Sonic 2003 Annual Report Download - page 32

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Notes to Consolidated Financial Statements
August 31, 2003, 2002 and 2001 (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.
From time to time, the company purchases existing franchised restaurants with proven track records in core markets
from franchisees and other minority investors as a means to deploy excess cash generated from operating activities and
provide a foundation for future earnings growth. On April 1, 2001, the company acquired 35 existing franchised
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 franchised 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.
On May 1, 2003, the company acquired 51 existing restaurants located in the San Antonio, Texas market from its
franchisees for cash consideration of approximately $34.6 million, prior to post closing adjustments. The acquisitions
were accounted for under the purchase method of accounting. The company also entered into long-term lease
agreements on each of the acquired restaurants, which have future minimum rental payments aggregating $3.5 million
annually. The following condensed balance sheet reflects the amount assigned to each major asset and liability category as
of the acquisition date:
As of May 1, 2003
Current assets $ 322
Property and equipment 7,250
Goodwill 26,995
Total assets acquired $ 34,567