Sonic 2003 Annual Report Download - page 33

p.31
Notes to Consolidated Financial Statements
August 31, 2003, 2002 and 2001 (In thousands, except share data)
The company did not assume any liabilities in connection with the acquisition and expects the amount assigned to
goodwill to be fully deductible for tax purposes. The results of operations of these restaurants were included with that of
the company’s commencing May 1, 2003. If the acquisition had been completed as of the beginning of fiscal year 2002,
pro forma revenues, net income and basic and diluted earnings per share would have been as follows for the years ending
August 31:
2003 2002
Revenues $ 475,052 $446,838
Net income $ 53,235 $ 50,115
Net income per share:
Basic $ 1.37 $ 1.25
Diluted $ 1.31 $1.19
The company completed the sale of 41 company-owned restaurants to franchisees during fiscal year 2003, the
majority of which were located in developing markets. A total of eight restaurants were sold in January 2003, eight were
sold in April 2003, 15 were sold in May 2003, and the balance were sold at various times during fiscal year 2003. The
company recognized a net gain of $1.6 million in other revenues resulting from the dispositions of these restaurants.
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.
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 which there
are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which generally
represents the individual restaurant. The company’s primary test for an indicator of potential impairment is operating
losses. If an indication of impairment is determined to be present, the company estimates the future cash flows expected
to be generated from the use of the asset and its eventual disposal. If the sum of undiscounted future cash flows is less
than the carrying amount of the asset, an impairment loss is recognized. The impairment loss is measured by comparing
the fair value of the asset to its carrying amount. The fair value of the asset is measured by calculating the present value of
estimated future cash flows using a discount rate equivalent to the rate of return the company expects to achieve from its
investment in newly-constructed restaurants.