Sonic 2004 Annual Report Download - page 26

1. Summary of Significant Accounting Policies
Operations
Sonic Corp. (the “Company”) operates and franchises a chain of quick-service drive-ins
in the United States and Mexico. It derives its revenues primarily from Partner Drive-In
sales and royalty fees from franchisees. The Company also leases signs and real estate,and
owns a minority interest in several Franchise Drive-Ins. The Company grants credit to 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 Franchise Drive-Ins 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, 2002, the Company acquired 23 existing Franchise
Drive-Ins 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 drive-ins 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 bank line of credit.
On May 1, 2003, the Company acquired 51 existing drive-ins 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 drive-ins, 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
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 drive-ins 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 $ .91 $ .83
Diluted $ .87 $ .79
The Company completed the sale of 41 Partner Drive-Ins to franchisees during fiscal
year 2003, the majority of which were located in developing markets. A total of eight
drive-ins 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 drive-ins.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company, its
wholly owned subsidiaries and its majority-owned, Partner Drive-Ins, 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 2004 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 that 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.
Notes to Consolidated Financial Statements
August 31, 2004, 2003 and 2002 (In thousands, except share data)
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