Sonic 2015 Annual Report Download - page 33

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. 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 franchise fees and 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 pay royalties based on a percentage of sales. Royalties are recognized as revenue when they
are earned.
Advertising Costs
Costs incurred in connection with advertising and promoting the Company’s products are included in other operating
expenses and are expensed as incurred. Such costs amounted to $24.5 million in fiscal year 2015 and to $22.4 million in each
of fiscal years 2014 and 2013.
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 advertising, either directly or through Company-required participation in advertising
cooperatives. A significant portion of the advertising cooperative contributions is remitted to the System Marketing Fund,
which purchases advertising on national cable and broadcast networks and local broadcast networks and also 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.
Under the Company’s franchise agreements, the Company is reimbursed by the Sonic Brand Fund for costs incurred to
administer the fund at an amount not to exceed 15% of the Sonic Brand Fund’s gross receipts. Reimbursements from the
Sonic Brand Fund are offset against selling, general and administrative expenses and totaled $5.0 million, $4.4 million and
$4.2 million in fiscal years 2015, 2014 and 2013, respectively.
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 the 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.
Stock-Based Compensation
The Company grants incentive stock options (“ISOs”), non-qualified stock options (“NQs”) and restricted stock units
(“RSUs”). For grants of NQs and RSUs, the Company expects to recognize a tax benefit upon exercise of the option or vesting
of the RSU. As a result, a tax benefit is recognized on the related stock-based compensation expense for these types of awards.
For grants of ISOs, a tax benefit only results if the option holder has a disqualifying disposition. As a result of the limitation
on the tax benefit for ISOs, 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.
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.
For additional information on stock-based compensation see note 13 - Stockholders’ Equity.
Notes to Consolidated Financial Statements
August 31, 2015, 2014 and 2013 (In thousands, except per share data)
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