UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[X]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT
|
|
OF
1934
|
For
the fiscal year ended:
August
31, 2006
|
|
|
OR
|
|
|
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
|
|
ACT
OF 1934
|
For
the transition period from _______________ to
_________________
|
|
|
Commission
File Number 0-18859
|
|
|
|
SONIC
CORP.
|
|
(Exact
name of registrant as specified in its charter)
|
|
|
|
Delaware
|
|
73-1371046
|
(State
of
|
|
(I.R.S.
Employer
|
incorporation)
|
|
Identification
No.)
|
300
Johnny Bench Drive
|
|
Oklahoma
City, Oklahoma
|
|
73104
|
|
|
(Address
of principal executive offices)
|
|
Zip
Code
|
|
|
|
Registrant’s
telephone number, including area code: (405)
225-5000
|
Securities
registered pursuant to section 12(b) of the Act:
None
Securities
registered pursuant to section 12(g) of the Act:
Common
Stock, Par Value $.01 (Title of class)
Rights
to
Purchase Series A Junior Preferred Stock, Par Value $.01 (Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
X
.
No
.
(Facing
Sheet Continued)
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
.
No
X
.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file the reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes
X
.
No
.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.
[
X
]
.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
X
.
Accelerated
filer ___.
Non-accelerated
filer __.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
.
No
X
.
As
of
February 28
,
2006
,
the
aggregate market value of the 81,870,537
shares
of
common stock of the Company held by non-affiliates of the Company equaled
$1,725,285,116 based on the closing sales price for the common stock as reported
for that date.
As
of
October 16
,
2006,
the
Registrant had
69,581,790
shares
of
common stock issued and outstanding.
Documents
Incorporated by Reference
Part
III
of this report incorporates by reference certain portions of the definitive
proxy statement which the Registrant will file with the Securities and Exchange
Commission no later than 120 days after August 31, 2006.
FORM
10-K OF SONIC CORP.
TABLE
OF CONTENTS
PART
I
|
|
|
|
|
Business
|
1
|
|
|
|
|
Risk
Factors
|
10
|
|
|
|
|
Unresolved
Staff Comments
|
14
|
|
|
|
|
Properties
|
14
|
|
|
|
|
Legal
Proceedings
|
14
|
|
|
|
|
Submission
of Matters to a Vote of Security Holders
|
15
|
|
|
|
|
Executive
Officers of the Company
|
15
|
|
|
|
PART
II
|
|
|
|
|
Market
for the Company’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
16
|
|
|
|
|
Selected
Financial Data
|
18
|
|
|
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
|
|
|
|
Quantitative
and Qualitative Disclosures About Market Risks
|
32
|
|
|
|
Financial
Statements and Supplementary Data
|
33
|
|
|
|
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
33
|
|
|
|
|
Controls
and Procedures
|
33
|
|
|
|
|
Other
Information
|
35
|
|
|
|
PART
III
|
|
|
|
|
Directors
and Executive Officers of the Company
|
|
|
|
|
|
Executive
Compensation
|
|
|
|
|
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
|
|
|
|
|
Certain
Relationships and Related Transactions
|
|
|
|
|
|
Principal
Accounting Fees and Services
|
|
|
|
|
PART
IV
|
|
|
|
|
Exhibits
and Financial Statement Schedules
|
|
FORM
10-K
SONIC
CORP.
PART
I
General
Sonic
Corp. (the “Company”) operates and franchises the largest chain of drive-in
restaurants (“Sonic Drive-Ins”) in the United States. As of August 31, 2006, the
Company had 3,188 Sonic Drive-Ins in operation, consisting of 623 Partner
Drive-Ins and 2,565 Franchise Drive-Ins, principally in the southern two-thirds
of the United States. We own a majority interest, typically at least 60%, and
the supervisor and manager of the drive-in own a minority interest in each
Partner Drive-In, which are owned and operated as either a limited liability
company or general partnership. Franchise Drive-Ins are owned and operated
by
our franchisees. At a typical Sonic Drive-In, a customer drives into one of
24
to 36 covered drive-in spaces, orders through an intercom speaker system, and
has the food delivered by a carhop within an average of four minutes. Most
Sonic
Drive-Ins also include a drive-through lane and patio seating.
The
Company has two operating subsidiaries, Sonic Industries Inc. and Sonic
Restaurants, Inc. Sonic Industries Inc. serves as the franchisor of the Sonic
Drive-In chain, as well as the administrative services center for the Company.
Sonic Restaurants, Inc. develops and operates the Partner Drive-Ins. References
to “Sonic,” the “Company,” “we,” “us,” and “our” in this report are references
to Sonic Corp. and its subsidiaries and predecessors, unless the context
indicates otherwise.
Our
objective is to maintain our position as, or to become, a leading operator
in
terms of the number of quick-service restaurants within each of our core and
developing markets. We have developed and are implementing a strategy designed
to build the Sonic brand and to continue to achieve high levels of customer
satisfaction and repeat business. The key elements of that strategy are: (1)
a
unique drive-in concept focusing on a distinctive menu of quality made-to-order
food products including several signature items; (2) a commitment to customer
service featuring the quick delivery of food by carhops; (3) the expansion
of
Partner Drive-Ins and Franchise Drive-Ins within Sonic’s core and developing
markets; (4) an owner/operator philosophy, in which managers have an equity
interest in their restaurants, thereby providing an incentive for managers
to
operate restaurants profitably and efficiently; and (5) a commitment to strong
franchisee relationships.
The
Sonic
Drive-In restaurant chain was begun in the early 1950’s. Sonic Corp. was
incorporated in the State of Delaware in 1990 in connection with its 1991 public
offering of common stock. Our principal executive offices are located at 300
Johnny Bench Drive, Oklahoma City, Oklahoma 73104. Our telephone number is
(405)
225-5000.
Menu
Sonic
Drive-Ins feature Sonic signature items, such as specialty soft drinks including
cherry limeades and slushes, frozen desserts, made-to-order sandwiches and
hamburgers, extra-long cheese coneys, hand-battered onion rings, tater tots,
salads, and wraps
.
Sonic
Drive-Ins also offer breakfast items that include sausage, ham, or bacon with
egg and cheese Breakfast Toaster
®
Bistro
sandwiches, sausage and egg burritos, and specialty breakfast drinks. Sonic
Drive-Ins typically are open from at least 7:00 a.m. to 11:00 p.m. and serve
the
full menu all day.
Restaurant
Locations
As
of
August 31, 2006, 3,188 Sonic Drive-Ins were in operation and located in 33
states, principally in the southern two-thirds of the United States, and in
Mexico. We identify markets based on television viewing areas and further
classify markets as either core or developing. We define our core television
markets as those markets where the penetration of Sonic Drive-Ins (as measured
by population per restaurant, advertising levels, and share of restaurant
spending) has reached a certain level of market maturity established by
management. All other television markets where Sonic Drive-Ins are located
are
referred to as developing markets. A market may be located where it extends
into
more than one state, causing some states to have both core and developing
markets. Our core markets contain approximately 76% of all Sonic Drive-Ins
as of
August 31, 2006. Developing markets are located in the states indicated below
and Mexico. The following table sets forth the number of Partner Drive-Ins
and
Franchise Drive-Ins by core and developing markets as of August 31, 2006:
|
Core
Markets
|
Developing
Markets
|
Total
|
States
|
Partner
|
Franchise
|
Total
|
Partner
|
Franchise
|
Total
|
|
Alabama
|
32
|
71
|
103
|
|
5
|
5
|
108
|
Arizona
|
|
|
|
|
93
|
93
|
93
|
Arkansas
|
29
|
157
|
186
|
|
|
|
186
|
California
|
|
|
|
|
34
|
34
|
34
|
Colorado
|
14
|
10
|
24
|
20
|
31
|
51
|
75
|
Delaware
|
|
|
|
|
1
|
1
|
1
|
Florida
|
18
|
4
|
22
|
11
|
72
|
83
|
105
|
Georgia
|
9
|
20
|
29
|
|
86
|
86
|
115
|
Idaho
|
|
|
|
|
16
|
16
|
16
|
Illinois
|
|
8
|
8
|
|
19
|
19
|
27
|
Indiana
|
|
|
|
|
14
|
14
|
14
|
Iowa
|
|
|
|
|
12
|
12
|
12
|
Kansas
|
40
|
95
|
135
|
|
|
|
135
|
Kentucky
|
4
|
42
|
46
|
|
23
|
23
|
69
|
Louisiana
|
23
|
132
|
155
|
|
|
|
155
|
Mississippi
|
|
123
|
123
|
|
|
|
123
|
Missouri
|
32
|
126
|
158
|
13
|
29
|
42
|
200
|
Nebraska
|
|
|
|
8
|
18
|
26
|
26
|
Nevada
|
|
|
|
|
18
|
18
|
18
|
New
Mexico
|
|
71
|
71
|
|
|
|
71
|
North
Carolina
|
|
1
|
1
|
|
88
|
88
|
89
|
Ohio
|
|
|
|
|
6
|
6
|
6
|
Oklahoma
|
79
|
186
|
265
|
|
|
|
265
|
Oregon
|
|
|
|
|
1
|
1
|
1
|
Pennsylvania
|
|
|
|
|
1
|
1
|
1
|
South
Carolina
|
42
|
22
|
64
|
|
46
|
46
|
110
|
Tennessee
|
|
161
|
161
|
10
|
|
10
|
171
|
Texas
|
211
|
673
|
884
|
|
2
|
2
|
886
|
Utah
|
|
|
|
7
|
19
|
26
|
26
|
Virginia
|
|
|
|
21
|
20
|
41
|
41
|
Washington
|
|
|
|
|
1
|
1
|
1
|
West
Virginia
|
|
|
|
|
1
|
1
|
1
|
Wyoming
|
|
|
|
|
5
|
5
|
5
|
|
|
|
|
|
|
|
|
Mexico
|
|
|
|
|
2
|
2
|
2
|
Total
|
533
|
1,902
|
2,435
|
90
|
663
|
753
|
3,188
|
Expansion
During
fiscal year 2006
,
we
opened 173 Sonic Drive-Ins, which consisted of 35 Partner Drive-Ins and 138
Franchise Drive-Ins. During fiscal year 2007, we anticipate approximately 180
to
200 new Sonic Drive-In openings, including 150 to 160 openings by our
franchisees. That expansion plan involves the opening of new Sonic Drive-Ins
predominantly by franchisees under existing area development agreements,
single-store development by existing franchisees, and development by new
franchisees. We believe that our existing core and developing markets, as well
as newly-opened markets, offer significant growth opportun
ities
for
both Partner Drive-In and Franchise Drive-In expansion. The a
bility
of
Sonic and its franchisees to open the anticipated number of Sonic Drive-Ins
during fiscal year 2007 necessarily will depend on various factors, including
those discussed under
Item
1A. Risk Factors - Failure to successfully implement our growth strategy could
reduce, or reduce the growth of, our revenue and net income,
of this
Form 10-K.
Our
expansion strategy for Sonic Drive-Ins involves two principal components: (1)
the building-out of existing core markets and (2) the further penetration of
developing markets. We are always in the process of identifying new markets
for
the opening of both Partner Drive-Ins and Franchise Drive-Ins. In addition,
we
may consider the acquisition of other similar local or regional brands for
conversion to Sonic Drive-Ins.
Restaurant
Design and Construction
General.
The
typical Sonic Drive-In consists of a kitchen housed in a one-story building
flanked by canopy-covered rows of 24 to 36 parking spaces, with each space
having its own intercom speaker system and menu board. In addition, since 1995,
most new Sonic Drive-Ins have incorporated a drive-through service and patio
seating area. We have 174 Sonic Drive-Ins that provide an indoor seating area,
44 of which are located in non-traditional areas such as shopping mall food
courts, airports, and universities, and 19 of which are located adjacent to
convenience stores.
Retrofit
.
In
fiscal 2006, we completed the retrofit of over 100 Partner Drive-Ins and began
implementing a program to retrofit all Sonic Drive-Ins over the next several
years. The retrofit is a remodeling program which includes significant trade
dress modifications to the drive-ins. In fiscal 2007, we expect to roll-out
the
retrofit program to approximately 150 additional Partner Drive-Ins and, in
January 2007, will begin to extend the program to Franchise Drive-Ins.
Franchisees will pay the cost of the retrofit for their drive-ins. We currently
estimate the cost to make a standard retrofit at approximately $125,000 to
$135,000 per drive-in. All new Sonic Drive-Ins being built in all markets will
now feature the new retrofit changes.
Marketing
We
have
designed our marketing program to differentiate Sonic Drive-Ins from our
competitors by emphasizing five key areas of customer satisfaction: (1) wide
variety of distinctive made-to-order menu items, (2) personal delivery of
service by carhops, (3) speed of service, (4) quality, and (5) value. The
marketing plan includes promotions for use throughout the Sonic chain. We
support those promotions with television, radio, interactive media,
point-of-sale materials, and other media as appropriate. Those promotions
generally center on products which highlight limited time new product
introductions or signature menu items of Sonic Drive-Ins.
Each
year
Sonic develops a marketing plan with the involvement of the Sonic Franchise
Advisory Council. (Information concerning the Sonic Franchise Advisory Council
is set forth on page 8 under Franchise Program -
Franchise
Advisory Council
.)
Funding for our marketing plan has three components: (1) local advertising
expenditures, (2) the System Marketing Fund, and (3) the Sonic Advertising
Fund.
Depending on the type of license agreement, each Sonic Drive-In must spend
2% to
3.25% of the drive-in’s gross revenues on local advertising, either directly or
through participation in the local advertising cooperative. The members of
each
local advertising cooperative may elect and frequently do elect by majority
vote
to require the cooperative’s member drive-ins to contribute more than the
minimum percentage of gross revenues to the advertising cooperative’s funds.
For
fiscal year 2006, drive-ins participating in cooperatives contributed an average
of 4.09% of their Sonic Drive-In’s gross revenues to Sonic advertising
cooperatives. As of August 31, 2006,
3,077
Sonic
Drive-Ins (97% of the chain) participated in advertising cooperatives. The
System Marketing Fund is funded out of the required local advertising funds
by
either redistributing 2.0% of each Sonic Drive-In’s gross revenues from the
local advertising cooperatives to the System Marketing Fund or, if no
advertising cooperative has been formed, requiring the Sonic Drive-In to pay
directly
2.0%
of
its gross revenues to the System Marketing Fund with a corresponding deduction
in the amount the drive-in is required to spend on local
advertising.
The System Marketing Fund complements local advertising efforts in attracting
customers to Sonic Drive-Ins by promoting the message of the Sonic brand to
an
expanded audience. The primary focus of the System Marketing Fund is to purchase
advertising on national cable and broadcast networks and other national media
and sponsorship opportunities.
The
Sonic
Advertising Fund is a national media production fund that we administer. Each
Sonic Drive-In must contribute 0.375% to 0.75%, depending on the type of license
agreement, of the Sonic Drive-In’s gross revenues to the Sonic Advertising Fund.
Once a sufficient number of Sonic Drive-Ins have been opened in a market, we
require the formation of advertising cooperatives among drive-in owners to
pool
and direct advertising expenditures in local markets.
The
total
amount spent on media (principally television) was approximately $145 million
for fiscal year 2006 and we expect media expenditures of approximately $160
million for fiscal year 2007.
Purchasing
We
negotiate with suppliers for our primary food products (hamburger patties,
dairy
products, chicken products, hot dogs, french fries, tater tots, cooking oil,
fountain syrup, produce, and other items) and packaging supplies to ensure
adequate quantities of food and supplies and to obtain competitive prices.
We
seek competitive bids from suppliers on many of our food products. We approve
suppliers of those products and require them to adhere to our established
product specifications. Suppliers manufacture several key products for Sonic
under private label and sell them to authorized distributors for resale to
Partner Drive-Ins and Franchise Drive-Ins.
We
require our Partner Drive-Ins and Franchise Drive-Ins to purchase from approved
distribution centers. By purchasing as a group, we have achieved cost savings,
improved food quality and consistency, and helped decrease the volatility of
food and supply costs for Sonic Drive-Ins. For fiscal year 2006, the average
cost of food and packaging for a Sonic Drive-In, as reported to us by our
Partner Drive-Ins and Franchise Drive-Ins, equaled approximately 27% of net
revenues.
Food
Safety and Quality Assurance
To
ensure
the consistent delivery of safe, high-quality food, we created a food safety
and
quality assurance program. Sonic’s food safety program promotes the quality and
safety of all products and procedures utilized by all Sonic Drive-Ins, and
provides certain requirements that must be adhered to by all suppliers,
distributors, and Sonic Drive-Ins. We also have a comprehensive,
restaurant-based food safety program called Sonic Safe. Sonic Safe is a
risk-based system that utilizes Hazard Analysis & Critical Control Points
(HACCP) principles for managing food safety and quality. Our food safety system
includes employee training, supplier product testing, unannounced drive-in
food
safety auditing by independent third-parties, and other detailed components
that
monitor the safety and quality of Sonic’s products and procedures at every stage
of the food preparation and production cycle. Employee food safety training
is
covered under our Sonic Drive-In training program, referred to as the STAR
Training Program. This program includes specific training information and
requirements for every station in the drive-in. We also require our drive-in
managers and assistant managers to pass ServSafe training programs. ServSafe
is
the most recognized food safety training certification in the restaurant
industry.
General
Operations
Management
Information Systems
.
We
utilize
point-of-sale equipment in each of our Partner Drive-Ins and Franchise
Drive-Ins. Certain financial and other information is polled on a daily basis
from most Partner Drive-Ins and many Franchise Drive-Ins. We are continuing
to
develop software and hardware enhancements to our management information systems
to facilitate improved communication and the exchange of information among
the
corporate office and Partner Drive-Ins and Franchise Drive-Ins. These
enhancements primarily utilize an intranet designed for that purpose, which
we
refer to as PartnerNet.
Reporting
.
The
license agreement requires all Sonic Drive-Ins to submit a profit and loss
statement on or before the 20
th
of each
month. All Partner Drive-Ins and 1,772 or 70% of Franchise Drive-Ins submit
their data electronically. We expect to add more Franchise Drive-Ins to
electronic reporting which will reduce resources needed for manual processing
of
restaurant level data.
Hours
of Operation
.
Sonic
Drive-Ins typically operate seven days a week and are open from at least 7:00
a.m. to 11:00 p.m.
Company
Operations
Restaurant
Personnel
.
A
typical Partner Drive-In is operated by a manager, two to four assistant
managers, and approximately 25 hourly employees, many of whom work part-time.
The manager has responsibility for the day-to-day operations of the Partner
Drive-In. Each supervisor has the responsibility of overseeing an average of
four to seven Partner Drive-Ins. Sonic Restaurants, Inc. (“SRI”), Sonic’s
operating subsidiary, oversees the operations and development of and provides
administrative services to all Partner Drive-Ins. SRI employs directors of
operations who oversee an average of four to seven supervisors within their
respective regions and report to either a regional vice president or a vice
president of SRI. SRI’s three regional vice presidents and three vice presidents
report to the president of SRI.
Ownership
Program
.
The
Sonic
Drive-In philosophy stresses an ownership relationship with supervisors and
managers. As part of the ownership program, either a limited liability company
or a general partnership is formed to own and operate each individual Partner
Drive-In. SRI owns a majority interest, typically at least 60%, in each of
these
limited liability companies and partnerships. Generally, the supervisors and
managers own a minority interest in the limited liability company or
partnership. The amount of ownership percentage is separately negotiated for
each Partner Drive-In. Supervisors and managers are not employees of Sonic
or of
the limited liability companies or partnerships in which they have an ownership
interest. As owners, they share in the cash flow and are responsible for their
share of any losses incurred by their Partner Drive-Ins. We believe that our
ownership structure provides a substantial incentive for Partner Drive-In
supervisors and managers to operate their restaurants profitably and
efficiently. Additional information regarding our ownership program can be
found
under
Ownership
Program,
in
Part
II, Item 7, at page 31 of this Form 10-K.
Sonic
records the interests of supervisors and managers as “minority interest in
earnings of Partner Drive-Ins” under costs and expenses on its financial
statements. We estimate that the average percentage interest of a supervisor
was
17% and the average percentage interest of a manager in a Partner Drive-In
was
19% in fiscal year 2006. Each Partner Drive-In distributes its available cash
flow to its supervisors and managers and to Sonic on a monthly basis pursuant
to
the terms of the operating agreement or partnership agreement for that
restaurant. Sonic has the right, but not the obligation, to purchase the
minority interest of the supervisor or manager in the restaurant. The amounts
of
the buy-in and the buy-out are generally based on the Partner Drive-In’s sales
during the preceding 12 months and approximate the fair market value of a
minority interest in that restaurant. Most supervisors and managers finance
the
buy-in with a loan from a third-party financial institution.
Each
Partner Drive-In usually purchases equipment with funds borrowed from Sonic
at
competitive rates. In most cases, Sonic alone owns or leases the land and
building and guarantees any third-party lease entered into for the
site.
Partner
Drive-In Data
.
The
following table provides certain financial information relating to Partner
Drive-Ins and the number of Partner Drive-Ins opened and closed during the
past
five fiscal years.
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Average
Sales per Partner Drive-In
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
in
thousands
)
|
|
$
|
980
|
|
$
|
957
|
|
$
|
886
|
|
$
|
799
|
|
$
|
791
|
|
Number
of Partner Drive-Ins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Open at Beginning of Year
|
|
|
574
|
|
|
539
|
|
|
497
|
|
|
452
|
|
|
393
|
|
Newly-Opened
and Re-Opened
|
|
|
35
|
|
|
37
|
|
|
21
|
|
|
35
|
|
|
40
|
|
Purchased
from Franchisees*
|
|
|
15
|
|
|
4
|
|
|
24
|
|
|
52
|
|
|
25
|
|
Sold
to Franchisees*
|
|
|
--
|
|
|
(5
|
)
|
|
(3
|
)
|
|
(41
|
)
|
|
(5
|
)
|
Closed
|
|
|
(1
|
)
|
|
(1
|
)
|
|
0
|
|
|
(1
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Open at Year End
|
|
|
623
|
|
|
574
|
|
|
539
|
|
|
497
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_________________
*The
relatively large number of drive-ins sold to franchisees in fiscal year 2003
and
purchased from franchisees in fiscal years 2002, 2003, 2004 and 2006 represent
transactions where a majority of Sonic Drive-Ins in a certain market were sold
to or purchased from a multi-unit franchisee group. In most instances where
we
purchased Sonic Drive-Ins, the selling multi-unit franchisee groups continued
to
own and operate multiple Franchise Drive-Ins.
Franchise
Program
General
.
As of
August 31, 2006, we had 2,565 Franchise Drive-Ins operating in 33 states and
in
Mexico. A large number of successful multi-unit franchisee groups have developed
during the Sonic system’s 53 years of operation. Those franchisees continue to
develop new Franchise Drive-Ins in their franchise territories either through
area development agreements or single site development. Our franchisees opened
138 Franchise Drive-Ins during fiscal year 2006 and we expect our franchisees
to
open approximately 150 to 160 Franchise Drive-Ins in fiscal 2007. We consider
our franchisees a vital part of our continued growth and believe our
relationship with our franchisees is good.
Franchise
Agreements
.
Each
Sonic Drive-In, including each Partner Drive-In, operates under a franchise
agreement that provides for payments to Sonic of an initial franchise fee and
a
royalty fee based on a graduated percentage of the gross revenues of the
drive-in. Our current standard license agreement provides for an initial
franchise fee of $30,000 and an ascending royalty rate beginning at 1% of gross
revenues and increasing to 5% as the level of gross revenues increases. For
non-traditional drive-ins, which are those Sonic Drive-Ins located in venues
such as shopping mall food courts, airports, and universities, the license
agreement provides for a franchise fee of $15,000 and a graduated royalty rate
from 1% to 5% of gross revenues. Approximately 96% of all Sonic Drive-Ins
opening in fiscal year 2007 are expected to open under the current standard
license agreement, with the remaining 4% expected to open in venues that would
be included under the non-traditional license agreement. The current standard
license agreement provides for a term of 20 years, with one 10-year renewal
option. The term for a non-traditional Sonic Drive-In is typically 10 years,
with two five-year renewal options. We have the right to terminate any franchise
agreement for a variety of reasons, including a franchisee’s failure to make
payments when due or failure to adhere to our policies and standards. Many
state
franchise laws affect our ability to terminate or refuse to renew a
franchise.
As
of
August 31, 2006, 48% of all Sonic Drive-Ins were subject to the 1% to 5%
graduated royalty rate. For fiscal year 2006, Sonic’s average royalty rate
equaled 3.59%. The license agreements for those Franchise Drive-Ins which
currently operate under the 1% to 4% or 1% to 3% graduated royalty rate expire
at various times over the next 16 years. We expect that almost all the Franchise
Drive-Ins currently operating under those expiring license agreements will
renew
their licenses pursuant to the terms of the then current license agreement.
Those renewals of the expiring license agreements to the current form of the
license agreement with the 1% to 5% graduated royalty rate will contribute
to an
increase in our royalty revenues.
Area
Development Agreements
.
We use
area development agreements to facilitate the planned expansion of the Sonic
Drive-In restaurant chain through multiple unit development. While many existing
franchisees continue to expand on a single drive-in basis, approximately 51%
of
the new Franchise Drive-Ins opened during fiscal year 2006 occurred as a result
of then-existing area development agreements. Each area development agreement
gives a developer the exclusive right to construct, own, and operate Sonic
Drive-Ins within a defined area. In exchange, each developer agrees to open
a
minimum number of Sonic Drive-Ins in the area within a prescribed time period.
If the developer does not meet the minimum opening requirements, we have the
right to terminate the area development agreement and grant a new area
development agreement to other franchisees for the area previously covered
by
the terminated area development agreement.
During
fiscal year 2006, we entered into 36 new area development agreements calling
for
the opening of 128 Franchise Drive-Ins and amended 10 existing area
development agreements calling for the opening of an additional 13 Franchise
Drive-Ins, all during the next five years. As of August 31, 2006, we had a
total
of 152 area development agreements in effect, calling for the development of
576
additional Sonic Drive-Ins during the next six years. We cannot give any
assurance that our franchisees will achieve that number of new Franchise
Drive-Ins for fiscal year 2007 or during the next six years. Of the 183
Franchise Drive-Ins scheduled to open during fiscal year 2006 under area
development agreements in place at the beginning of that fiscal year, 94 or
51%
opened during the period. During fiscal year 2006, we terminated 28 of the
163
area development agreements existing at the beginning of the fiscal year. The
terminated area development agreements called for the opening of 28 Franchise
Drive-Ins in fiscal year 2006 and an additional 73 Franchise Drive-Ins in the
next three fiscal years. All of these terminations were as a result of the
franchisee failing to meet the development schedule under the area development
agreement.
Our
realization of the expected benefits under various existing and future area
development agreements currently depends and will continue to depend upon the
ability of the developers to open the minimum number of Sonic Drive-Ins within
the time periods required by the agreements. The financial resources of the
developers, as well as their experience in managing quick-service restaurant
franchises, represent critical factors in the success of area development
agreements. Although we grant area development agreements only to those
developers whom we believe possess those qualities, we cannot give any
assurances that the future performance by developers will result in the opening
of the minimum number of Sonic Drive-Ins contemplated by the area development
agreements or reach the compliance rate we have previously
experienced.
Franchise
Drive-In Development
.
We
assist each franchisee in selecting sites and developing Sonic Drive-Ins. Each
franchisee has responsibility for selecting the franchisee’s drive-in location,
but must obtain our approval of each Sonic Drive-In design and each location
based on accessibility and visibility of the site and targeted demographic
factors, including population density, income, age, and traffic. We provide
our
franchisees with the physical specifications for the typical Sonic
Drive-In.
Franchisee
Financing
.
Other
than the agreements described below, we do not generally provide financing
to
franchisees or guarantee loans to franchisees made by third-parties.
We
had an
agreement with GE Capital Franchise Finance Corporation (“GEC”), pursuant to
which GEC made loans to existing Sonic franchisees who met certain underwriting
criteria set by GEC. Under the terms of the agreement with GEC, Sonic provided
a
guaranty of 10% of the outstanding balance of a loan from GEC to the Sonic
franchisee. The portions of loans made by GEC to Sonic franchisees that are
guaranteed by the Company total $2.7 million as of August 31, 2006. We ceased
guaranteeing new loans made under the program during fiscal year 2003 and have
not been required to make any payments under our agreement with GEC.
We
have
an agreement with Irwin Franchise Capital Corporation (“IFCC”) pursuant to which
IFCC has agreed to make loans to existing Sonic franchisees who meet certain
underwriting criteria set by IFCC to finance the equipment and improvements
for
our retrofit program as described under
Restaurant
Design and Construction - Retrofit
of
Item 1
of this Form 10-K. Under the terms of the agreement with IFCC, we will
provide a guaranty to IFCC of the greater of (i) 5% of the outstanding balance
of a loan from IFCC to the Sonic franchisee or (ii) $250,000, provided that
in
no event will our maximum liability to IFCC exceed $2,500,000 in the aggregate.
Since franchisees are not scheduled to begin the retrofit program until January
2007, they have not yet entered into any loan agreements with
IFCC.
Franchisee
Training
.
Each
franchisee must have at least one full time employee at the Sonic Drive-In
who
has completed the Sonic Management Development Program before opening or
operating the Sonic Drive-In. The program consists of a minimum of 12 weeks
of
on-the-job training and one week of classroom development. The program
emphasizes food safety, quality food preparation, speed of service, cleanliness
of Sonic Drive-Ins, management techniques and consistency of service. We
also
require
our management teams to pass ServSafe training programs. ServeSafe is the most
recognized food safety training certification in the restaurant
industry.
Franchisee
Support
.
In
addition to training, advertising and food purchasing as a system, and marketing
programs, we provide various other services to our franchisees. Those services
include: (1) assistance
with
quality control through area field representatives, to ensure that each
franchisee consistently delivers high quality food and service; (2) support
of
new franchisees with guidance and training in the opening of their first three
Sonic Drive-Ins; and (3) assistance in selecting sites for new Sonic Drive-Ins
using demographic data and studies of traffic patterns. Our field services
organization consists of
17
field
service consultants, 14 field marketing representatives, four regional marketing
directors, two senior marketing directors,
two
consultants
for new franchises,
five
regional
vice presidents, all with responsibility for defined geographic areas,
one
director
of new franchise services, and
two
vice
presidents of franchise finance. The field service consultants provide
operational services and support for our franchisees, while the field marketing
representatives assist the franchisees with the development of advertising
cooperative and local market promotional activities. New franchise consultants
support the successful integration of new franchisees into the Sonic system
from
training
through
the first months following the opening of each of the franchisee’s first three
Sonic Drive-Ins. One director, nine
field
trainers and four training consultants provide training to franchisees in such
areas as shift management, customer service, time management, supervisory
skills, and financial controls.
We
also
have a vice president of franchise real estate and
six
real
estate directors who assist the franchisees with the identification of trade
areas for new Franchise Drive-Ins and the
franchisees’ selection of sites for their Franchise Drive-Ins, subject to
Sonic’s final approval of those sites.
We
also
have a staff of six architect and engineering personnel to design, plan and
permit new stores. A senior director of construction with two construction
managers also assists in constructing new drive-ins.
Franchise
Operations
.
Sonic’s
franchisees operate all Franchise Drive-Ins in accordance with uniform operating
standards and specifications. These standards pertain to the quality and
preparation of menu items, selection of menu items, maintenance and cleanliness
of premises, and employee responsibilities. We develop all standards and
specifications with input from franchisees, and they are applied on a
system-wide basis.
Each
franchisee has full discretion to determine the prices charged to its customers.
Franchise
Advisory Council
.
We have
established a Franchise Advisory Council which provides advice, counsel, and
input to Sonic on important issues impacting the business, such as marketing
and
promotions, operations, purchasing, building design, human resources,
technology, and new products. The Franchise Advisory Council currently consists
of 18 members selected by Sonic. Currently we have six executive committee
members who are selected at large. The remaining 12 members are regional members
who represent four defined regions of the country and serve three-year terms.
We
have five Franchise Advisory Council task groups comprised of 46
total
members who serve two-year terms and lend support on individual key priorities.
Franchise
Drive-In Data
.
The
following table provides certain financial information relating to Franchise
Drive-Ins and the number of Franchise Drive-Ins opened, purchased from or sold
to Sonic, and closed during Sonic’s last five fiscal years.
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Average
Sales Per Franchise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drive-In
(
in
thousands
)
|
|
$
|
1,092
|
|
$
|
1,039
|
|
$
|
983
|
|
$
|
929
|
|
$
|
935
|
|
Number
of Franchise Drive-Ins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Open at Beginning of Year
|
|
|
2,465
|
|
|
2,346
|
|
|
2,209
|
|
|
2,081
|
|
|
1,966
|
|
New
Franchise Drive-Ins
|
|
|
138
|
|
|
138
|
|
|
167
|
|
|
159
|
|
|
142
|
|
Sold
to the Company*
|
|
|
(15
|
)
|
|
(4
|
)
|
|
(24
|
)
|
|
(52
|
)
|
|
(25
|
)
|
Purchased
from the Company*
|
|
|
--
|
|
|
5
|
|
|
3
|
|
|
41
|
|
|
5
|
|
Closed
and Terminated,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
of Re-openings
|
|
|
(23
|
)
|
|
(20
|
)
|
|
(9
|
)
|
|
(20
|
)
|
|
(7
|
)
|
Total
Open at Year End
|
|
|
2,565
|
|
|
2,465
|
|
|
2,346
|
|
|
2,209
|
|
|
2,081
|
|
_______________
*
The
relatively large number of drive-ins purchased from Sonic in fiscal year 2003
and sold to Sonic in fiscal years 2002, 2003, 2004 and 2006 represent
transactions where a majority of Sonic Drive-Ins in a certain market were sold
to or purchased from a multi-unit franchisee group. In most instances where
Sonic purchased Sonic Drive-Ins, the selling multi-unit franchisee groups
continued to own and operate multiple Franchise Drive-Ins.
Competition
We
compete in the restaurant industry, a highly competitive industry in terms
of
price, service, restaurant location, and food quality. The restaurant industry
is often affected by changes in consumer trends, economic conditions,
demographics, traffic patterns, and concerns about the nutritional content
of
quick-service foods. We compete on the basis of speed and quality of service,
method of food preparation (made-to-order), food quality and variety, signature
food items, and monthly promotions. The quality of service, featuring Sonic
carhops, constitutes one of our primary marketable points of difference from
the
competition. There are many well-established competitors with substantially
greater financial and other resources. These competitors include a large number
of national, regional, and local food services, including quick-service
restaurants and casual dining restaurants. A significant change in pricing
or
other marketing strategies by one or more of those competitors could have an
adverse impact on Sonic’s sales, earnings, and growth. In selling franchises, we
also compete with many franchisors of quick-service and other restaurants and
other business opportunities.
Seasonality
Our
results during Sonic’s second fiscal quarter (the months of December, January
and February) generally are lower than other quarters because of the lower
temperatures in the locations of a number of Partner Drive-Ins and Franchise
Drive-Ins, which reduces customer visits to our drive-ins.
Employees
As
of
August 31, 2006, we had 332 full-time corporate employees. This number does
not
include the approximately 20,000 full-time and part-time employees employed
by
separate partnerships and limited liability companies that operate our Partner
Drive-Ins or the supervisors or managers of the Partner Drive-Ins who own a
minority interest in the separate partnerships or limited liability companies.
None
of
our employees are subject to a collective bargaining agreement. We believe
that we have good labor relations with our employees.
Trademarks
and Service Marks
Sonic
owns numerous trademarks and service marks. We have registered many of those
marks, including the “Sonic” logo and trademark, with the United States Patent
and Trademark Office and the Mexican Institute of Industrial Property.
Trademarks and service marks generally are valid as long as they are used or
registered. We believe that our trademarks and service marks have significant
value and play an important role in our marketing efforts.
Government
Regulations
We
must
comply with regulations adopted by the Federal Trade Commission (the “FTC”) and
with several state laws that regulate the offer and sale of franchises. We
also
must comply with a number of state laws that regulate certain substantive
aspects of the franchisor-franchisee relationship. The FTC’s Trade Regulation
Rule on Franchising (the “FTC Rule”) requires that we furnish prospective
franchisees with a franchise offering circular containing information prescribed
by the FTC Rule.
State
laws that regulate the franchisor-franchisee relationship presently exist in
a
substantial number of states. Those laws regulate the franchise relationship,
for example, by requiring the franchisor to deal with its franchisees in good
faith, by prohibiting interference with the right of free association among
franchisees, by regulating discrimination among franchisees with regard to
charges, royalties, or fees, and by restricting the development of other
restaurants within certain prescribed distances from existing franchised
restaurants. Those laws also restrict a franchisor’s rights with regard to the
termination of a franchise agreement (for example, by requiring “good cause” to
exist as a basis for the termination), by requiring the franchisor to give
advance notice and the opportunity to cure the default to the franchisee, and
by
requiring the franchisor to repurchase the franchisee’s inventory or provide
other compensation upon termination. To date, those laws have not precluded
us
from seeking franchisees in any given area and have not had a significant effect
on our operations.
Each
Sonic Drive-In must comply with regulations adopted by federal agencies and
with
licensing and other regulations enforced by state and local health, sanitation,
safety, fire, and other departments. Difficulties or failures in obtaining
the
required licenses or approvals can delay and sometimes prevent the opening
of a
new Sonic Drive-In.
Sonic
Drive-Ins must comply with federal and state environmental regulations, but
those regulations have not had a material effect on their operations. More
stringent and varied requirements of local governmental bodies with respect
to
zoning, land use, and environmental factors can delay and sometimes prevent
development of new Sonic Drive-Ins in particular locations.
Sonic
and
its franchisees must comply with laws and regulations governing labor,
employment and wage and hour issues, such as minimum wage, overtime, family
and
medical leave, discrimination, and other working conditions. Many of the
food service personnel in Sonic Drive-Ins receive compensation at rates related
to federal, state, and local minimum wage laws and, accordingly, increases
in
applicable minimum wage laws will increase labor costs at those locations.
Available
Information
We
maintain an internet website with the address of
http://www.sonicdrivein.com
.
Copies
of the Company’s reports filed with, or furnished to, the Securities and
Exchange Commission on Forms 10-K, 10-Q, and 8-K and any amendments to such
reports are available for viewing and copying at such internet website, free
of
charge, as soon as reasonably practicable after filing such material with,
or
furnishing it to, the Securities and Exchange Commission. In addition, copies
of
Sonic’s corporate governance materials, including the Corporate Governance
Guidelines, Audit Committee Charter, Compensation Committee Charter, Nominating
and Corporate Governance Committee Charter, Code of Ethics for Financial
Officers, and Code of Business Conduct and Ethics are available for viewing
and
copying at the website, free of charge.
Events
reported in the media, such as incidents involving food-borne illnesses or
food
tampering, whether or not accurate, can cause damage to our reputation and
rapidly affect sales and profitability.
Reports,
whether true or not, of food-borne illnesses, such as e-coli, avian flu, bovine
spongiform encephalopathy (commonly known as mad cow disease), hepatitis A,
trichinosis or salmonella, and injuries caused by food tampering have in the
past severely injured the reputations of participants in the restaurant segment
and could in the future affect us. Our brand’s reputation is an important asset
to the business; as a result, anything that damages our brand’s reputation could
immediately and severely hurt sales, revenues, and profits. If customers become
ill from food-borne illnesses, we could also be forced to temporarily close
some
Sonic Drive-Ins. In addition, instances of food-borne illnesses or food
tampering occurring at the restaurants of competitors, could, by resulting
in
negative publicity about the restaurant industry, adversely affect our sales
on
a local, regional, or national basis. A decrease in customer traffic as a result
of these health concerns or negative publicity, or as a result of a temporary
closure of any Sonic Drive-Ins, could materially harm our reputation, sales,
and
profitability.
The
restaurant industry is highly competitive, and that competition could lower
our
revenues, margins, and market share.
The
restaurant industry is intensely competitive as to price, service, location,
personnel, dietary trends, and quality of food, and is often affected by changes
in consumer tastes, economic conditions, population, and traffic patterns.
We
compete with international, regional and local restaurants, some of which
operate more restaurants and have greater financial resources. We compete
primarily through the quality, price, variety, and value of food products
offered. Other key competitive factors include the number and location of
restaurants, quality and speed of service, attractiveness of facilities,
effectiveness of advertising and marketing programs, and new product development
by us and our competitors. We anticipate intense competition will continue
to
focus on pricing. Some of our competitors have substantially larger marketing
budgets, which may provide them with a competitive advantage. In addition,
our
system competes within the quick-service restaurant industry not only for
customers but also for management and hourly employees, suitable real estate
sites, and qualified franchisees.
Changing
health or dietary preferences may cause consumers to avoid our products in
favor
of alternative foods.
The
food
service industry is affected by consumer preferences and perceptions. If
prevailing health or dietary preferences and perceptions cause consumers to
avoid these products offered by Sonic Drive-Ins in favor of alternative or
healthier foods, demand for our products may be reduced and our business could
be harmed.
Our
earnings and business growth strategy depends in large part on the success
of
our franchisees, whose actions are outside of our control.
A
portion
of our earnings comes from royalties, rents and other amounts paid by our
franchisees. Franchisees are independent contractors, and their employees are
not our employees. We provide training and support to, and monitor the
operations of, our franchisees, but the quality of their drive-in operations
may
be diminished by any number of factors beyond our control. Franchisees may
not
successfully operate drive-ins in a manner consistent with our high standards
and requirements and franchisees may not hire and train qualified managers
and
other restaurant personnel. Any operational shortcoming of a Franchise Drive-In
is likely to be attributed by consumers to the entire Sonic brand, thus damaging
our reputation and potentially affecting revenues and profitability.
Changes
in economic, market and other conditions could adversely affect Sonic and its
franchisees, and thereby Sonic’s operating results.
The
quick-service restaurant industry is affected by changes in economic conditions,
consumer preferences and spending patterns, demographic trends, consumer
perceptions of food safety, weather, traffic patterns, the type, number and
location of competing restaurants, and the effects of war or terrorist
activities and any governmental responses thereto. Factors such as interest
rates, inflation, gasoline prices, food costs, labor and benefit costs, legal
claims, and the availability of management and hourly employees also affect
restaurant operations and administrative expenses. Economic conditions,
including interest rates and other government policies impacting land and
construction costs and the cost and availability of borrowed funds, affect
our
ability and our franchisees’ ability to finance new restaurant development,
improvements and additions to existing restaurants, and the acquisition of
restaurants from, and sale of restaurants to, franchisees. Inflation can cause
increased food, labor and benefits costs and can increase our operating
expenses. As operating expenses increase, we recover increased costs by
increasing menu prices, to the extent permitted by competition, or by
implementing alternative products or cost reduction procedures. We cannot
ensure, however, that we will be able to recover increases in operating expenses
due to inflation in this manner.
Our
financial results may fluctuate depending on various factors, many of which
are
beyond our control.
Our
sales
and operating results can vary from quarter to quarter and year to year
depending on various factors, many of which are beyond our control. Certain
events and factors may directly and immediately decrease demand for our
products. If customer demand decreases rapidly, our results of operations would
also decline precipitously. These events and factors include:
|
•
|
|
variations
in the timing and volume of Sonic Drive-Ins’ sales;
|
|
•
|
|
sales
promotions by Sonic and its competitors;
|
|
•
|
|
changes
in average same-store sales and customer visits;
|
|
•
|
|
variations
in the price, availability and shipping costs of
supplies;
|
|
•
|
|
seasonal
effects on demand for Sonic’s products;
|
|
•
|
|
unexpected
slowdowns in new drive-in development efforts;
|
|
•
|
|
changes
in competitive and economic conditions generally;
|
|
•
|
|
changes
in the cost or availability of ingredients or labor;
|
|
•
|
|
weather
and other acts of God; and
|
|
•
|
|
changes
in the number of franchise agreement
renewals.
|
Our
profitability may be adversely affected by increases in energy
costs.
Our
success depends in part on our ability to absorb increases in energy costs.
Various regions of the United States in which we operate multiple drive-ins
have
experienced significant increases in energy prices. If these increases continue
to occur, it would have an adverse effect on our profitability.
Shortages
or interruptions in the supply or delivery of perishable food products or rapid
price increases could adversely affect our operating results.
We
are
dependent on frequent deliveries of perishable food products that meet certain
specifications. Shortages or interruptions in the supply of perishable food
products may be caused by unanticipated demand, problems in production or
distribution, financial or other difficulties of suppliers, disease or
food-borne illnesses, inclement weather or other conditions. We purchase large
quantities of food and supplies, which can be subject to significant price
fluctuations due to seasonal shifts, climate conditions, industry demand, energy
costs, changes in international commodity markets and other factors. These
shortages or rapid price increases could adversely affect the availability,
quality and cost of ingredients, which would likely lower revenues and reduce
our profitability.
Failure
to successfully implement our growth strategy could reduce, or reduce the growth
of, our revenue and net income.
We
plan
to increase the number of Sonic Drive-Ins, but may not be able to achieve our
growth objectives and any new drive-ins may not be profitable. The opening
and
success of drive-ins depends on various factors, including:
|
•
|
|
competition
from other restaurants in current and future markets;
|
|
•
|
|
the
degree of saturation in existing markets;
|
|
•
|
|
the
identification and availability of suitable and economically viable
locations;
|
|
•
|
|
sales
levels at existing drive-ins;
|
|
•
|
|
the
negotiation of acceptable lease or purchase terms for new
locations;
|
|
•
|
|
permitting
and regulatory compliance;
|
|
•
|
|
the
cost and availability of construction resources;
|
|
•
|
|
the
availability of qualified franchisees and their financial and other
development capabilities;
|
|
•
|
|
the
ability to hire and train qualified management
personnel;
|
|
•
|
|
weather;
and
|
|
•
|
|
general
economic and business
conditions.
|
If
we are
unable to open as many new drive-ins as planned, if the drive-ins are less
profitable than anticipated or if we are otherwise unable to successfully
implement our growth strategy, revenue and profitability may grow more slowly
or
even decrease.
Our
outstanding and future leverage could have an effect on our
operations.
On
October 13, 2006, we completed a previously announced tender offer and
repurchased 15,918,131 shares, or approximately 19%, of our outstanding common
stock, for a total cost of $366.1 million. The shares were repurchased with
borrowings under a new term loan facility. As of October 13, 2006, we had
approximately $486 million of total long-term debt, comprised entirely of a
balance outstanding
on
our
term
loan facility. We may in the future repurchase shares of our common stock,
which
may be funded by additional debt. Our increased leverage and debt service
obligations could have the following consequences:
|
•
|
|
We
may be more vulnerable in the event of deterioration in our business,
in
the restaurant industry or in the economy generally. In addition,
we may
be limited in our flexibility in planning for, or reacting to,
changes in
our business and the industry in which we operate.
|
|
•
|
|
We
may be required to dedicate a substantial portion of our cash flow
to the
payment of interest on our indebtedness, which could reduce the amount
of
funds available for operations and thus place us at a competitive
disadvantage as compared with competitors that are less highly leveraged.
|
|
•
|
|
From
time to time, we may engage in various capital markets, bank credit
and
other financing activities to meet our cash requirements. We may
have
difficulty obtaining additional financing at economically acceptable
interest rates.
|
|
•
|
|
Our
new revolving credit facility contains, and any future debt obligations
may contain, certain negative covenants including limitations on
liens,
consolidations and mergers, indebtedness, capital expenditures,
asset
dispositions, sale-leaseback transactions, stock repurchases and
transactions with affiliates.
|
Sonic
Drive-Ins are subject to health, employment, environmental and other government
regulations, and failure to comply with existing or future government
regulations could expose us to litigation, damage our reputation and lower
profits.
Sonic
and
its franchisees are subject to various federal, state and local laws affecting
their businesses. The successful development and operation of restaurants depend
to a significant extent on the selection and acquisition of suitable sites,
which are subject to zoning, land use (including the placement of drive-thru
windows), environmental (including litter), traffic and other regulations.
Restaurant operations are also subject to licensing and regulation by state
and
local departments relating to health, food preparation, sanitation and safety
standards, federal and state labor laws (including applicable minimum wage
requirements, overtime, working and safety conditions and citizenship
requirements), federal and state laws prohibiting discrimination and other
laws
regulating the design and operation of facilities, such as the Americans with
Disabilities Act of 1990. If we fail to comply with any of these laws, we may
be
subject to governmental action or litigation, and our reputation could be
accordingly harmed. Injury to our reputation would, in turn, likely reduce
revenues and profits.
In
recent
years, there has been an increased legislative, regulatory and consumer focus
on
nutrition and advertising practices in the food industry, particularly among
restaurants. As a result, we may become subject to regulatory initiatives in
the
area of nutrition disclosure or advertising, such as requirements to provide
information about the nutritional content of our food products, which could
increase expenses. The operation of our franchise system is also subject to
franchise laws and regulations enacted by a number of states and rules
promulgated by the U.S. Federal Trade Commission. Any future legislation
regulating franchise relationships may negatively affect our operations,
particularly our relationship with our franchisees. Failure to comply with
new
or existing franchise laws and regulations in any jurisdiction or to obtain
required government approvals could result in a ban or temporary suspension
on
future franchise sales. Changes in applicable accounting rules imposed by
governmental regulators or private governing bodies could also affect our
reported results of operations.
We
are
subject to the Fair Labor Standards Act, which governs such matters as minimum
wages, overtime and other working conditions, along with the Americans with
Disabilities Act, various family leave mandates and a variety of other laws
enacted, or rules and regulations promulgated, by federal, state and local
governmental authorities that govern these and other employment matters. We
expect increases in payroll expenses as a result of federal and state mandated
increases in the minimum wage, and although such increases are not expected
to
be material, we cannot assure you that there will not be material increases
in
the future. In addition, our vendors may be affected by higher minimum wage
standards, which may increase the price of goods and services they supply to
us.
Litigation
from customers, franchisees, employees and others could harm our reputation
and
impact operating results.
Claims
of
illness or injury relating to food quality or food handling are common in the
food service industry. In addition, class action lawsuits have been filed,
and
may continue to be filed, against various quick service restaurants alleging,
among other things, that quick-service restaurants have failed to disclose
the
health risks associated with high-fat foods and that quick-service restaurants’
marketing practices have encouraged obesity. In addition to decreasing our
sales
and profitability and diverting management resources, adverse publicity or
a
substantial judgment against us could negatively impact our reputation,
hindering the ability to attract and retain qualified franchisees and grow
the
business.
Further,
we may be subject to employee, franchisee and other claims in the future based
on, among other things, discrimination, harassment, wrongful termination and
wage, rest break and meal break issues, including those relating to overtime
compensation.
We
may not be able to adequately protect our intellectual property, which could
decrease the value of our brand and products.
The
success of our business depends on the continued ability to use existing
trademarks, service marks and other components of our brand in order to increase
brand awareness and further develop branded products. All of the steps we have
taken to protect our intellectual property may not be adequate.
Ownership
and leasing of significant amounts of real estate exposes us to possible
liabilities and losses.
We
own or
lease the land and building for all Partner Drive-Ins. Accordingly, we are
subject to all of the risks associated with owning and leasing real estate.
In
particular, the value of our assets could decrease, and our costs could
increase, because of changes in the investment climate for real estate,
demographic trends and supply or demand for the use of our drive-ins, which
may
result from competition from similar restaurants in the area, as well as
liability for environmental conditions. We generally cannot cancel the leases,
so if an existing or future Sonic Drive-In is not profitable, and we decide
to
close it, we may nonetheless be committed to perform our obligations under
the
applicable lease including, among other things, paying the base rent for the
balance of the lease term. In addition, as each of the leases expires, we may
fail to negotiate renewals, either on commercially acceptable terms or at all,
which could cause us to close drive-ins in desirable locations.
Catastrophic
events may disrupt our business.
Unforeseen
events, including war, terrorism and other international conflicts, public
health issues, and natural disasters such as hurricanes, earthquakes, or other
adverse weather and climate conditions, whether occurring in the United States
or abroad, could disrupt our operations, disrupt the operations of franchisees,
suppliers or customers, or result in political or economic instability. These
events could reduce demand for our products or make it difficult or impossible
to receive products from suppliers.
None.
Of
the
623 Partner Drive-Ins operating as of August 31, 2006, we operated 249 of them
on property leased from third-parties and
374 of
them on property we own. The leases expire on dates ranging from 2006 to 2025,
with the majority of the leases providing for renewal options. All leases
provide for specified monthly rental payments, and some of the leases call
for
additional rentals based on sales volume. All leases require Sonic to maintain
the property and pay the cost of insurance and taxes.
We
moved
our corporate headquarters to a new building in the Bricktown district of
downtown Oklahoma City in November 2003 and have a 15-year lease to occupy
approximately 78,000 square feet in the new building. The lease expires in
November 2018 and has two five-year renewal options. Sonic believes its
properties are suitable for the purposes for which they are being
used.
On
September 13, 2005, Sonic Industries Inc. (“Sonic Industries”)
filed a declaratory judgment action against AeroComm,
Inc., in the United States District Court for the Western
District of Oklahoma in Oklahoma City, Oklahoma, in a case
titled,
Sonic
Industries Inc. v. AeroComm, Inc.
(Case
No.: CIV-05-1065-R). Sonic Industries seeks the Court's
declaration that Sonic Industries has not violated antitrust laws and that
AeroComm has no protected rights in Sonic Industries’ pay-at-your-stall
(PAYS) credit card system. AeroComm was the primary supplier of PAYS
radio components until AeroComm unilaterally terminated its relationship
with Sonic Industries. On October 24, 2005, AeroComm filed counterclaims against
Sonic Industries alleging that Sonic Industries interfered with AeroComm’s
business relationships and opportunities with another PAYS supplier, provided
proprietary information to the company that replaced AeroComm, and violated
antitrust laws by restricting the ability of another PAYS supplier to use
AeroComm for non-Sonic applications. The counterclaim seeks unspecified
compensatory and other damages and injunctive relief. On February 27, 2006,
AeroComm notified Sonic Industries that it was specifically seeking
compensatory damages for lost profits and lost valuation. The Company believes
that AeroComm's claims are without merit and will vigorously defend against
them. While acknowledging the uncertainties of litigation, the Company
does not believe that AeroComm’s claims
will
have
a material adverse effect on the Company’s business or financial
condition.
The
Company is involved in various other legal proceedings and has certain
unresolved claims pending. Based on the information currently available,
management believes that all claims currently pending are either covered by
insurance or would not have a material adverse effect on the Company’s business
or financial condition.
Sonic
did
not submit any matter during the fourth quarter of the Company’s last fiscal
year to a vote of Sonic’s stockholders, through the solicitation of proxies or
otherwise.
Identification
of Executive Officers
The
following table identifies the executive officers of the Company:
Name
|
Age
|
Position
|
Executive
Officer
Since
|
|
|
|
|
J.
Clifford Hudson
|
51
|
Chairman
of the Board of Directors, Chief Executive Officer and
President
|
June
1985
|
|
|
|
|
W.
Scott McLain
|
44
|
Executive
Vice President of Sonic Corp. and President of Sonic Industries
Inc.
|
April
1996
|
|
|
|
|
Michael
A. Perry
|
48
|
President
of Sonic Restaurants, Inc.
|
August
2003
|
|
|
|
|
Ronald
L. Matlock
|
55
|
Senior
Vice President, General Counsel and Secretary
|
April
1996
|
|
|
|
|
Stephen
C. Vaughan
|
40
|
Vice
President, Chief Financial Officer and Treasurer
|
January
1996
|
|
|
|
|
V.
Todd Townsend
|
42
|
Vice
President and Chief Marketing Officer
|
August
2005
|
|
|
|
|
Carolyn
C. Cummins
|
48
|
Vice
President of Compliance
|
April
2004
|
|
|
|
|
Terry
D. Harryman
|
41
|
Controller
|
January
1999
|
Business
Experience
The
following sets forth the business experience of the executive officers of the
Company for at least the past five years:
J.
Clifford Hudson has served as the Company’s Chairman of the Board and Chief
Executive Officer since January 2000. Mr. Hudson served as Chief Executive
Officer and President of the Company from April 1995 to January 2000 and
reassumed the position of President in November 2004. He has served in various
other offices with the Company since 1984. Mr. Hudson has served as a Director
of the Company since 1993. He served as Chairman of the Board of Securities
Investor Protection Corporation, the federally-chartered organization which
serves as the insurer of customer accounts with brokerage firms, from 1994
to
2001.
W.
Scott
McLain has served as Executive Vice President of the Company and President
and
Director of Sonic Industries Inc. since September 2004. He served as the
Company’s Executive Vice President and Chief Financial
Officer
from January 2004 until November 2004 and as the Company’s Senior Vice President
and Chief Financial Officer from January 2000 until January 2004. Mr. McLain
served as the Company’s Vice President of Finance and Chief Financial Officer
from August 1997 until January 2000.
Michael
A. Perry has served as President and Director of Sonic Restaurants, Inc. since
September 2004. He served as Senior Vice President of Operations and Director
of
Sonic Restaurants, Inc. from August 2003 until September 2004. Mr. Perry served
as Vice President of Franchise Services of Sonic Industries Inc. from September
1998 until August 2003.
Ronald
L.
Matlock has served as the Company’s Senior Vice President, General Counsel
and Secretary since January 2000. Mr. Matlock served as the Company’s Vice
President, General Counsel and Secretary from April 1996 until January 2000.
Mr.
Matlock has also served as a Director of Sonic Restaurants, Inc. and as a
Director of Sonic Industries Inc. since April 1996.
Stephen
C. Vaughan has served as Vice President and Chief Financial Officer of the
Company since November 2004 and as Treasurer of the Company since September
2006. Mr. Vaughan also served as Treasurer of the Company from November 2004
until April 2005. Mr. Vaughan served as Vice President of Planning and Analysis
and Treasurer from November 2001 until November 2004 and served as Vice
President of Planning and Analysis from January 1999 until November 2001. He
joined the Company in 1992.
V.
Todd
Townsend has served as Vice President and Chief Marketing Officer of the Company
since joining the Company in August 2005. Mr. Townsend served as Vice President
of Marketing for Yahoo! Inc. from 2004 until joining the Company in 2005. Mr.
Townsend served as Assistant Vice President of Marketing for Sprint Corp. from
2001 until 2003 and as
Senior
Director of Marketing for Sprint Corp.
from
2000
until 2001.
Carolyn
C. Cummins has served as the Company’s Vice President of Compliance since April
2004. Ms. Cummins has also served as Assistant General Counsel and Assistant
Secretary since joining the Company in January 1999.
Terry
D.
Harryman has served as the Company’s Controller since January 1999. Mr. Harryman
has also served as the Controller of Sonic Restaurants, Inc. and Sonic
Industries Inc. since January 2002. He served as Assistant Treasurer of Sonic
Restaurants, Inc. and Sonic Industries Inc. from October 1996 until January
2002.
PART
II
Market
Information
The
Company’s common stock trades on the Nasdaq National Market ("Nasdaq") under the
symbol "SONC." The following table sets forth the high and low closing bids
for
the Company’s common stock during each fiscal quarter within the two most recent
fiscal years as reported on Nasdaq. Share amounts set forth below and elsewhere
in this report have been adjusted to reflect the results of the April 2006
three-for-two stock split.
Fiscal
Year Ended August 31, 2006
|
High
|
Low
|
Fiscal
Year Ended August 31, 2005
|
High
|
Low
|
First
Quarter
|
$19.940
|
$17.987
|
First
Quarter
|
$19.987
|
$14.934
|
Second
Quarter
|
$
21.727
|
$18.327
|
Second
Quarter
|
$22.580
|
$19.447
|
Third
Quarter
|
$23.480
|
$20.827
|
Third
Quarter
|
$23.647
|
$20.534
|
Fourth
Quarter
|
$22.400
|
$19.070
|
Fourth
Quarter
|
$22.547
|
$19.447
|
Stockholders
As
of
October 16, 2006, the Company had
624
record holders of its common stock.
Dividends
The
Company did not pay any cash dividends on its common stock during its two most
recent fiscal years and does not intend to pay any dividends in the foreseeable
future as profits are reinvested in the Company to fund expansion of its
business, acquisition of Franchise Drive-Ins, repurchases of the Company’s
common stock, and payments under the Company’s financing arrangements. As in the
past, future payment of dividends will be considered after reviewing, among
other factors, returns to stockholders, profitability expectations and financing
needs.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth information about the Company’s equity compensation
plans as of August 31, 2006.
Equity
Compensation Plan Information
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation plans
(excluding
securities
reflected
in column (a))
|
Plan
category
|
(a)
|
(b)
|
(c)
|
|
|
|
|
Equity
compensation plans
not
approved by
security
holders
|
7,230,188
|
$11.98
|
6,051,382
|
Equity
compensation plans
not
approved by
security
holders
|
-0-
|
-0-
|
-0-
|
Issuer
Purchases of Equity Securities
Shares
repurchased during the fourth quarter of fiscal 2006 are as
follows:
Period
|
Total
Number of Shares
Purchased
(a)
|
Average
Price Paid per
Share
(b)
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
(1)
(c)
|
Maximum
Dollar Value that May Yet Be Purchased Under the
Program
(d)
|
June
1, 2006
through
June
30, 2006
|
132,800
|
$21.36
|
132,800
|
$89,412,723
|
July
1, 2006
through
July
31, 2006
|
--
|
--
|
--
|
$89,412,723
|
August
1, 2006 through
August
31, 2006
|
--
|
--
|
--
|
$89,412,723
|
Total
|
132,800
|
$21.36
|
132,800
|
|
(1)
All
of the shares purchased during the
fourth
quarter
of fiscal 2006 were purchased as part of the Company’s share repurchase program
which was first publicly announced on April 14, 1997. In April 2006, the
Company’s Board of Directors approved an increase in the share repurchase
authorization from $34,581,097 to $110,000,000 and extended the program to
August 31, 2007.
The
following table sets forth selected financial data regarding the Company’s
financial condition and operating results. One should read the following
information in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” below, and the Company’s
Consolidated Financial Statements included elsewhere in this
report.
[The
Remainder of this Page Intentionally Left Blank]
Selected
Financial Data
(In
thousands, except per share data)
|
|
Year
ended August 31,
|
|
|
|
2006
|
|
2005
(1)
|
|
2004
(1)
|
|
2003
(1)
|
|
2002
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partner
Drive-In sales
|
|
$
|
585,832
|
|
$
|
525,988
|
|
$
|
449,585
|
|
$
|
371,518
|
|
$
|
330,707
|
|
Franchise
Drive-Ins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
royalties
|
|
|
98,163
|
|
|
88,027
|
|
|
77,518
|
|
|
66,431
|
|
|
61,392
|
|
Franchise
fees
|
|
|
4,747
|
|
|
4,311
|
|
|
4,958
|
|
|
4,674
|
|
|
4,020
|
|
Other
|
|
|
4,520
|
|
|
4,740
|
|
|
4,385
|
|
|
4,017
|
|
|
4,043
|
|
Total
revenues
|
|
|
693,262
|
|
|
623,066
|
|
|
536,446
|
|
|
446,640
|
|
|
400,162
|
|
Cost
of Partner Drive-In sales
|
|
|
468,627
|
|
|
421,906
|
|
|
358,859
|
|
|
291,764
|
|
|
257,057
|
|
Selling,
general and administrative
|
|
|
52,048
|
|
|
47,503
|
|
|
44,765
|
|
|
41,061
|
|
|
38,246
|
|
Depreciation
and amortization
|
|
|
40,696
|
|
|
35,821
|
|
|
32,528
|
|
|
29,223
|
|
|
26,078
|
|
Provision
for impairment of long-lived
assets
|
|
|
264
|
|
|
387
|
|
|
675
|
|
|
727
|
|
|
1,261
|
|
Total
expenses
|
|
|
561,635
|
|
|
505,617
|
|
|
436,827
|
|
|
362,775
|
|
|
322,642
|
|
Income
from operations
|
|
|
131,627
|
|
|
117,449
|
|
|
99,619
|
|
|
83,865
|
|
|
77,520
|
|
Net
interest expense
|
|
|
7,578
|
|
|
5,785
|
|
|
6,378
|
|
|
6,216
|
|
|
6,319
|
|
Income
before income taxes
|
|
$
|
124,049
|
|
$
|
111,664
|
|
$
|
93,241
|
|
$
|
77,649
|
|
$
|
71,201
|
|
Net
income
|
|
$
|
78,705
|
|
$
|
70,443
|
|
$
|
58,031
|
|
$
|
47,801
|
|
$
|
43,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
$
|
0.78
|
|
$
|
0.65
|
|
$
|
0.55
|
|
$
|
0.49
|
|
Diluted
|
|
$
|
0.88
|
|
$
|
0.75
|
|
$
|
0.63
|
|
$
|
0.52
|
|
$
|
0.46
|
|
Weighted
average shares used in calculation
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
86,260
|
|
|
89,992
|
|
|
88,970
|
|
|
87,698
|
|
|
90,350
|
|
Diluted
|
|
|
89,239
|
|
|
93,647
|
|
|
92,481
|
|
|
91,365
|
|
|
94,965
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (deficit)
|
|
$
|
(35,585
|
)
|
$
|
(30,093
|
)
|
$
|
(14,537
|
)
|
$
|
(2,875
|
)
|
$
|
(12,942
|
)
|
Property,
equipment and capital leases, net
|
|
|
477,054
|
|
|
422,825
|
|
|
376,315
|
|
|
345,551
|
|
|
305,286
|
|
Total
assets
|
|
|
638,018
|
|
|
563,316
|
|
|
518,633
|
|
|
486,119
|
|
|
405,356
|
|
Obligations
under capital leases (including current portion)
|
|
|
36,625
|
|
|
38,525
|
|
|
40,531
|
|
|
27,929
|
|
|
12,938
|
|
Long-term
debt (including current portion)
|
|
|
122,399
|
|
|
60,195
|
|
|
82,169
|
|
|
139,587
|
|
|
109,375
|
|
Stockholders’
equity
|
|
|
391,693
|
|
|
387,917
|
|
|
337,900
|
|
|
267,733
|
|
|
232,236
|
|
Cash
dividends declared per common share
|
|
|
─
|
|
|
─
|
|
|
─
|
|
|
─
|
|
|
─
|
|
(1)
Previously reported prior-year results have been adjusted to implement SFAS
123R
on a modified retrospective basis.
(2)
Adjusted
for three-for-two stock splits in 2006, 2004 and 2002.
Overview
Description
of the Business
.
Sonic
operates and franchises the largest chain of drive-ins in the United States.
As
of August 31, 2006, the Sonic system was comprised of 3,188 drive-ins, of which
20% or 623 were Partner Drive-Ins and 80% or 2,565 were Franchise Drive-Ins.
Sonic Drive-Ins feature signature menu items such as specialty soft drinks
and
frozen desserts, made-to-order sandwiches and a unique breakfast menu. We derive
our revenues primarily from Partner Drive-In sales and royalties from
franchisees. We also receive revenues from initial franchise fees. To a lesser
extent, we also receive income from the selling and leasing of signs and real
estate, as well as from minority ownership interests in a few Franchise
Drive-Ins.
Costs
of
Partner Drive-In sales, including minority interest in earnings of drive-ins,
relate directly to Partner Drive-In sales. Other expenses, such as depreciation,
amortization, and general and administrative expenses, relate to the Company’s
franchising operations, as well as Partner Drive-In operations. Our revenues
and
expenses are directly affected by the number and sales volumes of Partner
Drive-Ins. Our revenues and, to a lesser extent, expenses also are affected
by
the number and sales volumes of Franchise Drive-Ins. Initial franchise fees
and
franchise royalties are directly affected by the number of Franchise Drive-In
openings.
Overview
of Business Performance
.
Business
performance was strong during fiscal year 2006 as net income increased 11.7%
and
earnings per share increased 17.3% to $0.88 per diluted share from $0.75 per
diluted share in the year-earlier period, which is adjusted for the
retrospective adoption of SFAS 123R for expensing stock-based compensation.
We
continue to experience considerable momentum in our business fueled by strong
growth in same-store sales that led to a strong increase in system-wide drive-in
level average profits. In turn, the rise in store-level profits, which have
grown handsomely over the last three years, helped produce a solid number of
new
drive-in openings by franchisees. We believe these results reflect our
multi-layered growth strategy that features the following
components:
|
•
|
|
Solid
same-store sales growth;
|
|
•
|
|
Expansion
of the Sonic brand through new unit growth, particularly by
franchisees;
|
|
•
|
|
Increased
franchising income stemming from franchisee new unit growth, solid
same-store sales growth and our unique ascending royalty
rate;
|
|
•
|
|
Operating
leverage at both the drive-in level and the corporate level;
and
|
|
•
|
|
The
use of excess operating cash flow and issuance of new debt for
franchise
acquisitions and share repurchases.
|
The
following table provides information regarding the number of Partner Drive-Ins
and Franchise Drive-Ins in operation as of the end of the periods indicated
as
well as the system-wide growth in sales and average unit volume. System-wide
information includes both Partner Drive-In and Franchise Drive-In information,
which we believe is useful in analyzing the growth of the brand as well as
the
Company’s revenues since franchisees pay royalties based on a percentage of
sales.
System-Wide
Performance
($
in thousands)
|
|
|
|
|
|
Year
Ended August 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Percentage
increase in sales
|
|
|
10.7
|
%
|
|
12.4
|
%
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
System-wide
drive-ins in operation
(1)
:
|
|
|
|
|
|
|
|
|
|
|
Total
at beginning of period
|
|
|
3,039
|
|
|
2,885
|
|
|
2,706
|
|
Opened
|
|
|
173
|
|
|
175
|
|
|
188
|
|
Closed
(net of re-openings)
|
|
|
(24
|
)
|
|
(21
|
)
|
|
(9
|
)
|
Total
at end of period
|
|
|
3,188
|
|
|
3,039
|
|
|
2,885
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
markets
(2)
|
|
|
2,435
|
|
|
2,165
|
|
|
2,059
|
|
Developing
markets
(2)
|
|
|
753
|
|
|
874
|
|
|
826
|
|
All
markets
|
|
|
3,188
|
|
|
3,039
|
|
|
2,885
|
|
System-Wide
Performance (cont’d)
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended August 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Average
sales per drive-in:
|
|
|
|
|
|
|
|
|
|
|
Core
markets
|
|
$
|
1,105
|
|
$
|
1,059
|
|
$
|
1,004
|
|
Developing
markets
|
|
|
954
|
|
|
934
|
|
|
861
|
|
All
markets
|
|
|
1,070
|
|
|
1,023
|
|
|
964
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in same-store sales
(3)
:
|
|
|
|
|
|
|
|
|
|
|
Core
markets
|
|
|
5.3
|
%
|
|
5.6
|
%
|
|
6.4
|
%
|
Developing
markets
|
|
|
1.5
|
|
|
7.4
|
|
|
6.8
|
|
All
markets
|
|
|
4.5
|
|
|
6.0
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Drive-ins that are temporarily closed for various reasons (repairs,
remodeling, management changes, etc.) are not considered closed unless
the
Company determines that they are unlikely to reopen within a reasonable
time.
(2)
Markets are identified based on television viewing areas and further
classified as core or developing markets based upon number of drive-ins
in
a market and the level of advertising support. Market classifications
are
updated periodically.
(3)
Represents percentage change for drive-ins open for a minimum of
15
months.
|
System-wide
same-store sales increased 4.5% during fiscal year 2006, with growth for the
year in all of our non-traditional day parts (morning, afternoon and evening).
The average check amount (average amount spent per transaction) represented
a
larger portion of the overall sales increase than traffic growth (number of
transactions). This marked our 20
th
consecutive year of positive same-store sales growth. We believe our strong
sales performance is a direct consequence of our specific sales-driving
initiatives including, but not limited to:
|
•
|
|
Continued
growth of our business in non-traditional day parts including
the morning,
afternoon, and evening day parts;
|
|
•
|
|
Use
of technology to reach customers and improve the customer
experience;
|
|
•
|
|
Monthly
promotions and new product news focused on quality and expanded
choice for
our customers; and
|
|
•
|
|
Growth
in brand awareness through increased media spending and greater
use of
network cable
advertising.
|
Looking
forward, these strategies are expected to continue to positively impact our
business. We expect revenue growth of between 11% and 13% for fiscal year 2007,
based upon targeted same-store sales growth in the range of 2% to 4%.
We
continue to promote the expansion of our business in non-traditional day parts
(morning, afternoon, and evening), which resulted in positive growth during
fiscal year 2006 compared to fiscal year 2005 for each of these non-traditional
day parts. We believe we have continuing opportunity to grow these day parts
throughout fiscal year 2007.
Implementation
of the PAYS program, which began in the fall of 2003, was completed in the
remainder of our Partner Drive-Ins during the second quarter of fiscal year
2005. Under the PAYS program, a credit card terminal is added to each drive-in
stall to facilitate credit and debit card transactions. Rollout to Franchise
Drive-Ins began in February 2005 and is expected to be substantially complete
system-wide by the end of calendar year 2006. Approximately 80% of Franchise
Drive-Ins and over 83% of drive-ins system-wide now have the PAYS system in
place.
We
continue to use our monthly promotions to highlight our distinctive food
offerings and to feature new products.
We
also
use our promotions and product news to create a strong emotional link with
consumers and to align closely with consumer trends for fresh ingredients,
customization, menu variety and choice. During the past year, our new product
offerings showcased the breadth of our menu and emphasized the opportunity
for
choice at Sonic. We will continue to have new product news in the coming months,
all designed to meet customers’ evolving taste preferences including the growing
desire for fresh, quality product offerings and healthier alternatives.
During
fiscal year 2006, our total system-wide media expenditures were approximately
$145 million as compared to $125 million in fiscal year 2005, which we believe
continues to increase overall brand awareness and strengthen our share of voice
relative to our competitors. We also continued to spend approximately one-half
of our marketing dollars on our system-wide marketing fund efforts, which are
largely used for network cable television advertising, growing this area of
our
advertising from approximately $60 million in fiscal year 2005 to approximately
$72 million in fiscal year 2006. We believe increased network cable advertising
provides several benefits including the ability to more effectively target
and
better reach the cable audience, which has now surpassed broadcast networks
in
terms of viewership. In addition, national cable advertising also allows us
to
bring additional depth to our media and expand our message beyond our
traditional emphasis on a single monthly promotion. Looking forward, we expect
system-wide media expenditures to be approximately $160 million in fiscal 2007.
The system-wide marketing fund portion will again represent approximately
one-half of total media expenditures for fiscal 2007.
Sonic
opened 173 new drive-ins during fiscal year 2006, consisting of 35 Partner
Drive-Ins and 138 Franchise Drive-Ins, down slightly from 175 drive-in openings
during fiscal year 2005 (37 Partner Drive-Ins and 138 Franchise Drive-Ins).
Looking forward, the Company expects to open 180 to 200 new drive-ins during
fiscal year 2007, including 150 to 160 by franchisees.
Overview
of Tender Offer and Financing Transactions
.
On
October 13, 2006, we repurchased 15.9 million shares of our common stock that
were properly tendered and not withdrawn, at a purchase price of $23.00 per
share for a total purchase price of $366.1 million. We funded the repurchase
of
the shares of our common stock with the proceeds from new senior secured credit
facilities with a syndicate of financial institutions led by Banc of America
Securities LLC and Lehman Brothers Inc. The new senior secured credit facilities
consist of a $100 million, five-year revolving credit facility and a $486
million, seven-year term loan facility.
Results
of Operations
Revenues
.
Total
revenues increased 11.3% to $693.3 million in fiscal year 2006 from $623.1
million during fiscal year 2005. The increase in revenues primarily relates
to
solid sales growth for Partner Drive-Ins and a rise in franchising income.
Revenues
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
Increase/
|
|
Increase/
|
|
Year
Ended August 31,
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
(Decrease)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partner
Drive-In sales
|
|
$
|
585,832
|
|
$
|
525,988
|
|
$
|
59,844
|
|
|
11.4
|
%
|
Franchise
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
royalties
|
|
|
98,163
|
|
|
88,027
|
|
|
10,136
|
|
|
11.5
|
|
Franchise
fees
|
|
|
4,747
|
|
|
4,311
|
|
|
436
|
|
|
10.1
|
|
Other
|
|
|
4,520
|
|
|
4,740
|
|
|
(220
|
)
|
|
(4.6
|
)
|
Total
revenues
|
|
$
|
693,262
|
|
$
|
623,066
|
|
$
|
70,196
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
Increase/
|
|
Increase/
|
|
Year
Ended August 31,
|
|
2005
|
|
2004
|
|
(Decrease)
|
|
(Decrease)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partner
Drive-In sales
|
|
$
|
525,988
|
|
$
|
449,585
|
|
$
|
76,403
|
|
|
17.0
|
%
|
Franchise
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
royalties
|
|
|
88,027
|
|
|
77,518
|
|
|
10,509
|
|
|
13.6
|
|
Franchise
fees
|
|
|
4,311
|
|
|
4,958
|
|
|
(647
|
)
|
|
(13.0
|
)
|
Other
|
|
|
4,740
|
|
|
4,385
|
|
|
355
|
|
|
8.1
|
|
Total
revenues
|
|
$
|
623,066
|
|
$
|
536,446
|
|
$
|
86,620
|
|
|
16.1
|
|
The
following table reflects the growth in Partner Drive-In sales and changes in
comparable drive-in sales for Partner Drive-Ins. It also presents information
about average unit volumes and the number of Partner Drive-Ins, which is useful
in analyzing the growth of Partner Drive-In sales.
Partner
Drive-In Sales
($
in thousands)
|
|
|
|
|
|
Year
Ended August 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Partner
Drive-In sales
|
|
$
|
585,832
|
|
$
|
525,988
|
|
$
|
449,585
|
|
Percentage
increase
|
|
|
11.4
|
%
|
|
17.0
|
%
|
|
21.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Partner
Drive-Ins in operation
(1)
:
|
|
|
|
|
|
|
|
|
|
|
Total
at beginning of period
|
|
|
574
|
|
|
539
|
|
|
497
|
|
Opened
|
|
|
35
|
|
|
37
|
|
|
21
|
|
Acquired
from (sold to) franchisees, net
|
|
|
15
|
|
|
(1
|
)
|
|
21
|
|
Closed
|
|
|
(1
|
)
|
|
(1
|
)
|
|
-
|
|
Total
at end of period
|
|
|
623
|
|
|
574
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
sales per Partner Drive-In
|
|
$
|
980
|
|
$
|
957
|
|
$
|
886
|
|
Percentage
increase
|
|
|
2.4
|
%
|
|
8.0
|
%
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Change
in same-store sales
(2)
|
|
|
1.9
|
%
|
|
7.4
|
%
|
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Drive-ins that are temporarily closed for various reasons (repairs,
remodeling, management changes, etc.) are not considered closed unless
the
Company determines that they are unlikely to reopen within a reasonable
time.
(2)
Represents percentage change for drive-ins open for a minimum of
15
months.
|
The
increases in Partner Drive-In sales result from newly constructed and acquired
drive-ins and same-store sales increases in existing drive-ins, offset by the
loss of sales for sold and closed drive-ins.
Change
in Partner Drive-In Sales
($
in thousands)
|
|
|
|
|
|
Year
Ended August 31,
|
|
|
|
2006
|
|
2005
|
|
Increase
from addition of newly constructed drive-ins
(1)
|
|
$
|
33,332
|
|
$
|
28,184
|
|
Increase
from acquisition of drive-ins
(2)
|
|
|
19,549
|
|
|
19,831
|
|
Increase
from same-store sales
|
|
|
9,754
|
|
|
31,109
|
|
Decrease
from drive-ins sold or closed
(3)
|
|
|
(2,791
|
)
|
|
(2,721
|
)
|
Net
increase in Partner Drive-In sales
|
|
$
|
59,844
|
|
$
|
76,403
|
|
|
|
|
|
|
|
|
|
(1)
Represents the increase for 72 and 58 drive-ins opened since the
beginning
of the prior fiscal year as of August 31, 2006 and 2005,
respectively.
|
(2)
Represents the increase for 19 and 28 drive-ins acquired since the
beginning of the prior fiscal year as of August 31, 2006 and 2005,
respectively.
|
(3)
Represents the decrease for 7 and 9 drive-ins sold or closed since
the
beginning of the prior fiscal year as of August 31, 2006 and 2005,
respectively.
|
Effective
September 1, 2005, we acquired 15 Franchise Drive-Ins located in the Tennessee
and Kentucky markets. This acquisition added approximately 3% to our revenue
growth during fiscal year 2006. Over the past several years, we have completed
the acquisition of several Franchise Drive-Ins in various markets. These
acquisitions are expected to continue to add to revenue growth and be accretive
to earnings. Our acquisitions are typically focused on higher volume stores
with
strong store-level management already in place. In addition, the selling
franchisee usually retains a significant drive-in base and continues growing
with us in other areas. We view these types of acquisitions of drive-ins with
proven track records as a very good, lower-risk use of our capital and they
remain a very viable potential use of our excess cash flow in future
years.
The
following table reflects the growth in franchise income (franchise royalties
and
franchise fees) as well as franchise sales, average unit volumes and the number
of Franchise Drive-Ins. While we do not record Franchise Drive-In sales as
revenues, we believe this information is important in understanding our
financial performance since these sales are the basis on which we calculate
and
record franchise royalties. This information is also indicative of the financial
health of our franchisees.
Franchise
Information
($
in thousands)
|
|
|
|
Year
Ended August 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Franchise
fees and royalties
(1)
|
|
$
|
102,910
|
|
$
|
92,338
|
|
$
|
82,476
|
|
Percentage
increase
|
|
|
11.4
|
%
|
|
12.0
|
%
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
Drive-Ins in operation
(2)
:
|
|
|
|
|
|
|
|
|
|
|
Total
at beginning of period
|
|
|
2,465
|
|
|
2,346
|
|
|
2,209
|
|
Opened
|
|
|
138
|
|
|
138
|
|
|
167
|
|
Acquired
from (sold to) Company, net
|
|
|
(15
|
)
|
|
1
|
|
|
(21
|
)
|
Closed
|
|
|
(23
|
)
|
|
(20
|
)
|
|
(9
|
)
|
Total
at end of period
|
|
|
2,565
|
|
|
2,465
|
|
|
2,346
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
Drive-In sales
|
|
$
|
2,735,802
|
|
$
|
2,474,133
|
|
$
|
2,219,340
|
|
Percentage
increase
|
|
|
10.6
|
%
|
|
11.5
|
%
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Effective
royalty rate
|
|
|
3.59
|
%
|
|
3.56
|
%
|
|
3.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Average
sales per Franchise Drive-In
|
|
$
|
1,092
|
|
$
|
1,039
|
|
$
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in same-store sales
(3)
|
|
|
5.1
|
%
|
|
5.8
|
%
|
|
6.2
|
%
|
|
(1)
See
Revenue
Recognition Related to Franchise Fees and Royalties
in
the
Critical
Accounting Policies and Estimates
section of MD&A.
|
(2)
Drive-ins that are temporarily closed for various reasons (repairs,
remodeling, management changes, etc.) are not considered closed unless
the
Company determines that they are unlikely to reopen within a reasonable
time.
(3)
Represents percentage change for drive-ins open for a minimum of
15
months.
|
Franchise
royalties increased 11.5% to $98.2 million in fiscal year 2006, compared to
$88.0 million in fiscal year 2005. Of the $10.2 million increase, approximately
$6.1 million resulted from Franchise Drive-Ins’ same-store sales growth of 5.1%
in fiscal year 2006, combined with an increase in the effective royalty rate
to
3.59% during fiscal year 2006 compared to 3.56% during fiscal year 2005. Each
of
our license agreements contains an ascending royalty rate whereby royalties,
as
a percentage of sales, increase as sales increase. The balance of the increase
was attributable to growth in the number of Franchise Drive-Ins over the prior
period.
Franchise
royalties increased 13.6% to $88.0 million in fiscal year 2005, compared to
$77.5 million in fiscal year 2004. Of the $10.5 million increase, approximately
$6.3 million resulted from Franchise Drive-Ins’ same-store sales growth of 5.8%
in fiscal year 2005, combined with an increase in the effective royalty rate
to
3.56% during fiscal year 2005 compared to 3.49% during fiscal year 2004. Each
of
our license agreements contains an ascending royalty rate whereby royalties,
as
a percentage of sales, increase as sales increase. The balance of the increase
was attributable to growth in the number of Franchise Drive-Ins over the prior
period.
Franchise
fees increased 10.1% to $4.7 million as franchisees opened 138 new drive-ins
in
both fiscal year 2006 and fiscal year 2005. The increase in franchise fee
revenue resulted from the termination of area development agreements related
to
an initiative to strengthen the franchise development pipeline by terminating
non-performing agreements. Franchise fees decreased 13.0% to $4.3 million during
fiscal 2005 as 138 Franchise Drive-Ins opened compared to 167 during the
previous year.
Looking
forward, there has been a strong increase in per store profits over the last
three years. Historically, strong growth in sales and profits has been a good
indicator of increased franchise openings in the following years. As of August
31, 2006, we had 152 area development agreements representing approximately
576
planned Franchise Drive-In openings over the next few years, compared to 163
such agreements at August 31, 2005 which represented approximately 635 planned
Franchise Drive-In openings. While the number of agreements and commitments
has
declined, we believe that the termination of several non-performing agreements
over the past year has improved the quality of our franchise
pipeline.
Another step that has contributed to growth of our confidence in the franchise
pipeline is the recent expansion into a number of new markets, primarily
located
along the east and west coasts. In the past, our market expansion has been
limited to a fewer number of markets at one time; we believe the brand awareness
provided by our national cable advertising efforts will support this planned
expansion to a greater number of markets.
Twenty-three
Franchise Drive-Ins were closed during fiscal year 2006, which was an increase
from the 20 Franchise Drive-Ins closed during fiscal year 2005. Most of the
closings in fiscal year 2006 were the result of low sales and were spread across
a broad range of markets and franchise groups. Fifteen of the fiscal year 2005
closings related primarily to two weaker franchise operators in two different
markets. We do not believe that these drive-in closings are indicative of the
Sonic brand’s success. We have taken steps to require stronger financial
qualifications of new franchisees, which we believe will significantly mitigate
this type of risk. In addition, we expect that some of these drive-ins may
re-open under new franchisee ownership.
We
anticipate 150 to 160 store openings by franchisees during fiscal year 2007.
Substantially all of these new drive-ins will open under our newest form of
license agreement, which contains a higher average royalty rate and initial
opening fee. As a result of these new Franchise Drive-In openings and the
continued benefit of the ascending royalty rate, we expect approximately $9
to
$10 million in incremental franchise fees and royalties in fiscal year 2007.
Operating
Expenses
.
Overall,
drive-in cost of operations, as a percentage of Partner Drive-In sales,
decreased to 80.0% in fiscal year 2006 from 80.2% in fiscal year 2005. Minority
interest in earnings of drive-ins is included as a part of cost of sales, in
the
table below, since it is directly related to Partner Drive-In operations.
Operating
Margins
|
|
|
|
|
|
Year
Ended August 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Costs
and Expenses
(1)
:
|
|
|
|
|
|
|
|
Partner
Drive-Ins:
|
|
|
|
|
|
|
|
|
|
|
Food
and packaging
|
|
|
25.9
|
%
|
|
26.2
|
%
|
|
26.3
|
%
|
Payroll
and other employee benefits
|
|
|
30.0
|
|
|
30.3
|
|
|
30.2
|
|
Minority
interest in earnings of
Partner
Drive-Ins
|
|
|
4.3
|
|
|
4.1
|
|
|
4.4
|
|
Other
operating expenses
|
|
|
19.8
|
|
|
19.6
|
|
|
18.9
|
|
Total
Partner Drive-In cost of operations
|
|
|
80.0
|
%
|
|
80.2
|
%
|
|
79.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)
As a percentage of Partner Drive-In
sales.
|
Food
and
packaging costs decreased by 0.3 percentage points during fiscal year 2006
compared to fiscal year 2005 following a decrease of 0.1 percentage points
during fiscal year 2005 compared to fiscal year 2004. The improvement for fiscal
year 2006 relates primarily to lower dairy costs and a favorable shift in
product mix to drinks and ice cream, which have more favorable margins than
other menu items. Looking forward, we anticipate that a benign commodity cost
environment will result in flat to slightly favorable food and packaging costs,
as a percentage of sales, on a year-over-year basis in fiscal year 2007.
Labor
costs decreased by 0.3 percentage points during fiscal year 2006 compared to
fiscal year 2005 after an increase of 0.1 percentage points during fiscal year
2005 compared to fiscal year 2004. The improvement for fiscal year 2006 is
primarily a result of leverage from higher sales volumes. The slight increase
for fiscal year 2005 resulted from staffing increases at the assistant manager
level, as well as higher labor costs related to opening newly constructed stores
as higher staffing levels were required for pre-opening training and through
the
initial opening period.
The
average wage rate has increased only slightly over the past year. Looking
forward, wage increases are expected to be leveraged by higher volumes. As
a
result, we expect labor costs to be slightly favorable, as a percentage of
sales, on a year-over-year basis, in fiscal year 2007.
Minority
interest, which reflects our store-level partners’ pro-rata share of earnings
through our partnership program, increased by $3.7 million during fiscal year
2006, reflecting the increase in average store-level profits. During fiscal
year
2005, minority interest increased $1.6 million, also reflecting the increase
in
average
profit
per store. We continue to view the partnership program as an integral
part of our culture at Sonic and a large factor in the success of our business,
and we are pleased that profit distributions to our partners increased during
fiscal year 2006. Since we expect our average store level profits to continue
to
grow in fiscal year 2007, we expect minority interest to continue to increase
in
dollar terms.
Other
operating expenses increased by 0.2 percentage points during fiscal year 2006
after an increase of 0.7 percentage points during fiscal year 2005. Leverage
from higher sales partially offset increased utility costs resulting from higher
energy prices in fiscal year 2006. The increase in fiscal year 2005 resulted
primarily from credit card charges associated with the increase in credit card
transactions stemming from the success of the PAYS program, as well as increased
repairs and maintenance expenses resulting from a greater focus on the physical
appearance of our drive-ins. Looking forward, we expect other operating expenses
to be flat to slightly favorable in fiscal year 2007, as we lap over the higher
costs from a year ago.
To
summarize, we are expecting overall restaurant-level margins to be slightly
favorable during fiscal year 2007 on a year-over-year basis.
Selling,
General and Administrative
.
Selling,
general and administrative expenses increased 9.6% to $52.0 million during
fiscal year 2006 and 6.1% to $47.5 million during fiscal year 2005. As a
percentage of total revenues, selling, general and administrative expenses
decreased to 7.5% in fiscal year 2006, compared with 7.6% in fiscal year 2005
and 8.3% in fiscal year 2004. Sonic adopted SFAS 123R at the beginning of fiscal
year 2006, therefore, we are now expensing the estimated fair value of stock
options over their vesting period. We chose to adopt the new standard using
the
modified retrospective application method, as provided for in the standard.
This
method of adoption requires us to adjust all prior periods to reflect expense
for the fair value of stock options that was previously only disclosed in the
footnotes to the financial statements. As of August 31, 2006, total remaining
unrecognized compensation cost related to unvested stock-based arrangements
was
$12.4 million and is expected to be recognized over a weighted average period
of
1.6 years. See Note 1 and Note 12 of the Notes to the Consolidated Financial
Statements included in this Form 10-K for additional information regarding
our
stock-based compensation. Excluding stock-based compensation expense, these
costs increased 10.1% during fiscal year 2006 and 6.5% during fiscal year 2005,
both increases related primarily to increased headcount additions to support
continued growth of our business. We anticipate that selling, general and
administrative costs will increase in the range of 10% to 12% in fiscal year
2007 and decline slightly, as a percentage of sales.
Depreciation
and Amortization
.
Depreciation and amortization expense increased 13.6% to $40.7 million in fiscal
year 2006 due, in part, to additional depreciation stemming from the Tennessee
and Kentucky acquisitions, as well as the reduction in remaining useful life
for
certain assets related to the retrofit of Partner Drive-Ins in the late 1990s.
This reduction in life resulted from a re-evaluation of the remaining life
of
such assets in the fourth quarter of fiscal year 2005. Depreciation and
amortization expense increased 10.1% to $35.8 million in fiscal year 2005 due,
in part, to additional depreciation stemming from the Colorado acquisition
in
July 2004. Capital expenditures during fiscal year 2006 were $113.6 million,
including $14.6 million related to the acquisition of drive-ins, and $12.1
million related to the purchase of real estate in the fourth quarter. Looking
forward, with approximately $75 to $80 million in capital expenditures planned
for the year, normal depreciation and amortization is expected to increase
by
approximately 8% to 10% for the year.
Provision
for Impairment of Long-lived Assets
.
Three
surplus properties became impaired during fiscal year 2006 under the guidelines
of FAS 144 - “Accounting for the Impairment or Disposal of Long-Lived Assets.”
As a result, a total provision for impairment of long-lived assets of $0.3
million was recorded for the carrying costs of these assets in excess of their
estimated fair values. One Partner Drive-In and one surplus property became
impaired during fiscal year 2005 which resulted in a provision for impairment
of
$0.4 million for carrying cost in excess of estimated fair value for the assets.
We continue to perform quarterly analyses of certain underperforming drive-ins.
It is reasonably possible that the estimate of future cash flows associated
with
these drive-ins may change in the near future resulting in the need to
write-down assets associated with one or more of these drive-ins to fair value.
While it is impossible to predict if future write-downs will occur, we do not
believe that future write-downs will impede our ability to continue growing
earnings at a solid rate.
Interest
Expense
.
Net
interest expense increased 31.0% in fiscal year 2006 compared to a 9.3% decrease
in fiscal year 2005. The increase in fiscal year 2006 resulted from increased
borrowings which have been used largely to fund approximately $93.7 million
in
share repurchases during the year and capital expenditures. The reduction in
interest expense for fiscal year 2005 was a result of strong cash flow from
operations that limited borrowings, with the reduction in interest expense
more
than offsetting the decrease in interest income relating to the outsourcing
of
our partner notes to a third-party financial institution in August 2004. Going
forward,
we expect net interest expense to increase as a result of the tender offer
initiated
by the Company in August 2006 and funded in October 2006. The resulting
additional long-term borrowings are expected to result in an increase in
net
interest expense to at least $32 million or more depending on the level of
share
repurchases and acquisitions of Franchise Drive-Ins.
Income
taxes
.
The
provision for income taxes remained relatively constant for fiscal year 2006
with an effective federal and state tax rate of 36.6% compared with 36.9%
in fiscal year 2005 and 37.8% in fiscal year 2004. The lower rate for
fiscal year 2005 as compared to fiscal year 2004 resulted primarily from a
retroactive tax law change that reinstated expired tax credits in the first
quarter of fiscal year 2005. The expiration of the Work Opportunity Tax Credit
on January 1, 2006 has negatively impacted and will continue to impact our
tax
rate going forward. We expect that Congress will reinstate the tax credit
retroactively, as they have done in the past. However, we are not allowed to
record the benefit of this credit for qualified employees hired after December
31, 2005 until the legislation becomes enacted law. We expect our tax rate
to be
in the range of 36.5% to 37.5% in fiscal year 2007. However, our tax rate may
continue to vary significantly from quarter-to-quarter depending upon the timing
of the renewal of the Work Opportunity Tax Credit program, option exercises
and
dispositions by option-holders and as circumstances on individual tax matters
change.
Financial
Position
During
fiscal year 2006, current assets increased 20.6% to $42.5 million compared
to
$35.2 million as of the end of fiscal year 2005. Cash balances increased by
$3.2
million as a result of positive operating cash flows and current notes
receivable from franchisees increased by approximately $2.5 million related
to
short term financing for certain franchisee capital projects. Net property,
equipment and capital leases increased by $54.2 million as a result of capital
expenditures and the Tennessee and Kentucky acquisition. Goodwill increased
by
$8.5 million and other intangibles increased by $4.3 million as a result of
the
Tennessee and Kentucky acquisition. These increases combined with the increase
in current assets resulted in a 13.3% increase in total assets to $638.0 million
as of the end of fiscal year 2006.
Total
current liabilities increased $12.8 million or 19.5% during fiscal year 2006
as
a result of a temporary increase in accounts payable and accrued liabilities,
which was partially offset by a reduction in tax liabilities due to the timing
of tax payments. The noncurrent portion of long-term debt increased $61.2
million or 109.5% as a result of advances on the Company’s line of credit to
fund portions of the share repurchases, capital expenditures and the Tennessee
and Kentucky acquisition. Overall, total liabilities increased $70.9 million
or
40.4% as a result of the items discussed above.
Stockholders’
equity increased $3.8 million or 1.0% during fiscal year 2006 primarily
resulting from earnings during the period of $78.7 million, along with $18.8
million for stock option-related and other activity, offset by treasury stock
repurchases during the period of $93.7 million. At the end of fiscal year
2006, our debt-to-total capital ratio stood at 28.9%, up from 20.3% at the
end
of fiscal year 2005. For the 12 months ended August 31, 2006, return on average
stockholders’ equity was 20.2% and return on average assets was
13.1%.
Liquidity
and Sources of Capital
Operating
Cash Flows
.
Net
cash
provided by operating activities decreased $0.2 million or 0.2% to $127.5
million in fiscal year 2006 as compared to $127.7 million in fiscal year 2005.
The increase in operating profit before depreciation and amortization was offset
by a less significant increase in operating liabilities related to the amount
and timing of tax and other liability payments and a decrease in benefit from
deferred income taxes. We anticipate continuing to generate positive free cash
flow going forward. We believe free cash flow, which we define as net income
plus depreciation, amortization and stock-based compensation expense less
capital expenditures, is useful in evaluating the liquidity of the Company
by
assessing the level of funds available for share repurchases, acquisitions
of
Franchise Drive-Ins, and repayment of debt.
Investing
Cash Flows.
We
opened
35 newly constructed Partner Drive-Ins and acquired 15 drive-ins from
franchisees during fiscal year 2006. We funded total capital additions for
fiscal year 2006 of $113.6 million, which included the cost of newly opened
drive-ins, new equipment for existing drive-ins, drive-ins under construction,
the acquisition of Franchise Drive-Ins and real estate, and other capital
expenditures, from cash generated by operating activities and borrowings under
our line of credit. During fiscal year 2006, we purchased the real estate for
24
of the 35 newly constructed and 12 of the 15 acquired drive-ins. Subsequent
to
year-end, we entered into a sale-leaseback agreement to dispose of the real
estate underlying the acquired drive-ins at an amount roughly equal to the
purchase price of the real estate. Sales of real estate relating to drive-ins
previously sold to franchisees are a component of cash from investing activities
and totaled $2.3 million during fiscal year 2006 compared to $1.3 million during
fiscal year 2005.
Financing
Cash Flows.
At
August
31, 2006 we had an agreement with a group of banks that provided us with a
$150.0 million line of credit expiring in July 2010. As of August 31, 2006,
our
outstanding borrowings under the line of credit were $101.2 million at an
effective borrowing rate of 6.1%, as well as $0.7 million in outstanding letters
of credit. Subsequent to year end, the new senior secured credit facility,
described further below, was used to refinance the existing line of credit
and
the senior unsecured notes balance of $19.9 million. As a result of the
subsequent credit facility, the amount classified as a current liability is
based upon the $5.1 million due by the end of fiscal year 2007 under the new
credit facility rather than upon amounts due under the line of credit and senior
unsecured notes because the new facility was utilized to repay those
obligations. After funding of the tender offer described below, we plan to
use
the new revolving credit facility to finance the opening of newly constructed
drive-ins and other planned capital expenditures, acquisitions of existing
drive-ins, purchases of the Company’s common stock and for other general
corporate purposes, as needed. See Note 9 of the Notes to Consolidated Financial
Statements for additional information regarding our long-term debt.
On
April
7, 2006, the Board of Directors approved an increase in the Company’s share
repurchase program from $34.6 million to $110.0 million and extended the program
through August 31, 2007. Pursuant to this program, the Company acquired 4.8
million shares at an average price of $19.57 for a total cost of $93.7 million
during fiscal year 2006. Of the amount repurchased during the year, $20.6
million was repurchased after the program’s extension leaving $89.4 million
available under the program as of August 31, 2006. See
Tender
Offer
below.
Tender
Offer
.
On
August
15, 2006, we commenced a “modified Dutch auction” tender offer, initially
offering to purchase 25.5 million shares of our common stock at a price not
less
than $19.50 and not greater than $22.00 per share, for a maximum aggregate
purchase price of $560 million. On September 25, 2006, we decreased the number
of shares sought in the tender offer to 24.3 million, and increased the purchase
price to not less than $19.50 and not greater than $23.00 per share. On October
13, 2006, we repurchased 15.9 million shares of our common stock that were
properly tendered and not withdrawn, at a purchase price of $23.00 per share
for
a total purchase price of $366.1 million.
Senior
Secured Credit Facilities
.
We
funded
the repurchase of the shares of our common stock with the proceeds from new
senior secured credit facilities with a syndicate of financial institutions
led
by Banc of America Securities LLC and Lehman Brothers Inc. The new senior
secured credit facilities consist of a $100 million, five-year revolving credit
facility and a $486 million, seven-year term loan facility. As of October 13,
2006, we had borrowed $486 million under the term loan facility and no advances
were outstanding under the revolving credit facility, to fund the purchase
of
the shares in the tender offer, as well as refinance certain of our existing
indebtedness and pay related fees and expenses.
Interest
Rate
.
Interest on loans under the new senior secured credit facility will be payable
at per annum rates equal to (1) in the case of the revolving credit facility,
initially, LIBOR plus 175 basis points and adjusting over time based upon
Sonic's leverage ratio and (2) in the case of the term loan facility, initially,
LIBOR plus 200 basis points and adjusting over time based upon Sonic's credit
ratings with Moody's Investors Service Inc. As discussed below, we expect to
refinance this facility with an alternative facility that is expected to bear
interest at a lower rate.
Commitment
Fees
.
We will
pay a commitment fee on the unused portion of the revolving credit facility,
starting at 0.375% and adjusting over time based upon our leverage ratio.
Conditions
to Funding
.
Our
ability to reserve funds from the revolving credit facility is conditioned
upon
various customary representations and warranties being true at the time of
the
borrowing, and upon no event of default existing or resulting from the receipt
of such finds.
Security
Interests
.
We and
all of our domestic subsidiaries have granted the lenders under the new senior
secured credit facility valid and perfected first priority (subject to certain
exceptions) liens and security interests in (1) all present and future shares
of
capital stock (or other ownership profit interests) in each of our present
and
future subsidiaries (subject to certain limitations), (2) all present and future
property and assets, real and personal and (3) all proceeds and products of
the
property and assets described in clauses (1) and (2).
Covenants
and Events of Default
.
The
credit agreement governing the new senior secured credit facilities contains
certain affirmative covenants, certain negative covenants, certain financial
covenants, certain conditions and events of default that are customarily
required for similar financings. Such
negative
covenants include limitations on liens, consolidations and mergers,
indebtedness, capital expenditures, asset dispositions, sale-leaseback
transactions, stock repurchases, transactions with affiliates and other
restrictions and limitations. Furthermore, the credit agreement requires us
to
maintain compliance with certain financial covenants such as a leverage ratio
and fixed charge coverage ratio. Although management does not anticipate an
event of default, if such an event occurred, the unpaid amounts outstanding
could become immediately due and payable.
Securitization
.
We
currently intend to refinance the new senior secured credit facilities in the
near future through a securitization of our Franchise and Partner Drive-In
royalties and Partner Drive-In rental stream. The securitization is expected
to
consist of a six-year term asset-backed securitization and a $100 million
variable funding note, and to involve the transfer of certain Franchise and
Partner Drive-In assets to a bankruptcy-remote vehicle. We expect the interest
rate on the securitization will be between 50 and 125 basis points lower than
on
the new senior secured credit facilities. The final interest rate will be
determined based upon final ratings that are in the process of being determined.
Additional fees related to the securitization are estimated at approximately
$20
million and will be amortized over the life of the related debt. The
securitization and the refinancing of the new senior secured credit facilities
are expected to occur by December 31, 2006. If, however, we cannot obtain the
securitization on terms satisfactory to us, we expect the new senior secured
credit facilities to remain in place until maturity or until an alternative
refinancing can be arranged.
Forward
Starting Swap Agreement
.
We
have
entered into a forward starting swap agreement with J.P. Morgan Chase Bank
with
a total notional amount of $400 million. The forward starting swap agreement
was
entered into to hedge part of our interest rate exposure associated with the
securitized financing. We expect to settle the forward swap agreement upon
the
initiation of the securitized financing. The settlement of this forward starting
swap is expected to provide us with an effective interest rate based upon a
five-year swap rate of 5.16% plus 90 to 110 basis points for $400 million of
the
amount financed. The remaining term loan balance is expected to bear interest
at
the five-year swap rate at the time the securitization is funded plus 90 to
110
basis points. If the securitization is not completed for any reason, we may
redesignate the forward starting swap as a hedge of future interest payments
under the new senior secured credit facilities, with any
ineffectiveness recorded as a charge or credit to earnings, or we could
terminate the swap resulting in an immediate charge or credit to
earnings.
We
plan
capital expenditures of approximately $75 to $80 million in fiscal year 2007,
excluding potential acquisitions and share repurchases. These capital
expenditures primarily relate to the development of additional Partner
Drive-Ins, retrofit of existing Partner Drive-Ins and other drive-in level
expenditures. We expect to fund these capital expenditures through cash flow
from operations and borrowings under our new senior secured credit facility.
As
of
August 31, 2006, our total cash balance of $9.6 million reflected the impact
of
the cash generated from operating activities, borrowing activity, and capital
expenditures mentioned above. We believe that existing cash and funds generated
from operations, as well as borrowings under the new senior secured credit
facility, will meet our needs for the foreseeable future.
Known
Trends, Events, Demands, Commitments and Uncertainties
Looking
forward, the tender offer and related increase in debt and decrease in shares
outstanding will impact a number of trends, including interest expense, cash
used for financing activities and earnings per share. As a result of the
increase in debt, interest expense is expected to increase to at least $32
million or more depending on the level of share repurchases and acquisitions
of
Franchise Drive-Ins. Sonic is currently pursuing refinancing the senior credit
facilities with a securitized financing arrangement. Although we currently
expect to successfully complete the securitization, if we are unable to do
so or
are delayed in completing it, nonrefundable fees associated with the
securitization of approximately $1 to $2 million would be expensed immediately
rather than amortized over the life of the securitization. Weighted shares
outstanding for calculating diluted earnings per share are expected to decrease
to approximately 81 million shares for the first fiscal quarter of 2007 and
to
approximately 75 million for fiscal year 2007, but may vary significantly,
depending upon the level of future share repurchases. The decrease in shares
outstanding will impact the resulting earnings per share
calculations.
Off-Balance
Sheet Arrangements
The
Company has obligations for guarantees on certain franchisee loans and lease
agreements. See Note 15 of the Notes to Consolidated Financial Statements for
additional information about these guarantees. The Company has no other material
off-balance sheet arrangements.
Contractual
Obligations and Commitments
In
the
normal course of business, Sonic enters into purchase contracts, lease
agreements and borrowing arrangements. Our commitments and obligations as of
August 31, 2006 are summarized in the following table:
Payments
Due by Period
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less
than
|
|
1
- 3
|
|
3
- 5
|
|
More
than
|
|
|
|
|
|
1
Year
|
|
Years
|
|
Years
|
|
5
Years
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
122,399
|
|
$
|
5,227
|
|
$
|
13,860
|
|
$
|
13,851
|
|
$
|
89,461
|
|
Capital
leases
|
|
|
54,437
|
|
|
4,891
|
|
|
9,597
|
|
|
9,507
|
|
|
30,442
|
|
Operating
leases
|
|
|
168,707
|
|
|
10,513
|
|
|
20,792
|
|
|
20,187
|
|
|
117,215
|
|
Total
|
|
$
|
345,543
|
|
$
|
20,631
|
|
$
|
44,249
|
|
$
|
43,545
|
|
$
|
237,118
|
|
Impact
of Inflation
Though
increases in labor, food or other operating costs could adversely affect our
operations, we do not believe that inflation has had a material effect on income
during the past several years.
Seasonality
We
do not
expect seasonality to affect our operations in a materially adverse manner.
Our
results during the second fiscal quarter (the months of December, January and
February) generally are lower than other quarters because of the climate of
the
locations of a number of Partner and Franchise Drive-Ins.
Critical
Accounting Policies and Estimates
The
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in this document contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to use its
judgment to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities.
These assumptions and estimates could have a material effect on our financial
statements. We evaluate our assumptions and estimates on an ongoing basis using
historical experience and various other factors that are believed to be relevant
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
We
annually review our financial reporting and disclosure practices and accounting
policies to ensure that our financial reporting and disclosures provide accurate
and transparent information relative to the current economic and business
environment. We believe that of our significant accounting policies (see Note
1
of Notes to Consolidated Financial Statements), the following policies involve
a
higher degree of risk, judgment and/or complexity.
Impairment
of Long-Lived Assets
.
We
review
each Partner Drive-In for impairment when events or circumstances indicate
it
might be impaired. We test for impairment using historical cash flows and other
relevant facts and circumstances as the primary basis for our estimates of
future cash flows. This process requires the use of estimates and assumptions,
which are subject to a high degree of judgment. In addition, at least annually,
we assess the recoverability of goodwill and other intangible assets related
to
our brand and drive-ins. These impairment tests require us to estimate fair
values of our brand and our drive-ins by making assumptions regarding future
cash flows and other factors. As of August 31, 2006, we reviewed 21 Partner
Drive-ins with combined carrying amounts of $4.9 million in property, equipment
and capital leases for possible impairment, and, based on our cash flow
assumptions, we determined that no impairments were needed. During the fourth
quarter of fiscal year 2006, we performed our annual assessment of
recoverability of goodwill and other intangible assets and determined that
no
impairment was indicated. As of August 31, 2006, goodwill and intangible assets
totaled $107.7 million. If these assumptions change in the future, we may be
required to record impairment charges for these assets.
Ownership
Program
.
Our
drive-in philosophy stresses an ownership relationship with supervisors and
drive-in managers. Most supervisors and managers of Partner Drive-Ins own an
equity interest in the drive-in, which is financed by third parties. Supervisors
and managers are neither employees of Sonic nor of the drive-in in which they
have an ownership interest.
The
minority ownership interests in Partner Drive-Ins of the managers and
supervisors are recorded as a minority interest liability on the Consolidated
Balance Sheets, and their share of the drive-in earnings is reflected as
Minority interest in earnings of Partner Drive-Ins in the Costs and expenses
section of the Consolidated Statements of Income. The ownership agreements
contain provisions, which give Sonic the right, but not the obligation, to
purchase the minority interest of the supervisor or manager in a drive-in.
The
amount of the investment made by a partner and the amount of the buy-out are
based on a number of factors, primarily upon the drive-in’s financial
performance for the preceding 12 months, and are intended to approximate the
fair value of a minority interest in the drive-in.
The
Company acquires and sells minority interests in Partner Drive-Ins from time
to
time as managers and supervisors buy-out and buy-in to the partnerships or
limited liability companies. If the purchase price of a minority interest that
we acquire 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 is recorded as a reduction in purchased
goodwill. Any subsequent sale of the minority interest to another minority
partner is recorded as a pro-rata reduction of goodwill, 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 FAS
142,
“Goodwill and Other Intangible Assets.”
Revenue
Recognition Related to Franchise Fees and Royalties
.
Initial
franchise fees are nonrefundable and are recognized in income when we have
substantially performed or satisfied all material services or conditions
relating to the sale of the franchise. 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
Sonic and the franchisee.
Our
franchisees are required under the provisions of the license agreements to
pay
royalties to Sonic each month based on a percentage of actual net sales.
However, the royalty payments and supporting financial statements are not due
until the 20
th
of the
following month. As a result, we accrue royalty revenue in the month earned
based on estimates of Franchise Drive-Ins sales. These estimates are based
on
actual sales at Partner Drive-Ins and projections of average unit volume growth
at Franchise Drive-Ins.
Accounting
for Stock-Based Compensation
.
As
discussed further in Note 1 and Note 12 of Notes to the Consolidated Financial
Statements in this Form 10-K, we adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) effective
September 1, 2005 using the modified retrospective application method. As a
result, financial statement amounts for prior periods presented in this Form
10-K have been adjusted to reflect the fair value method of expensing prescribed
by SFAS 123R.
We
estimate the fair value of options granted using the Black-Scholes option
pricing model along with the assumptions shown in Note 12 to the financial
statements. The assumptions used in computing the fair value of share-based
payments reflect our best estimates, but involve uncertainties relating to
market and other conditions, many of which are outside of our control. We
estimate expected volatility based on historical daily price changes of the
Company’s stock for a period equal to the current expected term of the options.
The expected option term is the number of years the Company estimates that
options will be outstanding prior to exercise considering vesting schedules
and
our historical exercise patterns. If other assumptions or estimates had been
used, the stock-based compensation expense that was recorded for the first
nine
months of 2006 could have been materially different. Furthermore, if different
assumptions are used in future periods, stock-based compensation expense could
be materially impacted in the future.
Income
Taxes
.
We
estimate certain components of our provision for income taxes. These estimates
include, among other items, depreciation and amortization expense allowable
for
tax purposes, allowable tax credits for items such as wages paid
to
certain employees, effective rates for state and local income taxes and the
tax
deductibility of certain other items.
Our
estimates are based on the best available information at the time that we
prepare the provision, including
legislative
and judicial developments. We generally file our annual income tax returns
several months after our fiscal year end. Income tax returns are subject to
audit by federal, state and local governments, typically several years after
the
returns are filed. These returns could be subject to material adjustments or
differing interpretations of the tax laws. Adjustments to these estimates or
returns can result in significant variability in the tax rate from period to
period.
Leases
.
Certain
Partner Drive-Ins lease land and buildings from third parties. Rent expense
for
operating leases 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.
Judgment is required to determine options expected to be exercised. 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 rent holidays and escalations are reflected in rent expense on a
straight-line basis over the expected lease term, including cancelable option
periods when appropriate. The lease term commences on the date when we have
the
right to control the use of 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 we determine that
it
is probable that such sales levels will be achieved.
Sonic’s
use of debt directly exposes the Company to interest rate risk. Floating rate
debt, where the interest rate fluctuates periodically, exposes the Company
to
short-term changes in market interest rates. Fixed rate debt, where the interest
rate is fixed over the life of the instrument, exposes the Company to changes
in
market interest rates reflected in the fair value of the debt and to the risk
that the Company may need to refinance maturing debt with new debt at a higher
rate. Sonic is also exposed to market risk from changes in commodity prices.
Sonic does not utilize financial instruments for trading purposes.
Sonic
manages its debt portfolio to achieve an overall desired position of fixed
and
floating rates and may employ interest rate swaps as a tool to achieve that
goal. The major risks from interest rate derivatives include changes in the
interest rates affecting the fair value of the instruments, potential increases
in interest expense due to market increases in floating rates and the
creditworthiness of the counterparties in such transactions.
Interest
Rate Risk.
Our
exposure to interest rate risk at August 31, 2006 consisted of our senior notes,
outstanding line of credit, and notes receivable. The senior notes and line
of
credit were subsequently repaid with the proceeds under the term loan facility
of the new senior secured credit facility. The term loan facility bears interest
at a floating rate benchmarked to U.S. and European short-term interest rates.
The collective balances outstanding as of August 31, 2006 that were repaid
by
the term loan facility totaled $121.0 million. The impact on our results of
operations of a one-point interest rate change on the average combined balance
that was outstanding under the line of credit and senior notes during fiscal
year 2006 would have been approximately $0.8 million. Looking forward, the
impact on our results of operations of a one-point interest rate change on
the
balances subsequently outstanding under the new senior credit facility would
be
approximately $4.6 million. We have made certain loans to our franchisees
totaling $5.9 million as of August 31, 2006. The interest rates on these notes
are generally between 6.0% and 10.5%. We believe the fair market value of these
notes approximates their carrying amount.
The
Company entered into an interest rate swap in February 2006, which was
designated as a cash flow hedge to modify a portion of the variable rate line
of
credit to a fixed rate obligation, thereby reducing the exposure to market
rate
fluctuations. Subsequent to repayment of the line of credit, this interest
rate
swap was terminated, resulting in an immaterial gain being recognized
immediately to income in the first quarter of fiscal year 2007.
In
August
2006, the Company entered into a forward starting swap agreement, which was
designated as a cash flow hedge of the variability in the cash outflows of
interest payments on the securitized financing that is anticipated to be
completed by December 31, 2006. The swap has a notional principal amount of
$400
million. The gross fair value of the forward starting swap as of August 31,
2006
was a liability of $0.8 million. A 1% increase or decrease in the benchmark
rate
is
estimated to result in approximately a $.2 million increase or decrease,
respectively, in the gross fair value of the forward starting swap.
Commodity
Price
Risk
.
The
Company and its franchisees purchase certain commodities such as beef, potatoes,
chicken and dairy products. These commodities are generally purchased based
upon
market prices established with vendors. These purchase arrangements may contain
contractual features that limit
the
price
paid by establishing price floors or caps; however, we have not made any
long-term commitments to purchase any minimum quantities under these
arrangements. We do not use financial instruments to hedge commodity prices
because these purchase agreements help control the ultimate cost and any
commodity price aberrations are generally short term in nature.
This
market risk discussion contains forward-looking statements. Actual results
may
differ materially from this discussion based upon general market conditions
and
changes in financial markets.
The
Company has included the financial statements and supplementary financial
information required by this item immediately following Part IV of this report
and hereby incorporates by reference the relevant portions of those statements
and information into this Item 8.
None.
As
of the
end of the period covered by
this
report, the Company carried out an evaluation, under the supervision and with
the participation of the Company’s management, including the Company’s Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of
the
design and operation of the Company’s disclosure controls and procedures (as
defined in Rule 13a-14 under the Securities Exchange Act of 1934). Based upon
that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective.
There were no significant changes in the Company’s internal controls or in other
factors that could significantly affect these controls subsequent to the date
of
their evaluation.
Management's
Report on Internal Control over Financial Reporting
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company’s internal
control system was designed to provide reasonable assurance to the Company’s
management and Board of Directors regarding the preparation and fair
presentation of published financial statements. All internal control systems,
no
matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of August 31, 2006. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control—Integrated
Framework. Based on our assessment, we believe that, as of August 31, 2006,
the
Company’s internal control over financial reporting is effective based on those
criteria.
The
Company’s independent registered public accounting firm has issued an
attestation report on management’s assessment of the Company’s internal control
over financial reporting. This report appears on the following page.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders of
Sonic
Corp.
We
have audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Sonic Corp. maintained
effective internal control over financial reporting as of August 31, 2006,
based
on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Sonic Corp.’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our opinion, management’s assessment that Sonic Corp. maintained effective
internal control over financial reporting as of August 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, Sonic Corp. maintained, in all material respects, effective internal
control over financial reporting as of August 31, 2006, based on
the
COSO
criteria
.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets
of
Sonic Corp. as of August 31, 2006 and 2005, and the related consolidated
statements of income, retained earnings, and cash flows for each of the three
years in the period ended August 31, 2006 of Sonic Corp. and our report dated
October 27, 2006 expressed an unqualified opinion thereon.
|
ERNST
& YOUNG LLP
|
Oklahoma
City, Oklahoma
|
|
October
27, 2006
|
|
No
information was required to be disclosed in a Form 8-K during the Company’s
fourth quarter of its 2006 fiscal year which was not reported.
PART
III
Sonic
has
adopted a Code of Ethics for Financial Officers and a Code of Business Conduct
and Ethics that applies to all directors, officers and employees. Sonic
has posted copies of these codes on the investor section of its internet website
at the internet address: http://www.sonicdrivein.com.
Information
regarding Sonic’s executive officers is set forth under Item 4A of Part I of
this report. The other information required by this item is incorporated by
reference from the definitive proxy statement which Sonic will file with the
Securities and Exchange Commission no later than 120 days after August 31,
2006
(the “Proxy Statement”), under the captions “Election of Directors” and “Section
16(a) Beneficial Ownership Reporting Compliance.”
The
information required by this item is incorporated by reference from the Proxy
Statement under the caption “Executive Compensation.”
The
information required by this item is incorporated by reference from the Proxy
Statement under the caption “Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.”
The
information required by this item is incorporated by reference from the Proxy
Statement under the caption “Certain Relationships and Related Transactions.”
The
information required by this item is incorporated by reference from the Proxy
Statement under the caption “Ratification of Independent Registered Public
Accounting Firm.”
PART
IV
Financial
Statements
The
following consolidated financial statements of the Company appear immediately
following this Item 15:
Financial
Statement Schedules
The
Company has included the following schedule immediately following this Item
15:
The
Company has omitted all other schedules because the conditions requiring their
filing do not exist or because the required information appears in Sonic’s
Consolidated Financial Statements, including the notes to those
statements.
Exhibits
The
Company has filed the exhibits listed below with this report. The Company has
marked all management contracts and compensatory plans or arrangements with
an
asterisk (*).
3.01.
Certificate
of Incorporation of the Company, which the Company hereby incorporates by
reference from Exhibit 3.1 to the Company’s Form S-1 Registration Statement No.
33-37158 filed on October 3, 1990.
3.02.
Certificate
of Amendment of Certificate of Incorporation of the Company, March 4, 1996,
which the Company hereby incorporates by reference from Exhibit 3.05 to the
Company’s Form 10-K for the fiscal year ended August 31, 2000.
3.03.
Certificate
of Amendment of Certificate of Incorporation of the Company, January 22, 2002,
which the Company hereby incorporates by reference from Exhibit 3.06 to the
Company’s Form 10-K for the fiscal year ended August 31, 2002.
3.04.
Certificate
of Amendment of Certificate of Incorporation of the Company as filed with the
Delaware Secretary of State on January 31, 2006.
3.05.
Bylaws
of
the Company, which the Company hereby incorporates by reference from Exhibit
3.2
to the Company’s Form S-1 Registration Statement No. 33-37158 filed on October
3, 1990.
3.06.
Certificate
of Designations of Series A Junior Preferred Stock, which the Company hereby
incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K filed on
June 17, 1997.
4.01.
Rights
Agreement, which the Company hereby incorporates by reference from Exhibit
99.1
to the Company’s Form 8-K filed on June 17, 1997.
4.02.
First
Amendment to Rights Agreement dated January 28, 2003, which the Company hereby
incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K filed
January 29, 2003.
4.03.
Second
Amendment to Rights Agreement dated January 7, 2005, which the Company hereby
incorporates by reference from Exhibit 4 to the Company’s Form 8-K filed January
7, 2005.
4.04.
Specimen
Certificate for Common Stock, which the Company hereby incorporates by reference
from Exhibit 4.01 to the Company’s Form 10-K for the fiscal year ended August
31, 1999.
4.05.
Specimen
Certificate for Rights, which the Company hereby incorporates by reference
from
Exhibit 99.1 to the Company’s Form 8-K filed on June 17, 1997.
10.01.
Form
of
Sonic Industries Inc. License Agreement (the Number 4 License Agreement), which
the Company hereby incorporates by reference from Exhibit 10.1 to the Company’s
Form S-1 Registration Statement No. 33-37158 filed on October 3,
1990.
10.02.
Form
of
Sonic Industries Inc. License Agreement (the Number 5 License Agreement), which
the Company hereby incorporates by reference from Exhibit 10.2 to the Company’s
Form S-1 Registration Statement No. 33-37158 filed on October 3,
1990.
10.03.
Form
of
Sonic Industries Inc. License Agreement (the Number 4.2 License Agreement and
Number 5.1 License Agreement), which the Company hereby incorporates by
reference from Exhibit 10.03 to Sonic’s Form 10-K for the fiscal year ended
August 31, 1994.
10.04.
Form
of
Sonic Industries Inc. License Agreement (the Number 6 License Agreement), which
the Company hereby incorporates by reference from Exhibit 10.04 to the Company’s
Form 10-K for the fiscal year ended August 31, 1994.
10.05.
Form
of
Sonic Industries Inc. License Agreement (the Number 6A License Agreement),
which
the Company hereby incorporates by reference from Exhibit 10.05 to the Company’s
Form 10-K for the fiscal year ended August 31, 1998.
10.06.
Form
of
Sonic Industries Inc. License Agreement (the Number 5.2 License Agreement),
which the Company hereby incorporates by reference from Exhibit 10.06 to the
Company’s Form 10-K for the fiscal year ended August 31, 1998.
10.07.
Form
of
Sonic Industries Inc. License Agreement (the Number 6NT License Agreement),
which the Company hereby incorporates by reference from Exhibit 10.07 to the
Company’s Form 10-K for the fiscal year ended August 31, 2004.
10.08.
Form
of
Sonic Industries Inc. Area Development Agreement, which the Company hereby
incorporates by reference from Exhibit 10.05 to the Company’s Form 10-K for the
fiscal year ended August 31, 1995.
10.09.
Form
of
Sonic Industries Inc. Sign Lease Agreement, which the Company hereby
incorporates by reference from Exhibit 10.4 to the Company’s Form S-1
Registration Statement No. 33-37158.
10.10.
Form
of
General Partnership Agreement, Limited Liability Company Operating Agreement
and
Master Agreement, which the Company hereby incorporates by reference from
Exhibit 10.09 to the Company’s Form 10-K for fiscal year ended August 31,
2003.
10.11.
1991
Sonic Corp. Stock Option Plan, which the Company hereby incorporates by
reference from Exhibit 10.5 to the Company’s Form S-1 Registration Statement No.
33-37158.
*
10.12.
1991
Sonic Corp. Stock Purchase Plan, which the Company hereby incorporates by
reference from Exhibit 10.6 to the Company’s Form S-1 Registration Statement No.
33-37158.
*
10.13.
1991
Sonic Corp. Directors’ Stock Option Plan, which the Company hereby incorporates
by reference from Exhibit 10.08 to the Company’s Form 10-K for the fiscal year
ended August 31, 1991.
*
10.14.
Sonic
Corp. Savings and Profit Sharing Plan, which the Company hereby incorporates
by
reference from Exhibit 10.8 to the Company’s Form S-1 Registration Statement No.
33-37158.
*
10.15.
Net
Revenue Incentive Plan, which the Company hereby incorporates by reference
from
Exhibit 10.19 to the Company’s Form S-1 Registration Statement No.
33-37158.
*
10.16.
Form
of
Indemnification Agreement for Directors, which the Company hereby incorporates
by reference from Exhibit 10.7 to the Company’s Form S-1 Registration Statement
No. 33-37158.
*
10.17.
Form
of
Indemnification Agreement for Officers, which the Company hereby incorporates
by
reference from Exhibit 10.14 to the Company’s Form 10-K for the fiscal year
ended August 31, 1995.
*
10.18.
Employment
Agreement with J. Clifford Hudson dated August 20, 1996, which the Company
hereby incorporates by reference from Exhibit 10.18 to the Company’s Form 10-K
for the fiscal year ended August 31, 2002.
*
10.19.
Employment
Agreement with Ronald L. Matlock dated August 20, 1996, which the Company hereby
incorporates by reference from Exhibit 10.20 to the Company’s Form 10-K for the
fiscal year ended August 31, 2002.
*
10.20.
Employment
Agreement with W. Scott McLain dated January 27, 1998, which the Company hereby
incorporates by reference from Exhibit 10.21 to the Company’s Form 10-K for the
fiscal year ended August 31, 2002.
*
10.21.
Employment
Agreement with Michael A. Perry dated August 20, 2003, which the Company hereby
incorporates by reference from Exhibit 10.22 to the Company’s Form 10-K for the
fiscal year ended August 31, 2003.
*
10.22.
Employment
Agreement with Stephen C. Vaughan dated August 20, 1996, which the Company
hereby incorporates by reference from Exhibit 10.23 to the Company’s Form 10-K
for the fiscal year ended August 31, 2002.
*
10.23.
Employment
Agreement with Terry D. Harryman dated January 19, 2000, which the Company
hereby incorporates by reference from Exhibit 10.24 to the Company’s Form 10-K
for the fiscal year ended August 31, 2002.
*
10.24.
Employment
Agreement with Carolyn C. Cummins dated April 29, 2004, which the Company hereby
incorporates by reference from Exhibit 10.25 to the Company’s Form 10-K for the
fiscal year ended August 31, 2004.
*
10.25.
Employment
Agreement with V. Todd Townsend dated August 18, 2005 which the Company hereby
incorporates by reference from Exhibit 10.26 to the Company’s Form 10-K for the
fiscal year ended August 31, 2005.
*
10.26.
Credit
Agreement with Bank of America, N.A., dated April 23, 2003 which the Company
hereby incorporates by reference from Exhibit 10.27 to the Company’s Form 10-K
for the fiscal year ended August 31, 2004.
10.27.
Credit
Agreement dated September 14, 2006, which the Company hereby incorporates by
reference from Exhibit (b)(ii) to the Company’s Amendment No. 3 to Schedule TO
filed September 14, 2006.
10.28.
2001
Sonic Corp. Stock Option Plan, which the Company hereby incorporates by
reference from Exhibit No. 10.32 to the Company’s Form 10-K for the fiscal year
ended August 31, 2001.
*
10.29.
2001
Sonic Corp. Directors’ Stock Option Plan, which the Company hereby incorporates
by reference from Exhibit No. 10.33 to the Company’s Form 10-K for the fiscal
year ended August 31, 2001.
*
10.30.
Note
Purchase Agreement dated August 10, 2001, which the Company hereby incorporates
by reference from Exhibit No. 10.34 to the Company’s Form 10-K for the fiscal
year ended August 31, 2001.
10.31.
Sonic
Corp. 2006 Long Term Incentive Plan.
*
21.01.
Subsidiaries
of the Company.
23.01.
Consent
of Independent Registered Public Accounting Firm.
31.01.
Certification
of Chief Executive Officer pursuant to S.E.C. Rule 13a-14.
31.02.
Certification
of Chief Financial Officer pursuant to S.E.C. Rule 13a-14.
32.01.
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.02.
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
The
Board
of Directors and Stockholders of
Sonic
Corp.
We
have
audited the accompanying consolidated balance sheets of Sonic Corp. as of August
31, 2006 and 2005, and the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the three years in the period
ended August 31, 2006. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and schedule are
the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sonic Corp. at August
31, 2006 and 2005, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended August 31, 2006,
in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As
discussed in Note 1 and Note 12 to the accompanying consolidated financial
statements, in fiscal year 2006, Sonic Corp. adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share Based Payment.”
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Sonic Corp.’s internal
control over financial reporting as of August 31, 2006, based on criteria
established in Internal Control-Integrated Framework issued by the Committee
of
Sponsoring Organizations of the Treadway Commission and our report dated October
27, 2006, expressed an unqualified opinion thereon.
|
ERNST
& YOUNG LLP
|
Oklahoma
City, Oklahoma
|
|
October
27, 2006
|
|
|
|
August
31,
|
|
|
|
2006
|
|
2005*
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,597
|
|
$
|
6,431
|
|
Accounts
and notes receivable, net
|
|
|
21,271
|
|
|
18,801
|
|
Net
investment in direct financing leases
|
|
|
1,287
|
|
|
1,174
|
|
Inventories
|
|
|
4,200
|
|
|
3,760
|
|
Deferred
income taxes
|
|
|
307
|
|
|
821
|
|
Prepaid
expenses and other
|
|
|
5,848
|
|
|
4,262
|
|
Total
current assets
|
|
|
42,510
|
|
|
35,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
receivable, net
|
|
|
5,182
|
|
|
3,138
|
|
|
|
|
|
|
|
|
|
Net
investment in direct financing leases
|
|
|
3,815
|
|
|
5,033
|
|
|
|
|
|
|
|
|
|
Property,
equipment and capital leases, net
|
|
|
477,054
|
|
|
422,825
|
|
|
|
|
|
|
|
|
|
Goodwill,
net
|
|
|
96,949
|
|
|
88,471
|
|
|
|
|
|
|
|
|
|
Trademarks,
trade names and other intangibles, net
|
|
|
10,746
|
|
|
6,434
|
|
|
|
|
|
|
|
|
|
Other
assets, net
|
|
|
1,762
|
|
|
2,166
|
|
Total
assets
|
|
$
|
638,018
|
|
$
|
563,316
|
|
Sonic
Corp.
Consolidated
Balance Sheets (continued)
|
|
August
31,
|
|
|
|
2006
|
|
2005*
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
23,438
|
|
$
|
14,117
|
|
Deposits
from franchisees
|
|
|
2,553
|
|
|
3,157
|
|
Accrued
liabilities
|
|
|
33,874
|
|
|
26,367
|
|
Income
taxes payable
|
|
|
10,673
|
|
|
15,174
|
|
Obligations
under capital leases and long-term debt due within one
year
|
|
|
7,557
|
|
|
6,527
|
|
Total
current liabilities
|
|
|
78,095
|
|
|
65,342
|
|
|
|
|
|
|
|
|
|
Obligations
under capital leases due after one year
|
|
|
34,295
|
|
|
36,259
|
|
Long-term
debt due after one year
|
|
|
117,172
|
|
|
55,934
|
|
Other
noncurrent liabilities
|
|
|
12,504
|
|
|
10,078
|
|
Deferred
income taxes
|
|
|
4,259
|
|
|
7,786
|
|
Commitments
and contingencies
(Notes
6, 7, 14, and 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, par value $.01; 1,000,000 shares authorized; none
outstanding
|
|
|
─
|
|
|
─
|
|
Common
stock, par value $.01; 245,000,000 shares authorized; shares issued
114,988,369 in 2006 and 113,649,009 in 2005
|
|
|
1,150
|
|
|
1,136
|
|
Paid-in
capital
|
|
|
173,802
|
|
|
153,776
|
|
Retained
earnings
|
|
|
476,694
|
|
|
397,989
|
|
Accumulated
other comprehensive income
|
|
|
(484
|
)
|
|
─
|
|
|
|
|
651,162
|
|
|
552,901
|
|
Treasury
stock, at cost; 29,506,003 shares in 2006 and 24,676,380 shares in
2005
|
|
|
(259,469
|
)
|
|
(164,984
|
)
|
Total
stockholders’ equity
|
|
|
391,693
|
|
|
387,917
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
638,018
|
|
$
|
563,316
|
|
*
Adjusted to include the impact of stock-based compensation expense and the
three-for-two stock split in April 2006; see Note 1 and Note 12 for additional
information.
See
accompanying notes.
|
|
Year
ended August 31,
|
|
|
|
2006
|
|
2005*
|
|
2004*
|
|
|
|
(In
Thousands, Except Per Share Data)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Partner
Drive-In sales
|
|
$
|
585,832
|
|
$
|
525,988
|
|
$
|
449,585
|
|
Franchise
Drive-Ins:
|
|
|
|
|
|
|
|
|
|
|
Franchise
royalties
|
|
|
98,163
|
|
|
88,027
|
|
|
77,518
|
|
Franchise
fees
|
|
|
4,747
|
|
|
4,311
|
|
|
4,958
|
|
Other
|
|
|
4,520
|
|
|
4,740
|
|
|
4,385
|
|
|
|
|
693,262
|
|
|
623,066
|
|
|
536,446
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
Partner
Drive-Ins:
|
|
|
|
|
|
|
|
|
|
|
Food
and packaging
|
|
|
151,724
|
|
|
137,845
|
|
|
118,073
|
|
Payroll
and other employee benefits
|
|
|
175,610
|
|
|
159,478
|
|
|
135,880
|
|
Minority
interest in earnings of Partner Drive-Ins
|
|
|
25,234
|
|
|
21,574
|
|
|
19,947
|
|
Other
operating expenses, exclusive of depreciation and amortization
included below
|
|
|
116,059
|
|
|
103,009
|
|
|
84,959
|
|
|
|
|
468,627
|
|
|
421,906
|
|
|
358,859
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
52,048
|
|
|
47,503
|
|
|
44,765
|
|
Depreciation
and amortization
|
|
|
40,696
|
|
|
35,821
|
|
|
32,528
|
|
Provision
for impairment of long-lived assets
|
|
|
264
|
|
|
387
|
|
|
675
|
|
|
|
|
561,635
|
|
|
505,617
|
|
|
436,827
|
|
Income
from operations
|
|
|
131,627
|
|
|
117,449
|
|
|
99,619
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
8,853
|
|
|
6,418
|
|
|
7,684
|
|
Interest
income
|
|
|
(1,275
|
)
|
|
(633
|
)
|
|
(1,306
|
)
|
Net
interest expense
|
|
|
7,578
|
|
|
5,785
|
|
|
6,378
|
|
Income
before income taxes
|
|
|
124,049
|
|
|
111,664
|
|
|
93,241
|
|
Provision
for income taxes
|
|
|
45,344
|
|
|
41,221
|
|
|
35,210
|
|
Net
income
|
|
$
|
78,705
|
|
$
|
70,443
|
|
$
|
58,031
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share
|
|
$
|
0.91
|
|
$
|
0.78
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share
|
|
$
|
0.88
|
|
$
|
0.75
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Adjusted to include the impact of stock-based compensation expense and the
three-for-two stock split in April 2006; see Note 1 and Note 12 for additional
information.
See
accompanying notes.
Consolidated
Statements of Stockholders’ Equity
|
|
Common
Stock
Shares
Amount
|
|
Paid-in
Capital*
|
|
Retained
Earnings*
|
|
Accumulated
Other Comprehensive Income
|
|
Treasury
Stock
Shares
Amount
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at August 31, 2003
|
|
|
49,181
|
|
$
|
492
|
|
$
|
116,753
|
|
$
|
269,515
|
|
$
|
-
|
|
|
9,964
|
|
$
|
(119,027
|
)
|
Exercise
of common stock options
|
|
|
592
|
|
|
6
|
|
|
5,608
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
-
|
|
|
6,495
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Tax
benefit related to exercise of employee stock options
|
|
|
-
|
|
|
-
|
|
|
3,398
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
148
|
|
|
(3,371
|
)
|
Three-for-two
stock split
|
|
|
24,845
|
|
|
248
|
|
|
(248
|
)
|
|
-
|
|
|
-
|
|
|
4,987
|
|
|
-
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
58,031
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at August 31, 2004
|
|
|
74,618
|
|
|
746
|
|
|
132,006
|
|
|
327,546
|
|
|
-
|
|
|
15,099
|
|
|
(122,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock options
|
|
|
1,148
|
|
|
12
|
|
|
10,796
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
-
|
|
|
6,757
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Tax
benefit related to exercise of employee stock options
|
|
|
-
|
|
|
-
|
|
|
4,595
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,352
|
|
|
(42,586
|
)
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
70,443
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at August 31, 2005
|
|
|
75,766
|
|
|
758
|
|
|
154,154
|
|
|
397,989
|
|
|
-
|
|
|
16,451
|
|
|
(164,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock options
|
|
|
1,003
|
|
|
10
|
|
|
7,981
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Stock-based
compensation expense, including capitalized
compensation
of
$216
|
|
|
-
|
|
|
-
|
|
|
7,404
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Tax
benefit related to exercise of employee stock options
|
|
|
-
|
|
|
-
|
|
|
4,645
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,538
|
|
|
(94,485
|
)
|
Three-for-two
stock split
|
|
|
38,219
|
|
|
382
|
|
|
(382
|
)
|
|
-
|
|
|
-
|
|
|
9,517
|
|
|
-
|
|
Deferred
hedging losses, net of tax of $300
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(484
|
)
|
|
-
|
|
|
-
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
78,705
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at August 31, 2006
|
|
|
114,988
|
|
$
|
1,150
|
|
$
|
173,802
|
|
$
|
476,694
|
|
$
|
(484
|
)
|
|
29,506
|
|
$
|
(259,469
|
)
|
*
Prior years adjusted to include the impact of stock-based compensation expense;
see Note 1 for additional information.
See
accompanying notes.
Consolidated
Statements of Cash Flows
|
|
Year
ended August 31,
|
|
|
|
2006
|
|
2005*
|
|
2004*
|
|
|
|
(In
Thousands)
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
78,705
|
|
$
|
70,443
|
|
$
|
58,031
|
|
Adjustments
to reconcile net income to net
cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
40,356
|
|
|
35,435
|
|
|
32,060
|
|
Amortization
|
|
|
340
|
|
|
386
|
|
|
468
|
|
Gain
on dispositions of assets, net
|
|
|
(422
|
)
|
|
(1,115
|
)
|
|
(868
|
)
|
Stock-based
compensation expense
|
|
|
7,188
|
|
|
6,757
|
|
|
6,495
|
|
(Credit)
provision for deferred income taxes
|
|
|
(2,713
|
)
|
|
1,075
|
|
|
2,706
|
|
Provision
for impairment of long-lived assets
|
|
|
264
|
|
|
387
|
|
|
675
|
|
Excess
tax benefit from exercise of employee stock options
|
|
|
(4,645
|
)
|
|
(4,595
|
)
|
|
(3,398
|
)
|
Other
|
|
|
625
|
|
|
500
|
|
|
145
|
|
Increase
in operating assets:
|
|
|
|
|
|
|
|
|
|
|
Accounts
and notes receivable
|
|
|
(2,275
|
)
|
|
(2,481
|
)
|
|
(737
|
)
|
Inventories
and prepaid expenses
|
|
|
(2,267
|
)
|
|
(1,371
|
)
|
|
(1,691
|
)
|
Increase
in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
2,821
|
|
|
5,847
|
|
|
2,702
|
|
Accrued
and other liabilities
|
|
|
9,496
|
|
|
16,417
|
|
|
6,672
|
|
Total
adjustments
|
|
|
48,768
|
|
|
57,242
|
|
|
45,229
|
|
Net
cash provided by operating activities
|
|
|
127,473
|
|
|
127,685
|
|
|
103,260
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(86,863
|
)
|
|
(85,905
|
)
|
|
(57,728
|
)
|
Acquisition
of businesses, net of cash received
|
|
|
(14,601
|
)
|
|
(820
|
)
|
|
(8,518
|
)
|
Acquisition
of real estate, net of cash received
|
|
|
(12,125
|
)
|
|
─
|
|
|
─
|
|
Investments
in direct financing leases
|
|
|
(237
|
)
|
|
(320
|
)
|
|
(539
|
)
|
Collections
on direct financing leases
|
|
|
1,342
|
|
|
1,266
|
|
|
1,124
|
|
Proceeds
from dispositions of assets
|
|
|
5,271
|
|
|
8,882
|
|
|
18,505
|
|
(Increase)
decrease in intangibles and other assets
|
|
|
(757
|
)
|
|
(1,053
|
)
|
|
434
|
|
Net
cash used in investing activities
|
|
|
(107,970
|
)
|
|
(77,950
|
)
|
|
(46,722
|
)
|
(Continued
on following page)
Sonic
Corp.
Consolidated
Statements of Cash Flows (continued)
|
|
Year
ended August 31,
|
|
|
|
2006
|
|
2005*
|
|
2004*
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
$
|
274,763
|
|
$
|
127,415
|
|
$
|
76,421
|
|
Payments
on long-term debt
|
|
|
(206,806
|
)
|
|
(149,390
|
)
|
|
(141,978
|
)
|
Purchases
of treasury stock
|
|
|
(93,689
|
)
|
|
(42,324
|
)
|
|
(3,067
|
)
|
Payments
on capital lease obligations
|
|
|
(2,444
|
)
|
|
(2,139
|
)
|
|
(1,839
|
)
|
Exercises
of stock options
|
|
|
7,194
|
|
|
10,546
|
|
|
5,310
|
|
Excess
tax benefit from exercise of employee stock options
|
|
|
4,645
|
|
|
4,595
|
|
|
3,398
|
|
Net
cash used in financing activities
|
|
|
(16,337
|
)
|
|
(51,297
|
)
|
|
(61,755
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
3,166
|
|
|
(1,562
|
)
|
|
(5,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of the year
|
|
|
6,431
|
|
|
7,993
|
|
|
13,210
|
|
Cash
and cash equivalents at end of the year
|
|
$
|
9,597
|
|
$
|
6,431
|
|
$
|
7,993
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
(net of amounts capitalized of $733, $604 and
$338,
respectively)
|
|
$
|
8,769
|
|
$
|
7,144
|
|
$
|
7,739
|
|
Income
taxes (net of refunds)
|
|
|
48,225
|
|
|
27,377
|
|
|
29,869
|
|
Additions
to capital lease obligations
|
|
|
4,958
|
|
|
877
|
|
|
16,098
|
|
Accounts
and notes receivable and decrease in capital lease
|
|
|
|
|
|
|
|
|
|
|
obligations
from property and equipment sales
|
|
|
6,514
|
|
|
1,063
|
|
|
1,656
|
|
Stock
options exercised by stock swap
|
|
|
787
|
|
|
250
|
|
|
298
|
|
Store
acquisitions financed through long-term notes
|
|
|
-
|
|
|
-
|
|
|
8,139
|
|
*
Prior years adjusted to include the impact of stock-based compensation expense
and the three-for-two stock split in April 2006; see Note 1 and Note 12 for
additional information.
See
accompanying notes.
Notes
to Consolidated Financial Statements
August
31, 2006, 2005 and 2004
(In
Thousands, Except Per Share Data)
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.
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 2006 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.
Inventories
Inventories
consist principally of food and supplies that are carried at the lower of cost
(first-in, first-out basis) or market.
Property,
Equipment and Capital Leases
Property
and equipment are recorded at cost, and leased assets under capital leases
are
recorded at the present value of future minimum lease payments. Depreciation
of
property and equipment and capital leases is computed by the straight-line
method over the estimated useful lives or the lease term, including cancelable
option periods when appropriate, and are combined for presentation in the
financial statements.
Accounting
for Long-Lived Assets
In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company reviews long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset might
not
be recoverable. Assets are grouped and evaluated for impairment at the lowest
level for which there are identifiable cash flows that are largely independent
of the cash flows of other groups of assets, which generally represents the
individual drive-in. The Company’s primary test for an indicator of potential
impairment is operating losses. If an indication of impairment is determined
to
be present, the Company estimates the future cash flows expected to be generated
from the use of the asset and its eventual disposal. If the sum of undiscounted
future cash flows is less than the carrying amount of the asset, an impairment
loss is recognized. The impairment loss is measured by comparing the fair value
of the asset to its carrying amount. Calculating the present value of future
cash flows is typically not required. Rather, because drive-in buildings are
typically single-purpose assets, the impairment provided is equal to the
carrying amount of the building and any improvements. The equipment associated
with a store can be easily relocated to another store, and therefore is not
adjusted.
Surplus
property assets are carried at the lower of depreciated cost or fair value
less
cost to sell. The majority of the value in surplus property is land. Fair values
are estimated based upon appraisals or independent assessments of the assets’
estimated sales values.
Goodwill
and Other Intangible Assets
The
Company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets”. Intangible assets with
lives restricted by contractual, legal, or other means are amortized over their
useful lives. Goodwill and other intangible assets not subject to amortization
are tested for impairment annually or more frequently if events or changes
in
circumstances indicate that the asset might be impaired. SFAS No. 142 requires
a
two-step process for testing impairment. First, the fair value of each reporting
unit is compared to its carrying value to determine whether an indication of
impairment exists. If an impairment is indicated, then the fair value of the
reporting unit’s goodwill is determined by allocating the unit’s fair value to
its assets and liabilities (including any unrecognized intangible assets) as
if
the reporting unit had been acquired in a business combination. The amount
of
impairment for goodwill and other intangible assets is measured as the excess
of
its carrying value over its fair value.
The
Company’s intangible assets subject to amortization under SFAS No. 142 consist
primarily of acquired franchise agreements, franchise fees, and other
intangibles. Amortization expense is calculated using the straight-line method
over the expected period of benefit, not exceeding 20 years. The Company’s
trademarks and trade names were deemed to have indefinite useful lives and
are
not subject to amortization. See Note 5 for additional disclosures related
to
goodwill and other intangibles.
Ownership
Program
The
Company’s drive-in philosophy stresses an ownership relationship with drive-in
supervisors and managers. Most supervisors and managers of Partner Drive-Ins
own
an equity interest in the drive-in, which is financed by third parties.
Supervisors and managers are neither employees of the Company nor of the
drive-in in which they have an ownership interest.
The
minority ownership interests in Partner Drive-Ins of the managers and
supervisors are recorded as a minority interest liability on the Consolidated
Balance Sheets, and their share of the drive-in earnings is reflected as
Minority interest in earnings of Partner Drive-Ins in the Costs and expenses
section of the Consolidated Statements of Income. The ownership agreements
contain provisions, which give the Company the right, but not the obligation,
to
purchase the minority interest of the supervisor or manager in a drive-in.
The
amount of the investment made by a partner and the amount of the buy-out are
based on a number of factors, primarily upon the drive-in’s financial
performance for the preceding 12 months, and is intended to approximate the
fair
value of a minority interest in the drive-in.
The
Company acquires and sells minority interests in Partner Drive-Ins from time
to
time as managers and supervisors buy-out and buy-in to the partnerships or
limited liability companies. If the purchase price of a minority interest that
we acquire 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 is recorded as a reduction in purchased
goodwill. Any subsequent sale of the minority interest to another minority
partner is recorded as a pro-rata reduction of goodwill, 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 20
th
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 included in other operating expenses and are expensed as incurred.
Such costs amounted to $30,948, $28,216, and $23,664 for fiscal years 2006,
2005
and 2004, 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
Effective
September 1, 2005, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”). Under the provisions of SFAS 123R, 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 Company adopted SFAS 123R using the
modified retrospective application method and, as a result, financial statement
amounts for the prior periods presented in this Form 10-K have been adjusted
to
reflect the fair value method of expensing prescribed by SFAS 123R. The Company
believes that the modified retrospective application of this standard achieves
the highest level of clarity and comparability among the presented
periods.
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:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
$
|
7,187
|
|
$
|
6,757
|
|
$
|
6,495
|
|
Income
tax benefit
|
|
|
(2,266
|
)
|
|
(1,819
|
)
|
|
(1,511
|
)
|
Net
stock-based compensation expense
|
|
$
|
4,921
|
|
$
|
4,938
|
|
$
|
4,984
|
|
Impact
on net income per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.06
|
|
$
|
.05
|
|
$
|
.06
|
|
Diluted
|
|
$
|
.06
|
|
$
|
.05
|
|
$
|
.05
|
|
Many
of
the options granted by Sonic are incentive stock options, for which a tax
benefit only results if the option holder has a disqualifying disposition.
For
grants of non-qualified stock options, the Company expects to recognize a tax
benefit on exercise of the option, so the full tax benefit is recognized on
the
related stock-based compensation expense. 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.
As
a
result of adopting SFAS 123R retrospectively, financial statements for the
prior
periods presented in this Form 10-K have been adjusted to reflect the fair
value
method of expensing stock options. The following table details the impact of
retrospective application on previously reported results for the years ended
August 31:
|
|
2005
|
|
|
|
2004
|
|
|
|
Adjusted
|
|
As
Previously Reported
|
|
|
|
Adjusted
|
|
As
Previously Reported
|
|
Income
Statement items
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
$
|
117,449
|
|
$
|
124,206
|
|
|
|
|
$
|
99,619
|
|
$
|
106,114
|
|
Income
before income taxes
|
|
|
111,664
|
|
|
118,421
|
|
|
|
|
|
93,241
|
|
|
99,736
|
|
Net
income
|
|
|
70,443
|
|
|
75,381
|
|
|
|
|
|
58,031
|
|
|
63,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share - basic
|
|
$
|
.78
|
|
$
|
.84
|
|
|
|
|
$
|
.65
|
|
$
|
.71
|
|
Net
income per share - diluted
|
|
|
.75
|
|
|
.80
|
|
|
|
|
|
.63
|
|
|
.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow items
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$
|
127,685
|
|
$
|
132,280
|
|
|
|
|
$
|
103,260
|
|
$
|
106,658
|
|
Net
cash used in financing activities
|
|
|
(51,297
|
)
|
|
(55,892
|
)
|
|
|
|
|
(61,755
|
)
|
|
(65,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet items
:
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
$
|
7,786
|
|
$
|
11,164
|
|
Paid-in
capital
|
|
|
153,776
|
|
|
121,982
|
|
Retained
earnings
|
|
|
397,989
|
|
|
426,783
|
|
Total
stockholders’ equity
|
|
|
387,917
|
|
|
384,539
|
|
Total
liabilities and stockholders’ equity
|
|
|
563,316
|
|
|
563,316
|
|
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Income
tax benefits credited to equity relate to tax benefits associated with amounts
that are deductible for income tax purposes but do not affect earnings. These
benefits are principally generated from employee exercises of non-qualified
stock options and disqualifying dispositions of incentive stock
options.
New
Accounting Pronouncements
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
a replacement of APB Opinion No. 20 and SFAS No. 3.” SFAS No. 154 changes the
requirements for the accounting for and reporting of a change in accounting
principle and a change required by an accounting pronouncement when the
pronouncement does not include specific transition provisions. SFAS No. 154
requires retrospective application of changes as if the new accounting principle
had always been used. SFAS No. 154 is effective for fiscal years beginning
after
December 15, 2005, which is our fiscal year beginning September 1, 2006. The
adoption of the pronouncement is not expected to have a material impact on
the
Company’s financial position or results of operations.
In
June
2006, the EITF reached consensus on EITF 06-3, “Disclosure Requirements for
Taxes Assessed by a Government Authority on Revenue-Producing Transactions.”
EITF 06-3 requires disclosure of a company’s accounting policy with respect to
presentation of taxes collected on a revenue producing transaction between
a
seller and a customer. For taxes that are reported on a gross basis (included
in
revenues and costs), EITF 06-3 also requires disclosure of the amount of taxes
included in the financial statements. EITF 06-3 is effective for interim and
annual reporting periods beginning after December 15, 2006, which will be our
third fiscal quarter beginning March 1, 2007. The Company does not expect the
adoption of EITF 06-3 to have a material impact on the Company’s consolidated
financial statements.
In
June
2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement 109,” which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with FAS 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 is effective for fiscal years beginning after December 15,
2006, which will be our fiscal year beginning September 1, 2007. The Company
is
currently evaluating the impact of adopting FIN 48.
On
September 13, 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on
how the effects of the carryover or reversal of prior year misstatements should
be considered in quantifying a current year misstatement. SAB 108 is effective
for the first fiscal year ending after November 15, 2006, which will be our
fiscal year beginning September 1, 2007. The adoption of this statement is
not
expected to have a material impact on the Company’s financial position or
results of operations.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
2.
Net Income Per Share
The
following table sets forth the computation of basic and diluted earnings per
share for the years ended August 31:
|
|
2006
|
|
2005*
|
|
2004*
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
78,705
|
|
$
|
70,443
|
|
$
|
58,031
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
86,260
|
|
|
89,992
|
|
|
88,970
|
|
Effect
of dilutive employee stock options
|
|
|
2,979
|
|
|
3,655
|
|
|
3,511
|
|
Weighted
average shares - diluted
|
|
|
89,239
|
|
|
93,647
|
|
|
92,481
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share - basic
|
|
$
|
0.91
|
|
$
|
0.78
|
|
$
|
0.65
|
|
Net
income per share - diluted
|
|
$
|
0.88
|
|
$
|
0.75
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
employee stock options excluded
|
|
|
1,378
|
|
|
249
|
|
|
389
|
|
*Adjusted
to include the impact of stock-based compensation expense and the three-for-two
stock split in April 2006
3.
Impairment of Long-Lived Assets
During
the fiscal years ended August 31, 2006, 2005 and 2004 the Company
identified impairments for certain drive-in assets and surplus property through
regular quarterly reviews of long-lived assets. During fiscal year 2006, these
analyses resulted in provisions for impairment totaling $264 to reduce the
carrying amount of three surplus properties down to fair value. During fiscal
year 2005, these analyses resulted in provisions for impairment totaling $387,
including $286 to writedown the carrying amount of building and leasehold
improvements on an underperforming drive-in, and $101 to reduce the carrying
amount of a surplus property down to fair value. During fiscal year 2004, the
regular quarterly reviews resulted in a provision of $675 to writedown the
carrying amount of building and leasehold improvements for an underperforming
drive-in.
4. Accounts
and Notes Receivable
Accounts
and notes receivable consist of the following at August 31, 2006 and
2005:
|
|
2006
|
|
2005
|
|
Current
Accounts and Notes Receivable:
|
|
|
|
|
|
|
|
Royalties
and other trade receivables
|
|
$
|
12,863
|
|
$
|
10,303
|
|
Notes
receivable franchisees
|
|
|
353
|
|
|
104
|
|
Notes
receivable from advertising funds
|
|
|
3,681
|
|
|
2,171
|
|
Other
|
|
|
4,682
|
|
|
6,446
|
|
|
|
|
21,579
|
|
|
19,024
|
|
Less
allowance for doubtful accounts and notes receivable
|
|
|
308
|
|
|
223
|
|
|
|
$
|
21,271
|
|
$
|
18,801
|
|
Noncurrent
Notes Receivable:
|
|
|
|
|
|
|
|
Notes
receivable franchisees
|
|
$
|
5,509
|
|
$
|
3,422
|
|
Less
allowance for doubtful notes receivable
|
|
|
327
|
|
|
284
|
|
|
|
$
|
5,182
|
|
$
|
3,138
|
|
The
Company’s receivables are primarily due from franchisees, all of whom are in the
restaurant business. Substantially all of the notes receivable from franchisees
are collateralized by real estate or equipment. The notes receivable from
advertising funds represent transactions in the normal course of business.
The
Company collects royalties from franchisees and provides for estimated losses
for receivables that are not likely to be collected. General allowances for
uncollectible receivables are estimated based on historical trends.
5. Goodwill,
Trademarks, Trade Names and Other Intangibles
The
gross
carrying amount of franchise agreements, franchise fees and other intangibles
subject to amortization was $5,245 and $749 at August 31, 2006 and 2005,
respectively. Accumulated amortization related to these intangible assets was
$543 and $359 at August 31, 2006 and 2005, respectively. The carrying amount
of
trademarks and trade names not subject to amortization was $6,044 at August
31,
2006 and 2005.
The
changes in the carrying amount of goodwill for fiscal years ending August 31,
2006 and 2005 were as follows:
|
|
2006
|
|
2005
|
|
Balance
as of September 1,
|
|
$
|
88,471
|
|
$
|
87,420
|
|
Goodwill
acquired during the year
|
|
|
8,504
|
|
|
468
|
|
Goodwill
acquired (disposed of) related to the acquisitions and
|
|
|
|
|
|
|
|
dispositions
of minority interests in Partner Drive-Ins, net
|
|
|
(26
|
)
|
|
733
|
|
Goodwill
disposed of related to the sale of Partner Drive-Ins
|
|
|
─
|
|
|
(150
|
)
|
Balance
as of August 31,
|
|
$
|
96,949
|
|
$
|
88,471
|
|
|
|
|
|
|
|
|
|
6. Leases
Description
of Leasing Arrangements
The
Company’s leasing operations consist principally of leasing certain land,
buildings and equipment (including signs) and subleasing certain buildings
to
franchise operators. The land and building portions of these leases are
classified as operating leases and expire over the next 15 years. The equipment
portions of these leases are classified principally as direct financing leases
and expire principally over the next 10 years. These leases include provisions
for contingent rentals that may be received on the basis of a percentage of
sales in excess of stipulated amounts. Income is not recognized on contingent
rentals until sales exceed the stipulated amounts. Some leases contain
escalation clauses over the lives of the leases. Most of the leases contain
one
to four renewal options at the end of the initial term for periods of five
years. The Company classifies income from leasing operations as other revenue
in
the Consolidated Statements of Income.
Certain
Partner Drive-Ins lease land and buildings from third parties. These leases,
which expire over the next 18 years, include provisions for contingent rentals
that may be paid on the basis of a percentage of sales in excess of stipulated
amounts. For the majority of the leases, the land portions are classified as
operating leases and the building portions are classified as capital
leases.
Direct
Financing Leases
Components
of net investment in direct financing leases are as follows at August 31, 2006
and 2005:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Minimum
lease payments receivable
|
|
$
|
6,827
|
|
$
|
8,619
|
|
Less
unearned income
|
|
|
1,725
|
|
|
2,412
|
|
Net
investment in direct financing leases
|
|
|
5,102
|
|
|
6,207
|
|
Less
amount due within one year
|
|
|
1,287
|
|
|
1,174
|
|
Amount
due after one year
|
|
$
|
3,815
|
|
$
|
5,033
|
|
Initial
direct costs incurred in the negotiations and consummations of direct financing
lease transactions have not been material. Accordingly, no portion of unearned
income has been recognized to offset those costs.
Future
minimum rental payments receivable as of August 31, 2006 are as
follows:
|
|
Operating
|
|
Direct
Financing
|
|
|
|
|
|
|
|
Year
ending August 31:
|
|
|
|
|
|
|
|
2007
|
|
$
|
563
|
|
$
|
1,920
|
|
2008
|
|
|
575
|
|
|
1,770
|
|
2009
|
|
|
571
|
|
|
1,284
|
|
2010
|
|
|
543
|
|
|
679
|
|
2011
|
|
|
543
|
|
|
442
|
|
Thereafter
|
|
|
2,960
|
|
|
732
|
|
|
|
|
5,755
|
|
|
6,827
|
|
Less
unearned income
|
|
|
-
|
|
|
1,725
|
|
|
|
$
|
5,755
|
|
$
|
5,102
|
|
Capital
Leases
Components
of obligations under capital leases are as follows at August 31, 2006 and
2005:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
$
|
54,437
|
|
$
|
58,960
|
|
Less
amount representing interest averaging 8.0% in 2006 and 7.3% in 2005
|
|
|
17,812
|
|
|
20,435
|
|
Present
value of net minimum lease payments
|
|
|
36,625
|
|
|
38,525
|
|
Less
amount due within one year
|
|
|
2,330
|
|
|
2,266
|
|
Amount
due after one year
|
|
$
|
34,295
|
|
$
|
36,259
|
|
Maturities
of these obligations under capital leases and future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of August 31, 2006 are as
follows:
|
|
Operating
|
|
Capital
|
|
Year
ending August 31:
|
|
|
|
|
|
|
|
2007
|
|
$
|
10,513
|
|
$
|
4,891
|
|
2008
|
|
|
10,431
|
|
|
4,767
|
|
2009
|
|
|
10,361
|
|
|
4,830
|
|
2010
|
|
|
10,210
|
|
|
4,853
|
|
2011
|
|
|
9,977
|
|
|
4,654
|
|
Thereafter
|
|
|
117,215
|
|
|
30,442
|
|
|
|
|
168,707
|
|
|
54,437
|
|
Less
amount representing interest
|
|
|
-
|
|
|
17,812
|
|
|
|
$
|
168,707
|
|
$
|
36,625
|
|
Total
rent expense for all operating leases and capital leases consists of the
following for the years ended August 31:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Operating
leases:
|
|
|
|
|
|
|
|
|
|
|
Minimum
rentals
|
|
$
|
12,731
|
|
$
|
11,355
|
|
$
|
9,292
|
|
Contingent
rentals
|
|
|
199
|
|
|
289
|
|
|
254
|
|
Sublease
rentals
|
|
|
(542
|
)
|
|
(536
|
)
|
|
(596
|
)
|
Capital
leases:
|
|
|
|
|
|
|
|
|
|
|
Contingent
rentals
|
|
|
1,123
|
|
|
1,109
|
|
|
789
|
|
|
|
$
|
13,511
|
|
$
|
12,217
|
|
$
|
9,739
|
|
The
aggregate future minimum rentals receivable under noncancelable subleases of
operating leases as of August 31, 2006 was $2,767.
7.
Property, Equipment and Capital Leases
Property,
equipment and capital leases consist of the following at August 31, 2006 and
2005:
|
|
Estimated
Useful Life
|
|
2006
|
|
2005
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
|
|
|
Home
office:
|
|
|
|
|
|
|
|
|
|
|
Leasehold
improvements
|
|
|
Life
of lease
|
|
$
|
3,066
|
|
$
|
3,046
|
|
Computer
and other equipment
|
|
|
2
- 5 yrs
|
|
|
28,842
|
|
|
26,338
|
|
Drive-ins,
including those leased to others:
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
154,092
|
|
|
134,695
|
|
Buildings
|
|
|
8
- 25 yrs
|
|
|
275,924
|
|
|
231,931
|
|
Equipment
|
|
|
5
- 7 yrs
|
|
|
168,019
|
|
|
146,116
|
|
Property
and equipment, at cost
|
|
|
|
|
|
629,943
|
|
|
542,126
|
|
Less
accumulated depreciation
|
|
|
|
|
|
185,275
|
|
|
154,269
|
|
Property
and equipment, net
|
|
|
|
|
|
444,668
|
|
|
387,857
|
|
Capital
Leases:
|
|
|
|
|
|
|
|
|
|
|
Leased
home office building
|
|
|
Life
of lease
|
|
|
9,321
|
|
|
9,321
|
|
Leased
drive-in buildings, equipment and other assets under
|
|
|
|
|
|
|
|
|
|
|
capital
leases, including those held for sublease
|
|
|
Life
of lease
|
|
|
35,844
|
|
|
36,111
|
|
Less
accumulated amortization
|
|
|
|
|
|
12,779
|
|
|
10,464
|
|
Capital
leases, net
|
|
|
|
|
|
32,386
|
|
|
34,968
|
|
Property,
equipment and capital leases, net
|
|
|
|
|
$
|
477,054
|
|
$
|
422,825
|
|
Land,
buildings and equipment with a carrying amount of $33,836 at August 31, 2006
were leased under operating leases to franchisees or other parties. The
accumulated depreciation related to these buildings and equipment was $7,507
at
August 31, 2006. As of August 31, 2006, the Company had drive-ins under
construction with costs to complete which aggregated $3,430.
8.
Accrued Liabilities
Accrued
liabilities consist of the following at August 31, 2006 and 2005:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Wages
and other employee benefits
|
|
$
|
9,707
|
|
$
|
6,153
|
|
Taxes,
other than income taxes
|
|
|
13,476
|
|
|
12,618
|
|
Accrued
interest
|
|
|
389
|
|
|
305
|
|
Minority
interest in consolidated drive-ins
|
|
|
2,610
|
|
|
1,904
|
|
Other
|
|
|
7,692
|
|
|
5,387
|
|
|
|
$
|
33,874
|
|
$
|
26,367
|
|
9.
Long-Term Debt
Long-term
debt consists of the following at August 31, 2006 and 2005:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Borrowings
under line of credit
(A)
|
|
$
|
101,150
|
|
$
|
30,150
|
|
Senior
unsecured notes
(B)
|
|
|
19,857
|
|
|
24,428
|
|
Other
|
|
|
1,392
|
|
|
5,617
|
|
|
|
|
122,399
|
|
|
60,195
|
|
Less
long-term debt due within one year
(C)
|
|
|
5,227
|
|
|
4,261
|
|
Long-term
debt due after one year
|
|
$
|
117,172
|
|
$
|
55,934
|
|
(A)
|
At
August 31, 2006 the Company had an agreement with a group of banks
that
provided for a $150,000 line of credit, including a $2,000 sub-limit
for
letters of credit, expiring in July 2010. In addition to the $101,150
borrowed under the line of credit as of August 31, 2006, there were
$676
in letters of credit outstanding. The Company’s effective borrowing rate
under this line of credit as of August 31, 2006 and 2005 was 6.1%
and
5.1%, respectively. Subsequent to year-end, Sonic signed a credit
agreement with a group of banks which provides for a $100,000 five-year
revolving credit facility and a $476,000 seven-year term loan facility.
The new facility was used to refinance the existing line of credit
in
September 2006. See Note 18 for additional information about the
new
credit agreement.
|
(B)
|
At
August 31, 2006 the Company had $19,857 of senior unsecured notes
with
$2,000 of Series A notes maturing in August 2008 and $17,857 of Series
B
notes maturing in August 2011 with interest payable semi-annually
at 6.58%
for the Series A notes and 6.87% for the Series B notes. The related
agreements required, among other things, the Company to maintain
equity of
a specified amount, and maintain ratios of debt to equity and fixed
charge
coverage. Subsequent to year-end, Sonic utilized funds available
from the
new credit agreement to pay the remaining balance of the senior unsecured
notes, incurring early payment penalties of approximately
$794.
|
(C)
|
As
a result of the subsequent repayment of the line of credit and senior
secured notes, the amount of long-term debt due within one year is
reflective of the maturities of the new credit agreement, along with
maturities of the other notes that were not repaid subsequent to
year-end.
|
In
February 2006, the Company entered into an interest rate swap agreement to
modify a portion of the variable rate line of credit to a fixed rate obligation,
thereby reducing the exposure to market rate fluctuations. The interest rate
swap agreement has been designated as a cash flow hedge, and effectiveness
is
determined by matching the principal balance and terms with that specific
obligation. The effective portions of changes in fair value are recognized
in
accumulated other comprehensive income in the accompanying Consolidated Balance
Sheets. Ineffective portions of changes in fair value are recognized as a charge
or credit to earnings. Under the terms of the interest rate swap agreement,
the
Company makes payments based on a fixed rate of 5.66% and receives interest
payments based on 3-month LIBOR on a notional amount of $60,000. The differences
to be paid or received under the interest rate swap agreement are recognized
as
an adjustment to interest expense. By its terms, the agreement would expire
in
May 2010 and settle quarterly, however, as a result of the repayment of the
line
of credit that was being hedged by this instrument, this derivative was
terminated subsequent to August 31, 2006 resulting in an immaterial gain that
will be reflected immediately in income in the first quarter of fiscal year
2007.
In
August
2006, the Company entered into a forward starting swap agreement with the same
financial institution to hedge part of the exposure associated with the new
debt related to the tender offer that is further discussed in Note 18. The
forward starting swap has been designated as a cash flow hedge, and is expected
to be settled at the time the debt refinancing is completed to provide
us with an effective interest rate of 5.16% plus 90 to 110 basis points for
$400 million of the amount financed. The effectiveness of the instrument will
be
assessed quarterly and at the time the financing closes and any ineffectiveness
will be recorded as a charge or credit to earnings. As of August 31, 2006,
there
was no hedge ineffectiveness.
The
following table presents the components of comprehensive income for the year
ended August 31, 2006:
Net
Income
|
|
$
|
78,705
|
|
Unrealized
gains on interest rate swap agreement, net of tax
|
|
|
(484
|
)
|
Total
comprehensive income
|
|
$
|
78,221
|
|
Maturities
of long-term debt, reflecting the impact of the debt refinancing further
described in Note 18, for each of the five years after August 31, 2006 are
$5,227 in 2007, $6,924 in 2008, $6,936 in 2009, $6,937 in 2010, $6,914 in 2011,
and $89,461 thereafter.
10.
Other Noncurrent Liabilities
Other
noncurrent liabilities consist of the following at August 31, 2006 and
2005:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Minority
interest in consolidated drive-ins
|
|
$
|
4,566
|
|
$
|
4,182
|
|
Deferred
area development fees
|
|
|
2,385
|
|
|
2,331
|
|
Other
|
|
|
5,553
|
|
|
3,565
|
|
|
|
$
|
12,504
|
|
$
|
10,078
|
|
11.
Income Taxes
The
Company’s income before the provision for income taxes is classified by source
as domestic income.
The
components of the provision for income taxes consist of the following for the
years ended August 31:
|
|
2006
|
|
2005
|
|
2004
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
42,629
|
|
$
|
37,572
|
|
$
|
30,388
|
|
State
|
|
|
4,163
|
|
|
3,269
|
|
|
2,185
|
|
|
|
|
46,792
|
|
|
40,841
|
|
|
32,573
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,127
|
)
|
|
284
|
|
|
2,242
|
|
State
|
|
|
(321
|
)
|
|
96
|
|
|
395
|
|
|
|
|
(1,448
|
)
|
|
380
|
|
|
2,637
|
|
Provision
for income taxes
|
|
$
|
45,344
|
|
$
|
41,221
|
|
$
|
35,210
|
|
The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate due to the following for the years ended
August 31:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Amount
computed by applying a tax rate of 35%
|
|
$
|
43,417
|
|
$
|
39,083
|
|
$
|
32,634
|
|
State
income taxes (net of federal income tax benefit)
|
|
|
2,767
|
|
|
2,481
|
|
|
1,678
|
|
Employment
related and other tax credits, net
|
|
|
(1,014
|
)
|
|
(1,092
|
)
|
|
(337
|
)
|
Other
|
|
|
174
|
|
|
749
|
|
|
1,235
|
|
Provision
for income taxes
|
|
$
|
45,344
|
|
$
|
41,221
|
|
$
|
35,210
|
|
Deferred
tax assets and liabilities consist of the following at August 31, 2006 and
2005:
|
|
2006
|
|
2005
|
|
Current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts and notes receivable
|
|
$
|
83
|
|
$
|
83
|
|
Property,
equipment and capital leases
|
|
|
272
|
|
|
194
|
|
Accrued
litigation costs
|
|
|
76
|
|
|
76
|
|
Deferred
income from franchisees
|
|
|
(327
|
)
|
|
─
|
|
Deferred
income from affiliated technology fund
|
|
|
203
|
|
|
468
|
|
Current
deferred tax assets, net
|
|
$
|
307
|
|
$
|
821
|
|
|
|
|
|
|
|
|
|
Noncurrent
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
Net
investment in direct financing leases including differences related
to
capitalization and amortization
|
|
$
|
(2,390
|
)
|
$
|
(2,649
|
)
|
Investment
in partnerships, including differences in capitalization and
depreciation
related to direct financing
|
|
|
|
|
|
|
|
leases
and different year ends for
financial
and tax reporting purposes
|
|
|
(8,764
|
)
|
|
(10,587
|
)
|
Capital
loss carryover
|
|
|
─
|
|
|
1,313
|
|
State
net operating losses
|
|
|
4,247
|
|
|
3,939
|
|
Property,
equipment and capital leases
|
|
|
(1,150
|
)
|
|
(2,104
|
)
|
Allowance
for doubtful accounts and notes receivable
|
|
|
160
|
|
|
111
|
|
Deferred
income from affiliated franchise fees
|
|
|
1,830
|
|
|
1,559
|
|
Accrued
liabilities
|
|
|
296
|
|
|
1,125
|
|
Intangibles
and other assets
|
|
|
407
|
|
|
93
|
|
Deferred
income from franchisees
|
|
|
877
|
|
|
─
|
|
Stock
compensation
|
|
|
4,420
|
|
|
3,378
|
|
Other
|
|
|
55
|
|
|
(25
|
)
|
|
|
|
(12
|
)
|
|
(3,847
|
)
|
Valuation
allowance
|
|
|
(4,247
|
)
|
|
(3,939
|
)
|
Noncurrent
deferred tax liabilities, net
|
|
$
|
(4,259
|
)
|
$
|
(7,786
|
)
|
|
|
|
|
|
|
|
|
Deferred
tax assets and (liabilities):
|
|
|
|
|
|
|
|
Deferred
tax assets (net of valuation allowance)
|
|
$
|
8,679
|
|
$
|
8,400
|
|
Deferred
tax liabilities
|
|
|
(12,631
|
)
|
|
(15,365
|
)
|
Net
deferred tax liabilities
|
|
$
|
(3,952
|
)
|
$
|
(6,965
|
)
|
State
net
operating loss carryforwards expire generally beginning in 2010. Management
does
not believe the Company will be able to realize the state net operating loss
carryforwards and therefore has provided a valuation allowance as of August
31,
2006 and 2005.
12.
Stockholders’ Equity
On
April
30, 2004, the Company’s board of directors authorized a three-for-two stock
split in the form of a stock dividend. A total of 24,845 shares of common stock
were issued on May 21, 2004 in connection with the split, and an aggregate
amount equal to the par value of the common stock issued of $248 was
reclassified from paid-in capital to common stock.
On
April
6, 2006, the Company’s board of directors authorized a three-for-two stock split
in the form of a stock dividend. A total of 38,219 shares of common stock were
issued in connection with the split, and an aggregate amount equal to the par
value of the common stock issued of $382 was reclassified from paid-in capital
to common stock.
All
references in the accompanying consolidated financial statements to weighted
average numbers of shares outstanding, per share amounts and Stock Purchase
Plan
and Stock Options share data have been adjusted to reflect the stock splits
on a
retroactive basis.
Stock
Purchase Plan
The
Company has an employee stock purchase plan for all full-time regular employees.
Employees are eligible to purchase shares of common stock each year through
a
payroll deduction not in excess of the lesser of 10% of compensation or $25.
The
aggregate amount of stock that employees may purchase under this plan is limited
to 759,375 shares. The purchase price will be between 85% and 100% of the
stock’s fair market value and will be determined by the Company’s board of
directors.
Stock-Based
Compensation
Under
the
provisions of SFAS 123R, 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 Company adopted SFAS 123R effective September 1, 2005, using the
modified retrospective application method and, as a result, financial statement
amounts for the prior periods presented in this Form 10-K have been adjusted
to
reflect the fair value method of expensing prescribed by SFAS 123R.
At
Sonic’s annual meeting of stockholders on January 31, 2006, the stockholders
approved the Sonic Corp. 2006 Long-Term Incentive Plan and the authorization
of
6,750 shares for awards to employees and non-employee directors. This omnibus
plan provides flexibility to award various forms of equity compensation, such
as
stock options, stock appreciation rights, performance shares, restricted stock
and other stock-based awards. Prior to approval of this plan, the Company had
two share-based compensation plans for employees and non-employee directors,
which authorized the granting of stock options. No further awards will be
granted under the previous plans now that the 2006 Long-Term Incentive Plan
has
been approved. The number of shares authorized for issuance under the Company’s
existing
plans
as
of August 31, 2006 totals 6,051, all of which were available for future
issuance. Stock options historically granted under the Company’s plans
have been granted with an exercise price equal to the market price of the
Company’s stock at the date of grant, a contractual term of 10 years, and
generally a vesting period of three years. The most recent options granted
in
April and August 2006 have a contractual term of seven years. The Company’s
policy is to recognize compensation cost for these options on a straight-line
basis over the requisite service period for the entire award. Additionally,
the
Company’s policy is to issue new shares of common stock to satisfy stock option
exercises.
The
Company measures the compensation cost associated with share-based payments
by
estimating the fair value of stock options as of the grant date using the
Black-Scholes option pricing model. The Company believes that the valuation
technique and the approach utilized to develop the underlying assumptions are
appropriate in calculating the fair values of the Company’s stock options
granted during 2006, 2005 and 2004. Estimates of fair value are not intended
to
predict actual future events or the value ultimately realized by the employees
who receive equity awards.
The
per
share weighted average fair value of stock options granted during 2006, 2005
and
2004 was $7.90, $8.94 and $6.89, respectively. In addition to the exercise
and
grant date prices of the awards, certain weighted average assumptions that
were
used to estimate the fair value of stock option grants in the respective periods
are listed in the table below:
|
2006
|
2005
|
2004
|
Expected
term (years)
|
4.5
|
5.1
|
5.8
|
Expected
volatility
|
34%
|
41%
|
46%
|
Risk-free
interest rate
|
4.7%
|
4.0%
|
3.8%
|
Expected
dividend yield
|
0%
|
0%
|
0%
|
The
Company estimates expected volatility based on historical daily price changes
of
the Company’s common stock for a period equal to the current expected term of
the options. The risk-free interest rate is based on the United States treasury
yields in effect at the time of grant corresponding with the expected term
of
the options. The expected option term is the number of years the Company
estimates that options will be outstanding prior to exercise considering vesting
schedules and our historical exercise patterns. The estimate of expected term
for options granted in April 2006 was adjusted to consider the reduced
contractual term from 10 years to 7 years, resulting in a lower expected
term.
SFAS
123R
requires the cash flows resulting from the tax benefits for tax deductions
in
excess of the compensation expense recorded for those options (excess tax
benefits) to be classified as financing cash flows. These excess tax benefits
were $4,645 for the year ended August 31, 2006 and are classified as a financing
cash inflow in the Company’s Consolidated Statements of Cash Flows.
A
summary
of stock option activity under the Company’s share-based compensation plans for
the year ended August 31, 2006 is presented in the following table:
|
|
Options
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life (Yrs.)
|
|
Aggregate
Intrinsic Value
|
|
Outstanding-beginning
of year
|
|
|
7,826
|
|
$
|
9.91
|
|
|
|
|
|
|
|
Granted
|
|
|
965
|
|
|
22.08
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,339
|
)
|
|
5.97
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(221
|
)
|
|
19.13
|
|
|
|
|
|
|
|
Outstanding
August 31, 2006
|
|
|
7,230
|
|
$
|
11.98
|
|
|
5.42
|
|
$
|
72,656
|
|
Exercisable
August 31, 2006
|
|
|
5,415
|
|
$
|
9.10
|
|
|
4.64
|
|
$
|
69,445
|
|
The
total
intrinsic value of options exercised during the years ended August 31, 2006,
2005 and 2004 was $19,567, $20,923 and $12,617, respectively. At August 31,
2006, total remaining unrecognized compensation cost related to unvested
stock-based arrangements was $12,441 and is expected to be recognized over
a
weighted average period of 1.6 years.
Stockholder
Rights Plan
The
Company has a stockholder rights plan which is designed to deter coercive
takeover tactics and to prevent a potential acquirer from gaining control of
the
Company without offering a fair price to all of the Company’s
stockholders.
The
plan
provided for the issuance of one common stock purchase right for each
outstanding share of the Company’s common stock. Each right initially entitles
stockholders to buy one unit of a share of preferred stock for $85. The rights
will be exercisable only if a person or group acquires beneficial ownership
of
15% or more of the Company’s common stock or commences a tender or exchange
offer upon consummation of which such person or group would beneficially own
15%
or more of the Company’s common stock. At August 31, 2006, 1,000 shares of
preferred stock have been reserved for issuance upon exercise of these
rights.
If
any
person becomes the beneficial owner of 15% or more of the Company’s common
stock, other than pursuant to a tender or exchange offer for all outstanding
shares of the Company approved by a majority of the independent directors not
affiliated with a 15%-or-more stockholder, then each right not owned by a
15%-or-more stockholder or related parties will then entitle its holder to
purchase, at the right’s then current exercise price, shares of the Company’s
common stock having a value of twice the right’s then current exercise price. In
addition, if, after any person has become a 15%-or-more stockholder, the Company
is involved in a merger or other business combination transaction with another
person in which the Company does not survive or in which its common stock is
changed or exchanged, or sells 50% or more of its assets or earning power to
another person, each right will entitle its holder to purchase, at the right’s
then current exercise price, shares of common stock of such other person having
a value of twice the right’s then current exercise price. Unless a triggering
event occurs, the rights will not trade separately from the common
stock.
The
Company will generally be entitled to redeem the rights at $0.01 per right
at
any time until 10 days (subject to extension) following a public announcement
that a 15% position has been acquired. The rights expire on June 16,
2007.
Stock
Repurchase Program
The
Company has a stock repurchase program that is authorized by the Board of
Directors.
On
April
7, 2006, the Board of Directors approved an increase in the Company’s share
repurchase program from $34.6 million to $110.0 million and extended the program
through August 31, 2007. Pursuant to this program, the Company acquired 4,787
shares at an average price of $19.57 for a total cost of $93,682 during fiscal
year 2006. As of August 31, 2006, the Company had $89,413 available under the
program.
13.
Net Revenue Incentive Plan
The
Company has a Net Revenue Incentive Plan (the “Incentive Plan”), as amended,
which applies to certain members of management and is at all times discretionary
with the Company’s board of directors. If certain predetermined earnings goals
are met, the Incentive Plan provides that a predetermined percentage of the
employee’s salary may be paid in the form of a bonus. The Company recognized as
expense incentive bonuses of $3,247, $2,997, and $3,070 during fiscal years
2006, 2005 and 2004, respectively.
14.
Employment Agreements
The
Company has employment contracts with its Chairman and Chief Executive Officer
and several members of its senior management. These contracts provide for use
of
Company automobiles or related allowances, medical, life and disability
insurance, annual base salaries, as well as an incentive bonus. These contracts
also contain provisions for payments in the event of the termination of
employment and provide for payments aggregating $8,608 at August 31, 2006 due
to
loss of employment in the event of a change in control (as defined in the
contracts).
15.
Contingencies
The
Company is involved in various legal proceedings and has certain unresolved
claims pending. Based on the information currently available, management
believes that all claims currently pending are either covered by insurance
or
would not have a material adverse effect on the Company’s business or financial
condition.
The
Company has an agreement with GE Capital Franchise Finance Corporation (“GEC”),
pursuant to which GEC made loans to existing Sonic franchisees who met certain
underwriting criteria set by GEC. Under the terms of the agreement with GEC,
the
Company provided a guarantee of 10% of the outstanding balance of loans from
GEC
to the Sonic franchisees, limited to a maximum amount of $5,000. As of August
31, 2006, the total amount guaranteed under the GEC agreement was $2,749. The
Company ceased guaranteeing new loans under the program during fiscal year
2002
and has not been required to make any payments under its agreement with GEC.
Existing loans under guarantee will expire through 2012. In the event of default
by a franchisee, the Company has the option to fulfill the franchisee’s
obligations under the note or to become the note holder, which would provide
an
avenue of recourse with the franchisee under the notes.
The
Company has obligations under various lease agreements with third-party lessors
related to the real estate for Partner Drive-Ins that were sold to franchisees.
Under these agreements, the Company remains secondarily liable for the lease
payments for which it was responsible as the original lessee. As of August
31,
2006, the amount remaining under the guaranteed lease obligations totaled
$3,934.
Effective
November 30, 2005, the Company extended a note purchase agreement to a bank
that
serves to guarantee the repayment of a franchisee loan and also benefits
the
franchisee with a lower financing rate. In the event of default by the
franchisee, the Company would purchase the franchisee loan from the bank,
thereby becoming the note holder and providing an avenue of recourse with
the
franchisee. As of August 31, 2006, the balance of the loan was
$2,631.
The
Company has not recorded a liability for its obligations under the guarantees,
other than an immaterial amount related to the fair value of the guarantee
associated with the note purchase agreement, and has not been required to
make
any payments under any of these guarantees.
16.
Selected Quarterly
Financial
Data (Unaudited)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Full
Year
|
|
|
|
2006
|
|
2005*
|
|
2006
|
|
2005*
|
|
2006
|
|
2005*
|
|
2006
|
|
2005*
|
|
2006
|
|
2005*
|
|
Income
statement data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partner
Drive-In sales
|
|
$
|
135,422
|
|
$
|
120,211
|
|
$
|
126,376
|
|
$
|
112,655
|
|
$
|
156,921
|
|
$
|
141,797
|
|
$
|
167,113
|
|
$
|
151,325
|
|
$
|
585,832
|
|
$
|
525,988
|
|
Other
|
|
|
24,378
|
|
|
22,016
|
|
|
22,572
|
|
|
19,958
|
|
|
29,548
|
|
|
25,856
|
|
|
30,932
|
|
|
29,248
|
|
|
107,430
|
|
|
97,078
|
|
Total
revenues
|
|
|
159,800
|
|
|
142,227
|
|
|
148,948
|
|
|
132,613
|
|
|
186,469
|
|
|
167,653
|
|
|
198,045
|
|
|
180,573
|
|
|
693,262
|
|
|
623,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partner
Drive-In operating expenses
|
|
|
110,125
|
|
|
97,784
|
|
|
102,615
|
|
|
91,682
|
|
|
123,755
|
|
|
111,691
|
|
|
132,132
|
|
|
120,749
|
|
|
468,627
|
|
|
421,906
|
|
Selling,
general and administrative
|
|
|
12,196
|
|
|
10,833
|
|
|
13,214
|
|
|
11,785
|
|
|
13,293
|
|
|
12,096
|
|
|
13,345
|
|
|
12,789
|
|
|
52,048
|
|
|
47,503
|
|
Other
|
|
|
9,897
|
|
|
8,406
|
|
|
9,997
|
|
|
9,257
|
|
|
10,361
|
|
|
9,051
|
|
|
10,705
|
|
|
9,494
|
|
|
40,960
|
|
|
36,208
|
|
Total
expenses
|
|
|
132,218
|
|
|
117,023
|
|
|
125,826
|
|
|
112,724
|
|
|
147,409
|
|
|
132,838
|
|
|
156,182
|
|
|
143,032
|
|
|
561,635
|
|
|
505,617
|
|
Income
from operations
|
|
|
27,582
|
|
|
25,204
|
|
|
23,122
|
|
|
19,889
|
|
|
39,060
|
|
|
34,815
|
|
|
41,863
|
|
|
37,541
|
|
|
131,627
|
|
|
117,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
1,307
|
|
|
1,605
|
|
|
2,096
|
|
|
1,532
|
|
|
2,215
|
|
|
1,292
|
|
|
1,960
|
|
|
1,356
|
|
|
7,578
|
|
|
5,785
|
|
Income
before income taxes
|
|
|
26,275
|
|
|
23,599
|
|
|
21,026
|
|
|
18,357
|
|
|
36,845
|
|
|
33,523
|
|
|
39,903
|
|
|
36,185
|
|
|
124,049
|
|
|
111,664
|
|
Provision
for income taxes
|
|
|
9,845
|
|
|
8,485
|
|
|
8,122
|
|
|
7,084
|
|
|
13,011
|
|
|
12,248
|
|
|
14,366
|
|
|
13,404
|
|
|
45,344
|
|
|
41,221
|
|
Net
income
|
|
$
|
16,430
|
|
$
|
15,114
|
|
$
|
12,904
|
|
$
|
11,273
|
|
$
|
23,834
|
|
$
|
21,275
|
|
$
|
25,537
|
|
$
|
22,781
|
|
$
|
78,705
|
|
$
|
70,443
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
$
|
0.17
|
|
$
|
0.15
|
|
$
|
0.12
|
|
$
|
0.28
|
|
$
|
0.24
|
|
$
|
0.30
|
|
$
|
0.26
|
|
$
|
0.91
|
|
$
|
0.78
|
|
Diluted
|
|
$
|
0.18
|
|
$
|
0.16
|
|
$
|
0.14
|
|
$
|
0.12
|
|
$
|
0.27
|
|
$
|
0.23
|
|
$
|
0.29
|
|
$
|
0.25
|
|
$
|
0.88
|
|
$
|
0.75
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
87,415
|
|
|
90,015
|
|
|
86,227
|
|
|
90,394
|
|
|
85,993
|
|
|
90,296
|
|
|
85,405
|
|
|
89,264
|
|
|
86,260
|
|
|
89,992
|
|
Diluted
|
|
|
90,521
|
|
|
93,578
|
|
|
89,261
|
|
|
94,182
|
|
|
89,007
|
|
|
94,074
|
|
|
88,168
|
|
|
92,755
|
|
|
89,239
|
|
|
93,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Prior years adjusted to include the impact of stock-based compensation expense
and the three-for-two stock split in April 2006; see Note 1 and Note 12 for
additional information.
17.
Fair Values of Financial Instruments
The
following discussion of fair values is not indicative of the overall fair value
of the Company’s consolidated balance sheet since the provisions of SFAS No.
107, “Disclosures About Fair Value of Financial Instruments,” do not apply to
all assets, including intangibles.
The
following methods and assumptions were used by the Company in estimating its
fair values of financial instruments:
Cash
and cash equivalents
—Carrying
value approximates fair value due to the short duration to
maturity.
Notes
receivable
—For
variable rate loans with no significant change in credit risk since the loan
origination, fair values approximate carrying amounts. Fair values for
fixed-rate loans are esti-mated using discounted cash flow analysis, using
interest rates that would currently be offered for loans with similar terms
to
borrowers of similar credit quality and/or the same remaining
maturities.
As
of
August 31, 2006 and 2005, carrying values approximate their estimated fair
values.
Borrowed
funds
—Fair
values for fixed rate borrowings are estimated using a discounted cash flow
analysis that applies interest rates currently being offered on borrowings
of
similar amounts and terms to those currently outstanding. Carrying values for
variable-rate borrowings approximate their fair values.
The
carrying amounts, including accrued interest, and estimated fair values of
the
Company’s fixed-rate borrowings at August 31, 2006 were $19,857 and $19,925,
respectively, and at August 31, 2005 were $24,526 and $25,123,
respectively.
18.
Subsequent Events
On
August
15, 2006, we commenced a “modified Dutch auction” tender offer, initially
offering to purchase 25
,455
shares of our common stock at a price not less than $19.50 and not greater
than
$22.00 per share, for a maximum aggregate purchase price of $560 million. On
September 25, 2006, we decreased the number of shares sought in the tender
offer
to 24,348, and increased the purchase price to not less than $19.50 and not
greater than $23.00 per share. On October 13, 2006, we repurchased 15,918 shares
of our common stock that were properly tendered and not withdrawn, at a purchase
price of $23.00 per share for a total purchase price of $366,117.
We
funded
the repurchase of the shares of our common stock with the proceeds from new
senior secured credit facilities with a syndicate of financial institutions
led
by Banc of America Securities LLC and Lehman Brothers Inc. The new senior
secured credit facilities consist of a $100,000, five-year revolving credit
facility and a $486,000, seven-year term loan facility. As of October 13, 2006,
we had borrowed $486,000 under the term loan facility and no advances were
outstanding under the revolving credit facility, to fund the purchase of the
shares in the tender offer, as well as refinance certain of our existing
indebtedness and pay related fees and expenses.
Interest
on loans under the new senior secured credit facility will be payable at per
annum rates equal to (1) in the case of the revolving credit facility,
initially, LIBOR plus 175 basis points and adjusting over time based upon
Sonic's leverage ratio and (2) in the case of the term loan facility, initially,
LIBOR plus 200 basis points and adjusting over time based upon Sonic's credit
ratings with Moody's Investors Service Inc.
We
will
pay a commitment fee on the unused portion of the revolving credit facility,
starting at 0.375% and adjusting over time based upon our leverage ratio. Our
ability to reserve funds from the revolving credit facility is conditioned
upon
various customary representations and warranties being true at the time of
the
borrowing, and upon no event of default existing or resulting from the receipt
of such finds. We and all of our domestic subsidiaries have granted the lenders
under the new senior secured credit facility valid and perfected first priority
(subject to certain exceptions) liens and security interests in (1) all present
and future shares of capital stock (or other ownership profit interests) in
each
of our present and future subsidiaries (subject to certain limitations), (2)
all
present and future property and assets, real and personal and (3) all proceeds
and products of the property and assets described in clauses (1) and (2).
The
credit agreement governing the new senior secured credit facilities contains
certain affirmative covenants, certain negative covenants, certain financial
covenants, certain conditions and events of default that are customarily
required for similar financings. Such negative covenants include limitations
on
liens, consolidations and mergers, indebtedness, capital expenditures, asset
dispositions, sale-leaseback transactions, stock repurchases, transactions
with
affiliates and other restrictions and limitations. Furthermore, the credit
agreement requires us to maintain compliance with certain financial covenants
such as a leverage ratio and fixed charge coverage ratio. Although management
does not anticipate an event of default, if such an event occurred, the unpaid
amounts outstanding could become immediately due and payable.
Schedule
II - Valuation and Qualifying Accounts
Description
|
|
Balance
at Beginning of Year
|
|
Additions
Charged to Costs and Expenses
|
|
Amounts
Written Off Against the Allowance
|
|
(Transfer)
Recoveries
|
|
Balance
at
End
of
Year
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts and notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
31, 2006
|
|
|
507
|
|
|
(5
|
)
|
|
86
|
|
|
219
|
|
|
635
|
|
August
31, 2005
|
|
|
526
|
|
|
414
|
|
|
542
|
|
|
109
|
|
|
507
|
|
August
31, 2004
|
|
|
1,157
|
|
|
351
|
|
|
982
|
|
|
-
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
carrying costs
for
drive-in closings and disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
31, 2006
|
|
|
162
|
|
|
-
|
|
|
49
|
|
|
-
|
|
|
113
|
|
August
31, 2005
|
|
|
198
|
|
|
-
|
|
|
36
|
|
|
-
|
|
|
162
|
|
August
31, 2004
|
|
|
774
|
|
|
-
|
|
|
576
|
|
|
-
|
|
|
198
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has caused the undersigned, duly-authorized,
to
sign this report on its behalf on this
30th
day of
October, 2006.
|
Sonic
Corp.
|
|
|
|
|
By:
|
/s/
J. Clifford Hudson
|
|
|
J.
Clifford Hudson
|
|
|
Chairman,
Chief Executive Officer and
President
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
undersigned have signed this report on behalf of the registrant, in the
capacities and as of the dates indicated.
|
|
|
Signature
|
Title
|
Date
|
|
|
|
/s/
J. Clifford Hudson
|
|
Chairman
of the Board of Directors, Chief Executive Officer
|
October
30, 2006
|
J.
Clifford Hudson,
Principal
Executive Officer
|
and
President
|
|
|
|
|
/s/
Stephen C. Vaughan
|
|
Vice
President, Chief Financial Officer and Treasurer
|
|
Stephen
C. Vaughan,
Principal
Financial Officer
|
|
|
|
|
|
/s/
Terry D. Harryman
|
|
Controller
|
|
Terry
D. Harryman,
Principal
Accounting Officer
|
|
|
|
|
|
/s/
Leonard Lieberman
|
|
Director
|
|
Leonard
Lieberman
|
|
|
|
|
|
/s/
Michael J. Maples
|
|
Director
|
|
Michael
J. Maples
|
|
|
|
|
|
/s/
Federico F. Peña
|
|
Director
|
|
Federico
F. Peña
|
|
|
|
|
|
/s/
H. E. Rainbolt
|
|
Director
|
|
H.E.
Rainbolt
|
|
|
|
|
|
/s/
Frank E. Richardson
|
|
Director
|
|
Frank
E. Richardson
|
|
|
|
|
|
/s/
Robert M. Rosenberg
|
|
Director
|
|
Robert
M. Rosenberg
|
|
|
|
|
|
EXHIBIT
INDEX
Exhibit
Number and Description
Exhibit
10.31
SONIC
CORP.
2006
LONG-TERM INCENTIVE PLAN
(as
amended April 28, 2006)
ARTICLE
1
PURPOSE
1.1
GENERAL
.
The
purpose of the Sonic Corp. 2006 Long-Term Incentive Plan (the “
Plan
”)
is to
promote the success, and enhance the value, of Sonic Corp., a Delaware
corporation (the “
Corporation
”),
by
linking the personal interests of its employees, officers and directors to
those
of Corporation shareholders and by providing such persons with an incentive
for
outstanding performance. The Plan is further intended to provide flexibility
to
the Corporation in its ability to motivate, attract and retain the services
of
employees, officers and directors upon whose judgment, interest and special
effort the successful conduct of the Corporation’s operation is largely
dependent. Accordingly, the Plan permits the grant of incentive awards from
time
to time to selected employees and officers and directors.
The
Plan
is intended to replace the 2001 Sonic Corp. Stock Option Plan and the 2001
Sonic
Corp. Directors’ Stock Option Plan and upon the Effective Date (as defined
below), no further awards shall be granted under such plans.
ARTICLE
2
EFFECTIVE
DATE
2.1
EFFECTIVE
DATE
.
The
Plan shall be effective as of the date upon which it shall be approved by the
Board and the shareholders of the Corporation (the “
Effective
Date
”).
In
the discretion of the Committee, Awards may be made to Covered Employees which
are intended to constitute qualified performance-based compensation under
Section 162(m) of the Code.
ARTICLE
3
DEFINITIONS
3.1
DEFINITIONS
.
When a
word or phrase appears in the Plan with the initial letter capitalized, and
the
word or phrase does not commence a sentence and is not otherwise defined in
the
Plan, the word or phrase shall generally be given the meaning ascribed to it
in
this Section
3.1
.
The
following words and phrases shall have the following meanings:
(a)
“
1933
Act
”
means
the Securities Act of 1933, as amended from time to time.
(b)
“
1934
Act
”
means
the Securities Exchange Act of 1934, as amended from time to time.
(c)
“
Affiliate
”
means
any Parent or Subsidiary and any person that directly, or indirectly through
one
or more intermediaries, controls, is controlled by, or is under common control
with, the Corporation.
(d)
“
Award
”
means
any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock
Unit Award, Performance Share Award, Performance Share Unit Award, Dividend
Equivalent Award or Other Stock-Based Award, or any other right or interest
relating to Stock or cash, granted to a Participant under the Plan.
(e)
“
Award
Agreement
”
means
any written agreement, contract or other instrument or document evidencing
an
Award.
(f)
“
Board
”
means
the Board of Directors of the Corporation, as constituted from time to
time.
(g)
“
Cause
”
as
a
reason for a Participant’s termination of employment or service shall have the
meaning assigned such term in the employment agreement, if any, between such
Participant and the Corporation or an Affiliate,
provided
,
however
,
that if
there is no such employment agreement in which such term is defined,
“
Cause
”
shall
mean any of the following acts by the Participant, as determined by the Board:
gross neglect of duty, prolonged absence from duty without the consent of the
Corporation, intentionally engaging in any activity that is in conflict with
or
adverse to the business or other interests of the Corporation, or willful
misconduct, misfeasance or malfeasance of duty which is reasonably determined
to
be detrimental to the Corporation.
(h)
“
Change
of Control
”
means
and includes the occurrence of any one of the following events:
(i)
individuals
who, at the Effective Date, constitute the Board (the “
Incumbent
Directors
”)
cease
for any reason to constitute at least a majority of the Board,
provided
that any
person becoming a director after the Effective Date and whose election or
nomination for election was approved by a vote of at least a majority of the
Incumbent Directors then on the Board (either by a specific vote or by approval
of the proxy statement of the Corporation in which such person is named as
a
nominee for director, without written objection to such nomination) shall be
an
Incumbent Director;
provided
,
however
,
that no
individual initially elected or nominated as a director of the Corporation
as a
result of an actual or threatened election contest (as described in Rule 14a-11
under the 1934 Act (“
Election
Contest
”))
or
other actual or threatened solicitation of proxies or consents by or on behalf
of any “person” (as such term is defined in Section 3(a)(9) of the 1934 Act and
as used in Section 13(d)(3) and 14(d)(2) of the 1934 Act) other than the Board
(“
Proxy
Contest
”),
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest, shall be deemed an Incumbent Director;
(ii)
any
person becomes a “beneficial owner” (as defined in Rule 13d-3 under the 1934
Act), directly or indirectly, of securities of the Corporation representing
20%
or more of the combined voting power of the Corporation’s then outstanding
securities eligible to vote for the election of the Board (the “
Corporation
Voting Securities
”);
or
(iii)
the
consummation of a reorganization, merger, consolidation, statutory share
exchange or similar form of corporate transaction involving the Corporation
that
requires the approval of the Corporation’s stockholders, whether for such
transaction or the issuance of securities in the transaction (a “
Reorganization
”),
or
the sale or other disposition of all or substantially all of the Corporation’s
assets to an entity that is not an Affiliate (a “
Sale
”),
unless immediately following such Reorganization or Sale: (A) more than 50%
of
the total voting power of (x) the corporation resulting from such Reorganization
or the corporation which has acquired all or substantially all of the assets
of
the Corporation (in either case, the “
Surviving
Corporation
”)
or (y)
if applicable, the ultimate parent corporation that directly or indirectly
has
beneficial ownership of 100% of the voting securities eligible to elect
directors of the Surviving Corporation (the “
Parent
Corporation
”),
is
represented by the Corporation Voting Securities that were outstanding
immediately prior to such Reorganization or Sale (or, if applicable, is
represented by shares into which such Corporation Voting Securities were
converted pursuant to such Reorganization or Sale), and such voting power among
the holders thereof is in substantially the same proportion as the voting power
of such Corporation Voting Securities among the holders thereof immediately
prior to the Reorganization or Sale, (B) no person (other than (x) the
Corporation, or (y) any employee benefit plan (or related trust) sponsored
or
maintained by the Surviving Corporation or the Parent Corporation is the
beneficial owner, directly or indirectly, of 20% or more of the total voting
power of the outstanding voting securities eligible to elect directors of the
Parent Corporation (or, if there is no Parent Corporation, the Surviving
Corporation) and (C) at least a majority of the members of the board of
directors of the Parent Corporation (or, if there is no Parent Corporation,
the
Surviving Corporation) following the consummation of the Reorganization or
Sale
were Incumbent Directors at the time of the Board’s approval of the execution of
the initial agreement providing for such Reorganization or Sale (any
Reorganization or Sale which satisfies all of the criteria specified in
(A),
(B)
and (C) above shall be deemed to be a “
Non-Qualifying
Transaction
”);
provided
,
however
,
that
under no circumstances shall a split-off, spin-off, stock dividend or similar
transaction as a result of which the voting securities of the Corporation
are
distributed to shareholders of the Corporation or its successors constitute
a
Change of Control.
Notwithstanding
the foregoing, with respect to an Award that is subject to Section 409A,
and the
payment or settlement of which is to be accelerated in connection with an
event
that would otherwise constitute a Change of Control, no event set forth in
the
definition of “Change of Control” will constitute a Change of Control for
purposes of the Plan or any Award Agreement unless such event also constitutes
a
“change in the ownership”, “change in the effective control” or “change in the
ownership of a substantial portion of the assets” of the Corporation as defined
under Section 409A.
(i)
“
Code
”
means
the Internal Revenue Code of 1986, as amended from time to time, and the
regulations promulgated thereunder.
(j)
“
Committee
”
means,
subject to the last sentence of Section
4.1
,
the
committee of the Board described in
Article
4
.
(k)
“
Covered
Employee
”
means
a
covered employee as defined in Section 162(m)(3) of the Code.
(l)
“
Disability
”
has
the
meaning ascribed under the long-term disability plan applicable to the
Participant. Notwithstanding the above, (i) with respect to an Incentive Stock
Option, Disability shall mean Permanent and Total Disability as defined in
Section 22(e)(3) of the Code and (ii) to the extent an Award is subject to
Section 409A, and payment or settlement of the Award is to be accelerated solely
as a result of the Participant’s Disability, Disability shall have the meaning
ascribed thereto under Section 409A.
(m)
“
Dividend
Equivalent
”
means
a
right granted to a Participant under
Article
11
.
(n)
“
Effective
Date
”
has
the
meaning assigned such term in Section
2.1
.
(o)
“
Eligible
Individual
”
has
the
meaning assigned to such term in Section
6.1
.
(p)
“
Fair
Market Value
”,
on any
date, means, with respect to a share of Stock, (i) if the Stock is listed on
a
securities exchange or is traded over the Nasdaq National Market, the closing
sales price on such exchange or over such system on such date or, in the absence
of reported sales on such date, the closing sales price on the immediately
preceding date on which sales were reported or (ii) if the Stock is not listed
on a securities exchange or traded over the Nasdaq National Market, Fair Market
Value will be determined by such other method as the Committee determines in
good faith to be reasonable.
(q)
“
Incentive
Stock Option
”
means
an Option that is intended to meet the requirements of Section 422 of the Code
or any successor provision thereto.
(r)
“
Maximum
Number
”
has
the
meaning assigned to such term in Section
5.1
.
(s)
“
Non-Employee
Director
”
means
a
member of the Board who is not an employee of the Corporation or any Parent
or
Affiliate.
(t)
“
Non-Qualified
Stock Option
”
means
an Option that is not an Incentive Stock Option.
(u)
“
Option
”
means
a
right granted to a Participant under
Article
7
to
purchase Stock at a specified price during specified time periods. An Option
may
be either an Incentive Stock Option or a Non-Qualified Stock
Option.
(v)
“
Other
Stock-Based Award
”
means
a
right, granted to a Participant under
Article
12
that
relates to or is valued by reference to Stock or other Awards relating to
Stock.
(w)
“
Parent
”
means
a
corporation which owns or beneficially owns a majority of the outstanding voting
stock or voting power of the Corporation. Notwithstanding the above, with
respect to an Incentive Stock Option, Parent shall have the meaning set forth
in
Section 424(e) of the Code.
(x)
“
Participant
”
means
a
person who, as an employee, officer or director of the Corporation or any
Parent, Subsidiary or Affiliate, has been granted an Award under the
Plan.
(y)
“
Performance
Period
”
means
the period established by the Committee and set forth in the applicable Award
Agreement over which Performance Targets are measured.
(z)
“
Performance
Target
”
means
the performance targets established by the Committee and set forth in the
applicable Award Agreement.
(aa)
“
Performance
Share Award
”
means
Stock granted to a Participant under
Article
9
that is
subject to certain restrictions and to risk of forfeiture upon failure to
achieve Performance Targets.
(bb)
“
Performance
Share Unit Award
”
means
a
right granted to a Participant under
Article
9
,
to
receive cash, Stock, or other property in the future that is subject to certain
restrictions and to risk of forfeiture upon failure to achieve Performance
Targets.
(cc)
“
Restricted
Stock Award
”
means
Stock granted to a Participant under
Article
10
that is
subject to certain restrictions and to risk of forfeiture.
(dd)
“
Restricted
Stock Unit Award
”
means
a
right granted to a Participant under
Article
10
,
to
receive cash, Stock, or other Awards in the future that is subject to certain
restrictions and to risk of forfeiture.
(ee)
“
Section
409A
”
means
Section 409A of the Internal Revenue Code of 1986, as amended, and the rules,
regulations and guidance issued thereunder.
(ff)
“
Stock
”
means
the $.01 par value common stock of the Corporation and such other securities
of
the Corporation as may be substituted for Stock pursuant to
Article
14
.
(gg)
“
Stock
Appreciation Right
”
or
“
SAR
”
means
a
right granted to a Participant under
Article
8
to
receive a payment equal to the difference between the Fair Market Value of
a
share of Stock as of the date of exercise of the SAR over the grant price of
the
SAR, all as determined pursuant to
Article
8
.
(hh)
“
Subsidiary
”
means
any corporation, limited liability company, partnership or other entity of
which
a majority of the outstanding voting equity securities or voting power is
beneficially owned directly or indirectly by the Corporation. Notwithstanding
the above, with respect to an Incentive Stock Option, Subsidiary shall have
the
meaning set forth in Section 424(f) of the Code.
(ii)
“
Target
Number
”
means
the target number of shares of Stock established by the Committee and set forth
in the applicable Award Agreement.
ARTICLE
4
ADMINISTRATION
4.1
COMMITTEE
.
The
Plan shall be administered by a committee (the “
Committee
”)
appointed by the Board (which Committee shall consist of two or more directors)
or, at the discretion of the Board from time to time, the Plan may be
administered by the Board. It is intended that the directors appointed to serve
on the Committee shall be “non-employee directors” (within the meaning of Rule
16b-3 promulgated under the 1934 Act)
and
“outside directors” (within the meaning of Section 162(m) of the Code) to the
extent that Rule 16b-3 and, if necessary for relief from the limitation under
Section 162(m) of the Code and such relief is sought by the Corporation,
Section
162(m) of the Code, respectively, are applicable. However, the mere fact
that a
Committee member shall fail to qualify under either of the foregoing
requirements shall not invalidate any Award made by the Committee, which
Award
is otherwise validly made under the Plan. The members of the Committee shall
be
appointed by, and may be changed at any time and from time to time in the
discretion of, the Board. During any time that the Board is acting as
administrator of the Plan, it shall have all the powers of the Committee
hereunder, and any reference herein to the Committee (other than in this
Section
4.1
)
shall
include the Board.
4.2
ACTION
BY THE COMMITTEE
.
For
purposes of administering the Plan, the following rules of procedure shall
govern the Committee. A majority of the Committee shall constitute a quorum.
The
acts of a majority of the members present at any meeting at which a quorum
is
present, and acts approved unanimously in writing by the members of the
Committee in lieu of a meeting, shall be deemed the acts of the Committee.
Each
member of the Committee is entitled to, in good faith, rely or act upon any
report or other information furnished to that member by any officer or other
employee of the Corporation or any Parent or Affiliate, the Corporation’s
independent certified public accountants, or any executive compensation
consultant or other professional retained by the Corporation to assist in the
administration of the Plan.
4.3
AUTHORITY
OF COMMITTEE
.
Except
as provided below, the Committee has the exclusive power, authority and
discretion to:
(a)
Designate
Participants;
(b)
Determine
the type or types of Awards to be granted to each Participant;
(c)
Determine
the number of Awards to be granted and the number of shares of Stock to which
an
Award will relate;
(d)
Determine
the terms and conditions of any Award granted under the Plan, including, but
not
limited to, the exercise price, grant price or purchase price, any restrictions
or limitations on the Award, any schedule for lapse of forfeiture restrictions
or restrictions on the exercisability of an Award, any effect of a Participant’s
termination of employment with the Corporation or a Parent or Subsidiary, and
accelerations or waivers thereof, based in each case on such considerations
as
the Committee in its sole discretion determines;
(e)
Accelerate
the vesting or lapse of restrictions of any outstanding Award, based in each
case on such considerations as the Committee in its sole discretion
determines;
(f)
Determine
whether, to what extent, and under what circumstances an Award may be settled
in, or the exercise price of an Award may be paid in, cash, Stock, other Awards
or other property, or an Award may be canceled, forfeited or
surrendered;
(g)
Prescribe
the form of each Award Agreement, which need not be identical for each
Participant;
(h)
Decide
all other matters that must be determined in connection with an
Award;
(i)
Establish,
adopt or revise any rules and regulations as it may deem necessary or advisable
to administer the Plan;
(j)
Make
all
other decisions and determinations that may be required under the Plan or as
the
Committee deems necessary or advisable to administer the Plan;
(k)
Construe
and interpret any Award Agreement delivered under the Plan;
(l)
Make
factual determinations in connection with the administration or interpretation
of the Plan;
(m)
Employ
such legal counsel, independent auditors and consultants as it deems desirable
for the administration of the Plan and to rely upon any opinion or computation
received therefrom;
(n)
Vary
the
terms of Awards to take account of tax, securities law and other regulatory
requirements of foreign jurisdictions or to procure favorable tax treatment
for
Participants; and
(o)
Amend
the
Plan or any Award Agreement as provided herein.
4.4
DELEGATION
OF AUTHORITY
.
To the
extent not prohibited by applicable laws, rules and regulations, the Board
or
the Committee may, from time to time, delegate some or all of its authority
under the Plan to a subcommittee or subcommittees thereof or to one or more
directors or executive officers of the Corporation as it deems appropriate
under
such conditions or limitations as it may set at the time of such delegation
or
thereafter, except that neither the Board nor the Committee may delegate its
authority pursuant to
Article
15
to amend
the Plan. For purposes of the Plan, references to the Committee shall be deemed
to refer to any subcommittee, subcommittees, directors or executive officers
to
whom the Board or the Committee delegates authority pursuant to this Section
4.4
.
4.5
DECISIONS
BINDING
.
The
Committee’s interpretation of the Plan, any Awards granted under the Plan, any
Award Agreement and all decisions and determinations by the Committee with
respect to the Plan are final, binding and conclusive on all
parties.
ARTICLE
5
SHARES
SUBJECT TO THE PLAN
5.1
NUMBER
OF SHARES
.
Subject
to adjustment as provided in Section
14.1
,
the
aggregate number of shares of Stock reserved and available for Awards or which
may be used to provide a basis of measurement for or to determine the value
of
an Award (such as with a Stock Appreciation Right or Performance Share Award)
shall be 6,750,000 shares (the “
Maximum
Number
”).
Not
more than
the
Maximum Number of shares of Stock shall be granted in the form of Incentive
Stock Options.
5.2
PLAN
SUB-LIMITS
.
Subject
to adjustment as provided in Section
14.1
,
the
maximum aggregate number of shares of Stock that may be issued in conjunction
with (i) Restricted Stock Awards, unrestricted shares of Stock, Performance
Share Awards, and Dividend Equivalents, and (ii) Restricted Stock Unit
Awards, Performance Share Unit Awards and Other Awards but only if such Awards
are paid or settled in shares of Stock, is
1,000,000 shares.
5.3
LAPSED
AWARDS
.
To the
fullest extent permissible under Rule 16b-3 under the 1934 Act and Section
422
of the Code and any other applicable laws, rules and regulations, (i) if an
Award is canceled, terminates, expires, is forfeited or lapses for any reason
without having been exercised or settled, any shares of Stock subject to the
Award will be added back into the Maximum Number and will again be available
for
the grant of an Award under the Plan and (ii) shares of Stock subject to SARs
or
other Awards settled in cash shall be added back into the Maximum Number and
will be available for the grant of an Award under the Plan.
5.4
LIMITED
DURATION OF CERTAIN RULES
.
Any
rule set forth in Section
5.2
that is
considered a “formula” under the rules of the NASDAQ Stock Market applicable to
the Corporation shall expire on and not be applied after the tenth anniversary
of the date on which the Plan is approved by the Corporation’s stockholders. The
expiration of any such rule shall not affect any calculation of shares of Stock
available for delivery under the Plan that was made while the rule was in
effect.
5.5
STOCK
DISTRIBUTED
.
Any
Stock distributed pursuant to an Award may consist, in whole or in part,
of
authorized and unissued Stock, treasury Stock or Stock purchased on the open
market.
5.6
LIMITATION
ON AWARDS
.
Notwithstanding any provision in the Plan to the contrary (but subject to
adjustment as provided in Section
14.1
),
the
maximum number of shares of Stock that may be issued in respect of, or used
to
provide a basis of measurement for or to determine the value of, one or more
Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock
Unit Awards, Performance Share Awards, Performance Share Unit Awards, Dividend
Equivalent Awards or Other Stock-Based Awards (regardless of whether such
Awards
are settled in cash, Stock or a combination thereof) granted during any one
calendar year under the Plan to any one Participant shall be 225,000 (all
of
which may be granted as Incentive Stock Options). The maximum amount of one
or
more Awards denominated in cash that may be received by any one Participant
during any one calendar year under the Plan shall be
$1,000,000.
ARTICLE
6
ELIGIBILITY
6.1
GENERAL
.
Awards
may be granted only to individuals who are employees, officers or directors
of
the Corporation or a Parent or Subsidiary (each, an “
Eligible
Individual
”).
Under
the Plan, references to “employment” or “employed” include the service of
Participants who are Non-Employee Directors.
ARTICLE
7
STOCK
OPTIONS
7.1
GENERAL
.
The
Committee is authorized to grant Options to Eligible Individuals on the
following terms and conditions:
(a)
EXERCISE
PRICE
.
The
exercise price per share of Stock under an Option shall be determined by the
Committee at the time of the grant but in no event shall the exercise price
be
less than 100% of the Fair Market Value of a share of Stock on the date of
grant.
(b)
TIME
AND CONDITIONS OF EXERCISE
.
The
Committee shall determine the time or times at which an Option may be exercised
in whole or in part, subject to Section
7.1
(e)
.
The
Committee also shall determine the performance or other conditions, if any,
that
must be satisfied before all or part of an Option may be exercised. The
Committee may waive any exercise provisions at any time in whole or in part
based upon factors as the Committee may determine in its sole discretion so
that
the Option becomes exerciseable at an earlier date.
(c)
PAYMENT
.
Unless
otherwise determined by the Committee, the exercise price of an Option may
be
paid (i) in cash, (ii) by actual delivery or attestation to ownership of freely
transferable shares of stock already owned;
provided
,
however
,
that to
the extent required by applicable accounting rules, such shares shall have
been
held by the Participant for at least six months, (iii) by a combination of
cash and shares of Stock equal in value to the exercise price, (iv) through
net
share settlement or a similar procedure involving the withholding of shares
of
Stock subject to the Option with a value equal to the exercise price or
(v) by such other means as the Committee, in its discretion, may authorize.
In accordance with the rules and procedures authorized by the Committee for
this
purpose, an Option may also be exercised through a “cashless exercise” procedure
authorized by the Committee that permits Participants to exercise Options by
delivering a properly executed exercise notice to the Corporation together
with
a copy of irrevocable instructions to a broker to deliver promptly to the
Corporation the amount of sale or loan
proceeds
necessary to pay the exercise price and the amount of any required tax or other
withholding obligations.
(d)
EVIDENCE
OF GRANT
.
All
Options shall be evidenced by an Award Agreement between the Corporation and
the
Participant. The Award Agreement shall include such provisions not inconsistent
with the Plan as may be specified by the Committee.
(e)
EXERCISE
TERM
.
In no
event may any Option be exercisable for more than ten years from the date of
its
grant.
7.2
INCENTIVE
STOCK OPTIONS
.
The
terms of any Incentive Stock Options granted under the Plan must comply with
the
following additional rules:
(a)
LAPSE
OF OPTION
.
An
Incentive Stock Option shall lapse under the earliest of the following
circumstances;
provided
,
however
,
that
the Committee may, prior to the lapse of the Incentive Stock Option under the
circumstances described in paragraphs (3), (4) and (5) below, provide in writing
that the Option will extend until a later date, but if an Option is exercised
after the dates specified in paragraphs (3), (4) and (5) below, it will
automatically become a Non-Qualified Stock Option:
(1)
The
Incentive Stock Option shall lapse as of the option expiration date set forth
in
the Award Agreement.
(2)
The
Incentive Stock Option shall lapse ten years after it is granted, unless an
earlier time is set in the Award Agreement.
(3)
If
the
Participant terminates employment for any reason other than as provided in
paragraph (4) or (5) below, the Incentive Stock Option shall lapse, unless
it is
previously exercised, three months after the Participant’s termination of
employment;
provided
,
however
,
that if
the Participant’s employment is terminated by the Corporation for Cause, the
Incentive Stock Option shall (to the extent not previously exercised) lapse
immediately.
(4)
If
the
Participant terminates employment by reason of his Disability, the Incentive
Stock Option shall lapse, unless it is previously exercised, one year after
the
Participant’s termination of employment.
(5)
If
the
Participant dies while employed, or during the three-month period described
in
paragraph (3) or during the one-year period described in paragraph (4) and
before the Option otherwise lapses, the Option shall lapse one year after the
Participant’s death. Upon the Participant’s death, any exercisable Incentive
Stock Options may be exercised by the Participant’s beneficiary, determined in
accordance with Section
13.5
.
Unless
the exercisability of the Incentive Stock Option is accelerated as provided
in
Article
13
,
if a
Participant exercises an Option after termination of employment, the Option
may
be exercised only with respect to the shares that were otherwise vested on
the
Participant’s termination of employment.
(b)
INDIVIDUAL
DOLLAR LIMITATION
.
The
aggregate Fair Market Value (determined as of the time an Award is made) of all
shares of Stock with respect to which Incentive Stock Options are first
exercisable by a Participant in any calendar year may not exceed
$100,000.
(c)
TEN
PERCENT OWNERS
.
No
Incentive Stock Option shall be granted to any individual who, at the date
of
grant, owns stock possessing more than ten percent of the total combined voting
power of all classes of stock of the Corporation or any Parent or Affiliate
unless the exercise price per share of such Option is at least 110% of the
Fair
Market Value per share of Stock at the date of grant and the Option expires
no
later than five years after the date of grant.
(d)
EXPIRATION
OF INCENTIVE STOCK OPTIONS
.
No
Award of an Incentive Stock Option may be made pursuant to the Plan after the
day immediately prior to the tenth anniversary of the Effective
Date.
(e)
RIGHT
TO EXERCISE
.
During
a Participant’s lifetime, an Incentive Stock Option may be exercised only by the
Participant or, in the case of the Participant’s Disability, by the
Participant’s guardian or legal representative.
(f)
DIRECTORS
.
The
Committee may not grant an Incentive Stock Option to a Non-Employee Director.
The Committee may grant an Incentive Stock Option to a director who is also
an
employee of the Corporation or any Parent or Affiliate but only in that
individual’s position as an employee and not as a director.
7.3
NO
REPRICING OF OPTIONS
.
The
Committee may not “reprice” any Option. “Reprice” means any of the following or
any other action that has the same effect: (i) amending an Option to reduce
its
exercise price, (ii) canceling an Option at a time when its exercise price
exceeds the Fair Market Value of a share of Stock in exchange for an Option,
Restricted Stock Award or other equity award unless the cancellation and
exchange occurs in connection with a merger, acquisition, spin-off or other
similar corporate transaction, or (iii) taking any other action that is treated
as a repricing under GAAP,
provided
that
nothing in this Section
7.3
shall
prevent the Committee from making adjustments pursuant to Section
14.1
.
ARTICLE
8
STOCK
APPRECIATION RIGHTS
8.1
GRANT
OF
STOCK
APPRECIATION RIGHTS
.
The
Committee is authorized to grant Stock Appreciation Rights to Participants
on
the following terms and conditions:
(a)
RIGHT
TO PAYMENT
.
Upon
the exercise of a Stock Appreciation Right, the Participant to whom it is
granted has the right to receive the excess, if any, of:
(1)
The
Fair
Market Value of one share of Stock on the date of exercise; over
(2)
The
grant
price of the Stock Appreciation Right as determined by the Committee, which
shall not be less than the Fair Market Value of one share of Stock on the date
of grant.
(b)
OTHER
TERMS
.
All
awards of Stock Appreciation Rights shall be evidenced by an Award Agreement.
The terms, methods of exercise, methods of settlement, form of consideration
payable in settlement, and any other terms and conditions of any Stock
Appreciation Right shall be determined by the Committee at the time of the
grant
of the Award and shall be reflected in the Award Agreement, provided that each
Stock Appreciation Right shall lapse ten years after it is granted, unless
an
earlier time is set in the Award Agreement.
ARTICLE
9
PERFORMANCE
SHARE
AWARDS AND
PERFORMANCE
SHARE UNIT AWARDS
9.1
PERFORMANCE
SHARE AWARDS
.
The
Committee is authorized to grant Performance Share Awards to Participants on
such terms and conditions as may be selected by the Committee. The Committee
shall have the complete discretion to determine the number of Performance Share
Awards granted to each Participant, subject to Section
5.6
.
All
Performance Share Awards shall be evidenced by an Award Agreement. A grant
of a
Performance Share Award shall consist of a Target Number of shares of Stock
granted to an Eligible Individual subject to risk of forfeiture for failure
to
achieve the Performance Targets and subject to the terms, conditions and
restrictions set forth in the Plan and the applicable Award Agreement. The
Performance Targets will be evaluated at
the
end
of the applicable Performance Period and a Participant may receive more or
less
than the Target Number of shares of Stock subject to a Performance Share Award,
subject to Section
5.6
,
depending on the extent to which the Performance Targets and other terms and
conditions to payment are met over the Performance Period.
9.2
PERFORMANCE
SHARE UNIT AWARDS
.
The
Committee is authorized to grant Performance Share Unit Awards to Participants
on such terms and conditions as may be selected by the Committee. The Committee
shall have the complete discretion to determine the number of Performance Share
Unit Awards granted to each Participant, subject to Section
5.6
.
All
Performance Share Unit Awards shall be evidenced by an Award Agreement. A
Performance Stock Unit Award shall entitle a Participant to receive, subject
to
the terms, conditions and restrictions set forth in the Plan and established
by
the Committee in connection with the Award and specified in the applicable
Award
Agreement, a Target Number of shares of Stock based upon the achievement of
Performance Targets over the applicable Performance Period. Performance Share
Unit Awards may be payable in cash, Stock or other
property,
as determined by the Committee and reflected in the Award Agreement. The
Performance Targets will be evaluated at the end of the applicable Performance
Period and a Participant may receive more or less than the Target Number
of
shares of Stock subject to a Performance Share Unit Award, subject to Section
5.6
,
depending on the extent to which the Performance Targets and other terms
and
conditions to payment are met over the Performance Period.
ARTICLE
10
RESTRICTED
STOCK AWARDS
AND
RESTRICTED
STOCK UNIT AWARDS
10.1
RESTRICTED
STOCK AWARDS
.
(a)
GRANT
.
The
Committee is authorized to grant Restricted Stock Awards to Participants in
such
amounts and subject to such terms and conditions as may be selected by the
Committee. All Restricted Stock Awards shall be evidenced by an Award Agreement.
A Restricted Stock Award shall consist of one or more shares of Stock granted
to
an Eligible Individual, and shall be subject to the terms, conditions and
restrictions set forth in the Plan and established by the Committee in
connection with the Award and specified in the applicable Award Agreement.
(b)
ISSUANCE
AND RESTRICTIONS
.
Restricted Stock shall be subject to such restrictions on transferability and
other restrictions as the Committee may impose (including, without limitation,
limitations on the right to vote Restricted Stock or the right to receive
dividends on the Restricted Stock). These restrictions may lapse separately
or
in combination at such times, under such circumstances, in such installments,
upon the satisfaction of performance goals or otherwise, as the Committee
determines at the time of the grant of the Award or thereafter.
(c)
FORFEITURE
.
Except
as otherwise determined by the Committee at the time of the grant of the Award
or thereafter, upon termination of employment during the applicable restriction
period or upon failure to satisfy a performance goal during the applicable
restriction period, Restricted Stock that is at that time subject to
restrictions shall be forfeited and reacquired by the Corporation;
provided
,
however
,
that
the Committee may provide in any Award Agreement that restrictions or forfeiture
conditions relating to Restricted Stock will be waived in whole or in part
in
the event of terminations resulting from specified causes, and the Committee
may
in other cases waive in whole or in part restrictions or forfeiture conditions
relating to Restricted Stock.
(d)
CERTIFICATES
FOR RESTRICTED STOCK
.
Restricted Stock granted under the Plan may be evidenced in such manner as
the
Committee shall determine. If certificates representing shares of Restricted
Stock are registered in the name of the Participant, certificates must bear
an
appropriate legend referring to the terms, conditions and restrictions
applicable to such Restricted Stock.
10.2
RESTRICTED
STOCK UNIT AWARDS
.
The
Committee is authorized to grant Restricted Stock Unit Awards to Participants
in
such amounts and subject to such terms and conditions as may be selected by
the
Committee.
All Restricted Stock Unit Awards shall be evidenced by an Award Agreement.
A
Restricted Stock Unit shall entitle a Participant to receive, subject to the
terms, conditions and restrictions set forth in the Plan and established by
the
Committee in connection with the Award, one or more shares of Stock. Restricted
Stock Units may, among other things, be subject to restrictions on
transferability, vesting requirements or other specified circumstances under
which they may be canceled. Restricted Stock Units may be payable in cash,
shares of Stock or other property, as determined by the Committee and reflected
in the Award Agreement.
ARTICLE
11
DIVIDEND
EQUIVALENTS
11.1
GRANT
OF DIVIDEND EQUIVALENTS
.
The
Committee is authorized to grant Dividend Equivalents to Participants subject
to
such terms and conditions as may be selected by the Committee. Dividend
Equivalents shall entitle the Participant to receive payments (in cash, Stock
or
other property) equal to dividends with respect to all or a portion of
the
number of shares of Stock subject to an Award, as determined by the Committee.
The Committee may provide that Dividend Equivalents be paid or distributed
when
accrued, or be deemed to have been reinvested in additional shares of Stock
or
otherwise reinvested;
provided
,
however
,
that
the terms of any reinvestment of Dividend Equivalents must comply with all
applicable laws, rules and regulations, including, without limitation, Section
409A.
ARTICLE
12
OTHER
STOCK-BASED AWARDS
12.1
GRANT
OF OTHER STOCK-BASED AWARDS
.
The
Committee is authorized, subject to limitations under applicable law, to grant
to Participants such other Awards that are payable in, valued in whole or in
part by reference to, or otherwise based on or related to shares of Stock,
as
deemed by the Committee to be consistent with the purposes of the Plan,
including, without limitation, shares of Stock awarded purely as a “bonus” and
not subject to any restrictions or conditions, convertible or exchangeable
debt
securities, other rights convertible or exchangeable into shares of Stock,
stock
units, phantom stock and other Awards valued by reference to book value of
shares of Stock or the value of securities of or the performance of specified
Parents or Subsidiaries. The Committee shall determine the terms and conditions
of such Awards.
ARTICLE
13
PROVISIONS
APPLICABLE TO AWARDS
13.1
STAND-ALONE,
TANDEM, AND SUBSTITUTE AWARDS
.
Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with, or in substitution for, any
other Award granted under the Plan. If an Award is granted in substitution
for
another Award, the Committee may require the surrender of such other Award
in
consideration of the grant of the new Award. Awards granted in addition to
or in
tandem with other Awards may be granted either at the same time as or at a
different time from the grant of such other Awards.
13.2
TERM
OF AWARD
.
The
term of each Award shall be for the period as determined by the Committee,
provided
that in
no event shall the term of any Incentive Stock Option or a Stock Appreciation
Right granted in tandem with the Incentive Stock Option exceed a period of
ten
years from the date of its grant (or, if Section
7.2
(c)
applies,
five years from the date of its grant).
13.3
FORM
OF PAYMENT FOR AWARDS
.
Subject
to the terms of the Plan and any applicable law or Award Agreement, payments
or
transfers to be made by the Corporation or a Parent or Affiliate on the grant
or
exercise of an Award may be made in such form as the Committee determines at
or
after the time of grant, including, without limitation, cash, Stock, other
Awards or other property, or any combination thereof, and may be made in a
single payment or transfer, in installments or on a deferred basis, in each
case
determined in accordance with rules adopted by, and at the discretion of, the
Committee.
13.4
LIMITS
ON TRANSFER
.
No
right or interest of a Participant in any unexercised or restricted Award may
be
pledged, encumbered or hypothecated to or in favor of any party other than
the
Corporation or a Parent or Affiliate, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than
the
Corporation or a Parent or Affiliate. No unexercised or restricted Award shall
be assignable or transferable by a Participant other than by will or the laws
of
descent and distribution or, except in the case of an Incentive Stock Option,
pursuant to a domestic relations order that would satisfy Section 414(p)(1)(A)
of the Code if such Section applied to an Award under the Plan;
provided
,
however
,
that
the Committee may (but need not) permit other transfers where the Committee
concludes that such transferability (i) does not result in accelerated taxation
or other adverse tax consequences, (ii) does not cause any Option intended
to be
an Incentive Stock Option to fail to be described in Section 422(b) of the
Code,
(iii) does not result in cash or any other consideration being exchanged for
the
Award, and (iv) is otherwise appropriate and desirable, taking into account
any
factors deemed relevant, including, without limitation, state or federal tax
or
securities laws applicable to transferable Awards.
13.5
BENEFICIARIES
.
Notwithstanding Section
13.4
,
a
Participant may, in the manner determined by the Committee, designate a
beneficiary to exercise the rights of the Participant and to receive any
distribution with respect to any Award upon the Participant’s death. A
beneficiary, legal guardian, legal representative or other person claiming
any
rights under the Plan is subject to all terms and conditions of the Plan and
any
Award Agreement applicable to the Participant, except to the extent the Plan
and
such Award Agreement otherwise provide, and to any additional restrictions
deemed necessary or appropriate by the Committee. If no beneficiary has been
designated or survives the Participant, payment shall be made to the
Participant’s estate. Subject to the foregoing, a beneficiary designation may be
changed or revoked by a Participant at any time,
provided
the
change or revocation is filed with the Committee.
13.6
STOCK
CERTIFICATES
.
All
Stock issuable under the Plan is subject to any stop-transfer orders and other
restrictions as the Committee deems necessary or advisable to comply with
federal or state securities laws, rules and regulations and the rules of any
national securities exchange or automated quotation system on which the Stock
is
listed, quoted or traded. The Committee may place legends on any Stock
certificate or issue instructions to the transfer agent to reference
restrictions applicable to the Stock.
13.7
ACCELERATION
UPON DEATH OR DISABILITY
.
Unless
otherwise set forth in an Award Agreement, upon the Participant’s death or
Disability during his employment or service as a director, all outstanding
Options, Stock Appreciation Rights, Restricted Stock Awards and other Awards
in
the nature of rights that may be exercised shall become fully exercisable and
all restrictions on outstanding Awards shall lapse. Any Option or Stock
Appreciation Right shall thereafter continue or lapse in accordance with the
other provisions of the Plan and the Award Agreement. To the extent that this
provision causes Incentive Stock Options to exceed the dollar limitation set
forth in Section
7.2
(b)
,
the
excess Options shall be deemed to be Non-Qualified Stock Options.
13.8
ACCELERATION
OF VESTING AND LAPSE OF RESTRICTIONS
.
The
Committee may, in its sole discretion, at any time (including, without
limitation, prior to, coincident with or subsequent to a Change of Control)
determine that (a) all or a portion of a Participant’s Options, Stock
Appreciation Rights and other Awards in the nature of rights that may be
exercised shall become fully or partially exercisable, and/or (b) all or a
part
of the restrictions on all or a portion of the outstanding Awards shall lapse,
in each case, as of such date as the Committee may, in its sole discretion,
declare;
provided
,
however
,
that,
with respect to Awards that are subject to Section 409A, the Committee shall
not
have the authority to accelerate or postpone the timing of payment or settlement
of an Award in a manner that would cause such Award to become subject to the
interest and penalty provisions under Section 409A. The Committee may
discriminate among Participants and among Awards granted to a Participant in
exercising its discretion pursuant to this Section
13.8
.
13.9
OTHER
ADJUSTMENTS
.
If (i)
an Award is accelerated under Section
13.8
or (ii)
a Change of Control occurs (regardless or whether acceleration under Section
13.8
occurs),
the Committee may, in its sole discretion, provide (a) that the Award will
expire after a designated period of time after such acceleration or Change
of
Control, as applicable, to the extent not then exercised, (b) that the Award
will be settled in cash rather than Stock, (c) that the Award will be assumed
by
another party to a transaction giving rise to the acceleration or a party to
the
Change of Control, (d) that the Award will otherwise be equitably converted
or
adjusted in connection with
such
transaction or Change of Control, or (e) any combination of the foregoing.
The
Committee’s determination need not be uniform and may be different for different
Participants whether or not such Participants are similarly situated;
provided
,
however
,
that,
with respect to Awards that are subject to Section 409A, the Committee shall
not
have the authority to accelerate or postpone the timing of payment or settlement
of an Award in a manner that would cause such Award to become subject to the
interest and penalty provisions under Section 409A.
13.10
PERFORMANCE
GOALS
.
In
order to preserve the deductibility of an Award under Section 162(m) of the
Code, the Committee may determine that any Award granted pursuant to the Plan
to
a Participant that is or is expected to become a Covered Employee shall be
determined solely on the basis of (a) the achievement by the Corporation or
a
Parent or Subsidiary of a specified target return, or target growth in return,
on equity or assets, (b) the Corporation’s stock price, (c) the Corporation’s
total shareholder return (stock price appreciation plus reinvested dividends)
relative to a defined comparison group or target over a specific performance
period, (d) the achievement by the Corporation or a Parent or Subsidiary, or
a
business unit of any such entity, of a specified target, or target growth in,
net income, revenues, earnings per share, earnings before income and taxes,
and
earnings before income, taxes, depreciation and amortization, or (e) any
combination of the goals set forth in (a) through (d) above. If an Award
is made on such basis, the Committee shall
establish
goals prior to the beginning of the period for which such performance goal
relates (or such later date as may be permitted under Section 162(m) of the
Code
or the regulations thereunder), and the Committee has the right for any reason
to reduce (but not increase) the Award, notwithstanding the achievement of
a
specified goal. Any payment of an Award granted with performance goals shall
be
conditioned on the written certification of the Committee in each case that
the
performance goals and any other material conditions were
satisfied.
13.11
TERMINATION
OF EMPLOYMENT
.
Whether
military, government or other service or other leave of absence shall constitute
a termination of employment shall be determined in each case by the Committee
at
its discretion, and any determination by the Committee shall be final and
conclusive. A termination of employment shall not occur (i) in a circumstance
in
which a Participant transfers from the Corporation to one of its Parents or
Subsidiaries, transfers from a Parent or Affiliate to the Corporation, or
transfers from one Parent or Affiliate to another Parent or Affiliate, or (ii)
in the discretion of the Committee as specified at or prior to such occurrence,
in the case of a split-off, spin-off, sale or other disposition of the
Participant’s employer from the Corporation or any Parent or Affiliate. To the
extent that this provision causes Incentive Stock Options to extend beyond
three
months from the date a Participant is deemed to be an employee of the
Corporation, a Parent or Affiliate for purposes of Section 424(f) of the Code,
the Options held by such Participant shall be deemed to be Non-Qualified Stock
Options.
ARTICLE
14
CHANGES
IN CAPITAL STRUCTURE
14.1
GENERAL
.
In the
event of a corporate transaction involving the Corporation (including, without
limitation, any stock dividend, stock split, extraordinary cash dividend,
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination or exchange of shares), the authorization limits under Sections
5.1
and
5.6
shall be
adjusted proportionately, and the Committee may adjust Awards to preserve the
benefits or potential benefits of the Awards. Action by the Committee may
include: (i) adjustment of the number and kind of shares which may be delivered
under the Plan; (ii) adjustment of the number and kind of shares subject to
outstanding Awards; (iii) adjustment of the exercise price of outstanding
Awards; (iv) adjustments to the type or form of Award; and (v) any other
adjustments that the Committee determines to be equitable. Without limiting
the
foregoing, in the event a stock dividend or stock split is declared upon the
Stock, the authorization limits under Sections
5.1
and
5.6
shall be
increased proportionately, and the shares of Stock then subject to each Award
shall be increased proportionately without any change in the aggregate purchase
price therefor.
ARTICLE
15
AMENDMENT,
MODIFICATION AND TERMINATION
15.1
AMENDMENT,
MODIFICATION AND TERMINATION
.
The
Board or the Committee may, at any time and from time to time, amend, modify
or
terminate the Plan;
provided
,
however
,
that
the Board or the
Committee
may condition any amendment or modification on the approval of shareholders
of
the Corporation if such approval is necessary or deemed advisable with respect
to tax, securities or other applicable laws, policies or
regulations.
15.2
AWARDS
PREVIOUSLY GRANTED
.
At any
time and from time to time, the Committee may amend, modify or terminate any
outstanding Award or Award Agreement without approval of the Participant;
provided
,
however
,
that,
subject to the terms of the applicable Award Agreement, such amendment,
modification or termination shall not, without the Participant’s consent, reduce
or diminish the value of such Award determined as if the Award had been
exercised, vested, cashed in or otherwise settled on the date of such amendment
or termination;
provided
further
,
however
,
that
the original term of any Option may not be extended. No termination, amendment,
or modification of the Plan shall adversely affect any Award previously granted
under the Plan, without the written consent of the Participant. Notwithstanding
any provision herein to the contrary, the Committee shall have broad authority
to amend the Plan or any outstanding Award under the Plan without approval
of
the Participant to the extent necessary or desirable (i) to comply with, or
take into account changes in, applicable tax laws, securities laws, accounting
rules and other applicable laws, rules and regulations or (ii) to ensure
that an Award is not subject to interest and penalties under Section
409A.
ARTICLE
16
GENERAL
PROVISIONS
16.1
NO
RIGHTS TO AWARDS
.
No
Participant or any Eligible Individual shall have any claim to be granted any
Award under the Plan, and neither the Corporation nor the Committee is obligated
to treat Participants or Eligible Individuals uniformly.
16.2
NO
STOCKHOLDER RIGHTS
.
No
Award gives the Participant any of the rights of a shareholder of the
Corporation unless and until shares of Stock are in fact issued to such person
in connection with the exercise, payment or settlement of such
Award.
16.3
WITHHOLDING
.
The
Corporation or any Subsidiary, Parent or Affiliate shall have the authority
and
the right to deduct or withhold, or require a Participant to remit to the
Corporation, an amount sufficient to satisfy federal, state, local and other
taxes (including the Participant’s FICA obligation) required by law to be
withheld with respect to any taxable event arising as a result of the Plan.
With
respect to withholding required upon any taxable event under the Plan, the
Committee may, at the time the Award is granted or thereafter, require or permit
that any such withholding requirement be satisfied, in whole or in part, by
(i)
withholding from the Award shares of Stock or (ii) delivering shares of Stock
that are already owned, having a Fair Market Value on the date of withholding
equal to the minimum amount (and not any greater amount) required to be withheld
for tax purposes, all in accordance with such procedures as the Committee
establishes. The Corporation or any Subsidiary, Parent or Affiliate, as
appropriate, shall also have the right to deduct from all cash payments made
to
a Participant (whether or not such payment is made in connection with an Award)
any applicable taxes required to be withheld with respect to such
payments.
16.4
NO
RIGHT TO CONTINUED SERVICE
.
Nothing
in the Plan or any Award Agreement shall interfere with or limit in any way
the
right of the Corporation or any Parent or Affiliate to terminate any
Participant’s employment or status as an officer or director at any time, nor
confer upon any Participant any right to continue as an employee, officer or
director of the Corporation or any Parent or Affiliate. In its sole discretion,
the Board or the Committee may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan to deliver shares
of
Stock with respect to awards hereunder.
16.5
UNFUNDED
STATUS OF AWARDS
.
The
Plan is intended to be an “unfunded” plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant
pursuant to an Award, nothing contained in the Plan or any Award Agreement
shall
give the Participant any rights that are greater than those of a general
creditor of the Corporation or any Parent or Affiliate.
16.6
INDEMNIFICATION
.
To the
extent allowable under applicable law, each member of the Committee shall be
indemnified and held harmless by the Corporation from any loss, cost, liability
or expense that may be imposed upon or reasonably incurred by such member in
connection with or resulting from any claim, action, suit or proceeding to
which
such member may be a party or in which he may be involved by reason of any
action or failure to act under the Plan and against and from any and all amounts
paid by such member in satisfaction of judgment in such action, suit or
proceeding against him;
provided
such
member shall give the Corporation an opportunity, at its own expense, to handle
and defend the same before such member undertakes to handle and defend it on
his
or her own behalf. The foregoing right of indemnification shall not be exclusive
of any other rights of indemnification to which such persons may be entitled
under the Corporation’s Certificate of Incorporation or Bylaws, as a matter of
law, or otherwise, or any power that the Corporation may have to indemnify
them
or hold such persons harmless.
16.7
RELATIONSHIP
TO OTHER BENEFITS
.
No
payment under the Plan shall be taken into account in determining any benefits
under any pension, retirement, savings, profit sharing, group insurance, welfare
or benefit plan of the Corporation or any Parent or Affiliate unless provided
otherwise in such other plan.
16.8
EXPENSES;
APPLICATION OF FUNDS
.
The
expenses of administering the Plan shall be borne by the Corporation and its
Parents or Subsidiaries. The proceeds received by the Corporation from the
sale
of shares of Stock pursuant to Awards will be used for general corporate
purposes.
16.9
TITLES
AND HEADINGS
.
The
titles and headings of the Sections in the Plan are for convenience of reference
only, and in the event of any conflict, the text of the Plan, rather than such
titles or headings, shall control.
16.10
GENDER
AND NUMBER
.
Except
where otherwise indicated by the context, any masculine term used herein also
shall include the feminine; the plural shall include the singular and the
singular shall include the plural.
16.11
FRACTIONAL
SHARES
.
No
fractional shares of Stock shall be issued and the Committee shall determine,
in
its discretion, whether cash shall be given in lieu of fractional shares or
whether such fractional shares shall be eliminated by rounding up or
down.
16.12
GOVERNMENT
AND OTHER REGULATIONS
.
The
obligation of the Corporation to make payment of awards in Stock or otherwise
shall be subject to all applicable laws, rules and regulations, and to such
approvals by government agencies as may be required. To the extent that Awards
under the Plan are awarded to individuals who are domiciled or resident outside
of the United States or to persons who are domiciled or resident in the United
States but who are subject to the tax laws of a jurisdiction outside of the
United States, the Committee may adjust the terms of the Awards granted
hereunder to such person (i) to comply with the laws of such jurisdiction and
(ii) to avoid adverse tax consequences relating to an Award. The authority
granted under the previous sentence shall include the discretion for the
Committee to adopt, on behalf of the Corporation, one or more sub-plans
applicable to separate classes of Participants who are subject to the laws
of
jurisdictions outside of the United States.
16.13
SECURITIES
LAW RESTRICTIONS
.
An
Award may not be exercised or settled and no shares of Stock may be issued
in
connection with an Award unless the issuance of such shares of Stock has been
registered under the 1933 Act and qualified under applicable state “blue sky”
laws and any applicable foreign securities laws, or the Corporation has
determined that an exemption from registration and from qualification under
such
state “blue sky” laws is available. The Corporation shall be under no obligation
to register under the 1933 Act, or any state securities act, any of the shares
of Stock issued in connection with the Plan. The shares issued in connection
with the Plan may in certain circumstances be exempt from registration under
the
1933 Act, and the Corporation may restrict the transfer of such shares in such
manner as it deems advisable to ensure the availability of any such exemption.
The Committee may require each Participant purchasing or acquiring shares of
Stock pursuant to an Award under the Plan to represent to and agree with the
Corporation in writing that such Participant is acquiring the shares of Stock
for investment purposes and not with a view to the distribution thereof. All
certificates for shares of Stock delivered under the Plan shall be subject
to
such stock-transfer orders and other restrictions as the Committee
may
deem
advisable under the rules, regulations and other requirements of the Securities
and Exchange Commission, any exchange upon which the Stock is then listed,
and
any applicable securities law, and the Committee may cause a legend or legends
to be put on any such certificates to make appropriate reference to such
restrictions.
16.14
SATISFACTION
OF OBLIGATIONS
.
Subject
to applicable law, the Corporation may apply any cash, shares of Stock,
securities or other consideration received upon exercise or settlement of an
Award to any obligations a Participant owes to the Corporation and its Parents,
Subsidiaries or Affiliates in connection with the Plan or otherwise, including,
without limitation, any tax obligations or obligations under a currency facility
established in connection with the Plan.
16.15
SECTION
409A OF THE CODE
.
If any
provision of the Plan or an Award Agreement contravenes any regulations or
Treasury guidance promulgated under Section 409A or could cause an Award to
be
subject to the interest and penalties under Section 409A, such provision of
the
Plan or any Award Agreement shall be modified to maintain, to the maximum extent
practicable, the original intent of the applicable provision without violating
the provisions of Section 409A. Moreover, any discretionary authority that
the
Board or the Committee may have pursuant to the Plan shall not be applicable
to
an Award that is subject to Section 409A to the extent such discretionary
authority will contravene Section 409A.
16.16
GOVERNING
LAW
.
To the
extent not governed by federal law, the Plan and all Award Agreements shall
be
construed in accordance with and governed by the laws of the State of
Delaware.
16.17
ADDITIONAL
PROVISIONS
.
Each
Award Agreement may contain such other terms and conditions as the Board or
the
Committee may determine,
provided
that
such other terms and conditions are not inconsistent with the provisions of
the
Plan. In the event of any conflict or inconsistency between the Plan and an
Award Agreement, the Plan shall govern and the Award Agreement shall be
interpreted to minimize or eliminate such conflict or
inconsistency.