Sonic 2011 Annual Report Download - page 37

individual area 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 sales. However, the royalty payments and supporting financial statements
are not due until the following month under the terms of the franchise agreements. As a result, the company accrues royalty
revenue in the month earned.
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 the company would incur an economic penalty for not exercising the
options. Within the terms of some 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 the company has the right to control the use of the leased property, which can occur
before rent payments are due under the terms of the lease. Contingent rent is generally based on sales levels and is
accrued at the point in time it is probable that such sales levels will be achieved.
Advertising Costs
Costs incurred in connection with the advertising and promoting of the company’s products are included in other
operating expenses and are expensed as incurred. Such costs amounted to $22.5 million in fiscal years 2011 and 2010.
In fiscal year 2009 these costs totaled $33.0 million.
Under the company’s franchise agreements, both Company Drive-Ins and Franchise Drive-Ins must contribute a
minimum percentage of revenues to a national media production fund (Sonic Brand 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 funds other national media and sponsorship opportunities. As
stated in the terms of existing franchise 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 Brand Fund, or the System Marketing Fund are included in
the company’s consolidated financial statements. However, all advertising contributions by Company Drive-Ins are recorded
as expense on the company’s financial statements.
Stock-Based Compensation
Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the requisite employee service period (generally the vesting period of the grant).
The following table shows total stock-based compensation expense and the tax benefit included in the Consolidated
Statements of Income and the effect on basic and diluted earnings per share for the years ended August 31:
2011 2010 2009
Stock-based compensation $ 5,644 $ 7,666 $ 6,910
Income tax benefit (1,315) (4,260) (2,452)
Net stock-based compensation expense $ 4,329 $ 3,406 $ 4,458
Impact on net income per share:
Basic $ 0.07 $ 0.05 $ 0.07
Diluted $ 0.07 $ 0.05 $ 0.07
The company grants both incentive and non-qualified stock options. For grants of non-qualified stock options, the
company expects to recognize a tax benefit upon exercise of the option, so the full tax benefit is recognized on the related
stock-based compensation expense. For grants of incentive stock options, a tax benefit only results if the option holder
has a disqualifying disposition. As a result of the limitation on the tax benefit for incentive stock options, the tax benefit
for stock-based compensation will generally be less than the company’s overall tax rate, and will vary depending on the
timing of employees’ exercises and sales of stock. However, in fiscal year 2010, the company executed a stock option
exchange which resulted in an additional tax benefit of $1.8 million for the conversion of eligible incentive stock options
to nonqualified stock options. Additional information regarding the stock option exchange program is provided in note 13
- Stockholders’ Equity.
Notes to Consolidated Financial Statements
August 31, 2011, 2010 and 2009 (In thousands, except per share data)
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