Sonic 2005 Annual Report Download - page 37

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.
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 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 2003, pro forma revenues, net income and basic and diluted earnings per share would have been as follows:
Year ended August 31, 2003
Revenues $ 475,052
Net income $53,235
Net income per share:
Basic $ .91
Diluted $ .87
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 Financial Statements to conform to the fiscal year
2005 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.
Cash Equivalents
Cash equivalents consist of highly liquid investments that mature in three months or less from date of purchase.
Notes to Consolidated Financial Statements
August 31, 2005, 2004 and 2003 (In thousands, except share data)
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