Sonic 2004 Annual Report Download - page 29

New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51,” (“FIN 46”). FIN 46 provides a new framework for
identifying variable interest entities (“VIEs”) and determining when a company should
include the assets, liabilities, non-controlling interests and results of activities of a VIE in its
consolidated financial statements. Previously, entities were generally consolidated by an
enterprise when a controlling financial interest through ownership of a majority voting
interest in the entity was obtained. In December 2003, the FASB published a revision to
FIN 46 (“FIN 46R”) to make certain technical corrections and address certain
implementation issues that had arisen. In addition, FIN 46R added several new scope
limitations, including one which provides that companies are not required to apply the
Interpretation to an entity that meets the criteria to be considered a “business,” as defined
in the Interpretation, unless certain conditions exist.
In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any
other legal structure used to conduct activities or hold assets that either (1) has an
insufficient amount of equity to carry out its principal activities without additional
subordinated financial support, (2) has a group of equity owners that are unable to make
significant decisions about its activities,or (3) has a group of equity owners that do not have
the obligation to absorb losses or the right to receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or
other financial interest in the VIE (a “variable interest holder”) is obligated to absorb a
majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the
VIE’s residual returns (if no party absorbs a majority of the VIE’s losses), or both. A variable
interest holder that consolidates the VIE is called the primary beneficiary. Upon
consolidation, the primary beneficiary generally must initially record all of the VIE’s assets,
liabilities and non-controlling interests at fair value and subsequently account for the VIE
as if it were consolidated based on majority voting interest.FIN 46 also requires disclosures
about VIEs that the variable interest holder is not required to consolidate but in which it
has a significant variable interest.
We have performed a review of the franchisees and other entities with which we
conduct business to identify ownership, contractual or other financial interests and
determine if any of these entities require further evaluation as potential VIEs. Based on our
review and analysis, we have determined that each of these entities either meet the
criteria to be considered a “business,” and therefore will not be subject to the
Interpretation due to the “business scope” exception or would not be considered a
significant variable interest.
In performing our review, we specifically addressed four conditions, which if met,
might preclude a franchise from being considered a “business.” These conditions are (1)
whether Sonic or its related parties participated significantly in the design or redesign of
the entity, (2) whether the franchise entities were designed so that substantially all of their
activities either involve or are conducted on behalf of Sonic, (3) whether Sonic and its
related parties provide more than half of the equity, subordinated debt and other forms of
subordinated financial support to the entity based on an analysis of the fair values of the
interests in the franchisees, and (4) whether the activities of the franchise entities are
primarily related to securitizations, other forms of asset-backed financing, or single-lessee
leasing arrangements. We concluded that Sonic does not meet conditions one, two or four
in any case and does not meet the third condition in most cases. However, there are a few
instances where Sonic does provide more than half of the subordinated financial support
to franchise entities, primarily in the form of loans. In these instances, Sonic is not required
to determine if the franchise entities are VIEs since the interests in those entities would not
be significant variable interests, as discussed in paragraph 6 of FIN 46R.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123."
SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation which
includes the prospective method, modified prospective method and retroactive
restatement method. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the effect
of the method used on reported results. Adoption of the annual disclosure and voluntary
transition requirements of SFAS No. 148 is required for annual financial statements issued
for fiscal years ending after December 15,2002. Pursuant to the provisions of SFAS No. 123,
the Company has elected to continue using the intrinsic value method of accounting for
its stock-based employee compensation plans in accordance with APB 25. See "Stock-
Based Compensation" in Note 1 for a further discussion.
2. Net Income Per Share
The following table sets forth the computation of basic and diluted earnings per share
for the years ended August 31:
2004 2003 2002
Numerator:
Net income $ 63,015 $ 52,261 $ 47,692
Denominator:
Weighted average shares outstanding – basic 59,313,614 58,465,029 60,233,283
Effect of dilutive employee stock options 2,340,687 2,444,669 3,076,841
Weighted average shares – diluted 61,654,301 60,909,698 63,310,124
Net income per share – basic $ 1.06 $ .89 $ .79
Net income per share – diluted $ 1.02 $ .86 $ .75
Anti-dilutive employee stock options excluded 259,382 933,774 157,209
Notes to Consolidated Financial Statements
August 31, 2004, 2003 and 2002 (In thousands, except share data)
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