10-K 1 sonc-20130831x10k.htm 10-K 3bad3c7db29d4a9

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

Picture 1

[X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended:  August 31, 2013

 

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 or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

 

 

 

 

 

 

 

 

300 Johnny Bench Drive

 

73104

Oklahoma City, Oklahoma

 

(Zip Code)

(Address of principal executive offices)

 

 

 

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)

 

(Facing Sheet Continued)


 

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  o

 

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  o  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  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

 

 

Large accelerated filer o

Accelerated filer                  x

Non-accelerated filer   o (Do no check if a smaller reporting company)

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o  No  x

 

As of February 28,  2013, the aggregate market value of the 52,135,564 shares of common stock of the Company held by non-affiliates of the Company equaled $588,610,518 based on the closing sales price for the common stock as reported for that date.

 

As of October 15,  2013,  the Registrant had 56,217,062 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, 2013.


 

FORM 10-K OF SONIC CORP.

 

TABLE OF CONTENTS

 

 

 

 

PART I 

 

 

 

Item 1.

Business

 

 

 

Item 1A.

Risk Factors

 

 

 

Item 1B.

Unresolved Staff Comments

12 

 

 

 

Item 2.

Properties

12 

 

 

 

Item 3.

Legal Proceedings

12 

 

 

 

Item 4.

Mine Safety Disclosures

12 

 

 

 

Item 4A.

Executive Officers of the Company

13 

 

PART II 

 

 

 

Item 5.

Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15 

 

 

 

Item 6.

Selected Financial Data

15 

 

 

 

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

17 

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

28 

 

 

 

Item 8.

Financial Statements and Supplementary Data

29 

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

29 

 

 

 

Item 9A.

Controls and Procedures

29 

 

 

 

Item 9B.

Other Information

32 

 

PART III 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

32 

 

 

 

Item 11.

Executive Compensation

32 

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

32 

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

32 

 

 

 

Item 14.

Principal Accounting Fees and Services

32 

 

PART IV 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

33 

 


 

 

FORM 10-K

 

SONIC CORP.

 

PART I

 

Item 1.  Business

 

Overview

 

Sonic Corp. operates and franchises the largest chain of drive-in restaurants (“Sonic Drive-Ins”) in the United States.  References to “Sonic Corp.,” “Sonic,” “the Company,” “we,” “us” and “our” in this Form 10-K are references to Sonic Corp. and its subsidiaries. 

 

The first Sonic Drive-In restaurant opened in 1953.  As of the end of our fiscal year on August 31, 2013, the Sonic system included 3,522 Sonic Drive-Ins in 44 states of which 396 were owned and operated by Sonic Restaurants, Inc., the Company’s operating subsidiary (“Company Drive-Ins”), and 3,126 were owned and operated by franchisees (“Franchise Drive-Ins”).

 

Sonic Corp. was incorporated in the State of Delaware in 1990 in connection with its 1991 initial public offering of common stock.  Sonic is publicly traded on the NASDAQ Stock Exchange (Ticker: SONC).

 

Restaurant Design and Construction

 

The typical Sonic Drive-In consists of a kitchen housed in a one-story building, which is approximately 1,500 square feet, flanked by canopy-covered rows of 16 to 24 parking spaces, with each space having its own payment terminal, intercom speaker system and menu board.  At a typical Sonic Drive-In, a customer drives into one of the parking spaces, orders through the intercom speaker system and has the food delivered by a carhop.  Most Sonic Drive-Ins also include a drive-thru lane and patio seating to provide customers alternative dining options.

 

Menu

 

Sonic maintains a highly diverse menu.  The strategy is to ensure the menu items appeal to a broad range of target customers.  The menu includes a variety of traditional and healthy choices as well as creative and fun items.  Sonic’s signature food items include specialty drinks (such as cherry limeades and slushes), ice cream desserts, made-to-order sandwiches and hamburgers, a variety of hot dogs including six-inch premium beef hot dogs and footlong quarter-pound coneys, hand-battered onion rings, tater tots and wraps.  Sonic Drive-Ins also offer breakfast items that include a variety of breakfast burritos and serve the full menu all day. 

 

Strategy

 

Sonic has developed and implemented a strategy designed to enhance the Sonic brand and to achieve high levels of customer satisfaction and repeat business.  The key elements of its strategy are:

 

·

A distinctive drive-in concept focusing on a unique menu of quality, made-to-order food products including several signature items;

·

A commitment to customer service featuring the quick delivery of food by skating carhops; and

·

A commitment to strong franchisee relationships.

 

Sonic’s growth strategies include the following:

 

·

Same-store sales growth fueled by Sonic’s core brand strengths, including consistent drive-in execution, improved high-quality products, new product news and service differentiation with skating carhops.  These strengths are complemented by increased media effectiveness, the use of innovative technology to enhance the customer experience and improved drive-in and operating margins with the use of the Sonic system’s new point-of-sale technology;

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·

Improved performance of Company Drive-Ins, including consistent and improved operations execution, improved speed of service, cleanliness of drive-ins and focus on the customer experience; and

·

Expansion of Sonic Drive-Ins.

 

Restaurant Locations

 

As of August 31, 2013, 3,522 Sonic Drive-Ins were in operation from coast to coast in 44 states, consisting of 396 Company Drive-Ins and 3,126 Franchise Drive-Ins.  

 

Expansion

 

During fiscal year 2013, we opened 27 Sonic Drive-Ins, which consisted of two Company Drive-Ins and 25 Franchise Drive-Ins.  Expansion plans for fiscal year 2014 involve the opening of multiple Sonic Drive-Ins under development agreements, as well as single-store development by new and long-standing franchisees.  We believe that our existing, as well as newly opened markets, offer significant growth opportunities for both Company Drive-In and Franchise Drive-In expansion over the long term.

   

Marketing

 

We have a fully integrated marketing strategy that includes a national advertising campaign.  We have designed this marketing program to differentiate Sonic Drive-Ins from our competitors by emphasizing high quality distinctive made-to-order menu items and personalized service featuring skating carhops.  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 highlight limited time products and signature menu items.

 

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 4 under Franchise Program -Franchise Advisory Council.)  Funding for our marketing plan is provided by the System Marketing Fund, the Sonic Brand Fund and local advertising expenditures.  The System Marketing Fund primarily focuses on purchasing advertising on national cable and broadcast networks and other national media, sponsorship and brand enhancement opportunities.  The Sonic Brand Fund supports national media production as well as other programs designed to promote or enhance the Sonic brand.   Franchisees are also required to spend additional amounts on local advertising, typically through participation in the local advertising cooperative.  Our franchise agreements require advertising contributions by franchisees of up to 5.9% of gross sales to these marketing funds and local advertising cooperatives. 

 

Purchasing

 

We negotiate with suppliers for the Sonic Drive-Ins’ primary food products 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 and packaging items.  We approve suppliers of those products and require them to adhere to our established product and food safety specifications.  Suppliers manufacture several key products for Sonic under private label and sell them to authorized distributors for resale to Sonic Drive-Ins.  We require all Sonic Drive-Ins to purchase from approved distributors.

 

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 program includes components to monitor and ensure the safety and quality of Sonic’s products and procedures at every stage of the food preparation and production cycle including, but not limited to, employee training, supplier product inspections and testing and unannounced drive-in food safety

2

 


 

auditing by independent third parties.  All Sonic Drive-In employees are required to be trained in food safety in their first stage of training, utilizing an internal training program, referred to as the STAR Training Program.  This program includes specific training on food safety information and requirements for every station in the drive-in.  We also require our drive-in managers and assistant managers to pass and maintain the ServSafe® certification.  ServSafe® is the most recognized food safety training certification in the restaurant industry.

 

Information Systems 

 

Sonic Drive-Ins are equipped with information technology systems that are designed to provide operational tools for sales and inventory.  This technology includes industry-specific, off-the-shelf systems as well as proprietary software that assist in managing food and beverage costs.  These solutions are integrated with our point-of-sale systems to provide daily, weekly and period-to-date information that is important for managers to run efficient and effective operations.  We have centralized financial and accounting systems for Company Drive-Ins.  We also have systems that receive transaction-level data from Franchise Drive-Ins.  We believe these systems are important in analyzing and improving profit margins and accumulating marketing information.  In addition, we use a Pay-at-Your-Stall (PAYS) payment system, a network-based credit-card terminal at each stall of the drive-in to facilitate credit and debit card transactions by the customer.  We are also making strategic investments in technology tools such as mobile payment and gift card capabilities, digital technology point-of-purchase menu boards, and social media to enhance the customers’ experience and drive sales.  We are further investing in new point-of-sale systems to improve drive-in level operations and profits.

 

Company Operations

 

Management Structure.  A typical Company 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 Company Drive-In.  Supervisors oversee several Company Drive-Ins and supervise the managers of those drive-ins.  The employee compensation program at Company Drive-Ins for managers and supervisors is comprised of a guaranteed base compensation with additional significant incentive compensation based on drive-in level performance.    

 

Company Drive-In Data.  The following table provides certain financial information relating to Company Drive-Ins and the number of Company Drive-Ins opened, purchased from or sold to franchisees, and closed during the past five fiscal years and should be read in conjunction with the information in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

Average sales per Company Drive-In

 

$

990 

 

$

958 

 

$

920 

 

$

893 

 

$

954 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Company Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total open at beginning of year

 

 

409 

 

 

446 

 

 

455 

 

 

475 

 

 

684 

New Company Drive-Ins

 

 

 

 

 

 

 

 

 

 

11 

Purchased from franchisees

 

 

 

 

 -

 

 

 

 

 -

 

 

 -

Sold to franchisees(1) 

 

 

 -

 

 

(35)

 

 

(6)

 

 

(16)

 

 

(205)

Closed (net of re-openings)

 

 

(16)

 

 

(3)

 

 

(7)

 

 

(9)

 

 

(15)

Total open at end of year

 

 

396 

 

 

409 

 

 

446 

 

 

455 

 

 

475 

—————————

 

 

 

 

 

 

 

 

 

(1) The large number of drive-ins sold by Sonic in fiscal 2009 reflects the refranchising initiative which Sonic implemented in fiscal 2009 and includes 88 drive-ins in which Sonic retained a noncontrolling interest.

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Franchise Program

 

General.  As of August 31, 2013, we had 3,126 Franchise Drive-Ins in operation.  A large number of successful multi-unit franchisee groups have developed during the Sonic system’s 60 years of operation.  Those franchisees continue to develop new Franchise Drive-Ins in their franchise territories either through development agreements or single-site development.  Our franchisees opened 25 drive-ins during fiscal year 2013.  We consider our franchisees a vital part of our continued growth and believe our relationship with our franchisees is good.

 

Franchise Agreements.  For traditional drive-ins, the current franchise agreement provides for a franchise fee of $45,000 per drive-in, a royalty fee of up to 5% of gross sales on a graduated percentage basis, and a 20-year term.  For fiscal year 2013, Sonic’s average royalty rate was 3.74%.  The franchisee also pays advertising fees of up to 5.9% of gross sales.   

 

From time to time, at our discretion, the Company offers incentives to franchisees to increase the development of Sonic Drive-Ins in certain markets.  These incentives typically offer reduced or waived franchise fees and/or royalty fees upon certain conditions.

 

Development Agreements.  We use development agreements to facilitate the planned expansion of the Sonic Drive-In restaurant chain through single and multiple unit development.  While many existing franchisees continue to expand on a single drive-in basis, more than half of the new Franchise Drive-Ins opened during fiscal year 2013 occurred as a result of then-existing development agreements.  Each 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. 

 

We offer development agreements for construction of one or more new Sonic Drive-Ins over a defined period of time and in a defined geographic area.  Franchisees who enter into development agreements are required to pay a fee, a portion of which is credited against franchise fees due when Sonic Drive-Ins are opened in the future.  Franchisees may forfeit such fees and lose their rights to future development if they do not maintain the required schedule of openings. 

 

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.  As described above, we may offer incentives to franchisees from time to time, at our discretion, to increase the development of Sonic Drive-Ins. 

 

Franchise Advisory Council.  Our Franchise Advisory Council 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 23 members selected by Sonic.  We have seven executive committee members who are selected at large and 16 regional members representing all regions of the country.  We also have four Franchise Advisory Council task groups comprised of 52 members who generally serve three-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.  The table should be read in conjunction with the information in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.

 

 

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2013

 

2012

 

2011

 

2010

 

2009

Average sales per Franchise Drive-In

 

$

1,125 

 

$

1,081 

 

$

1,054 

 

$

1,043 

 

$

1,122 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total open at beginning of year

 

 

3,147 

 

 

3,115 

 

 

3,117 

 

 

3,069 

 

 

2,791 

New Franchise Drive-Ins

 

 

25 

 

 

36 

 

 

40 

 

 

80 

 

 

130 

Sold to the Company

 

 

(1)

 

 

 -

 

 

(1)

 

 

 -

 

 

 -

Purchased from the Company(1) 

 

 

 -

 

 

35 

 

 

 

 

16 

 

 

205 

Closed (net of re-openings)

 

 

(45)

 

 

(39)

 

 

(47)

 

 

(48)

 

 

(57)

Total open at end of year

 

 

3,126 

 

 

3,147 

 

 

3,115 

 

 

3,117 

 

 

3,069 

—————————

 

 

 

 

 

 

 

 

 

(1) The large number of drive-ins sold by Sonic in fiscal 2009 reflects the refranchising initiative which Sonic implemented in fiscal 2009 and includes 88 drive-ins in which Sonic retained a noncontrolling interest.

 

Competition

 

We compete in the restaurant industry, specifically in the segment known as the quick-service restaurant (“QSR”) segment, a highly competitive industry in terms of price, service, 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 distinctive food and service with signature food items and skating carhops and the method of food preparation (made-to-order).  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 service establishments, including QSRs, casual-dining restaurants and convenience storesA significant change in market conditions or in pricing or other marketing strategies by one or more of Sonic’s competitors could have an adverse impact on Sonic’s sales, earnings and growth.  Furthermore, the restaurant industry has few barriers to entry, and new competitors may emerge at any time.  In selling franchises, we also compete with many franchisors of QSR and other restaurants, in addition to franchisors of 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 Sonic Drive-Ins, which tends to reduce customer visits to our drive-ins. 

 

Employees

 

As of August 31, 2013, we had 333 full-time corporate employees and approximately 10,900 full-time and part-time restaurant employees.    None of our employees are subject to a collective bargaining agreement.  We believe that we have good labor relations with our employees. 

 

Intellectual Property

 

Sonic owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information, including the “Sonic” logo and trademark, which are of material importance to our business.  Depending on the jurisdiction, trademarks and service marks generally are valid as long as they are used and/or registered.  Patents, copyrights and licenses are of varying durations.

 

Customers

 

Our business is not dependent upon either a single customer or a small group of customers.

 

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Government Contracts

 

No portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.

 

Government Regulation

 

Our restaurants are subject to licensing and regulation by state and local health, safety, fire and other authorities, including licensing requirements and regulations for the sale of food.  The development and construction of new restaurants is subject also to compliance with applicable zoning, land use and environmental regulations.  We are also subject to federal regulation and state laws that regulate the offer and sale of franchises and substantive aspects of the franchisor-franchisee relationship.  Various federal and state labor laws govern our relationship with our employees and affect operating costs.  These laws govern minimum wage requirements, overtime pay, meal and rest breaks, unemployment tax rates, health care and benefits, workers' compensation rates, citizenship or residency requirements, child labor regulations and discriminatory conduct.  Federal, state and local government agencies have established or are in the process of establishing regulations requiring that we disclose to our customers nutritional information regarding our menu items.  We have processes in place to monitor compliance with applicable laws and regulations governing our operations.

 

Environmental Matters

 

We are not aware of any federal, state or local environmental laws or regulations that will materially affect our earnings or competitive position or result in material capital expenditures.  However, we cannot predict the effect on operations of possible future environmental legislation or regulations.  During fiscal year 2013, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.

 

Available Information

 

We maintain a website with the address of 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 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.

 

Forward-Looking Information

 

This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, principally in the sections captioned “Business,” “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur.  In some cases, forward-looking statements can be identified by words such as “anticipate,” “estimate,” “expect,”  “goals,” “guidance,”  “plan,”  “may,” “will,”  “would” and similar expressions.  Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this report.  These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties.  Our actual future results and trends may differ materially depending on a variety of factors including, but not limited to, the risks and uncertainties discussed below.  We undertake no obligation to publicly update or revise them, except as may be required by law.

 

Item 1A.  Risk Factors

 

We caution you that our business and operations are subject to a number of risks and uncertainties.  The factors listed below are important factors that could cause our actual results to differ materially from our historical

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results and from projections in forward-looking statements contained in this report, in our other filings with the Securities and Exchange Commission, in our news releases and in oral statements by our representatives.  However, other factors that we do not anticipate or that we do not consider significant based on currently available information may also have an adverse effect on our results.

 

Events reported in the media, including social 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 or food tampering have in the past severely injured the reputations of participants in the restaurant industry and could affect us in the future.  The potential for terrorism affecting our nation’s food supply also exists and, if such an event occurs, it could have a negative impact on our brand’s reputation and could severely hurt sales, revenues, and profits.  Our ability to remain a trusted brand and increase sales and profits depends on our ability to manage the potential impact on Sonic of food-borne illnesses or reports of food-borne illnesses.  We have implemented a food safety and quality assurance program to minimize the risk of food-borne illness.  Nevertheless, these risks cannot be completely eliminated.  Any outbreak of such illness attributed to our restaurants or within the food service industry, or any widespread negative publicity regarding our brand or the restaurant industry in general, could materially harm our brand, 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 with respect to price, service, location, personnel, dietary trends, including nutritional content of quick-service foods, and quality of food and is often affected by changes in consumer tastes and preferences, 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 and our distinctive service experience.  Other key competitive factors include the number and location of restaurants, speed of service, attractiveness of facilities, effectiveness of advertising and marketing programs and new product development by us and our competitors.  We cannot ensure that we will compete successfully in the restaurant industry on these factors.  In addition, some of our competitors have substantially larger marketing budgets, which may provide them with a competitive advantage.  Our system also competes within the QSR industry not only for customers but also for management and hourly employees, suitable real estate sites, and qualified franchisees.

Changing dietary preferences may cause consumers to avoid our products in favor of alternative foods.

 

The restaurant industry is affected by consumer preferences and perceptions.  Although we monitor these changing preferences and strive to adapt to meet changing consumer needs, growth of our brand and, ultimately, system-wide sales depend on the sustained demand for our products.  If dietary preferences and perceptions cause consumers to avoid certain products offered by Sonic Drive-Ins in favor of different 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, who exercise independent control of their businesses.

 

We have significantly increased the percentage of restaurants owned and operated by our franchisees.  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 they may not invest in facilities and initiatives as necessary to compete successfully in the restaurant industry.  Franchisees also may fail to properly implement the requirements of the Patient Protection and Affordable Care Act (the “ACA”) enacted in 2010 or may respond to the ACA in a manner that is viewed negatively by employees or consumers.  In addition, franchisees may not hire and train qualified managers and other restaurant personnel and may not adequately plan for and train their own successors. 

7

 


 

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 QSR industry is affected by changes in economic conditions, consumer tastes and 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.  We are also affected by these factors, and the concentration of 35% of our Drive-Ins in Texas and Oklahoma further subject us to risk particularly if these factors impact those states.  Factors such as interest rates, inflation, gasoline prices, energy costs, food and packaging costs, labor and benefit costs, legal claims and the availability of management and hourly employees also affect restaurant operations and administrative expenses for all Drive-Ins.  Economic conditions, including disruptions in the financial markets, 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 and the consumer environment, or by implementing alternative products or processes, or by implementing other cost reduction procedures.  We cannot ensure, however, that we will be able to recover increases in operating expenses 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, and we cannot ensure that we will be able to respond to or address the events and factors sufficiently.  If customer demand decreases rapidly, our results of operations, including store-level sales and profits, would also decline precipitously.  These events and factors include:

 

·

sales promotions and product offerings by Sonic and its competitors;

·

changes in average same-store sales and customer visits;

·

the inability to purchase sufficient levels of media;

·

variations in the price, availability and shipping costs of supplies such as food products;

·

seasonal effects on demand for Sonic’s products;

·

unexpected slowdowns in new drive-in development or franchise agreement renewals;

·

changes in competitive conditions;

·

changes in economic conditions generally, including consumer spending;

·

consumer sensitivity to price and value;

·

changes in consumer tastes and preferences;

·

changes in the cost of labor; and

·

weather and other acts of God.

 

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, acts of terrorism, financial or other difficulties of suppliers, disease or food-borne illnesses, droughts, inclement weather or other conditions.  We source 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.

 

8

 


 

Failure to successfully implement our growth strategy could reduce, or reduce the growth of, our revenue and net income.

 

We plan to continue to increase the number of Sonic Drive-Ins, but may not be able to achieve our growth objectives, and new drive-ins may not be profitable.  The opening and success of drive-ins depend on various factors, including:

 

·

competition from other restaurants in current and future markets;

·

the degree of saturation in existing markets;

·

consumer interest in and acceptance of the Sonic brand in existing and new markets;

·

the identification and availability of suitable and economically viable locations;

·

sales and profit levels at existing drive-ins;

·

the negotiation of acceptable lease or purchase terms for new locations;

·

permitting and regulatory requirements;

·

the cost and availability of construction resources and financing;

·

the ability to meet construction schedules;

·

the availability of qualified franchisees and their financial and other development capabilities, including their desire and ability to access and commit capital;

·

the ability to hire and train qualified management personnel; 

·

sufficient marketing efforts;

·

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 May 20, 2011, the Company closed on a securitized financing facility comprised of a $500 million fixed rate term loan and a $100 million variable rate revolving credit facility.  Effective July 22, 2013, we refinanced $155 million of the fixed rate term loan.  As of August 31, 2013, we had $292.4 million in outstanding debt including accrued interest under the fixed rate notes at an interest rate of 5.4%, with an anticipated repayment date of May 2018, and $155.2 million in outstanding debt including accrued interest under the fixed rate notes at an interest rate of 3.75%, with an anticipated repayment date of July 2020.  We believe our current leverage ratio is moderate.  We have historically generated net operating cash flows significantly in excess of our debt service requirements.  In the event that we default on our debt obligations, the following consequences could apply:

 

·

Our flexibility may be reduced in responding to changes in business, industry, regulatory or economic conditions.

·

Our ability to obtain additional financing in the future for acquisitions, working capital, capital expenditures and general corporate or other purposes could be impaired or any such financing may not be available on terms favorable to us.

·

Any substantial decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt service requirements or force us to modify our operations or sell assets; as a result a substantial portion of our cash flows could be required for debt service and might not be available for our operations or other purposes.

·

Unpaid amounts outstanding could become immediately due and payable. 

 

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 to 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 depends 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),

9

 


 

environmental (including litter), traffic and other regulations.  More stringent requirements of local and state governmental bodies with respect to zoning, land use and environmental factors could delay, prevent or make cost prohibitive to the continuing operations of an existing restaurant or the development of new restaurants in particular locations.  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 and immigration laws (including applicable minimum wage requirements, overtime, working and safety conditions and work authorization requirements), federal and state laws prohibiting discrimination and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act.  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 have and will become subject to regulatory initiatives in the area of nutritional content, disclosure and 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 wage, 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 have experienced and expect further increases in payroll expenses as a result of government-mandated increases in the minimum wage, and although such increases are not expected to be material, there may be material increases in the future.  Enactment and enforcement of various federal, state and local laws, rules and regulations on immigration and labor organizations may adversely impact the availability and costs of labor for our restaurants in a particular area or across the United States.  In addition, our vendors may be affected by higher minimum wage standards or availability of labor, which may increase the price of goods and services they supply to us. 

 

We are implementing various aspects of the ACA in our business as they take effect.  There are no assurances that a combination of cost management and price increases can accommodate all of the costs associated with compliance.  

 

Litigation from customers, franchisees, employees and others could harm our reputation and impact operating results.

 

Our legal and regulatory environment exposes us to complex compliance and litigation risk.  Claims of illness or injury relating to food content, food quality or food handling are common in the QSR industry, as are intellectual property claims (including often aggressive or opportunistic attempts to enforce patents used in information technology systems).  In addition, class action lawsuits have been filed, and may continue to be filed, against various QSRs alleging, among other things, that QSRs have failed to disclose the health risks associated with foods we serve and that QSR marketing practices have encouraged obesity and other health issues.  There are also litigation and compliance risks and costs associated with privacy, consumer data protection and similar laws, particularly as they apply to children, as well as laws related to the collection or use of consumer, employee or franchisee data.  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.

10

 


 

 

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. 

 

Our reputation and business could be materially harmed as a result of data breaches.

 

Unauthorized intrusion into portions of our computer systems or those of our franchisees that process and store information related to our customers and their transactions may result in the theft of customer data.  We rely on proprietary and commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as payment card and personal information.  Further, the systems currently used for transmission and approval of payment card transactions, and the technology utilized in payment cards themselves, all of which can put payment card data at risk, are determined and legally mandated by payment card industry standards, not by us.  Improper activities by third parties, advances in computer and software capabilities and encryption technology, new tools and discoveries and other events or developments may facilitate or result in a compromise or breach of our or our franchisees’ computer systems.  Any such compromises or breaches could cause interruptions in our operations and damage to our reputation, subject us to costs and liabilities and hurt sales, revenues and profits. 

 

Unreliable or inefficient drive-in technology and lack of support for drive-in technology could adversely impact operating results.

 

We rely on proprietary and commercially available technologies at our drive-ins, including point-of-sale and payment card systems.  These systems may be unreliable or inefficient, and the technology vendors may limit or terminate product support and maintenance, which could impact the reliability of critical systems supporting drive-in operations.  Additionally, replacement parts and support and maintenance skills may become scarce, cost prohibitive or non-existent.  Any such deficiencies could impact sales and profitability by disrupting our operations, damaging our reputation or subjecting us to excessive costs and liabilities.

 

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 Company 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 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, or the prospect of such events, including war, terrorism and other international conflicts, public health issues, including health epidemics or pandemics, 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. 

 

11

 


 

 

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 2.  Properties

 

Of the 396 Company Drive-Ins operating as of August 31, 2013, we operated 177 of them on property leased from third parties and 219 of them on property we own.  The leases expire on dates ranging from 2014 to 2030, with the majority of the leases providing for renewal options.  All leases provide for specified monthly rental payments and/or additional rentals based on sales volume.  Most leases require Sonic to maintain the property and pay the cost of insurance and taxes.  We also own and lease 142 properties and sublease 44 properties to franchisees and other parties.  These leases with franchisees expire on dates ranging from 2013 to 2030, with the majority of the leases providing for renewal options.  The majority of the leases for Franchise Drive-Ins provide for percentage rent based on sales volume, with a minimum base rent.  These leases generally require the franchisee to maintain the property and pay the costs of insurance and taxes.  Virtually all of our owned properties are pledged as collateral under the terms of our securitized financing facility, as described under “Liquidity and Sources of Capital” in Part II, Item 7.

 

Our corporate headquarters is located in Oklahoma City.  We have an existing lease to occupy approximately 83,000 square feet.  This 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.

 

Item 3.  Legal Proceedings

 

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.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

12

 


 

Item 4A.  Executive Officers of the Company

 

Identification of Executive Officers

 

The following table identifies the executive officers of the Company:

 

 

 

 

 

Name

Age

Position

Executive

Officer Since

 

 

 

 

J. Clifford Hudson

58

Chairman of the Board of Directors, Chief Executive Officer and President

1985

 

 

 

 

Stephen C. Vaughan

47

Executive Vice President and Chief Financial Officer

1996

 

 

 

 

Omar R. Janjua

55

President of Sonic Restaurants, Inc. and Chief Restaurant Operations Officer of Sonic Industries Services Inc.

2009

 

 

 

 

John H. Budd III

46

Senior Vice President and Chief Development and Strategy Officer

2013

 

 

 

 

Craig J. Miller

52

Senior Vice President and Chief Information Officer of Sonic Industries Services Inc.

2011

 

 

 

 

James P. O’Reilly

47

Senior Vice President and Chief Marketing Officer

2012

 

 

 

 

Paige S. Bass

44

Vice President, General Counsel and Assistant Corporate Secretary

2007

 

 

 

 

Michelle E. Britten

46

Vice President and Controller

2012

 

 

 

 

Carolyn C. Cummins

55

Vice President of Compliance and Corporate Secretary

2004

 

 

 

 

Claudia San Pedro

44

Vice President of Investor Relations and Communications and Treasurer

2007

 

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 since January 2000 and Chief Executive Officer since April 1995.  Mr. Hudson served as President of the Company from April 1995 to January 2000 and reassumed that position from November 2004 until May 2008 and again in April 2013 to the present.  He has served in various other offices with the Company since 1984.  Mr. Hudson has served as a Director of the Company since 1993.  Mr. Hudson has served on the Board of Trustees of the Ford Foundation since January 2006.  

 

Stephen C. Vaughan has served as Executive Vice President of the Company and Chief Financial Officer since August 2008 and was the Company’s Vice President and Chief Financial Officer from November 2004 until August 2008.  Mr. Vaughan also served as Treasurer of the Company from November 2001 until April 2005.  He joined the Company in 1992.

 

Omar R. Janjua has served as President of Sonic Restaurants, Inc. since September 2009 and Chief Restaurant Operations Officer on Sonic Industries Services Inc. since March 2013.  He also served as Executive Vice President of Operations of Sonic Industries Services Inc. from September 2010 until March 2013.  He served as Executive Vice President and Chief Operating Officer for The Steak n Shake Company from June 2007 to September 2009.  Prior to joining Steak n Shake, Mr. Janjua worked for 18 years with YUM! Brands, Inc. in its Pizza Hut operations in various positions of increasing responsibility, the most recent of which was Vice President of Company Operations.

13

 


 

John H. Budd III has served as Senior Vice President and Chief Development and Strategy Officer since joining the Company in August 2013.  Mr. Budd served in several progressive positions for Boston Consulting Group from 1997 until joining Sonic.  His most recent position with Boston Consulting Group was Partner and Managing Director.  

 

Craig J. Miller has served as Senior Vice President and Chief Information Officer of Sonic Industries Services Inc. since January 2010.  He served as the Executive Vice President and Chief Information Officer for Movie GalleryInc., also known as Hollywood Video, from September 2008 until September 2009In February 2010, Movie GalleryInc. filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.  Mr. Miller was Senior Vice President of Shared Information Services for Bank of America from February 2005 until July 2008.

 

James P. O’Reilly has served as Senior Vice President and Chief Marketing Officer of Sonic Corp. since April 2012.  He served as the Chief Concept Officer of Einstein Noah Restaurant Group, Inc. from April 2009 until joining Sonic.  Prior to April 2009, Mr. O'Reilly served for 13 years in progressive roles throughout the YUM! system including Senior Vice President of US Marketing, Chief Marketing Officer of KFC – US and international roles with KFC, Taco Bell, Pizza Hut and Yum! Restaurants International.

 

Paige S. Bass has served as Vice President and General Counsel of the Company since January 2007 and has also served as Assistant Corporate Secretary since October 2008.  Ms. Bass joined the Company as Associate General Counsel in 2004.  Prior to joining the Company, Ms. Bass was employed as an associate with the law firm of Crowe & Dunlevy in Oklahoma City, Oklahoma.

 

Michelle E. Britten has served as Vice President and Controller of the Company since November 2012.  She served as Senior Director of Corporate Accounting from April 2009 until November 2012 and as Senior Director of SEC Reporting from January 2007 until April 2009.  Ms. Britten joined the Company in 2005 as its Director of SEC Reporting.

 

Carolyn C. Cummins has served as the Company’s Corporate Secretary since January 2007 and as the Company’s Vice President of Compliance since April 2004.  Ms. Cummins joined the Company as Assistant General Counsel in 1999. 

 

Claudia San Pedro has served as Vice President of Investor Relations and Communications of the Company since January 2013 and was its Vice President of Investor Relations from July 2010 until January 2013.  She served as Vice President of Investor Relations and Brand Strategies from October 2009 until July 2010.  Ms. San Pedro has also served as Treasurer of the Company since January 2007 and as Treasurer of Sonic Industries Services Inc. and Sonic Restaurants, Inc. since November 2006.  She served as the Director of the Oklahoma Office of State Finance from June 2005 through November 2006.  From July 2003 to May 2005, Ms. San Pedro served as the Budget Division Director for the Oklahoma Office of State Finance.

 

14

 


 

PART II

 

Item 5.  Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

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 sales price for the Company’s common stock during each fiscal quarter within the two most recent fiscal years as reported on NASDAQ. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended

 

 

 

 

 

 

 

Fiscal Year Ended

 

 

 

 

 

 

August 31, 2013

 

High

 

Low

 

August 31, 2012

 

High

 

Low

First Quarter

 

$

10.83 

 

$

9.06 

 

First Quarter

 

$

9.31 

 

$

6.35 

Second Quarter

 

$

11.60 

 

$

9.62 

 

Second Quarter

 

$

8.45 

 

$

6.49 

Third Quarter

 

$

13.59 

 

$

11.08 

 

Third Quarter

 

$

8.57 

 

$

6.84 

Fourth Quarter

 

$

16.99 

 

$

13.16 

 

Fourth Quarter

 

$

10.94 

 

$

7.92 

 

Stockholders

 

As of October 15, 2013, the Company had 707 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, payments under the Company’s financing arrangements and other stockholder value-enhancing initiatives.  As in the past, future payment of dividends will be considered after reviewing, among other factors, returns to stockholders, profitability expectations and financing needs.

 

Issuer Purchases of Equity Securities

 

While we did not repurchase any shares during the fourth quarter of fiscal 2013, we continue to maintain our share repurchase program.  In August 2013, the Board of Directors extended the share repurchase program through August 31, 2014, with a total authorization of up to $40 million.  Share repurchases may be made from time to time in the open market or in negotiated transactions, depending on share price, market conditions and other factors.  The share repurchase program may be extended, modified, suspended or discontinued at any time.

 

 

Item 6.  Selected Financial Data

 

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 in Part II, Item 7, and the Company’s Consolidated Financial Statements included elsewhere in this report.

15

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Financial Data

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended August 31,

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

402,296 

 

$

404,443 

 

$

410,820 

 

$

414,369 

 

$

567,436 

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties and fees

 

 

130,737 

 

 

128,013 

 

 

125,871 

 

 

125,137 

 

 

131,712 

Lease revenue

 

 

4,785 

 

 

6,575 

 

 

6,023 

 

 

6,879 

 

 

3,985 

Other

 

 

4,767 

 

 

4,699 

 

 

3,237 

 

 

4,541 

 

 

3,148 

Total revenues

 

 

542,585 

 

 

543,730 

 

 

545,951 

 

 

550,926 

 

 

706,281 

Cost of Company Drive-In sales

 

 

343,209 

 

 

347,470 

 

 

356,236 

 

 

354,659 

 

 

464,876 

Selling, general and administrative

 

 

66,022 

 

 

65,173 

 

 

64,943 

 

 

66,847 

 

 

63,358 

Depreciation and amortization

 

 

40,387 

 

 

41,914 

 

 

41,225 

 

 

42,615 

 

 

48,064 

Provision for impairment of long-lived assets

 

 

1,776 

 

 

764 

 

 

824 

 

 

15,161 

 

 

11,163 

Other operating (income) expense, net

 

 

1,943 

 

 

(531)

 

 

(585)

 

 

763 

 

 

(12,508)

Total expenses

 

 

453,337 

 

 

454,790 

 

 

462,643 

 

 

480,045 

 

 

574,953 

Income from operations

 

 

89,248 

 

 

88,940 

 

 

83,308 

 

 

70,881 

 

 

131,328 

Interest expense, net(1)

 

 

32,949 

 

 

30,978 

 

 

54,929 

 

 

36,073 

 

 

35,657 

Income before income taxes

 

$

56,299 

 

$

57,962 

 

$

28,379 

 

$

34,808 

 

$

95,671 

Net income-including noncontrolling interests

 

 

36,701 

 

 

36,085 

 

 

19,225 

 

 

25,839 

 

 

64,793 

Net income-noncontrolling interests(2)

 

 

 -

 

 

 -

 

 

 -

 

 

4,630 

 

 

15,351 

Net income-attributable to Sonic Corp.

 

$

36,701 

 

$

36,085 

 

$

19,225 

 

$

21,209 

 

$

49,442 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.65 

 

$

0.60 

 

$

0.31 

 

$

0.35 

 

$

0.81 

Diluted

 

$

0.64 

 

$

0.60 

 

$

0.31 

 

$

0.34 

 

$

0.81 

Weighted average shares used in calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

56,384 

 

 

60,078 

 

 

61,781 

 

 

61,319 

 

 

60,761 

Diluted

 

 

57,191 

 

 

60,172 

 

 

61,943 

 

 

61,576 

 

 

61,238 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

67,792 

 

$

26,635 

 

$

22,178 

 

$

15,320 

 

$

84,813 

Property, equipment and capital leases, net

 

 

399,661 

 

 

443,008 

 

 

464,875 

 

 

489,264 

 

 

523,938 

Total assets

 

 

660,794 

 

 

680,760 

 

 

679,742 

 

 

737,320 

 

 

849,041 

Obligations under capital leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(including current portion)

 

 

26,864 

 

 

31,676 

 

 

34,063 

 

 

36,256 

 

 

39,461 

Long-term debt (including current portion)

 

 

447,294 

 

 

481,793 

 

 

497,013 

 

 

591,621 

 

 

699,550 

Stockholders’ equity (deficit)

 

 

77,464 

 

 

59,247 

 

 

51,833 

 

 

22,566 

 

 

(2,352)

Cash dividends declared per common share

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

—————————

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Includes net (gain) loss from early extinguishment of debt of $4.4 million, $23.0 million, $0.3 million and $(6.4) million for fiscal years 2013,  2011, 2010 and 2009, respectively.

(2)  Effective April 1, 2010, we revised our compensation program at the Company Drive-In level.  As a result of these changes, noncontrolling interests are immaterial for fiscal years 2013, 2012 and 2011 and have been included in payroll and other employee benefits.

16

 


 

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Description of the BusinessSonic operates and franchises the largest chain of drive-in restaurants in the United States.  As of August 31, 2013, the Sonic system was comprised of 3,522 drive-ins, of which 11% were Company Drive-Ins and 89% were Franchise Drive-Ins.  Sonic’s signature food items include specialty drinks (such as cherry limeades and slushes), ice cream desserts, made-to-order sandwiches and hamburgers, a variety of hot dogs including six-inch premium beef hot dogs and footlong quarter pound coneys, hand-battered onion rings, tater tots and wrapsSonic Drive-Ins also offer breakfast items that include a variety of breakfast burritos and serve the full menu all day.  We derive our revenues primarily from Company Drive-In sales and royalties from franchisees.  We also receive revenues from leasing real estate to franchisees, franchise fees, earnings from minority investments in franchise operations and other miscellaneous revenues. 

 

Costs of Company Drive-In sales relate directly to Company Drive-In sales.  Other expenses, such as depreciation, amortization and general and administrative expenses, relate to our franchising operations, as well as Company Drive-In operations.  Our revenues and Company Drive-In expenses are directly affected by the number and sales volumes of Company Drive-Ins.  Our revenues and, to a lesser extent, selling, general and administrative expenses also are affected by the number and sales volumes of Franchise Drive-Ins.  Franchise royalties and franchise fees are directly affected by the number of operating Franchise Drive-Ins and new drive-in openings.  Lease revenues are generated by the leasing of land and buildings for Company Drive-Ins that have been sold to franchisees.

 

Overview of Business Performance.    System-wide same-store sales increased 2.3% during fiscal year 2013 as compared to an increase of 2.2% for fiscal year 2012.  Same-store sales at Company Drive-Ins increased by 2.5% during fiscal year 2013 as compared to an increase of 2.8% for 2012.  We believe the successful implementation of initiatives, including product quality improvements, a greater emphasis on personalized service and a tiered pricing strategy, have set a solid foundation for growth which is reflected in our operating resultsWe continue to focus on our innovative product pipeline, and our recent shift to a higher proportion of national media expenditures is supporting our day-part promotional strategy to drive same-store sales.  To achieve earnings per share growth, we utilize a multi-layered growth strategy which incorporates same-store sales growth, operating leverage, new drive-in development, an ascending royalty rate and deployment of cashPositive same-store sales is the most important layer and drives operating leverage and increased operating cash flows.

 

Revenues decreased slightly to $542.6 million for fiscal year 2013 from $543.7 million for the same period last year, which was primarily related to a $2.1 million decline in Company Drive-Ins sales resulting from the refranchising of 34 lower-performing Company Drive-Ins during the second fiscal quarter of 2012, offset by an increase in same-store sales.  Franchising revenues increased $0.9 million during fiscal year 2013 reflecting an increase in royalties primarily related to positive same-store sales of 2.3% at Franchise Drive-Ins, the refranchising of the 34 drive-ins mentioned above, partially offset by the decline in lease revenues resulting from the transaction during the second quarter of fiscal year 2013, in which a franchisee purchased land and buildings leased or subleased from us relating to previously refranchised drive-ins.  Restaurant margins at Company Drive-Ins improved by 60 basis points during fiscal year 2013, reflecting the leverage of positive same-store sales and, to a lesser extent, the refranchising of the 34 Company Drive-Ins mentioned above. 

 

Net income and diluted earnings per share for fiscal year 2013 were $36.7 million and $0.64, respectively, as compared to net income of $36.1 million or $0.60 per diluted share for fiscal year 2012.  Excluding various non‑GAAP adjustments further described below, net income per diluted share was $0.72 for fiscal year 2013.

 

The following non-GAAP adjustments are intended to supplement the presentation of the Company’s financial results in accordance with GAAP.  We believe the exclusion of these items in evaluating the change in net income and diluted earnings per share for the periods below provides useful information to investors and management regarding the underlying business trends and the performance of our ongoing operations and is helpful for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the financial results for the Company and predicting future performance.

 

 

 

17

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended

 

Fiscal Year Ended

 

 

August 31, 2013

 

August 31, 2012

 

 

Net

 

Diluted

 

Net

 

Diluted

 

 

Income

 

EPS

 

Income

 

EPS

Reported – GAAP

 

$

36,701 

 

$

0.64 

 

$

36,085 

 

$

0.60 

After-tax loss from early extinguishment of debt(1)

 

 

2,798 

 

 

0.05 

 

 

 -

 

 

 -

Retroactive tax benefit of WOTC and resolution of tax matters(2)

 

 

(743)

 

 

(0.02)

 

 

 -

 

 

 -

After-tax loss on closure of Company Drive-Ins(3)

 

 

1,510 

 

 

0.03 

 

 

 -

 

 

 -

After-tax impairment charge for point-of-sale assets(4)

 

 

1,013 

 

 

0.02 

 

 

 -

 

 

 -

Adjusted - Non-GAAP

 

$

41,279 

 

$

0.72 

 

$

36,085 

 

$

0.60 

—————————

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Loss on early extinguishment of debt including $0.5 million and $3.9 million in the second and fourth quarters of fiscal year 2013, respectively.

(2)  Tax benefit which includes the retroactive reinstatement of the Work Opportunity Tax Credit (“WOTC”) and resolution of certain income tax matters during the second quarter of fiscal year 2013.

(3)  Loss of $2.4 million on the closure of 12 lower-performing Company Drive-Ins as a result of an assessment in advance of capital expenditures for pending technology initiatives.

(4)  Impairment charge of $1.6 million related to the write-off of assets associated with a change in the vendor for the Sonic system’s new point-of-sale technology.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended

 

Fiscal Year Ended

 

 

August 31, 2012

 

August 31, 2011

 

 

Net

 

Diluted

 

Net

 

Diluted

 

 

Income

 

EPS

 

Income

 

EPS

Reported – GAAP

 

$

36,085 

 

$

0.60 

 

$

19,225 

 

$

0.31 

After-tax net loss from early extinguishment of debt(1)

 

 

 -

 

 

 -

 

 

14,439 

 

 

0.24 

Tax benefit from favorable tax settlement(2)

 

 

 -

 

 

 -

 

 

(1,073)

 

 

(0.02)

Adjusted - Non-GAAP

 

$

36,085 

 

$

0.60 

 

$

32,591 

 

$

0.53 

—————————

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Net loss on early extinguishment of debt including a $5.2 million gain and a $28.2 million loss in the second and third quarters of fiscal year 2011, respectively.

(2)  Tax benefit recognized during the first quarter of fiscal year 2011 relating to the favorable settlement of state tax audits.

 

The following table provides information regarding the number of Company Drive-Ins and Franchise Drive-Ins operating as of the end of the years indicated as well as the system-wide change in sales and average unit volume.  System-wide information includes both Company 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.

 

18

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

System-wide Performance

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended August 31,

 

 

2013

 

2012

 

2011

Increase in total sales

 

 

2.4 

%

 

 

2.7 

%

 

 

1.9 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

System-wide drive-ins in operation(1):

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of year

 

 

3,556 

 

 

 

3,561 

 

 

 

3,572 

 

Opened

 

 

27 

 

 

 

37 

 

 

 

43 

 

Closed (net of re-openings)

 

 

(61)

 

 

 

(42)

 

 

 

(54)

 

Total at end of year

 

 

3,522 

 

 

 

3,556 

 

 

 

3,561 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average sales per drive-in

 

$

1,109 

 

 

$

1,066 

 

 

$

1,037 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in same-store sales(2)

 

 

2.3 

%

 

 

2.2 

%

 

 

0.5 

%

—————————

 

 

 

 

 

(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, 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.

 

 

Results of Operations

 

Revenues.  The following table sets forth the components of revenue for the reported periods and the relative change between the comparable periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

($ in thousands)

 

 

 

 

 

 

 

 

 

Percent

 

 

 

Year ended August 31,

 

Increase

 

Increase

 

 

 

2013

 

2012

 

(Decrease)

 

(Decrease)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

402,296 

 

$

404,443 

 

$

(2,147)

 

(0.5)

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

130,009 

 

 

125,989 

 

 

4,020 

 

3.2 

 

Franchise fees

 

 

728 

 

 

2,024 

 

 

(1,296)

 

(64.0)

 

Lease revenue

 

 

4,785 

 

 

6,575 

 

 

(1,790)

 

(27.2)

 

Other

 

 

4,767 

 

 

4,699 

 

 

68 

 

1.4 

 

Total revenues

 

$

542,585 

 

$

543,730 

 

$

(1,145)

 

(0.2)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

 

Year ended August 31,

 

Increase

 

Increase

 

 

 

 

2012

 

 

2011

 

(Decrease)

 

(Decrease)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

404,443 

 

$

410,820 

 

$

(6,377)

 

(1.6)

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

125,989 

 

 

124,127 

 

 

1,862 

 

1.5 

 

Franchise fees

 

 

2,024 

 

 

1,744 

 

 

280 

 

16.1 

 

Lease revenue

 

 

6,575 

 

 

6,023 

 

 

552 

 

9.2 

 

Other

 

 

4,699 

 

 

3,237 

 

 

1,462 

 

45.2 

 

Total revenues

 

$

543,730 

 

$

545,951 

 

$

(2,221)

 

(0.4)

%

19

 


 

 

The following table reflects the changes in sales and same-store sales at Company Drive-Ins.  It also presents information about average unit volumes and the number of Company Drive-Ins, which is useful in analyzing the growth of Company Drive-In sales.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In Sales

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended August 31,

 

 

2013

 

 

2012

 

2011

Company Drive-In sales

 

$

402,296 

 

 

$

404,443 

 

 

$

410,820 

 

Percentage decrease

 

 

(0.5)

%

 

 

(1.6)

%

 

 

(0.9)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins in operation(1):

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of year

 

 

409 

 

 

 

446 

 

 

 

455 

 

Opened

 

 

 

 

 

 

 

 

 

Acquired from (sold to) franchisees, net

 

 

 

 

 

(35)

 

 

 

(5)

 

Closed (net of re-openings)

 

 

(16)

 

 

 

(3)

 

 

 

(7)

 

Total at end of year

 

 

396 

 

 

 

409 

 

 

 

446 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average sales per Company Drive-In

 

$

990 

 

 

$

958 

 

 

$

920 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in same-store sales(2)

 

 

2.5 

%

 

 

2.8 

%

 

 

1.8 

%

—————————

 

 

 

 

 

(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, 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.

 

Same-store sales for Company Drive-Ins increased 2.5% for fiscal year 2013 and 2.8% for fiscal year 2012, showing continued momentum from the Company’s successful implementation of initiatives to improve product quality, service and value perception.  Furthermore, we continued to focus on our innovative product pipeline and increased media effectiveness.  Company Drive-In sales decreased $2.1 million, or 0.5%, during fiscal year 2013 as compared to 2012.  This decrease was primarily attributable to  an  $11.3 million reduction in sales from the refranchising of 34 lower-performing drive-ins during the second quarter of fiscal year 2012 and a $2.5 million decrease related to drive-ins that were closed during or subsequent to fiscal year 2012, partially offset by a $10.0 million improvement in same-store sales and  $1.7 million of incremental sales from new drive-in openings.

 

For fiscal year 2012, Company Drive-In sales decreased $6.4 million, or 1.6%, as compared to 2011.  This decrease was primarily attributable to an $18.6 million reduction in sales from the refranchised drive-ins discussed earlier and a $2.3 million decrease related to drive-ins that were closed during or subsequent to fiscal year 2011, partially offset by an $11.0 million improvement in same-store sales and $3.5 million of incremental sales from new drive-in openings. 

 

20

 


 

The following table reflects the change in franchise sales, the number of Franchise Drive-Ins, average unit volumes and franchising revenues.  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.