Sonic 2009 Annual Report Download - page 34

Initial franchise fees are recognized in income when all material services or conditions relating to the sale of the franchise have been
substantially performed or satisfied by the company and the fees are nonrefundable. Area development agreement fees are generally
nonrefundable and are recognized in income on a pro rata basis when the conditions for revenue recognition under the individual area
development agreements are met. Both initial franchise fees and area development fees are generally recognized upon the opening of
a franchise drive-in or upon termination of the agreement between the company and the franchisee.
The company’s franchisees are required under the provisions of the license agreements to pay the company royalties each month
based on a percentage of actual net royalty sales. However, the royalty payments and supporting financial statements are not due until
the following month. As a result, the company accrues royalty revenue in the month earned based on estimates of Franchise Drive-In
sales. These estimates are based on projections of average unit volume growth at Franchise Drive-Ins from preliminary data collected
from drive-ins for the month, along with consideration of actual sales at Partner Drive-Ins.
Operating Leases
Rent expense is recognized on a straight-line basis over the expected lease term, including cancelable option periods when it is
deemed to be reasonably assured that we would incur an economic penalty for not exercising the options. Within the provisions of certain
of our leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods. The effects
of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes
cancelable option periods when appropriate. The lease term commences on the date when we have the right to control the use of the
leased property, which can occur before rent payments are due under the terms of the lease. Percentage rent expense is generally based
on sales levels and is accrued at the point in time we determine that it is probable that such sales levels will be achieved.
Advertising Costs
Costs incurred in connection with the advertising and promoting of the company’s products are included in other operating expenses
and are expensed as incurred. Such costs amounted to $32,997, $36,801, and $35,241 for fiscal years 2009, 2008 and 2007, respectively.
Under the company’s license agreements, both Partner-Drive-Ins and Franchise Drive-Ins must contribute a minimum percentage
of revenues to a national media production fund (Sonic Brand Fund) and spend an additional minimum percentage of gross revenues
on local advertising, either directly or through company-required participation in advertising cooperatives. A portion of the local advertising
contributions is redistributed to a System Marketing Fund, which purchases advertising on national cable and broadcast networks and
other national media and sponsorship opportunities. As stated in the terms of existing license agreements, these funds do not constitute
assets of the company, 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 Brand Fund, or the System Marketing Fund are
included in the company’s consolidated financial statements. However, all advertising contributions by Partner Drive-Ins are recorded
as expense on the company’s financial statements.
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”),
stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an
expense over the requisite employee service period (generally the vesting period of the grant).
The following table shows total stock-based compensation expense and the tax benefit included in the Consolidated Statements
of Income and the effect on basic and diluted earnings per share for the years ended August 31:
2009 2008 2007
Selling, general and administrative $ 6,910 $ 7,428 $ 7,059
Income tax benefit (2,452) (2,820) (2,254)
Net stock-based compensation expense $ 4,458 $ 4,608 $ 4,805
Impact on net income per share:
Basic $ 0.07 $ 0.08 $ 0.07
Diluted $ 0.07 $ 0.07 $ 0.07
The company grants both incentive and non-qualified stock options. For grants of non-qualified stock options, the company expects
to recognize a tax benefit on exercise of the option, so the full tax benefit is recognized on the related stock-based compensation expense.
For grants of incentive stock options, a tax benefit only results if the option holder has a disqualifying disposition. As a result of the
limitation on the tax benefit for incentive stock options, the tax benefit for stock-based compensation will generally be less than the
company’s overall tax rate, and will vary depending on the timing of employees’ exercises and sales of stock.
Notes to Consolidated Financial Statements
August 31, 2009, 2008 and 2007 (In thousands, except per share data)
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