Sonic 2002 Annual Report Download - page 27

Sonic 02 25
Notes to Consolidated Financial Statements
August 31, 2002, 2001 and 2000 (In thousands, except share data)
1. Summary of Significant Accounting Policies
Operations
Sonic Corp. (the “company”) operates and franchises a chain of quick-service drive-in restaurants in the United
States. It derives its revenues primarily from company-owned restaurant sales and royalty fees from franchisees. The
company also leases signs and real estate, and owns a minority interest in several franchised restaurants. The company
grants credit to its operating partners and its franchisees, all of whom are in the restaurant business. Substantially all of
the notes receivable and direct financing leases are collateralized by real estate or equipment.
On April 1, 2001, the company acquired 35 existing franchise restaurants located in the Tulsa, Oklahoma market
from a franchisee and other minority investors. The acquisitions were accounted for under the purchase method of
accounting, with the results of operations of these restaurants included with that of the company’s commencing April 1,
2001. The company’s cash acquisition cost, prior to post-closing adjustments, of approximately $21.9 million consisted
of the drive-ins’ operating assets ($0.2 million), equipment ($4.4 million) and goodwill ($17.3 million, which is expected
to be fully deductible for tax purposes). The company also entered into long-term real estate leases on each of these
drive-in restaurants, which have future minimum rental payments aggregating $1.8 million annually over the next 15
years ($5.1 million of which was recorded as capital leases related to the buildings). The company funded this
acquisition through operating cash flows and borrowings under its existing $80.0 million bank line of credit.
On April 1, 2002, the company acquired 23 existing franchise restaurants located in the Wichita, Kansas market
from a franchisee and other minority investors. The acquisitions were accounted for under the purchase method of
accounting, with the results of operations of these restaurants included with that of the company’s commencing April 1,
2002. The company’s cash acquisition cost, prior to post-closing adjustments, of approximately $19.4 million consisted
of real estate ($10.7 million), equipment ($1.7 million) and goodwill ($7.0 million, which is expected to be fully
deductible for tax purposes). The company funded this acquisition through operating cash flows and borrowings under
its existing $80.0 million bank line of credit.
Principles of Consolidation
The accompanying financial statements include the accounts of the company, its wholly-owned subsidiaries and its
majority-owned, company-operated restaurants, organized as general partnerships and limited liability companies. All
significant intercompany accounts and transactions have been eliminated.
Certain amounts have been reclassified in the consolidated balance sheets to conform to the fiscal year 2002
presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in
the United States requires management to make estimates and assumptions that affect the amounts reported and
contingent assets and liabilities disclosed in the financial statements and accompanying notes. Actual results may differ
from those estimates, and such differences may be material to the financial statements.
Inventories
Inventories consist principally of food and supplies which are carried at the lower of cost (first-in, first-out basis)
or market.
Property, Equipment and Capital Leases
Property and equipment are recorded at cost, and leased assets under capital leases are recorded at the present value
of future minimum lease payments. Depreciation of property and equipment and capital leases are computed by the
straight-line method over the estimated useful lives or initial terms of the leases, respectively, and are combined for
presentation in the financial statements.
Accounting for Long-Lived Assets
The company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable. Assets are grouped and evaluated for impairment at the lowest level for