Sonic 2012 Annual Report Download - page 35

Ins operated as individual limited liability companies or general partnerships in which the manager and the supervisor for the
respective drive-in owned a noncontrolling interest. Under this form of ownership, managers and supervisors shared in the
cash flow for their Company Drive-Ins, but were also responsible for their share of any losses incurred by the drive-ins.
Refranchising of Company Drive-Ins
Gains and losses from the sale of Company Drive-Ins are recorded as other operating income (expense), net on the
Consolidated Statements of Income. The company may periodically refranchise other operations when circumstances warrant.
Revenue Recognition, Franchise Fees and Royalties
Revenue from Company Drive-In sales is recognized when food and beverage products are sold. Company Drive-In sales
are presented net of sales tax and other sales-related taxes.
Initial franchise fees are recognized in income when the company has substantially performed or satisfied all material
services or conditions relating to the sale of the franchise and the fees are nonrefundable. Area development fees are
nonrefundable and are recognized in income on a pro-rata basis when the conditions for revenue recognition under the 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 $22.6 million in fiscal year 2012 and $22.5 million in both
fiscal year 2011 and 2010.
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 expenses 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 on a straight-line basis over the requisite service period of the award (generally the vesting period
of the grant) or to an employee’s eligible retirement date, if earlier.
Notes to Consolidated Financial Statements
August 31, 2012, 2011 and 2010 (In thousands, except per share data)
33