Sonic 2005 Annual Report Download - page 39

The net book value of a minority interest acquired by the Company in a Partner Drive-In is recorded as an
investment in partnership, which results in a reduction in the minority interest liability on the Consolidated Balance
Sheet. If the purchase price exceeds the net book value of the assets underlying the partnership interest, the excess is
recorded as goodwill. The acquisition of a minority interest for less than book value results in a decrease in purchased
goodwill. Any subsequent sale of the minority interest to another minority partner is recorded as a pro-rata reduction
of goodwill and investment, and no gain or loss is recognized on the sale of the minority ownership interest. Goodwill
created as a result of the acquisition of minority interests in Partner Drive-Ins is not amortized but is tested annually
for impairment under the provisions of SFAS No. 142.
Revenue Recognition, Franchise Fees and Royalties
Revenue from Partner Drive-In sales is recognized when food and beverage products are sold.
Initial franchise fees are nonrefundable and are recognized in income when all material services or conditions
relating to the sale of the franchise have been substantially performed or satisfied by the Company. Area
development fees are nonrefundable and are recognized in income on a pro rata basis when the conditions for
revenue recognition under the individual development agreements are met. Both initial franchise fees and area
development fees are generally recognized upon the opening of a franchise drive-in or upon termination of the
agreement between the Company and the franchisee.
The Company’s franchisees are required under the provisions of the license agreements to pay the Company
royalties each month based on a percentage of actual net royalty sales. However, the royalty payments and
supporting financial statements are not due until the 20th of the following month. As a result, the Company accrues
royalty revenue in the month earned based on estimates of Franchise Drive-In sales. These estimates are based on
actual sales at Partner Drive-Ins and projections of average unit volume growth at Franchise Drive-Ins.
Operating Leases
Rent expense is recognized on a straight-line basis over the expected lease term, including cancelable option
periods when it is deemed to be reasonably assured that we would incur an economic penalty for not exercising the
options. Within the provisions of certain of our leases, there are rent holidays and/or escalations in payments over the
base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent
expense on a straight-line basis over the expected lease term, which includes cancelable option periods when
appropriate. The lease term commences on the date when we have the right to control the use of the leased property,
which can occur before rent payments are due under the terms of the lease. Percentage rent expense is generally
based on sales levels and is accrued at the point in time we determine that it is probable that such sales levels will be
achieved.
Advertising Costs
Costs incurred in connection with the advertising and promotion of the Company’s products are expensed as
incurred. Such costs amounted to $28,216, $23,664, and $19,665 for fiscal years 2005, 2004 and 2003, respectively.
Under the Company’s license agreements, both Partner-Drive-Ins and Franchise Drive-Ins must contribute a
minimum percentage of revenues to a national media production fund (Sonic Advertising Fund) and spend an
additional minimum percentage of gross revenues on local advertising, either directly or through Company-required
participation in advertising cooperatives. A portion of the local advertising contributions is redistributed to a System
Marketing Fund, which purchases advertising on national cable and broadcast networks and other national media and
sponsorship opportunities. As stated in the terms of existing license agreements, these funds do not constitute assets
of the Company and the Company acts with limited agency in the administration of these funds. Accordingly, neither
the revenues and expenses nor the assets and liabilities of the advertising cooperatives, the Sonic Advertising Fund, or
the System Marketing Fund are included in the Company’s consolidated financial statements. However, all advertising
contributions by Partner Drive-Ins are recorded as expense on the Company’s financial statements.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25, ”Accounting for Stock Issued to
Employees” (”APB 25”) and related interpretations in accounting for its stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, ”Accounting for Stock-Based Compensation,” requires the use
of option valuation models that were not developed for use in valuing such stock options. Under APB 25, because the
exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Notes to Consolidated Financial Statements
August 31, 2005, 2004 and 2003 (In thousands, except share data)
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