earnings per share: Basic – as reported  $ 1.69 $ 1.55  $ 1.26 Basic – pro forma  $ 1.64 $ 1.52  $ 1.24 Diluted – as reported  $ 1.68 $ 1.55  $ 1.26 Diluted – pro forma  $ 1.62 $ 1.51  $ 1.24