-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Av0KUTJ6tX/Jg9Oa4YL+w6YnvBs4ZS/ffMB5rFslnQsxVYd5m+4bGhG5lisKqfF8 HGkDlfcavHCfWL30clZH1g== 0000912057-96-027662.txt : 19961202 0000912057-96-027662.hdr.sgml : 19961202 ACCESSION NUMBER: 0000912057-96-027662 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961126 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONIC CORP CENTRAL INDEX KEY: 0000868611 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 731371046 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18859 FILM NUMBER: 96672634 BUSINESS ADDRESS: STREET 1: 101 PARK AVENUE STREET 2: STE 1400 CITY: OKLAHOMA CITY STATE: OK ZIP: 73102-7202 BUSINESS PHONE: 4052807654 MAIL ADDRESS: STREET 1: 101 PARK AVE STREET 2: 14TH FLOOR CITY: OKLAHOMA CITY STATE: OK ZIP: 73102 10-K405 1 FORM 10-K 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 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Commission File Number August 31, 1996 0-18859 - ------------------------- ---------------------- SONIC CORP. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 73-1371046 - ------------------------ ------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 101 Park Avenue Oklahoma City, Oklahoma 73102 ---------------------------------------- ------------ (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (405) 280-7654 Securities Registered Pursuant to Section 12(b) of the Exchange Act: None Securities Registered Pursuant to Section 12(g) of the Exchange Act: Common Stock, Par Value $.01 Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for the shorter period that the Registrant has had 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 this Form 10-K does not contain and, to the best of the Registrant's knowledge, the Registrant's definitive proxy statement or information statement incorporated by reference in Part III of this Form 10-K will not contain a disclosure of delinquent filers pursuant to Item 405 of Regulation S-K. YES X . No . ----- ---- As of November 22, 1996, the aggregate market value of the 12,529,424 shares of common stock of the Company held by non-affiliates of the Company equaled approximately $291 million, based on the closing sales price for the common stock as reported for that date. As of November 22, 1996, the Registrant had 13,569,454 shares of common stock issued and outstanding (excluding 7,580 shares of common stock held as treasury stock). (Facing Sheet Continued) 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 in connection with the Company's annual meeting of stockholders following the fiscal year ended August 31, 1996. FORM 10-K OF SONIC CORP. TABLE OF CONTENTS PART I Page ---- Item 1. Business 1 Item 2. Properties 9 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 4A. Executive Officers of the Company 10 PART II Item 5 Market for the Company's Common Stock and Related Stockholder Matters 13 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8. Financial Statements and Supplementary Data 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20 PART III (Incorporated by reference from the Company's definitive proxy statement for its annual meeting of stockholders following the fiscal year ended August 31, 1996) PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 21 FORM 10-K SONIC CORP. PART I ITEM 1. BUSINESS GENERAL Sonic Corp. (the "Company") operates and franchises the largest chain of drive-in restaurants in the United States. As of August 31, 1996, the Company had 1,567 restaurants in operation, consisting of 231 Company-owned restaurants and 1,336 franchised restaurants, principally in the south central and southeastern United States. Sonic restaurants offer made-to-order hamburgers and other sandwiches and feature Sonic signature items, such as footlong coney cheese dogs, hand-battered fried onion rings, tater tots, and specialty soft drinks, including cherry limeades and slushes. At a typical Sonic restaurant, a customer drives into one of 24 to 36 covered drive-in spaces, orders through an intercom, and has the food delivered by a carhop within an average of four minutes. In September of 1995, the Company reorganized its operating subsidiaries into two, directly-held subsidiaries consisting of Sonic Industries Inc. and Sonic Restaurants, Inc. Sonic Industries Inc. serves as the franchisor of the Sonic restaurant chain, as well as the insurance and administrative services center for the Company. Sonic Restaurants, Inc. develops and operates the Company's Company-owned restaurants. In February of 1996, the Company sold its equipment sales division to N. Wasserstrom & Sons, Inc. of Columbus, Ohio, and discontinued that line of business. The Company continues to rent the large Sonic pole signs to its franchisees. The Company's objective is to maintain its position as, or to become, a leading operator in terms of the number of quick-service hamburger restaurants within each of its core and developing markets. The Company has developed and is 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 menu of quality made-to-order and signature items; (2) a commitment to customer service featuring the quick delivery of food by carhops; (3) the expansion of Company-owned and franchised restaurants within the Company's core and developing markets; (4) an owner/operator philosophy, in which managers have an equity interest in their restaurant, thereby providing an incentive for managers to operate Company-owned restaurants profitably and efficiently; and (5) a commitment to support the Sonic system. The Company has its principal executive offices at 101 Park Avenue, Oklahoma City, Oklahoma 73102. Its telephone number is (405) 280-7654. As used in this report, the word "Company" means Sonic Corp. and each of its subsidiaries and predecessors, unless the context indicates otherwise. RESTAURANT LOCATIONS As of August 31, 1996, the Company operated or franchised 1,567 drive-in restaurants, principally in the south central and southeastern United States. The Company's core markets, consisting of the nine contiguous states of Texas, Oklahoma, Tennessee, Missouri, Arkansas, Kansas, Louisiana, Mississippi, and New Mexico, contained approximately 84% of all Sonic restaurants as of August 31, 1996. Developing markets primarily are located in Alabama, Arizona, Colorado, Florida, Georgia, Kentucky, North Carolina, and South Carolina. The following table sets forth the number of Company-owned and franchised restaurants by core and developing markets as of August 31, 1996: COMPANY-OWNED FRANCHISED CORE MARKET RESTAURANTS RESTAURANTS TOTAL ----------- ------------- ----------- ----- Texas 57 406 463 Oklahoma 22 162 184 Tennessee 22 104 126 Missouri 27 95 122 Arkansas 14 97 111 Kansas 6 85 91 Louisiana 15 74 89 Mississippi 4 78 82 New Mexico 0 56 56 --- ----- ----- Total 167 1,157 1,324 --- ----- ----- --- ----- ----- COMPANY-OWNED FRANCHISED DEVELOPING MARKETS RESTAURANTS RESTAURANTS TOTAL ------------------ ------------- ----------- ----- Alabama 33 20 53 Arizona 0 23 23 California 0 3 3 Colorado 0 19 19 Florida 10 1 11 Georgia 1 26 27 Illinois 0 4 4 Indiana 0 2 2 Iowa 0 1 1 Kentucky 4 25 29 Nebraska 0 2 2 Nevada 0 6 6 North Carolina 10 15 25 Ohio 0 3 3 South Carolina 0 25 25 Utah 0 1 1 Virginia 6 2 8 West Virginia 0 1 1 --- ----- ----- Total 64 179 243 --- ----- ----- --- ----- ----- Total System 231 1,336 1,567 --- ----- ----- --- ----- ----- 2 EXPANSION During fiscal 1996, the Company opened 30 Company-owned restaurants and its franchisees opened 81 restaurants. During fiscal 1997, the Company plans to open 45 Company-owned restaurants and anticipates that its franchisees will open 85 restaurants. That expansion plan involves the opening of new restaurants by franchisees under existing area development agreements, single-store development by existing franchisees, and development by new franchisees. The Company believes that its existing core and developing markets offer a significant growth opportunity for both Company-owned and franchised restaurant expansion. However, the ability of the Company and its franchisees to open the anticipated number of Sonic drive-in restaurants during fiscal 1997 necessarily will depend on various factors. Those factors include (without limitation) the availability of suitable sites, the negotiation of acceptable lease or purchase terms for new locations, local permitting and regulatory compliance, the financial resources of the Company's franchisees, and the general economic and business conditions to be faced in fiscal 1997. The Company's expansion strategy for Company-owned restaurants involves three principal components: (1) the building-out of existing core markets, (2) the further penetration of developing markets, and (3) the acquisition by the Company of existing Sonic franchised restaurants. In addition, the Company may consider the acquisition of other similar concepts for conversion to Sonic restaurants. RESTAURANT DESIGN AND CONSTRUCTION The typical Sonic drive-in restaurant consists of a kitchen housed in a one-story building flanked by two canopy-covered rows of 24 to 36 parking spaces, with each space having its own intercom and menu board. In addition, since the first half of fiscal 1995, the Company has incorporated a drive- through window and patio seating area in almost all new Company-owned restaurants. Sonic restaurants generally do not provide an indoor seating area. MARKETING The Company has designed its marketing program to differentiate Sonic drive-in restaurants from the Company's competitors by emphasizing five key areas of customer satisfaction: (1) the personal manner of service by carhops, (2) made-to-order menu items, (3) speed of service, (4) quality, and (5) value. The marketing plan includes monthly promotions for use throughout the Sonic chain. The Company supports those promotions with television commercials and point-of-sale materials. Those promotions center on a "meal deal" which highlights signature menu items of Sonic drive-in restaurants. Each year the Company and its advertising agency (with involvement of the Sonic Franchisee Advisory Council) develop a marketing plan. The Company requires the formation of advertising cooperatives among restaurant owners to pool and direct advertising expenditures in local markets. Under each of the Company's license agreements, the franchisee must contribute a minimum percentage of the franchisee's gross revenues to a national media production fund and spend an additional minimum percentage of gross revenues on local advertising, either directly or through the Company-required participation in advertising cooperatives. Depending on the type of license agreement, the minimum percentages of gross revenues contributed by franchisees for local advertising cooperative funds range from 1.125% to 3.25% and, for the Sonic Advertising Fund (the national fund directed by the Company), the franchisees contribute a range of 0.375% to 0.75% of gross revenues. For fiscal 1996, franchisees participating in cooperatives contributed an average of 2.845% of gross revenues to Sonic advertising cooperatives, exceeding the required 2.375% under most license agreements in effect during that period. As of August 31, 1996, 1,444 Sonic restaurants (approximately 92% of the chain) participated in advertising cooperatives. The Company estimates that the total amount spent on media and media production (principally television) exceeded $28 million for fiscal 1996 and should exceed $32 million for fiscal 1997. 3 PURCHASING The Company negotiates with suppliers for its primary food products (hamburger patties, hot dogs, french fries, tater tots, cooking oil, fountain syrup, and other products) and packaging supplies to ensure adequate quantities of food and supplies and to obtain competitive prices. The Company seeks competitive bids from suppliers on many of its food products. The Company approves suppliers of those products and requires them to adhere to product specifications established by the Company. Suppliers manufacture several key products for the Company under private label and sell them to authorized distributors for resale to Company-owned and franchised restaurants. The Company and its franchisees purchase a majority of their food and beverage products from authorized local or national distributors. The Company requires its Company-owned and franchised restaurants to participate in purchasing cooperatives. Those cooperatives have achieved cost savings, improved food quality and consistency, and helped decrease the volatility of food and supply costs for Sonic restaurants. For fiscal 1996, the average cost of food and paper supplies for a Sonic restaurant, as reported to the Company by its franchisees, equaled approximately 31.6% of revenues. The Company believes that food purchasing cooperatives have allowed Sonic restaurants to avoid menu price increases that otherwise might have occurred. A planned reduction in the number of food and paper product distributors to the Sonic chain has improved the ability of the Company to negotiate more advantageous purchasing terms and to maintain more uniform products. COMPANY OPERATIONS RESTAURANT PERSONNEL. A typical Sonic restaurant employs a managing partner, an assistant manager, and approximately 23 hourly employees, most of whom work part-time. The managing partner has responsibility for the day-to-day operations of the restaurant. The Company believes that its owner/operator structure has contributed to the Company's low managerial turnover rate, thereby resulting in decreased training costs, higher productivity, and a better knowledge of the restaurant's customer base at the managing partner level. The Company initially forms a partnership with its supervising partners, each of whom on average has the responsibility of overseeing four to six Company-owned restaurants. Those supervising partners derive their income out of their share of partnership net profits of the restaurants they supervise. Supervising partners generally may own up to 20% of the restaurants they supervise. The Company also employs six regional directors who oversee supervising partners within their respective regions, and the Company has a Vice President of Operations based in Oklahoma City who oversees the operations of all Company- owned restaurants. PARTNERSHIP PROGRAM. The Sonic restaurant philosophy stresses a partnership relationship between restaurant owners and managers, in which most managers of Company-owned and franchised restaurants own an equity interest in the restaurant. The Company believes that its ownership structure provides a substantial incentive for restaurant managers to operate their restaurants profitably and efficiently. Under the partnership structure, general partnerships own and operate the Company-owned restaurants. The Company, as a general partner, owns a majority interest and the managers involved in the day-to-day management and operation of the restaurant own a minority interest in the partnership. Ownership equity of a typical established Company-owned restaurant generally is distributed 60% to the Company, 20% to the managing partner, and 20% to the supervising partner. The Company records other partners' interest as a minority interest in earnings of restaurant partnerships on its financial statements. Under the standard partnership agreement, the Company has the right to purchase the interest of any managing partner on short notice. Each supervising and managing partner contributes his or her pro rata portion of all start-up costs, which include the required franchise fee, opening inventory, advertising and promotion costs; initial training and insurance costs; and some amounts for working capital. The amount of capital contribution by a supervising partner and managing partner for a restaurant typically equals approximately $10,000 for a 20% interest. The partnerships usually purchase equipment with funds borrowed from the Company at competitive 4 rates. In most cases, the Company alone guarantees any third-party lease entered into for the site. The partnerships distribute available cash flow to partners on a monthly basis pursuant to the terms of the partnership agreements. POINT-OF-SALE SYSTEMS. The Company has developed and is implementing a point-of-sale system in Company-owned restaurants. The Company believes the point-of-sale system will increase speed and accuracy in order-taking and pricing and will allow the restaurant manager to better monitor and control food and labor costs and reduce paper work. The system will have polling capabilities to allow the Company to obtain current restaurant reporting information, thereby improving the accuracy and efficiency of store-level reporting on a next-day basis. The Company believes the system also should enhance marketing capabilities through the development of a database with information on customers and their buying habits with respect to the Company's products. As of August 31, 1996, the Company had installed the point-of-sale system in 106 Company-owned restaurants. The Company expects to install the point-of-sale system in all Company-owned restaurants by the end of the second quarter of fiscal 1997. Certain franchisees had installed the system in approximately 15 restaurants as of August 31, 1996. HOURS OF OPERATION. Sonic restaurants operate seven days a week, typically from 10:30 a.m. to 11:00 p.m. COMPANY-OWNED RESTAURANT DATA. The following table provides certain financial information relating to Company-owned restaurants and the number of Company-owned restaurants opened and closed during the past five fiscal years. 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Average Sales per Company-owned Restaurant $601,000 $577,000 $558,000 $547,000 $526,000 Number of Restaurants Total Open at Beginning of Year 178 142 120 91 80 Newly-Opened and Re-Opened 30 31 20 10 1 Purchased from Franchisees 28 6 13 20 10 Sold or Closed (5) (1) (11) (1) -- --- --- --- --- --- Total Open at Year End 231 178 142 120 91 --- --- --- --- --- --- --- --- --- --- FRANCHISE PROGRAM GENERAL. During its more than 40 years in operation, the Sonic system has produced a large number of successful multi-unit franchisee groups. Those franchisees continue to develop new restaurants in their franchise territories either through area development agreements or single site development. The Company considers its franchisees a vital part of the Company's continued growth and believes its relationship with its franchisees is good. As of August 31, 1996, the Company had 1,336 franchised restaurants operating in 27 states and the Company had development agreements which contemplate the opening of 54 additional restaurants during fiscal 1997. However, the Company cannot give any assurance that the Company's franchisees will achieve that number of new restaurants for fiscal 1997. During fiscal 1996, the Company's franchisees opened 81 Sonic drive-in restaurants. FRANCHISE AGREEMENTS. Each Sonic restaurant, including each Company-owned restaurant, operates under a franchise agreement that provides for payments to the Company of an initial franchise fee and a graduated percentage of the gross revenues of the restaurant. In September of 1994, the Company began offering a new Number 6 License Agreement, which provides for a franchise fee of $30,000 and an ascending royalty rate beginning at 1.0% of gross revenues and increasing to 5.0% as the level of gross revenues increases. Pursuant to the terms of existing area development agreements and the outstanding license option agreements described below, almost all Sonic restaurants opening in fiscal 1997 will open under the Number 5.1 License Agreement. That agreement provides for a franchisee fee of $15,000 and an ascending royalty rate beginning at 1.0% of gross revenues and increasing to 4.0% as the level of gross revenues increases. For fiscal 1996, the Company's average royalty rate equaled 2.7%. Both of the foregoing franchise agreements provide for a term of 20 years, with one 10-year renewal option. 5 The Company has 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 the Company's policies and standards. Many state franchise laws limit the ability of the Company to terminate or refuse to renew a franchise. DEVELOPMENT AGREEMENTS. The Company uses area development agreements to facilitate the planned expansion of the Sonic drive-in restaurant chain through multiple unit development. While existing franchisees continue to expand on a single restaurant basis, approximately 41% of the new franchised restaurants opened during fiscal 1996 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 restaurants within a defined area. In exchange, each developer agrees to open a minimum number of Sonic restaurants in the area within a prescribed time period. If the developer does not meet the minimum opening requirements, the Company has the right to terminate the area development agreement and grant a new area development agreement or other franchises in the area previously covered by the terminated area development agreement. During fiscal 1996, the Company entered into four new area development agreements calling for the opening of 45 Sonic drive-in restaurants during the next six years. As of November 22, 1996, the Company had a total of 44 area development agreements in effect, calling for the development of 227 additional Sonic drive-in restaurants during the next six years. Of the 96 restaurants scheduled to open during fiscal 1996 under area development agreements in place at the beginning of that fiscal year, 33 (or 34%) opened during the period. Realization by the Company of the expected benefits under various existing and future area development agreements currently depends and will continue to depend upon the ability of franchisees to open the minimum number of restaurants 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 the Company grants area development agreements only to those developers whom the Company believes possess those qualities, the Company cannot give any assurances that the future performance by developers will result in the opening of the minimum number of restaurants contemplated by the development agreements or reach the compliance rate previously experienced by the Company. OPTION AGREEMENTS. In connection with the Company's introduction of a new Number 6 License Agreement in fiscal 1995, the Company offered its existing franchisees the opportunity to acquire options to purchase the Number 5.1 License Agreement for new Sonic drive-in restaurants developed by the franchisee (the "Number 5.1 Options"). The Number 5.1 License Agreement has a lower initial franchise fee and royalty rate than the Number 6 License Agreement. All outstanding Number 5.1 Options have terms ending on December 31, 1996, with the right to renew for up to four additional years upon the payment of $1,000 on each anniversary date of the option. Unlike the area development agreements described above, the options do not cover any specific location. The Company currently is not offering additional option agreements to its franchisees and, as the options expire or the franchisees exercise them, the number of outstanding options will decrease over time. As of August 31, 1996, the Company had 268 Number 5.1 Options outstanding. FRANCHISED RESTAURANT DEVELOPMENT. The Company furnishes each franchisee with assistance in selecting sites and developing restaurants. Each franchisee has responsibility for selecting the franchisee's restaurant locations but must obtain Company approval of each restaurant design and each location based on accessibility and visibility of the site and targeted demographic factors, including population, density, income, age and traffic. The Company provides its franchisees with the physical specifications for the typical Sonic drive-in restaurants. FRANCHISEE FINANCING. The Company has an arrangement with Franchise Finance Company of America ("FFCA"), pursuant to which FFCA may make loans to Sonic franchisees who meet certain underwriting criteria set by FFCA. Under the terms of the arrangement with FFCA, the Company may provide a guaranty of up to 10% of the outstanding balance of a loan from FFCA to a Sonic franchisee. The Company retains the absolute right to determine which loans it will guarantee and to impose any conditions the Company may deem appropriate. 6 FRANCHISEE TRAINING. Each franchisee must have at least one individual working full time at the Sonic drive-in restaurant who has completed the Sonic Management Development Program before opening or operating the Sonic drive-in restaurant. The program consists of nine weeks of on-the-job training and one week of classroom development. The program emphasizes quality food preparation, quick service, cleanliness of restaurants, and consistency of service. FRANCHISEE SUPPORT. In addition to training, advertising and food purchasing cooperatives, and marketing programs, the Company provides various other services to its 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) assistance in selecting sites for new restaurants using demographic data and studies of traffic patterns; (3) financing through third party sources to qualified franchisees for purchasing restaurant equipment; and (4) one-stop shopping for all equipment needed to open a new restaurant through N. Wasserstrom & Sons, Inc. in Columbus, Ohio. The Company's field services organization consists of 16 field representatives and five field marketing representatives with responsibility for defined geographic areas. The field representatives provide operational services and support for the Company's franchisees, while the field marketing representatives assist the franchisees with point-of-sale and local marketing programs. FRANCHISE OPERATIONS. All franchisees must operate their Sonic drive-in restaurants in compliance with the Company's policies, standards and specifications, including matters such as menu items, materials, supplies, services, fixtures, furnishings, decor and signs. Each franchisee has full discretion to determine the prices charged to its customers. All restaurants must display a Sonic drive-in restaurant sign manufactured in accordance with Company specifications. In most cases, the Company owns the sign and leases it to the franchisee and, if the franchisee breaches its franchise agreement, the Company may remove the sign. FRANCHISEE ADVISORY COUNCIL. The Company has established a Franchisee Advisory Council that primarily consists of franchisee representatives. The Franchisee Advisory Council holds periodic meetings to discuss new marketing ideas, operations, growth and other relevant issues. REPORTING. The Company collects weekly and monthly sales and other operating information from its franchisees. The Company has agreements with many of its franchisees permitting the Company to debit electronically the franchisees' bank accounts for the payment of royalties and advertising fund contributions. That system significantly reduces the resources needed to process receivables, improves cash flow, and reduces past-due accounts receivable. FRANCHISED RESTAURANT DATA. The following table provides certain financial information relating to franchised restaurants and the number of franchised restaurants opened, purchased from or sold to the Company, and closed during the Company's last five fiscal years. 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Average Sales Per Franchised Restaurant $657,000 $620,000 $592,000 $568,000 $526,000 Number of Restaurants: Total Open at Beginning of Year 1,286 1,227 1,154 1,100 1,032 New Restaurants 81 80 80 82 80 Sold to the Company (28) (6) (13) (20) (28) Purchased from the Company 4 1 10 -- -- Closed and Terminated, Net of Re-openings (7) (16) (4) (18) (2) ------ ------ ------ ------ ------ Total Open at Year End 1,336 1,286 1,227 1,154 1,100 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- 7 EQUIPMENT SALES In fiscal 1996, the Company sold its restaurant equipment division and discontinued that operation. Equipment sales generated revenues of approximately $3.7 million during fiscal 1996, an amount equal to 2.5% of the Company's total consolidated revenues, compared to approximately $9.1 million or 7.3% of total consolidated revenues for fiscal 1995 and approximately $9.6 million or 9.6% of total consolidated revenues for fiscal 1994. COMPETITION The Company competes in the quick-service restaurant industry, a highly competitive industry in terms of price, service, restaurant location, and food quality, and an industry often affected by changes in consumer trends, economic conditions, demographics, traffic patterns, and concerns about the nutritional content of quick-service foods. The Company competes on the basis of speed and quality of service, method of food preparation (made-to-order), food quality, signature food items, and monthly promotions. The quality of service, featuring the Sonic carhops, constitutes one of the Company's primary marketable points of difference with the competition. Several major chains, many of which have substantially greater financial resources than the Company, dominate the quick-service restaurant industry. A significant change in pricing or other marketing strategies by one or more of those competitors could have an adverse impact on the Company's sales, earnings and growth. In selling franchises, the Company also competes with many franchisors of fast-food and other restaurants and other business opportunities. EMPLOYEES As of August 31, 1996, the Company had 178 full-time employees. No collective bargaining agreement covers any of its employees. Company-owned restaurants (operated as separate partnerships or limited liability companies) employed approximately 6,200 full-time and part-time persons as of August 31, 1996, none of whom constitute employees of the Company. The Company believes that it has good labor relations with its employees. TRADEMARKS AND SERVICE MARKS The Company, through a wholly-owned subsidiary, owns numerous trademarks and service marks. The Company has registered many of those marks, including the "Sonic" logo and trademark, with the United States Patent and Trademark Office. The Company believes that its trademarks and service marks have significant value and play an important role in its marketing efforts. GOVERNMENT REGULATION The Company 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. The Company 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 the Company 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 proscribed 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 the Company from seeking franchisees in any given area and have not had a significant effect on the Company's operations. 8 Each Sonic restaurant 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 restaurant. Sonic restaurants 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 restaurants in particular locations. The owners of Sonic restaurants must comply with the Fair Labor Standards Act and various state laws governing various matters, such as minimum wages, overtime and other working conditions. Significant numbers of the food service personnel in Sonic restaurants receive compensation at rates related to the federal minimum wage and, accordingly, increases in the minimum wage will increase labor costs at those locations. The owners of Sonic restaurants also must comply with the provisions of the Americans with Disabilities Act (the "ADA"), which requires the owners to provide reasonable accommodation for employees with disabilities and to make their restaurants accessible to customers with disabilities. The Company has made certain modifications to the design and construction of its restaurants in order to comply with the ADA. However, the ADA has not had a material impact on the Company, primarily because of a drive-in restaurant's inherent accessibility to all customers. Many owners of Sonic restaurants also must comply with the Family Medical Leave Act (the "Family Leave Act"), which covers employers of 50 or more persons at locations within any 75-mile radius. The Family Leave Act requires covered employers to grant eligible employees up to 12 weeks of unpaid leave for family and medical reasons and to reinstate the employee to the same or an equivalent position at the end of the leave. An employee may take leave for the birth, adoption, or foster care of a child; for any serious health condition of a spouse, sibling, child or parent; or for an employee's own serious health condition. ITEM 2. PROPERTIES Of the 231 Company-owned restaurants operating as of August 31, 1996, the Company operated 101 of them on property leased from third parties and 130 of them on property owned by the Company. The leases expire on dates ranging from 1997 to 2016, with the majority of the leases providing for renewal options. All leases provide for specified periodic rental payments, and some leases call for additional rentals based on sales volume. Most leases require the Company to maintain the property and pay the cost of insurance and taxes. The Company has its principal office located in approximately 50,000 square feet of leased office space in Oklahoma City, Oklahoma, at an effective annual rental rate of $9.15 per square foot. The lease for that property expires in October of 2002. The Company believes that its leased office provides an adequate amount of space and will meet the Company's needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Except as set forth below, the Company does not have any material legal proceedings pending against the Company, any of its subsidiaries, or any of their properties. In July of 1996, the Company filed an appeal with the Texas Supreme Court in a case involving L & G Restaurants, Inc., Lucky Ott, and William Owen. The circuit court of appeals previously had reinstated a jury verdict against Sonic Land Corporation for tortious interference with contract in that case. The damages, as originally found by the jury and reinstated by the appellate court, consist of actual damages of $52,500 for Mr. Ott and $729,070 for Mr. Owen, as well as punitive damages of $500,000 for Mr. Ott and $500,000 for Mr. Owen. The appellate court affirmed that part of the previous judgment notwithstanding the verdict which threw out the jury's original finding that Sonic 9 Land Corporation had violated the Texas Deceptive Trade Practices Act. In addition, the appellate court itself threw out a $32,000 claim by Carolyn Ott for intentional infliction of emotional distress by Sonic Restaurants, Inc. The Company continues to believe that the findings of the jury had no merit, and will continue to defend its position vigorously during the appellate process. However, the Company cannot guarantee that the Texas Supreme Court will decide to review the case or, if it does, that the Company will receive a favorable outcome from the appeal. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter during the fourth quarter of the Company's last fiscal year to a vote of the Company's stockholders, through the solicitation of proxies or otherwise. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY IDENTIFICATION OF EXECUTIVE OFFICERS The following table identifies the executive officers of the Company.
NAME AGE POSITION OFFICER SINCE ----- ---- ---------- ------------- J. Clifford Hudson 42 President, Chief Executive Officer, June of 1985 and Director Michael R. Shumsky 45 President of Sonic Restaurants, Inc. October of 1994 Kenneth L. Keymer 48 President of Sonic Industries Inc. August of 1996 Lewis B. Kilbourne 49 Senior Vice President and Chief January of 1994 Financial Officer Pattye T. Moore 38 Senior Vice President of Marketing June of 1992 and Brand Development Ronald L. Matlock 45 Vice President, General Counsel, April of 1996 and Secretary Diane C. Dolan 34 Vice President of Administration and August of 1996 Corporate Human Resources W. Scott McLain 34 Treasurer April of 1996 Stephen C. Vaughan 30 Controller January of 1996 Larry P. Gadola 55 Vice President of Corporate Development August of 1996 of Sonic Restaurants, Inc. Wes Jablonski 42 Vice President of Technology Services October of 1995 of Sonic Industries Inc. Stanley S. Jeska 56 Vice President of Franchise Development September of 1993 of Sonic Industries Inc. Robert R. Moore 47 Vice President of Operations Services of Sonic Restaurants, Inc. July of 1996 Andrew G. Ritger, Jr. 39 Vice President of Purchasing of January of 1996 Sonic Industries Inc. Warner Van Sciver 57 Vice President of Franchise Services April of 1988 of Sonic Industries Inc. Frank B. Young, Jr. 45 Vice President of Operations of Sonic October of 1994 Restaurants, Inc.
BUSINESS EXPERIENCE The following material sets forth the business experience of the executive officers of the Company for at least the past five years. 10 J. Clifford Hudson has served as President and Chief Executive Officer of the Company since April of 1995 and has served as a director of the Company since August of 1993. He served as President and Chief Operating Officer of the Company from August of 1994 until April of 1995, and he served as Executive Vice President and Chief Operating Officer from August of 1993 until August of 1994. From August of 1992 until August of 1993, Mr. Hudson served as Senior Vice President and Chief Financial Officer of the Company. From August of 1990 until August of 1992, Mr. Hudson served as Senior Vice President of Corporate Development and, from June of 1985 to August of 1992, served as Vice President, General Counsel and Secretary of the Company. Since October of 1994, Mr. Hudson has 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. Michael R. Shumsky has served as President of Sonic Restaurants, Inc., the Company's restaurant operations subsidiary, since October of 1994. Prior to joining the Company, Mr. Shumsky spent 15 years with Taco Bell, serving most recently as a Zone Vice President with responsibility for the operations of 350 Taco Bell restaurants. Kenneth L. Keymer has served as President and a director of Sonic Industries Inc., the Company's franchise operations subsidiary, since August of 1996. From June of 1994 to August of 1996, Mr. Keymer served as Executive Vice President of Operations for the Memphis, Tennessee region of Perkins Family Restaurants, a subsidiary of Tennessee Restaurant Corporation of Itasca, Illinois. From March of 1993 to June of 1994, Mr. Keymer served as Senior Vice President of Operations for the then Chicago-based Boston Chicken, Inc. From August of 1990 to March of 1993, he served as the Zone Vice President in Chicago, Illinois, for Taco Bell. Lewis B. Kilbourne has served as Senior Vice President and Chief Financial Officer of the Company since January of 1994, and he served as Treasurer of the Company from January of 1994 until April of 1996. From June of 1991 through December of 1993, Mr. Kilbourne operated Kilbourne and Associates, a consulting firm for small private and public companies and, also, served as an Adjunct Professor of Finance at the University of Houston. From May of 1988 until June of 1991, Mr. Kilbourne served as Executive Vice President, Chief Financial Officer, and a director of Church's Fried Chicken, Inc., which conducted business as Al Copeland Enterprises Inc. Pattye T. Moore has served as Senior Vice President of Marketing and Brand Development of the Company since April of 1996. From August of 1995 until April of 1996, Mrs. Moore served as Senior Vice President of Marketing and Brand Development for Sonic Industries Inc. and served as Vice President of Marketing of Sonic Industries Inc. from June of 1992 to August of 1995. From August of 1984 until joining Sonic Industries Inc., Ms. Moore served as Vice President of Operations for Advertising Incorporated of Tulsa, Oklahoma. While serving as an officer of Advertising Incorporated, Ms. Moore had responsibility for the account service department, personnel management, and strategic planning for the agency. She also served as the management supervisor for the accounts of Sonic Industries Inc. and several other clients. Ronald L. Matlock has served as Vice President, General Counsel, and Secretary of the Company since April of 1996. Prior to joining the Company, Mr. Matlock practiced law from January of 1995 to April of 1996 with the Matlock Law Firm in Oklahoma City, Oklahoma, concentrating in corporate, securities and franchise law. From November of 1987 to December of 1994, Mr. Matlock was a shareholder and director of the law firm of Hastie & Kirschner in Oklahoma City, Oklahoma. Diane C. Dolan has served as Vice President of Administration and Corporate Human Resources of the Company since August of 1996. Ms. Dolan served as a human resources consultant for Sonic Restaurants, Inc. from January of 1995 until joining Sonic Restaurants, Inc. as Director of Field Human Resources in July of 1995. From November of 1993 until July of 1995, Ms. Dolan served as a human resources consultant for the American Red Cross in St. Louis, Missouri. From June of 1993 to November of 1993, Ms. Dolan served as a co-instructor of cross-cultural/global management training programs as part of a graduate internship with Training Management Corporation in Princeton, New Jersey. From June of 1991 until June of 1993, Ms. Dolan attended school full time at American Graduate School of International Management in Glendale, Arizona. 11 W. Scott McLain has served as Treasurer of the Company since April of 1996. From August of 1993 until joining the Company, Mr. McLain served as Treasurer of Stevens International, Inc. in Fort Worth, Texas. From March of 1991 until August of 1993, he served as a Manager - Corporate Recovery for Price Waterhouse in Dallas, Texas. Stephen C. Vaughan has served as Controller of the Company since January of 1996. Mr. Vaughan joined the Company in March of 1992 as an auditor and became Assistant Controller of the Company in March of 1993. From July of 1989 until March of 1992, Mr. Vaughan served as an auditor with the firm of Ernst & Young LLP in Oklahoma City, Oklahoma. Larry P. Gadola has served as Vice President of Corporate Development of Sonic Restaurants, Inc. since August of 1996. From December of 1994 until joining the Company, Mr. Gadola served as Director of Corporate/Franchise Development of Flagstar, Inc. of Spartanburg, South Carolina. From August of 1989 until December of 1994, Mr. Gadola worked for ViCorp Restaurants, Inc. in Denver, Colorado, where he served as Vice President of Real Estate and Construction from August of 1989 until June of 1992 and as Vice President of Development from June of 1992 to December of 1994. Wes Jablonski has served as Vice President of Technology Services of Sonic Industries Inc. since October of 1995. Prior to joining the Company, Mr. Jablonksi worked as an independent restaurant consultant. From March of 1989 to April of 1992, Mr. Jablonski served as the Director of Franchising with El Chico Restaurants, Inc. in Dallas, Texas. Stanley S. Jeska has served as Vice President of Franchise Development of Sonic Industries Inc. since July of 1996 and also served in that capacity from September of 1993 until August of 1994. Mr. Jeska served as Vice President of Corporate Development for Sonic Restaurants, Inc. from August of 1994 until July of 1996. From April of 1990 until joining the Company, Mr. Jeska founded and served as President of Corporate Real Estate Advisors of Worthington, Ohio, a management consultant firm. Robert R. Moore has served as Vice President of Operations Services of Sonic Restaurants, Inc. since July of 1996. From November of 1990 until joining the Company, Mr. Moore served as a Regional Director of Operations for Whataburger, Inc. in Dallas, Texas. Andrew G. Ritger, Jr. has served as Vice President of Purchasing of Sonic Industries Inc. since January of 1996. From May of 1993 until joining the Company, Mr. Ritger served as Vice President of Purchasing of Fast Food Merchandisers, Inc., a subsidiary of Hardees, Inc. of Rocky Mount, North Carolina. From August of 1987 until May of 1993, he served as General Manager of Logistics of H.J. Heinz, Inc. in Nashville, Tennessee. Warner L. Van Sciver has served as Vice President of Franchise Services for Sonic Industries Inc. since April of 1988. Frank B. Young, Jr. has served as Vice President of Operations of Sonic Restaurants, Inc. since October of 1994. From April of 1993 until joining the Company, Mr. Young served as the President and sole shareholder of Wendco, Inc. of Madison, Wisconsin, a business consulting firm. From October of 1989 through March of 1993, Mr. Young engaged in business as a franchisee for three Wendy's restaurants in the Madison area. 12 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 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.
QUARTER ENDED HIGH LOW QUARTER ENDED HIGH LOW ------------- ---- --- ------------- ---- --- November 30, 1994 $15.812 $11.812 November 30, 1995 $23.875 $20.125 February 28, 1995 16.500 13.187 February 29, 1996 21.500 15.062 May 31, 1995 18.500 14.687 May 31, 1996 24.062 18.750 August 31, 1995 21.250 17.187 August 31, 1996 25.000 20.875
STOCKHOLDERS As of November 22, 1996, the Company had 269 record holders of its common stock. As of that date, the Company had approximately 2,300 stockholders, including beneficial owners holding shares in street or nominee name. DIVIDENDS The Company did not pay any dividends on its common stock during its two most recent fiscal years and does not intend to pay any dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data regarding the financial condition and operating results of the Company. One should read the following information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation," below, and the Company's Consolidated Financial Statements included elsewhere in this report. 13
Year ended August 31, ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------- (In thousands except per share data) INCOME STATEMENT DATA: Sales by Company-owned restaurants $ 120,700 $ 91,438 $ 72,629 $ 58,228 $ 44,335 Franchised restaurants: Franchise fees 1,453 1,409 1,144 1,513 1,251 Franchise royalties 23,315 20,392 14,703 12,872 10,580 Equipment sales 3,743 9,076 9,602 9,797 8,975 Other 1,919 1,445 1,626 1,380 1,535 - ----------------------------------------------------------------------------------------------------------------------------- Total revenues 151,130 123,760 99,704 83,790 66,676 - ----------------------------------------------------------------------------------------------------------------------------- Cost of restaurant sales 92,663 72,275 56,966 45,961 34,301 Cost of equipment sales 3,101 7,354 7,775 8,082 7,304 Selling, general and administrative 14,498 13,260 10,918 9,572 8,625 Depreciation and amortization 8,896 5,910 4,165 2,918 2,130 Minority interest in earnings of restaurant partnerships 4,806 3,259 2,723 2,640 2,678 Provision for litigation costs - - - 300 - Provision for impairment of long-lived assets 8,627 71 4,153 246 271 - ----------------------------------------------------------------------------------------------------------------------------- Total expenses 132,591 102,129 86,700 69,719 55,309 - ----------------------------------------------------------------------------------------------------------------------------- Income from operations 18,539 21,631 13,004 14,071 11,367 Interest expense 1,184 1,823 1,084 799 666 Interest income (708) (409) (308) (383) (549) - ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 18,063 $ 20,217 $ 12,228 $ 13,655 $ 11,250 - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 11,244 $ 12,484 $ 7,643 $ 8,644 $ 6,814 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Net income per share (1) $ 0.84 $ 1.05 $ 0.64 $ 0.72 $ 0.58 - ----------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding (1) 13,449 11,842 11,954 11,970 11,803 BALANCE SHEET DATA: Working capital $ 3,491 $ 4,249 $ 7,314 $ 7,383 $ 9,486 Property, equipment and capital leases, net 100,505 70,171 40,979 31,695 20,050 Total assets 147,444 105,331 76,982 63,517 50,303 Obligations under capital leases (including current portion) 9,808 6,274 6,823 5,836 5,328 Long-term debt (including current portion) 12,401 24,902 6,419 1,243 1,243 Stockholders' equity 109,683 63,357 54,377 46,750 35,964
(1) Adjusted for a 3-for-2 stock split which had a record date of July 31, 1995 and an ex-dividend date of August 11, 1995. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS From time to time, the Company may publish forward-looking statements relating to certain matters including anticipated financial performance, business prospects, the future opening of Company-owned and franchised restaurants, anticipated capital expenditures, and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of that safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. In addition, the Company disclaims any intent or obligation to update those forward-looking statements. RESULTS OF OPERATIONS The Company derives its revenues primarily from sales by Company-owned restaurants and royalty fees from franchisees. The Company also receives revenues from initial franchise fees, area development fees, and the leasing of signs and real estate. Costs of Company-owned restaurant sales and minority interest in earnings of restaurant partnerships relate directly to Company-owned restaurant sales. Other expenses, such as depreciation, amortization, and general and administrative expenses, relate to both Company-owned restaurant operations, as well as the Company's franchising operations. The Company's revenues and expenses are directly affected by the number and sales volumes of Company-owned restaurants. The Company's revenues and, to a lesser extent, expenses also are affected by the number and sales volumes of franchised restaurants. Initial franchise fees are directly affected by the number of franchised restaurant openings. 15 The following table sets forth the percentage relationship to total revenues, unless otherwise indicated, of certain items included in the Company's statements of income. The table also sets forth certain restaurant data for the periods indicated. PERCENTAGE RESULTS OF OPERATIONS AND RESTAURANT DATA YEAR ENDED AUGUST 31, ($ IN THOUSANDS)
YEAR ENDED AUGUST 31, --------------------------------- 1996 1995 1994 ---- ---- ---- INCOME STATEMENT DATA: Revenues: Sales by Company-owned restaurants 79.9% 73.9% 72.9% Franchised restaurants: Franchise fees and royalties 16.4 17.6 15.9 Equipment sales 2.5 7.3 9.6 Other 1.2 1.2 1.6 -------- -------- -------- 100.0% 100.0% 100.0% -------- -------- -------- -------- -------- -------- Costs and expenses: Company-owned restaurants (1) 76.8% 79.0% 78.4% Equipment sales (2) 82.8 81.0 81.0 Selling, general and administrative 9.6 10.7 11.0 Depreciation and amortization 5.9 4.8 4.2 Minority interest in earnings of restaurant partnerships (1) 4.0 3.6 3.7 Provision for impairment of long-lived assets 5.7 .1 4.1 Income from operations 12.3 17.5 13.0 Net interest expense .3 1.1 .8 Net income 7.4% 10.1% 7.7% RESTAURANT OPERATING DATA: Company-owned restaurants (3) 231 178 142 Franchised restaurants (3) 1,336 1,286 1,227 -------- -------- -------- Total 1,567 1,464 1,369 -------- -------- -------- -------- -------- -------- System-wide sales $984,784 $880,521 $776,347 Percentage increase (4) 11.8% 13.4% 12.3% Average sales per restaurant: Company-owned $ 601 $ 577 $ 558 Franchise 657 620 592 System-wide 648 615 585 Change in comparable restaurant sales (5): Company-owned 4.9% 1.9% 2.5% Franchise 5.1 3.9 2.9 System-wide 5.0 3.6 2.8
- ------------------- (1) As a percentage of sales by Company-owned restaurants. (2) As a percentage of equipment sales. (3) Number of restaurants open at end of period. (4) Represents percentage increase from the comparable period in the prior year. (5) Represents percentage increase for restaurants open in both the reported and prior years. 16 COMPARISON OF FISCAL YEAR 1996 TO FISCAL YEAR 1995. Total revenues increased 22.1% to $151.1 million in fiscal 1996 from $123.8 million in fiscal 1995. Sales by Company-owned restaurants increased 32.0% to $120.7 million in fiscal 1996 from $91.4 million in fiscal 1995. Of the $29.3 million increase, $25.3 million was due to the net addition of 89 Company-owned restaurants since the beginning of fiscal 1995. Average sales increases of approximately 4.9% by stores open the full reporting periods of fiscal 1996 and fiscal 1995 accounted for $4.0 million of the increase. Franchise fee revenues increased to $1.5 million during fiscal 1996 as compared to $1.4 million during fiscal 1995. Franchise royalties increased 14.3% to $23.3 million in fiscal 1996, compared to $20.4 million in fiscal 1995. Increased sales by comparable franchised restaurants resulted in an increase in royalties of approximately $1.2 million and resulted from the franchise same store sales growth of 5.1% over fiscal 1995. Approximately $1.0 million of the $2.9 million increase resulted from the progressive nature of the Company's franchise agreements that require a higher royalty percentage as average monthly sales volumes increase. Additional franchise restaurants in operation resulted in an increase in royalties of $0.7 million. Restaurant equipment sales decreased 58.8% to $3.7 million in fiscal 1996 from $9.1 million in fiscal 1995, because of the sale of the restaurant equipment division in the second fiscal quarter of 1996. Restaurant cost of operations, as a percentage of sales by Company-owned restaurants, was 76.8% in fiscal 1996, compared to 79.0% in fiscal 1995. Management believes the improvement in restaurant operating margins resulted from (1) a 2.5% average price increase implemented during the second fiscal quarter of 1996, (2) reductions in the percentage of promotional discounting from standard menu prices, as a percentage of sales, of approximately 10%, (3) reductions in cost of food and paper items due to declining beef prices and consolidation of purchasing distribution functions, and (4) improved operational cost controls through the implementation of a standard ideal food cost program. The improvements mentioned above were partially offset by increased marketing expenditures, which reflects the Company's commitment to increased media penetration through its system of advertising cooperatives. Management bonuses also increased, as a percentage of sales, due largely to the improved operating margins. Minority interest in earnings of restaurant partnerships increased, as a percentage of sales by Company-owned restaurants, to 4.0% in fiscal 1996 as compared to 3.6% in fiscal 1995. This increase occurred primarily due to the improvements in operating margins discussed above. Selling, general and administrative expenses, as a percentage of total revenues, decreased to 9.6% in fiscal 1996 compared with 10.7% in fiscal 1995. Management expects this decrease to continue in future periods because the Company expects a significant portion of future revenue growth to be attributable to Company-owned restaurants. Company-owned restaurants require a lower level of selling, general and administrative expenses than the Company's franchising operations since most of these expenses are reflected in restaurant cost of operations and minority interest in restaurant operations. Many of the managers and supervisors of Company-owned restaurants own a minority interest in the restaurant, and their compensation flows through the minority interest in earnings of restaurant partnerships. Depreciation and amortization expense increased approximately $3.0 million due to the purchase of buildings and equipment for new and existing restaurants and corporate furniture and information systems upgrades. Management expects this trend to continue due to increased capital expenditures planned for fiscal 1997. Effective June 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Assets To Be Disposed Of" (SFAS 121). The provision for adoption of SFAS 121 was $8.5 million. For additional explanation of this provision, see Note 2 in the Notes to Consolidated Financial Statements. Income from operations decreased to $18.5 million from $21.6 million in fiscal 1995. Excluding the provision for impairment of long-lived assets discussed above, income from operations increased 25.2% to $27.1 million. Net interest expense decreased to $0.5 million in fiscal 1996 from $1.4 million in fiscal 1995. This decrease was the result of a pay down on the revolving credit facility with the proceeds from the secondary stock offering, as well as increased interest income from the investment of excess offering proceeds during the year. 17 Provision for income taxes reflects an effective federal and state tax rate of 37.75% for fiscal year ended August 31, 1996, compared to 38.25% for the comparable period in fiscal 1995. Net income for fiscal 1996 increased 32.7% to $16.6 million and earnings per share increased 17.1% to $1.23, excluding the after-tax effect of the provision for impairment of long-lived assets discussed above. COMPARISON OF FISCAL YEAR 1995 TO FISCAL YEAR 1994. Total revenues increased 24.1% to $123.8 million in fiscal 1995 from $99.7 million in fiscal 1994. Sales by Company-owned restaurants increased 25.9% to $91.4 million in fiscal 1995 from $72.6 million in fiscal 1994. Of the $18.8 million increase, $17.5 million was due to the net addition of 58 Company-owned restaurants since the beginning of fiscal 1994. Average sales increases of approximately 2% by stores open the full reporting periods of fiscal 1995 and fiscal 1994 accounted for $1.2 million of the increase. Franchise fee revenues increased to $1.4 million during fiscal 1995 as compared to $1.1 million during fiscal 1994. The increase resulted from a larger percentage of new restaurants opening under the 1988 form of license agreement, which requires a $15,000 fee rather than the 1984 form of license agreement, which calls for a $7,500 fee, combined with an increase in area development agreement fee forfeitures of approximately $140,000. Franchise royalties increased 38.7% to $20.4 million in fiscal 1995, compared to $14.7 million in fiscal 1994. Increased royalties earned from franchisees who elected to convert their existing license agreements to a new license agreement with a higher effective royalty rate, in exchange for a new 20-year term and other benefits, resulted in an increase in royalty revenues of approximately $3.8 million. Increased sales by comparable franchised restaurants resulted in an increase in royalties of approximately $1.4 million and resulted from the franchise same store sales growth of 3.9% over fiscal 1994. Of the $1.4 million increase, approximately $600,000 resulted from the progressive nature of the Company's franchise agreements that require a higher royalty percentage as monthly sales volumes increase. Additional restaurants in operation resulted in an increase in royalties of $500,000. Restaurant equipment sales decreased 5.5% to $9.1 million in fiscal 1995 from $9.6 million in fiscal 1994, due primarily to fewer new restaurant equipment packages being sold in fiscal 1995 as compared to fiscal 1994. Restaurant cost of operations, as a percentage of sales by Company-owned restaurants, was 79.0% in fiscal 1995, compared to 78.4% in fiscal 1994. An improvement in food and packaging costs, as a percentage of sales (due primarily to lower beef costs), was offset by increased labor and marketing costs. The labor increase was a result of 38 drive-ins opening either during fiscal 1995 or the month preceding the same reporting period. Newly-opened drive-ins generally experience a higher labor cost, as a percentage of sales, than established drive-ins. Based upon the prior performance of other newly-opened restaurants, the Company expects labor costs, as a percentage of sales, to become consistent with established drive-ins over time. The increase in marketing expenditures reflects the Company's commitment to increased media expenditures through its system of advertising cooperatives. Minority interest in earnings of restaurant partnerships decreased, as a percentage of sales by Company-owned restaurants, to 3.6% in fiscal 1995 as compared to 3.7% in fiscal 1994. This decline occurred due to an increase in the Company's average ownership percentage in Company-owned restaurants and the unfavorable variance in restaurant operating margins discussed above. Cost of restaurant equipment sales, as a percentage of equipment sales, was consistent with fiscal 1994. Selling, general and administrative expenses, as a percentage of total revenues, decreased to 10.7% in fiscal 1995 compared with 11.0% in fiscal 1994. Management expects this decrease to continue in future periods because the Company expects a significant portion of future revenue growth to be attributable to Company-owned restaurants. Company-owned restaurants require a lower level of selling, general and administrative expenses than the Company's franchising operations since most of these expenses are reflected in restaurant cost of operations and minority interest in restaurant operations. Many of the managers and supervisors of Company-owned restaurants own a minority interest in the restaurant, and their compensation flows through the minority interest in earnings of restaurant partnerships. Depreciation and amortization expense increased approximately $1.7 million due to the purchase of buildings and equipment for new and existing restaurants and corporate furniture and information systems upgrades. 18 Excluding unusual write-downs in fiscal 1994 of approximately $3.9 million, income from operations for fiscal 1995 increased 28.2% to $21.6 million from $16.9 million for fiscal 1994. Net interest expense increased to $1.4 million in fiscal 1995 from $775,000 in fiscal 1994. This increase was the result of the Company's restaurant growth strategy being funded partially through advances under the revolving credit facility. Provision for income taxes reflects an effective federal and state tax rate of 38.25% for fiscal year ended August 31, 1995, compared to 37.5% for the comparable period in fiscal 1994. The increase in the Company's effective tax rate was due primarily to the phase-out of the benefit of graduated federal tax rates as a result of an increase in income before income taxes. Net income for the period, excluding the special provisions discussed above, increased 24.1% to $12.5 million. LIQUIDITY AND SOURCES OF CAPITAL During fiscal year 1996, the Company opened 30 new restaurants, acquired a majority interest in 28 existing restaurants, sold four restaurants to franchisees, and closed one restaurant. The Company funded the total capital additions for fiscal year 1996 of $45.3 million (which included the cost of newly-opened restaurants, acquired restaurants, restaurants under construction, new furniture and equipment for existing restaurants and general corporate use) internally by cash from operating activities, through borrowings under the Company's line of credit, and through the use of capital leases. During fiscal year 1996, the Company purchased the real estate on 21 of the 30 newly- constructed restaurants. The Company purchased the real estate on 10 of the 28 acquired restaurants. The Company expects to own the land and building for approximately two-thirds of its future newly-constructed restaurants. In October of 1995, the Company completed an offering of 1,668,826 shares of common stock, including the underwriters' over-allotment shares. Net proceeds to the Company from the offering were approximately $33.2 million. The Company used approximately $23 million of the proceeds to pay off the existing balance on its line of credit. In August of 1996, the Company entered into an agreement with a group of banks to increase its existing $40 million line of credit to $60 million. The Company will use the line of credit to finance the opening of newly-constructed restaurants, acquisitions of existing restaurants, and for other general corporate purposes. As of August 31, 1996, the Company's outstanding borrowings under the line of credit were $11.5 million, as well as $100,000 in outstanding letters of credit. The available line of credit as of August 31, 1996, was $48.4 million. As of August 31, 1996, the Company's total cash balance of $7.7 million reflected the impact of the stock offering, line of credit activity, and capital expenditures mentioned above. The Company expects capital expenditures of approximately $50 million in fiscal 1997, excluding potential acquisitions. Those capital expenditures primarily relate to the development of additional Company-owned restaurants, maintenance and remodeling of Company-owned restaurants, and enhancements to existing financial and operating information systems, including the further development and installation of a point-of-sale system. See "Business - Expansion," above. The Company expects to fund those capital expenditures through borrowings under its existing unsecured revolving credit facility and cash flow from operations. The Company believes that existing cash and funds generated from internal operations, as well as borrowing under the line of credit, will meet the Company's needs for the foreseeable future. IMPACT OF INFLATION Though increases in labor, food or other operating costs could adversely affect the Company's operations, management does not believe that inflation has had a material effect on income during the past several years. During fiscal 1997, however, the Company intends to increase prices for its Company-owned restaurants primarily because of higher labor costs resulting from increases in the federal minimum wage. 19 SEASONALITY The Company does not expect seasonality to affect its operations in a materially adverse manner. The Company's results during its 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 the Company's Company-owned and franchised restaurants. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disagreements between the Company and its accountants have occurred within the 24-month period prior to the date of the Company's most recent financial statements. PART III Except for the information on the Company's executive officers set forth under Item 4A of Part I of this report, the Company hereby incorporates by reference the information required by Part III of this report from the definitive proxy statement which the Company must file with the Securities and Exchange Commission in connection with the Company's annual meeting of stockholders following the fiscal year ended August 31, 1996. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS The following consolidated financial statements of the Company appear immediately following this Item 14: Pages ----- Report of Independent Auditors F-1 Consolidated Balance Sheets at August 31, 1996 and 1995 F-2 Consolidated Statements of Income for each of the three years in the period ended August 31, 1996 F-4 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended August 31, 1996 F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1996 F-6 Notes to Consolidated Financial Statements F-8 FINANCIAL STATEMENT SCHEDULES The Company has included the following schedules immediately following this Item 14: Page ---- Schedule II - Valuation and Qualifying Accounts F-27 The Company has omitted all other schedules because the conditions requiring their filing do not exist or because the required information appears in the Company'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 employment 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. 3.02. 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. 4.01. 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, 1995. 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. 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. 21 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 the Company'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. 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. 10.06. 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. 10.07. Form of General Partnership Agreement and Master 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, 1995. 10.08. 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.* 10.09. 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.* 10.10. 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.* 10.11. 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.* 10.12. 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.* 10.13. 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.* 10.14. 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.* 10.15. Sonic Corp. 1995 Stock Incentive Plan.* 10.16. Form of Employment Agreement and Schedule of Material Differences for the Executive Officers of the Company.* 10.17. Loan Agreement with Texas Commerce Bank National Association dated July 31, 1995, 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, 1995. 10.18. First Amendment to Loan Agreement with Texas Commerce Bank National Association. 10.19. Second Amendment to Loan Agreement with Texas Commerce Bank National Association. 21.01. Subsidiaries of the Company. 22 23.01. Consent of Independent Auditors. 24.01. Power of Attorney. 27.01. Financial Data Schedules REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during its last fiscal quarter ended August 31, 1996. 23 Report of Independent Auditors The Board of Directors and Stockholders Sonic Corp. We have audited the accompanying consolidated balance sheets of Sonic Corp. as of August 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14. 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 generally accepted auditing standards. 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 1996, in conformity with 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 2 to the accompanying consolidated financial statements, in fiscal year 1996 Sonic Corp. changed its method of accounting for impairment of long-lived assets by adopting Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." /s/ ERNST & YOUNG LLP ------------------------------- ERNST & YOUNG LLP Oklahoma City, Oklahoma October 18, 1996 F-1 Sonic Corp. Consolidated Balance Sheets
AUGUST 31, 1996 1995 ---------------------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 7,706 $ 3,778 Accounts and notes receivable, net (NOTE 4) 5,229 5,181 Net investment in direct financing and sales-type leases (NOTE 6) 783 908 Inventories 1,868 2,252 Deferred income taxes (NOTE 11) 110 132 Prepaid expenses and other 481 463 ---------------------------- Total current assets 16,177 12,714 Notes receivable, net (NOTE 4) 3,063 2,731 Net investment in direct financing and sales-type leases (NOTE 6) 3,421 3,048 Deferred income taxes (NOTE 11) 2,184 257 Property, equipment and capital leases, net (NOTES 2, 6 AND 7) 100,505 70,171 Intangibles and other assets, net (NOTE 5) 22,094 16,410 ---------------------------- Total assets $147,444 $105,331 ---------------------------- ----------------------------
F-2 Sonic Corp. Consolidated Balance Sheets (continued)
AUGUST 31, 1996 1995 ---------------------------- (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,904 $ 1,691 Deposits from franchisees 601 833 Accrued liabilities (NOTE 8) 7,841 5,353 Obligations under capital leases due within one year (NOTE 6) 823 481 Long-term debt due within one year (NOTE 9) 517 107 ---------------------------- Total current liabilities 12,686 8,465 Obligations under capital leases due after one year (NOTE 6) 8,985 5,793 Long-term debt due after one year (NOTE 9) 11,884 24,795 Other noncurrent liabilities (NOTE 10) 4,206 2,921 Commitments and contingencies (NOTES 3, 6, 14 AND 15) Stockholders' equity (NOTE 12): Preferred stock, par value $.01; 1,000,000 shares authorized; none outstanding - - Common stock, par value $.01; 40,000,000 shares authorized; shares issued--13,475,078 in 1996 and 12,079,886 in 1995 135 121 Paid-in capital 59,107 30,355 Retained earnings 50,584 39,340 ---------------------------- 109,826 69,816 Treasury stock, at cost; 7,580 shares in 1996 and 428,026 shares in 1995 (143) (6,459) ---------------------------- Total stockholders' equity 109,683 63,357 ---------------------------- Total liabilities and stockholders' equity $147,444 $105,331 ---------------------------- ----------------------------
SEE ACCOMPANYING NOTES. F-3 Sonic Corp. Consolidated Statements of Income
YEAR ENDED AUGUST 31, 1996 1995 1994 -------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Sales by Company-owned restaurants $120,700 $ 91,438 $ 72,629 Franchised restaurants: Franchise fees 1,453 1,409 1,144 Franchise royalties 23,315 20,392 14,703 Equipment and sign sales (NOTE 1) 3,743 9,076 9,602 Other 1,919 1,445 1,626 -------------------------------------- 151,130 123,760 99,704 Costs and expenses: Company-owned restaurants: Food and packaging 37,463 30,073 24,270 Payroll and other employee benefits 34,555 27,265 20,951 Other operating expenses 20,645 14,937 11,746 -------------------------------------- 92,663 72,275 56,967 Equipment and sign cost of sales (NOTE 1) 3,101 7,354 7,775 Selling, general and administrative 14,498 13,260 10,918 Depreciation and amortization 8,896 5,910 4,165 Minority interest in earnings of restaurant partnerships 4,806 3,259 2,723 Provision for impairment of long-lived assets (NOTE 2) 8,627 71 4,153 -------------------------------------- 132,591 102,129 86,701 -------------------------------------- Income from operations 18,539 21,631 13,003 Interest expense 1,184 1,823 1,084 Interest income (708) (409) (309) -------------------------------------- Net interest expense 476 1,414 775 -------------------------------------- Income before income taxes 18,063 20,217 12,228 Provision for income taxes (NOTE 11) 6,819 7,733 4,585 -------------------------------------- Net income $ 11,244 $ 12,484 $ 7,643 -------------------------------------- -------------------------------------- Net income per share (NOTE 12) $.84 $1.05 $.64 -------------------------------------- -------------------------------------- Weighted average shares outstanding (NOTE 12) 13,449 11,842 11,954 -------------------------------------- --------------------------------------
SEE ACCOMPANYING NOTES. F-4 Sonic Corp. Consolidated Statements of Stockholders' Equity
NUMBER COMMON PAID-IN RETAINED TREASURY OF SHARES STOCK CAPITAL EARNINGS STOCK --------------------------------------------------------------------- (IN THOUSANDS) Balance at August 31, 1993 7,913 $ 79 $27,948 $19,213 $ (492) Exercise of common stock options 13 - 204 - - Purchase of treasury stock - - - - (218) Net income - - - 7,643 - --------------------------------------------------------------------- Balance at August 31, 1994 7,926 79 28,152 26,856 (710) Exercise of common stock options 134 1 2,244 - - Purchase of treasury stock - - - - (5,749) Three-for-two stock split, including $1,200 paid in cash for fractional shares (NOTE 12) 4,020 41 (41) - - Net income - - - 12,484 - --------------------------------------------------------------------- Balance at August 31, 1995 12,080 121 30,355 39,340 (6,459) Exercise of common stock options 154 2 2,037 - - Purchase of treasury stock - - - - (143) Sale of common stock (NOTE 12) 1,241 12 26,715 - 6,459 Net income - - - 11,244 - --------------------------------------------------------------------- Balance at August 31, 1996 13,475 $135 $59,107 $50,584 $ (143) --------------------------------------------------------------------- ---------------------------------------------------------------------
SEE ACCOMPANYING NOTES. F-5 Sonic Corp. Consolidated Statements of Cash Flows
YEAR ENDED AUGUST 31, 1996 1995 1994 ------------------------------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $11,244 $12,484 $ 7,643 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,896 5,910 4,165 Gains on dispositions of assets (309) (52) (230) Amortization of franchise and development fees (1,453) (1,409) (1,131) Accretion of interest expense 74 100 100 Franchise and development fees collected 1,460 1,376 1,091 Provision (credit) for deferred income taxes (1,905) 370 (1,291) Provision for impairment of long-lived assets 8,627 71 4,153 (Increase) decrease in operating assets: Accounts and notes receivable (380) (448) (1,275) Inventories, prepaid expenses and other (766) (331) 416 Increase (decrease) in operating liabilities: Accounts payable 1,213 (741) 526 Accrued and other liabilities 2,154 2,209 (789) ------------------------------------- Total adjustments 17,611 7,055 5,735 ------------------------------------- Net cash provided by operating activities 28,855 19,539 13,378 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (41,107) (34,208) (14,615) Investment in direct financing leases (1,235) (1,016) (832) Collections on direct financing leases 987 902 729 Proceeds from sales of inventories and property, equipment and capital leases 2,450 346 660 Increase in intangibles and other assets: Goodwill resulting from acquisitions of restaurants (5,964) (181) (2,197) Other (1,721) (1,592) (809) ------------------------------------- Net cash used in investing activities (46,590) (35,749) (17,064)
(CONTINUED ON FOLLOWING PAGE) F-6 Sonic Corp. Consolidated Statements of Cash Flows (continued)
YEAR ENDED AUGUST 31, 1996 1995 1994 ------------------------------------- (IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock $33,186 $ - $ - Proceeds from long-term borrowings 11,500 18,250 4,964 Payments on long-term debt (24,250) (222) (100) Payments on capital lease obligations (669) (549) (547) Exercises of stock options 1,900 550 204 Purchases of treasury stock (4) (4,054) (219) ------------------------------------- Net cash provided by financing activities 21,663 13,975 4,302 ------------------------------------- Net increase (decrease) in cash and cash equivalents 3,928 (2,235) 616 Cash and cash equivalents at beginning of the year 3,778 6,013 5,397 ------------------------------------- Cash and cash equivalents at end of the year $ 7,706 $ 3,778 $ 6,013 ------------------------------------- ------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest $ 1,369 $ 1,794 $ 965 Income taxes (net of refunds) 8,192 5,581 6,187 Additions to capital lease obligations 4,203 - 1,837 Property and equipment purchases financed through notes payable 175 354 211 Notes receivable from property and equipment sales - 317 370 Capital lease obligations retired in connection with sales of property and equipment - - 303 Purchases of treasury stock in connection with exercises of stock options 139 1,695 -
SEE ACCOMPANYING NOTES. F-7 Sonic Corp. Notes to Consolidated Financial Statements August 31, 1996, 1995 and 1994 (in thousands, except share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS Sonic Corp. (the "Company") operates and franchises a chain of quick-service drive-in restaurants in the United States. In addition, the Company sells and leases restaurant equipment and signs. In February 1996, the Company sold its restaurant equipment division, including restaurant equipment inventories of approximately $1,500, for $1,747 in cash and recognized a gain of $250. The Company grants credit to its franchisees, all of whom are in the restaurant business. Substantially all of the notes receivable and direct financing leases are collateralized by real estate or equipment. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned, Company-operated restaurants, organized principally as general partnerships. All significant intercompany accounts and transactions have been eliminated. Investments in minority-owned restaurants, organized principally as general partnerships, and other minority investments are carried at equity and are included in other assets. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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 inevitably will differ from those estimates, and such differences may be material to the financial statements. INVENTORIES Inventories consist principally of food and supplies which are carried at the lower of cost (first-in, first-out basis) or market and restaurant equipment held for sale (primarily used equipment as of August 31, 1996 and new equipment as of August 31, 1995) which is carried at the lower of weighted average cost or market. F-8 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 amortization of capital leases are computed by the straight-line method over the estimated useful lives or initial terms of the leases, respectively. ACCOUNTING FOR LONG-LIVED ASSETS Prior to the fourth quarter of fiscal year 1996, certain restaurants which were nonoperating and were either held for disposition or were under short-term subleases were carried at the lower of depreciated cost or estimated net realizable values. Estimated net realizable values were determined annually based upon appraisals or other independent assessments of the restaurants' estimated sales values. Subsequent to restaurant closings, the related restaurant buildings and equipment were not depreciated and the related leased restaurant buildings under capital leases were not amortized. All estimated costs which were expected to be incurred in the closings and disposals of Company-owned and certain other restaurants were accrued when the decisions were made to close such restaurants. These estimated costs included accruals for future occupancy costs, estimated direct disposal costs and reductions of the carrying values of property, equipment and capital leases to estimated net realizable values. Allowances for impairment and accrued carrying costs for restaurant closings and disposals were adjusted when necessary based on subsequent information and events. Effective June 1, 1996 (NOTE 2), the Company reviews long-lived assets, identifiable intangibles, and goodwill related to those 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. The Company has determined that an individual restaurant is the level at which this review will be applied. 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. The fair value of the asset is measured by calculating the present value of estimated future cash flows using a discount rate equivalent to the rate of return the Company expects to achieve from its investment in newly-constructed restaurants. F-9 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Long-lived assets and identifiable intangibles held for disposal are carried at the lower of depreciated cost or fair value less cost to sell. Fair values are estimated based upon appraisals or other independent assessments of the assets' estimated sales values. During the period in which assets are being held for disposal, depreciation and amortization of such assets are not recognized. PRE-OPENING COSTS The costs of hiring, training and other direct costs associated with opening new restaurants are capitalized and amortized over the first twelve months of restaurant operations. TRADEMARKS, TRADE NAMES AND OTHER GOODWILL Trademarks, trade names and other goodwill are amortized on the straight-line method over periods not exceeding 40 years. FRANCHISE AGREEMENTS Costs of franchise agreements capitalized in connection with the acquisition of existing franchises are amortized on the straight-line method over the life of the agreements, not exceeding 15 years. OTHER INTANGIBLES Other intangibles and deferred costs included in other assets are amortized on the straight-line method over the expected period of benefit, not exceeding 15 years. FRANCHISE FEES AND ROYALTIES 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. Royalties from franchise operations are recognized in income as earned. ADVERTISING COSTS Costs incurred in connection with advertising and promotion of the Company's products are expensed as incurred. Such costs amounted to $4,956, $4,204 and $3,134 for the years ended August 31, 1996, 1995 and 1994, respectively. F-10 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," permits stock compensation cost to be measured using the intrinsic value based method or the fair value based method. The Company will continue to use the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"; however, expanded disclosure of the impact of the fair value based method will be provided in the footnotes to the fiscal year 1997 financial statements as required by SFAS 123. The Company's existing stock option plans have no intrinsic value at grant date, and no compensation cost has been recognized for them (NOTE 12). NET INCOME PER SHARE Net income per share is based upon the weighted average number of common shares and dilutive common stock equivalent shares outstanding during each year (NOTE 12). CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with a maturity of three months or less from date of purchase. 2. IMPAIRMENT OF LONG-LIVED ASSETS The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," at the beginning of the fourth quarter of fiscal year 1996. Based on an evaluation of all restaurants which had incurred operating losses through May 31, 1996, the Company determined that certain restaurants and other assets with carrying amounts of $12,553 were impaired and wrote them down to their fair values. The initial charge upon adoption of SFAS 121 was $8,541 ($5,316 after-tax or $.40 per share) and included $5,720 ($3,560 after-tax or $.27 per share) related to restaurants and other assets held for disposal and $2,821 ($1,756 after-tax or $.13 per share) related to restaurants to be held and used. The difference in the Company's previous policy and fair value under SFAS 121 for assets held for disposal at the beginning of the fourth quarter of fiscal year 1996 was not material. The Company plans to dispose of the related assets during fiscal years 1997 and 1998 and has estimated the sales value, net of related costs to sell, at $2,651. The charge primarily relates to F-11 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 2. IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED) the write-down of certain restaurants to fair value consistent with the earnings expectations of each restaurant using discounted estimated future cash flows. Considerable management judgment is necessary to estimate future discounted cash flows. Accordingly, actual results could vary significantly from management's estimates. The evaluation for impairment is done for each individual restaurant, rather than all restaurants as a group. The initial charge resulted from the Company grouping assets at a lower level than under its previous accounting policy for evaluating and measuring impairment. Prior to adoption of this new standard, a write-down of a restaurant only took place when a decision was made to close or dispose of the restaurant. As a result of the reduced carrying value of the impaired assets, depreciation and amortization expense for fiscal year 1997 is expected to be reduced by approximately $800 ($500 after-tax or $.04 per share). During 1994, the Company recorded a pre-tax charge of $3,144 for the expected costs and expenses required to discontinue the Company's operation of seven restaurants in south Florida. The provision is composed of the write-down of property and equipment to estimated net realizable value of $2,294, the accrual of carrying costs of $577 and the write-down of other assets of $273. During 1994, the Company accrued $720 in equipment write-downs related to the Company adopting an implementation plan for a new PC-based point-of-sale system. This new system will enhance the Company's ability to monitor store level operations through the transferring of restaurant information electronically in a more timely manner. The implementation plan is expected to be completed by the end of fiscal year 1997. The equipment currently in service has been written down to the estimated net realizable value, after giving effect to normal depreciation of historical cost during the implementation period. 3. RESTAURANT TRANSACTIONS WITH RELATED PARTY In March 1994, the Company entered into an agreement with a director and former officer of the Company in connection with his leaving the Company and returning to his career as a Sonic franchisee. Under that agreement, the director exchanged certain rights under his employment agreement, including the right to purchase six existing Sonic restaurants, for the right to purchase the Company's interest in two existing Sonic restaurants (with financing provided by the Company) and to acquire certain development rights for future Sonic restaurants. As part of the agreement, the Company also agreed to assist the director with obtaining development financing for up to six Sonic restaurants. Since March 1994, the Company has entered into certain agreements with the director and the director's lender which provide that in the event of a default by the director under the terms of the director's F-12 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 3. RESTAURANT TRANSACTIONS WITH RELATED PARTY (CONTINUED) restaurant development loans (aggregating $3,460 as of August 31, 1996), the Company is required to purchase the collateral (shares of the Company's common stock and real estate related to Sonic restaurants) securing the director's loans at fair market value as specified in the repurchase agreements. The Company's repurchase obligations under these agreements expire in 1999 ($1,749), 2000 ($102) and 2001 ($1,609). 4. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable consist of the following at August 31, 1996 and 1995: 1996 1995 ------------------ Trade receivables $2,878 $3,784 Notes receivable--current 846 540 Other 1,638 1,005 ------------------ 5,362 5,329 Less allowance for doubtful accounts and notes receivable 133 148 ------------------ $5,229 $5,181 ------------------ ------------------ Notes receivable--noncurrent $3,193 $2,760 Less allowance for doubtful notes receivable 130 29 ------------------ $3,063 $2,731 ------------------ ------------------ 5. INTANGIBLES AND OTHER ASSETS Intangibles and other assets consist of the following at August 31, 1996 and 1995: 1996 1995 ------------------ Trademarks, trade names, and other goodwill $20,945 $14,980 Franchise agreements 1,870 1,870 Other intangibles and other assets 3,775 3,065 ------------------ 26,590 19,915 Less accumulated amortization 4,496 3,505 ------------------ $22,094 $16,410 ------------------ ------------------ F-13 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 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 portions of these leases are classified as operating leases and expire over the next six years. The buildings and equipment portions of these leases are classified principally as direct financing or sales-type leases and expire over the next eight years. These leases include provisions for contingent rentals which may be received on the basis of a percentage of sales in excess of stipulated amounts. Some leases contain escalation clauses over the lives of the leases. Certain Company-owned restaurants lease land and buildings from third parties. These leases, which expire over the next twenty years, include provisions for contingent rentals which may be paid on the basis of a percentage of sales in excess of stipulated amounts. The land portions of these leases are classified as operating leases and the buildings portions are classified as capital leases. DIRECT FINANCING AND SALES-TYPE LEASES Components of net investment in direct financing and sales-type leases are as follows at August 31, 1996 and 1995: 1996 1995 ------------------ Minimum lease payments receivable $5,670 $5,609 Less unearned income 1,466 1,653 ------------------ Net investment in direct financing and sales-type leases 4,204 3,956 Less amount due within one year 783 908 ------------------ Amount due after one year $3,421 $3,048 ------------------ ------------------ Minimum lease payments receivable for each of the five years after August 31, 1996 are $1,336 in 1997, $1,241 in 1998, $1,120 in 1999, $886 in 2000, $681 in 2001 and $406 thereafter. Initial direct costs incurred in the negotiation and consummation of direct financing and sales-type lease transactions have not been material during fiscal years 1996 and 1995. Accordingly, no portion of unearned income has been recognized to offset those costs. F-14 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 6. LEASES (CONTINUED) Equipment and sign sales include $1,340, $1,163 and $836 for the years ended August 31, 1996, 1995 and 1994, respectively, related to sign lease transactions that have been accounted for as sales-type leases. CAPITAL LEASES Components of obligations under capital leases are as follows at August 31, 1996 and 1995: 1996 1995 ------------------ Total minimum lease payments $16,701 $11,249 Less amount representing interest 6,893 4,975 ------------------ Present value of net minimum lease payments 9,808 6,274 Less amount due within one year 823 481 ------------------ Amount due after one year $ 8,985 $ 5,793 ------------------ ------------------ Maturities of these obligations under capital leases, including interest, at rates averaging approximately 13%, and future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year are as follows: OPERATING CAPITAL ------------------ Year ending August 31: 1997 $ 2,416 $ 1,858 1998 2,344 1,836 1999 2,256 1,645 2000 2,195 1,439 2001 2,153 1,389 Thereafter 13,111 8,534 ------------------ 24,475 16,701 Less amount representing interest - 6,893 ------------------ $24,475 $ 9,808 ------------------ ------------------ Total minimum lease payments do not include contingent rentals. Contingent rentals on capital leases were $334, $291 and $284 for the years ended August 31, 1996, 1995 and 1994, respectively. F-15 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 6. LEASES (CONTINUED) Rent expense on all operating leases was $2,443, $1,918 and $1,905 for the years ended August 31, 1996, 1995 and 1994, respectively. 7. PROPERTY, EQUIPMENT AND CAPITAL LEASES Property, equipment and capital leases consist of the following at August 31, 1996 and 1995: 1996 1995 ------------------- Home office: Land and leasehold improvements $ 1,041 $ 1,180 Furniture and equipment 13,165 9,077 Restaurants, including those leased to others: Land 24,184 15,974 Buildings, including property held for disposition 38,013 26,775 Equipment 31,702 24,057 ------------------- Property and equipment, at cost 108,105 77,063 Less accumulated depreciation and allowance for impairment 15,497 11,782 ------------------- Property and equipment, net 92,608 65,281 Leased restaurant buildings and equipment under capital leases, including those held for sublease 10,809 7,233 Less accumulated amortization and allowance for impairment 2,912 2,343 ------------------- Capital leases, net 7,897 4,890 ------------------- Property, equipment and capital leases, net $100,505 $70,171 ------------------- ------------------- Property and equipment include land and buildings with a carrying value of $533 at August 31, 1996 and $514 at August 31, 1995 which were leased under operating leases to franchisees or other parties. The accumulated depreciation related to these buildings was $249 at August 31, 1996 and $270 at August 31, 1995. Property, equipment and capital leases also include assets held for disposal or sublease with an aggregate carrying value of $3,571, exclusive of certain carrying costs reflected in liabilities, at August 31, 1996 and $2,092 at August 31, 1995. F-16 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 8. ACCRUED LIABILITIES Accrued liabilities consist of the following at August 31, 1996 and 1995: 1996 1995 ------------------- Wages and other employee benefits (NOTE 13) $1,422 $ 938 Income taxes payable (NOTE 11) 2,635 2,103 Taxes, other than income taxes 2,717 1,274 Accrued litigation costs 51 159 Accrued carrying costs for restaurant closings and disposals 592 120 Other 424 759 ------------------- $7,841 $5,353 ------------------- ------------------- 9. LONG-TERM DEBT Long-term debt consists of the following at August 31, 1996 and 1995: 1996 1995 ------------------- Borrowings under line of credit (A) $11,500 $23,000 Non-interest bearing obligation, due in 1997; net of discount based on imputed interest rate of 8.3% 422 1,340 Notes payable to banks, at various interest rates, due in varying annual installments through 1997 80 328 8.5% notes payable, due in monthly installments until 2011 399 234 ------------------- 12,401 24,902 Less long-term debt due within one year 517 107 ------------------- Long-term debt due after one year $11,884 $24,795 ------------------- ------------------- F-17 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 9. LONG-TERM DEBT (CONTINUED) (A) In July 1995, the Company entered into an agreement with a group of banks which provided the Company with a $40,000 line of credit expiring in June 1998. The agreement allows for annual renewal options, subject to approval by the banks, which has not currently been exercised by the Company. In August 1996, the line of credit was increased to $60,000. The Company uses the line of credit to finance the opening of newly-constructed restaurants, acquisition of existing restaurants and for general corporate purposes. Borrowings under the line of credit are unsecured and bear interest at a specified bank's prime rate or, at the Company's option, LIBOR plus 0.75% to 1.25%. In addition, the Company pays an annual commitment fee ranging from .125% to .25% on the unused portion of the line of credit. As of August 31, 1996, the Company's effective borrowing rate was 7.07%. Under its line of credit, the Company may borrow up to $60,000 in the form of direct borrowings and letters of credit with a $2,000 sub-limit for letters of credit. As of August 31, 1996 there were $100 in letters of credit outstanding under the line of credit. Borrowings under the line of credit are subject to various restrictive financial covenants. Maturities of long-term debt, net of discount, for each of the five years after August 31, 1996 are $517 in 1997, $11,516 in 1998, $18 in 1999, $19 in 2000, $21 in 2001 and $310 thereafter. 10. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities consist of the following at August 31, 1996 and 1995: 1996 1995 ------------------- Deferred area development fees $ 608 $ 369 Minority interest in consolidated restaurant partnerships 2,589 2,175 Accrued carrying costs for restaurant closings and disposals 870 250 Other 139 127 ------------------- $4,206 $2,921 ------------------- ------------------- F-18 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 11. INCOME TAXES The provision for income taxes consists of the following: YEAR ENDED AUGUST 31, 1996 1995 1994 ------------------------------ Current: Federal $8,371 $6,744 $5,394 State 353 619 482 ------------------------------ 8,724 7,363 5,876 Deferred: Federal (1,839) 357 (1,246) State (66) 13 (45) ------------------------------ (1,905) 370 (1,291) ------------------------------ Provision for income taxes $6,819 $7,733 $4,585 ------------------------------ ------------------------------ The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate due to the following: YEAR ENDED AUGUST 31, 1996 1995 1994 ------------------------------ Amount computed by applying a tax rate of 35% $6,322 $7,076 $4,280 State income taxes (net of federal income tax benefit) 187 411 284 Permanent differences in expenses for financial and income tax reporting purposes (283) (56) 77 Effect of graduated tax rates - - (100) Other, including effect of tax rate changes 593 302 44 ------------------------------ Provision for income taxes $6,819 $7,733 $4,585 ------------------------------ ------------------------------ F-19 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 11. INCOME TAXES (CONTINUED) Deferred tax assets and liabilities consist of the following at August 31, 1996 and 1995:
1996 1995 --------------------- Deferred tax assets: Asset valuation reserves $1,407 $1,135 Accrued carrying costs for restaurant closings and disposals 753 159 Accrued litigation costs 18 56 Investment in partnerships, including differences in capitalization and depreciation related to direct financing and sales-type leases and different year ends for financial and tax reporting purposes 1,095 204 Allowance for doubtful accounts and notes receivable 94 62 Other 63 12 --------------------- 3,430 1,628 Valuation allowance - - --------------------- Deferred tax assets 3,430 1,628 Less deferred tax liabilities: Accumulated amortization of license agreements, management contracts and other intangibles 409 422 Net investment in direct financing and sales-type leases, including differences related to capitalization and amortization 639 640 Other 88 177 --------------------- Deferred tax liabilities 1,136 1,239 --------------------- Net deferred tax assets $2,294 $ 389 --------------------- ---------------------
12. STOCKHOLDERS' EQUITY In July 1995, the Company's board of directors authorized a three-for-two stock split in the form of a stock dividend. A total of 4,019,321 shares of common stock were issued in connection with the split. The stated par value of each share was not changed from $.01. A total of $40 was reclassified from paid-in capital to common stock. All references in the accompanying consolidated financial statements to average numbers of shares outstanding, per share amounts and Stock Purchase Plan and Stock Options share data have been restated to reflect the split. F-20 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 12. STOCKHOLDERS' EQUITY (CONTINUED) In October 1995, the Company completed a public offering of 1,668,826 shares of common stock at $21.25 per share. The offering included 428,026 shares of treasury stock which had a cost of $6,459. The proceeds of the offering, after deducting the underwriting discount and offering expenses, were $33,186. A portion of the proceeds ($23,000) was used to repay the borrowings under the Company's line of credit. In January 1996, the stockholders approved an increase in common stock authorized from 20,000,000 to 40,000,000 shares. STOCK PURCHASE PLAN The Company has an employee stock purchase plan for all full-time regular employees of the Company. 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 each calendar year under this plan is limited to 150,000 shares. The purchase price will be between 85% and 100% of the stock's fair market value. Such price will be determined by the Company's board of directors. STOCK OPTIONS The Company has an Incentive Stock Option Plan (the "Incentive Plan") and a Directors' Stock Option Plan (the "Directors' Plan"). Under the Incentive Plan, the Company is authorized to grant options to purchase up to 1,340,000 (1,245,000 in 1995) shares of the Company's common stock to officers and key employees of the Company and its subsidiaries. Under the Directors' Plan, the Company is authorized to grant options to purchase up to 225,000 shares of the Company's common stock to the Company's outside directors. The exercise price of the options to be granted is equal to the fair market value of the Company's common stock on the date of grant. Unless otherwise provided by the Company's Stock Plan Committee, options under both plans become exercisable ratably over a three-year period or immediately upon change in control of the Company, as defined by the plans. During fiscal year 1994, the Company granted certain options under the Incentive Plan which become exercisable ratably over a five- year period. All options expire at the earlier of termination of employment or ten years after the date of grant. F-21 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) Activity in the Company's stock option plans for the years ended August 31, 1996 and 1995 is as follows: 1996 1995 ----------------------- Outstanding options, beginning of year 940,438 1,148,934 Granted 378,444 275,342 Exercised (154,392) (190,321) Canceled or expired (149,600) (293,517) ----------------------- Outstanding options, end of year 1,014,890 940,438 ----------------------- ----------------------- At end of year: Average option price per share $16.70 $14.90 Range of option prices $10.00 $10.00 to to $22.63 $20.75 Options exercisable 406,533 381,981 Options available for future grants 143,326 277,170 STOCK INCENTIVE PLAN In November 1995, the Company adopted the Sonic Corp. 1995 Stock Incentive Plan (the "Stock Incentive Plan") whereby the Company may issue up to 120,000 shares of common stock to certain key employees. Participants in the Stock Incentive Plan receive awards of shares of restricted common stock (the "Restricted Stock"), subject to not vesting if the Company does not meet certain annual performance criteria. If the Company meets the performance criteria, the portion of the award tied to the criteria will vest. Until the Restricted Stock vests, an escrow agent holds the Restricted Stock. If the Company does not meet the performance criteria, the portion of the award tied to that criteria will not vest and the related shares are available for future awards. Upon vesting, the participant will have the right to receive certificates representing the shares of vested Restricted Stock. During fiscal year 1996, the Company awarded 87,000 shares of Restricted Stock which vest over a three-year period if specified performance goals are met. The Company did not meet the specified performance criteria in fiscal year 1996 which resulted in 20,000 shares not vesting. Shares applicable to awards which have not vested are not reflected as shares issued in the accompanying financial statements. F-22 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 13. EMPLOYEE BENEFIT PLANS SAVINGS AND PROFIT SHARING PLAN The Company has a Savings and Profit Sharing Plan (the "Plan"), as amended, for eligible employees. Employees who have completed one year of service with the Company are eligible to participate in the Plan. Under the Plan, participating employees may authorize payroll deductions up to 11% of their earnings. The Company may elect to contribute a percentage of participants' contributions to the Plan. Additional amounts may be contributed at the option of the Company's board of directors. Company contributions are subject to vesting at the rate of 20% each year upon completion of two years of service, with 100% vesting after six years. Matching contributions of $114, $101 and $97 were made by the Company during the years ended August 31, 1996, 1995 and 1994, respectively. For the year ended August 31, 1996, a discretionary contribution of $35 was accrued ($50 for each of the two years ended August 31, 1995 and 1994). 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 accrued incentive bonuses of $341, $367 and $60 during the years ended August 31, 1996, 1995 and 1994, respectively. 14. EMPLOYMENT AGREEMENTS The Company has employment contracts with its President 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 (NOTE 13). These contracts also contain provisions for payments in the event of the termination of employment and provide for payments aggregating $3,623 at August 31, 1996 due to loss of employment in the event of a change in control (as defined in the contracts). F-23 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 15. CONTINGENCIES In October 1993, following a jury trial, the District Court of Jefferson County, Texas (the "District Court") entered a judgment against two subsidiaries of the Company in the amount of $935 of actual damages and prejudgment interest, and $1,000 of punitive damages in an action in which the plaintiffs claim the subsidiaries interfered with contractual relations of the plaintiffs and were guilty of deceptive trade practices. In March 1994, the District Court granted a motion for judgment notwithstanding the verdict filed by the two subsidiaries of the Company. The District Court's judgment eliminated the award of actual and punitive damages in favor of certain plaintiffs. The plaintiffs appealed the reversal of the previous judgments. In April 1996, the Texas Court of Appeals reversed the District Court's judgment notwithstanding the verdict and reinstated the jury's verdict in the amount of $782 of actual damages, $1,000 of punitive damages, and pre and post judgment interest. The Company has appealed the Court of Appeals reversal to the Supreme Court of Texas. The Company continues to believe that the findings of the jury and the Court of Appeals had no merit and will defend its position vigorously. The Company presently cannot predict the ultimate outcome of this matter. A final resolution is not expected to have a material adverse effect on the Company's financial position or results of operations. The Company is a party to several additional legal actions arising in the conduct of its business. Management of the Company believes that the ultimate resolution of these actions will not have a material adverse effect on the Company's financial position or results of operations. F-24 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER FULL YEAR 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 --------------------------------------------------------------------------------------------- Income statement data: Sales by Company-owned restaurants $25,444 $19,816 $23,274 $19,421 $33,642 $25,153 $38,340 $27,048 $120,700 $ 91,438 Franchised restaurants: Franchise fees 262 334 553 269 287 228 351 578 1,453 1,409 Franchise royalties 5,810 4,926 4,894 4,305 5,717 5,284 6,894 5,877 23,315 20,392 Equipment and sign sales (a) 2,254 2,130 1,489 1,763 - 2,705 - 2,478 3,743 9,076 Other 373 364 631 263 479 399 436 419 1,919 1,445 --------------------------------------------------------------------------------------------- Total revenues 34,143 27,570 30,841 26,021 40,125 33,769 46,021 36,400 151,130 123,760 Company-owned restaurants: Food and packaging 8,294 6,413 7,582 6,389 10,315 8,311 11,272 8,960 37,463 30,073 Payroll and other employee benefits 7,628 5,969 7,061 5,827 8,941 7,547 10,925 7,922 34,555 27,265 Other operating expenses 4,472 3,378 4,327 3,201 5,348 3,796 6,498 4,562 20,645 14,937 --------------------------------------------------------------------------------------------- 20,394 15,760 18,970 15,417 24,604 19,654 28,695 21,444 92,663 72,275 Equipment and sign cost of sales (a) 1,891 1,739 1,210 1,380 - 2,207 - 2,028 3,101 7,354 Selling, general and administrative 3,299 3,331 3,375 3,322 3,776 3,483 4,048 3,124 14,498 13,260 Depreciation and amortization 1,989 1,209 2,123 1,426 2,394 1,521 2,390 1,754 8,896 5,910 Minority interest in earnings of restaurant partnerships 794 625 615 620 1,800 965 1,597 1,049 4,806 3,259 Provision for impairment of long-lived assets (b) 22 19 27 15 16 18 8,562 19 8,627 71 --------------------------------------------------------------------------------------------- Income from operations 5,754 4,887 4,521 3,841 7,535 5,921 729 6,982 18,539 21,631 Interest expense 399 354 231 378 258 543 296 548 1,184 1,823 Interest income (208) (105) (257) (117) (137) (94) (106) (93) (708) (409) --------------------------------------------------------------------------------------------- Income before income taxes $ 5,563 $ 4,638 $ 4,547 $ 3,580 $ 7,414 $ 5,472 $ 539 $ 6,527 $ 18,063 $ 20,217 --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- Net income $ 3,463 $ 2,864 $ 2,831 $ 2,211 $ 4,615 $ 3,379 $ 335 $ 4,030 $ 11,244 $ 12,484 --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- Net income per share (NOTE 12) $.27 $.24 $.21 $.19 $.34 $.29 $.02 $.34 $.84 $1.05 --------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------
(a) Restaurant equipment sales and cost of sales declined due to the sale of the Company's equipment division in February 1996. (b) The Company adopted Statement of Financial Accounting Standards No. 121 during the fourth quarter of 1996 resulting in a $8,541 pre-tax impairment provision. F-25 Sonic Corp. Notes to Consolidated Financial Statements (continued) (in thousands, except share data) 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. 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 estimated using discounted cash flow analysis, using interest rates which 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, 1996 and 1995, 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. As of August 31, 1996 and 1995, carrying values approximate their estimated fair values. F-26
Sonic Corp. Schedule II - Valuation and Qualifying Accounts ADDITIONS AMOUNTS BALANCE AT CHARGED TO WRITTEN OFF BALANCE BEGINNING COSTS AND AGAINST THE AT END DESCRIPTION OF YEAR EXPENSES ALLOWANCE RECOVERIES OF YEAR - ---------------------------------------------------------------------------------------------------------- (IN THOUSANDS) ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE Year ended: August 31, 1996 $177 $ 124 $ 93 $ 55 $ 263 August 31, 1995 $299 $ 99 $ 226 $ 5 $ 177 August 31, 1994 $257 $ 95 $ 53 $ - $ 299 ACCRUED CARRYING COSTS FOR RESTAURANT CLOSINGS AND DISPOSALS Year ended: August 31, 1996 $370 $1,354 $262 $ - $1,462 August 31, 1995 $596 $ 60 $286 $ - $ 370 August 31, 1994 $241 $ 648 $293 $ - $ 596
F-27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has caused the undersigned, duly- authorized, to sign this report on its behalf on this 25th day of November, 1996. Sonic Corp. By: /s/ J. Clifford Hudson --------------------------------------------------------- J. Clifford Hudson, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the undersigned have signed this report on behalf of the Company, in the capacities and on the dates indicated.
Signature Title Date ---------- ----- ----- /s/ J. Clifford Hudson President, Chief Executive November 25, 1996 - ---------------------------------- Officer, and Director J. Clifford Hudson, Principal Executive Officer /s/ Lewis B. Kilbourne Senior Vice President and Chief November 25, 1996 - ---------------------------------- Financial Officer Lewis B. Kilbourne, Principal Financial Officer /s/ Stephen C. Vaughan Controller November 25, 1996 - ---------------------------------- Stephen C. Vaughan, Principal Accounting Officer /s/ E. Dean Werries Chairman of the Board November 14, 1996 - ---------------------------------- and Director E. Dean Werries /s/ Dennis H. Clark Director November 13, 1996 - ---------------------------------- Dennis H. Clark /s/ Leonard Lieberman Director November 14, 1996 - ---------------------------------- Leonard Lieberman /s/ H. E. Rainbolt Director November 14, 1996 - ---------------------------------- H. E. Rainbolt /s/ Frank E. Richardson III Director November 14, 1996 - ---------------------------------- Frank E. Richardson III /s/ Robert M. Rosenberg Director November 9, 1996 - ---------------------------------- Robert M. Rosenberg
EXHIBIT INDEX EXHIBIT NUMBER AND DESCRIPTION - ------------------------------ 10.15. Sonic Corp. 1995 Stock Incentive Plan 10.16. Form of Employment Agreement and Schedule of Material Differences for the Executive Officers of the Company 10.18. First Amendment to Loan Agreement with Texas Commerce Bank National Association 10.19. Second Amendment to Loan Agreement with Texas Commerce Bank National Association 21.01. Subsidiaries of the Company 23.01. Consent of Independent Auditors 24.01. Power of Attorney 27.01. Financial Data Schedules EX-10.15 2 1995 STOCK INCENTIVE PLAN Exhibit 10.15 Sonic Corp. 1995 Stock Incentive Plan 1995 STOCK INCENTIVE PLAN SONIC CORP., a Delaware corporation (the "Company"), hereby adopts the Sonic Corp. Stock Incentive Plan upon the following terms and conditions: ARTICLE I NAME AND PURPOSE OF PLAN 1.1 NAME OF PLAN. This Plan shall be hereafter known as the SONIC CORP. 1995 STOCK INCENTIVE PLAN. 1.2 PURPOSE. The purpose of the Plan is to provide Key Employees who are selected to be Participants under the Plan an incentive to motivate and financially reward such individuals who contribute to the long term growth and profitability of the Company, with such reward to be based on the financial performance of the Company, including its Subsidiaries, during Performance Cycles. 1.3 TYPE OF PLAN. This Plan shall be considered as a "nonqualified deferred compensation plan" which is to be sponsored by the Company solely for the purpose of providing a supplemental income for certain Key Employees who contribute materially to the continued growth, development and future business success of the Company. It is the intention of the Company that this Plan and any Agreements entered into pursuant to the Plan be administered as an unfunded welfare benefit plan established and maintained for a select group of Key Employees. ARTICLE II DEFINITIONS AND CONSTRUCTION 2.1 DEFINITIONS. Where the following capitalized words and phrases appear in this instrument, they shall have the respective meanings set forth below unless a different context is clearly expressed herein. (a) AGREEMENT. The word "Agreement" shall mean that certain agreement which will be entered into by and between the Company and the Participant which represents the Participant's Award for a particular Performance Cycle as provided in Section 3.3 hereof. (b) ANNIVERSARY DATE: The words "Anniversary Date" shall mean August 31, which is end of the fiscal year of the Company. (c) AWARD: The word "Award" shall mean, with respect to any Participant, the number of shares of Restricted Stock granted to the Participant at the beginning of each Performance Cycle. (d) BENEFICIARY: The word "Beneficiary" shall mean that person designated by the Participant pursuant to Section 6.2 hereof who may be entitled to receive such Participant's Award in the event of the death of the Participant. (e) BOARD: The word "Board" shall mean the Board of Directors of the Company. (f) CHANGE OF CONTROL: The words "Change of Control" shall mean the change in the control of the Company as described in Section 9.1 hereof. (g) CODE: The word "Code" shall mean the Internal Revenue Code of 1986, as amended. (h) COMMITTEE: The word "Committee" shall mean the committee appointed by the Board which in accordance with Article X herein will administer the Plan. (i) COMMON STOCK: The words "Common Stock" shall mean the shares of common stock, $.01 par value per share of the Company. (j) COMPANY: The word "Company" shall mean Sonic Corp., or its successor. (k) DISABILITY: The word "Disability" shall mean a physical or mental condition arising during employment with the Employer whereby a Participant has become totally and permanently disabled. (l) EFFECTIVE DATE: The words "Effective Date" shall mean the date that this Plan shall have been approved by the Board, which is the date that this Plan shall be effective for all purposes. (m) ELIGIBLE SPOUSE: The words "Eligible Spouse" shall mean the spouse to whom the Participant is married on his date of death. (n) EMPLOYER: The word "Employer" shall mean either the Company or any Subsidiary. (o) ESCROW: The word "Escrow" shall mean that separate arrangement under which Restricted Stock will be held pending distribution to the Participant on the Vesting Date or as otherwise provided in the Plan. (p) ESCROW AGENT: The words "Escrow Agent" shall mean the person or entity who shall administer the Escrow. (q) INCUMBENT BOARD. The words "Incumbent Board" shall mean the individuals who, as of the date hereof, constitute the Board, provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. (r) KEY EMPLOYEES: The words "Key Employee" shall mean any full time employee of the Company or a Subsidiary who holds the position of Chairman, Chief Executive Officer, President, Executive Vice President, Senior Vice President or Vice President or any other employee of the Company or a Subsidiary who is selected for participation in the Plan. (s) PARTICIPANT: The word "Participant" shall mean a Key Employee who has been selected by the Committee. 2 (t) PERFORMANCE CYCLE: The words "Performance Cycle" shall mean a fixed period of time determined by the Committee over which Awards may be earned by the Participant. (u) PERFORMANCE GOALS: The words "Performance Goals" shall mean those factors, goals and criteria selected by the Committee which must be met by the Participant during the Performance Cycle in order for a Participant to earn his Award, or to become vested in his Award, under the Performance Vesting Schedule. (v) PERFORMANCE VESTING SCHEDULE: The words "Performance Vesting Schedule" shall mean that schedule selected by the Committee which shall contain the Performance Goals which must be met during the applicable Performance Cycle in order for a Participant to become vested in his Award under the Performance Vesting Schedule. (w) PLAN: The word "Plan" shall mean the "Sonic Corp. 1995 Stock Incentive Plan," as set forth in this instrument, and as hereafter amended from time to time. (x) RESTRICTED STOCK: The words "Restricted Stock" shall mean those shares of Common Stock which a Participant may earn as provided in Article V hereof. (y) RETIREMENT: The word "Retirement" shall mean a Participant's termination of employment with the Company or a Subsidiary after attaining the age of 65 years or later or, at the discretion of the Committee, after attaining the age of 55 years or later. (z) SERVICE VESTING SCHEDULE. The words "Service Vesting Schedule" shall mean the period of employment service with the Employer established by the Committee which must be met in order for a Participant to become vested in his Award under the Service Vesting Schedule. (aa) SUBSIDIARY: The word "Subsidiary" shall mean any corporation with 80% or more of its voting common stock being owned, directly or indirectly, by the Company. (bb) VESTING DATE: The words "Vesting Date" shall mean the date on which a Participant becomes vested in his Award after satisfying the requirements, if any, of any Performance Vesting Schedule and/or Service Vesting Schedule; provided, however, that no Participant may become vested in his Award within six months from date the Award is granted. (cc) YEAR: The word "Year" shall mean the fiscal year of the Company. 2.2 CONSTRUCTION: The masculine gender, wherever appearing in the Plan, shall be deemed to include the feminine gender, unless the context clearly indicates to the contrary. Any word appearing herein in the plural shall include the singular, where appropriate, and likewise the singular shall include the plural, unless the context clearly indicates to the contrary. 3 ARTICLE III PARTICIPATION 3.1 SELECTION FOR PARTICIPATION. In order to be eligible for participation in the Plan, a Key Employee of the Company must be selected by the Committee. Selection for participation in the Plan shall be in the sole and absolute discretion of the Committee. 3.2 PARTICIPATION IN CONSIDERATION FOR FUTURE SERVICES. Selection of a Key Employee by the Committee for participation in the Plan and the granting of any Award will be deemed to be for all purposes in consideration of future services to be rendered by the Key Employee to the Company or its Subsidiaries. 3.3 AWARD AGREEMENTS. Any Key Employee selected by the Committee as a Participant, shall, as a condition of participation, execute and return to the Committee an Agreement evidencing the Key Employee's participation in the Plan, the amount of his Award and his agreement to the terms and conditions of the Plan and the Agreement. A separate Agreement will be entered into by the Company and the Participant for each Performance Cycle. ARTICLE IV RESTRICTED STOCK SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES OF RESTRICTED STOCK. Shares of Common Stock subject to Award under this Plan in the form of Restricted Stock shall not exceed in the aggregate One Hundred Twenty Thousand (120,000) shares of the Common Stock of the Company. Either authorized and unissued shares or treasury shares may be subject to Award and delivered pursuant to the Plan. If any Restricted Stock issued to a Participant is forfeited as provided in this Plan, the Committee may reissue such Restricted Stock to Participants. ARTICLE V THE AWARDS 5.1 AMOUNT OF AWARDS. The Award granted to each Participant for each Performance Cycle, expressed as a number of shares of Restricted Stock, is determined solely in the discretion of the Committee. Awards of Restricted Stock will be paid in Common Stock of the Company. Each Award of Restricted Stock shall contain such terms, restrictions and conditions as the Committee may determine, which terms, restrictions and conditions may or may not be the same in each case. 5.2 RESTRICTED STOCK HELD IN ESCROW. The Committee shall cause a certificate to be delivered to the Escrow Agent (appointed pursuant to Section 5.3 below) registered in the name of the Participant representing the total number of shares of Restricted Stock represented by his Award and a copy of the Agreement relating to such Award in accordance with the following: (a) Any such certificate shall be legended to indicate that the shares of Restricted Stock represented thereby are subject to the terms and conditions of the Award and the Plan. (b) Restricted Stock held by the Escrow Agent in the Escrow shall constitute issued and outstanding shares of Common Stock of the Company for all corporate purposes, 4 and the Participant shall, unless the Agreement shall provide otherwise, receive all dividends thereon and shall have the right to vote such shares; provided, however, that the right to receive such dividends and to vote such shares shall forthwith terminate with respect to unvested shares of Restricted Stock of any Participant whose Award has been forfeited as provided in this Plan or the Agreement. (c) While such Restricted Stock is held in Escrow and until such Restricted Stock has become fully vested on the Vesting Date, it shall be subject to the restrictions set forth in Section 7.1 of the Plan. (d) As such Restricted Stock shall vest from time to time in the Participant in accordance with his Award, the Escrow Agent shall deliver to such Participant or his respective Beneficiary (in the case of the Participant's death) certificates representing such vested shares of Restricted Stock. As a condition precedent to delivering a certificate representing shares of Restricted Stock covered by an Award to the Escrow Agent, the Committee may require the Participant to deliver to the Escrow Agent a duly executed irrevocable stock power or powers (in blank) covering the Restricted Stock represented by such certificate. (e) Certificates representing unvested shares of Restricted Stock held by the Escrow Agent for the benefit of any Participant whose Award (to the extent then unvested) has been forfeited shall be returned (together with the related stock power) by the Escrow Agent to the Company. (f) The Company shall have no liability to issue any Restricted Stock hereunder unless such Restricted Stock and issuance thereof comply with any applicable federal or state securities laws or any other applicable laws. (g) Participants may be granted more than one Award. The granting of an Award shall not affect any outstanding Award previously made to a Participant under the Plan. 5.3 ESCROW AGENT. An Escrow Agent for the Escrow shall be appointed by the Committee for such period and upon such terms and conditions as the Committee deems appropriate. The Committee shall have the power to remove any person from the position of Escrow Agent and to appoint a substitute or successor Escrow Agent. The fees and expenses of the Escrow Agent shall be paid by the Company. The Escrow Agent shall not incur liability for any action taken pursuant to the Plan or any Award made thereunder so long as the Escrow Agent acts in good faith in accordance with the instructions of the Committee. ARTICLE VI PAYMENT OF AWARD 6.1 PAYMENT OF AWARD. (a) GENERAL. With respect to each applicable Performance Cycle, after satisfaction of any Performance Vesting Schedule and/or Service Vesting Schedule prescribed by the Committee, payment of Awards shall be made as soon as practicable following the Vesting Date which relates to the Award. 5 (b) SPECIAL CIRCUMSTANCES. In the event of termination of a Participant's employment due to death, Retirement or Disability, then any unvested Award of a Participant shall thereupon immediately be forfeited; provided, however, in the event of death of a Participant after the completion of three fiscal quarters for any Year in a Performance Cycle, the Award to such Participant shall vest for that Year if the Performance Goals for that year are otherwise achieved, and all unvested Restricted Stock subject to vesting for any Year thereafter shall be forfeited. 6.2 BENEFICIARY DESIGNATION. In the event of the death of a Participant during a Performance Cycle, then, the Participant's Award, if any, to the extent vested prior to the death of the Participant, or to become vested as provided in Section 6.1(b), shall be paid to the then surviving Beneficiary designated by the Participant on a form provided by the Committee, and, if there is no Beneficiary then surviving, such benefits will automatically be paid to the surviving Eligible Spouse of such Participant, otherwise to the estate of such Participant. ARTICLE VII GENERAL BENEFIT PROVISIONS 7.1 RESTRICTIONS ON ALIENATION OF BENEFITS. No right or benefit under this Plan or the Agreement shall be subject in any manner to garnishment, attachment, anticipation, alienation, sale, transfer, assignment, gift, pledge, encumbrance, disposition, hypothecation, levy, execution or the claims of creditors, either voluntarily or involuntarily, and any attempt to so garnish, attach, anticipate, alienate, sell, transfer, assign, gift, pledge, encumber, dispose, hypothecate, levy or execute on the same shall be null and void, and neither shall such benefits or beneficial interests be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person to whom such benefits or funds are payable. 7.2 NO TRUST. Other than as specifically provided in this Plan, no action under this Plan by the Company, its Board or the Committee shall be construed as creating a trust, escrow or other secured or segregated fund in favor of the Participant, his Beneficiary, or any other persons otherwise entitled to his Award. The status of the Participant and his Beneficiary with respect to any liabilities assumed by the Company hereunder shall be solely those of unsecured creditors of the company who employs such Participant. Any asset acquired or held by the Company in connection with liabilities assumed by it hereunder, shall not be deemed to be held under any trust, escrow or other secured or segregated fund for the benefit of the Participant or his Beneficiaries or to be security for the performance of the obligations of the Company or any Subsidiary, but shall be and remain a general, unpledged, unrestricted asset of the Company at all times subject to the claims of general creditors of the Company. 7.3 WITHHOLDING FOR INCOME AND EMPLOYMENT TAXES. Since all amounts to be paid under the Plan and the related Agreement to a Participant are to be considered as supplemental compensation paid for services rendered by the Participant, the Company shall comply with all federal and state laws and regulations respecting the withholding, deposit and payment of any income, employment or other taxes relating to any payments made under this Plan, and accordingly, all amounts of Awards shall be subject to and reduced by the amount of such taxes. At such times as are required under applicable income, employment or other tax laws or regulations, the Company shall withhold a number of shares of Restricted Stock equal to the withholding deposit which is otherwise required with respect to such income or other employment taxes. Notwithstanding the withholding of such Restricted Stock, such shares shall still be considered to be subject to withholding taxes. The additional amount of tax which is due may be likewise paid either in cash 6 or by the withholding of additional shares. The Participant may elect to pay any employment or withholding taxes by directing the Company to withhold from his salary, or, prior to the required time to withhold such taxes, to remit to the Company in cash, an amount sufficient to pay such income or other employment taxes. 7.4 NO INTEREST ON AWARDS. All Awards to be paid hereunder will be paid without interest or investment earnings of any kind whatsoever except as otherwise specifically provided in the Plan. 7.5 PAYMENTS BY THE COMPANY OR SUBSIDIARY. The payments required to fund the cost of the Awards provided by the Plan shall be made solely by the Company or any Subsidiary whose Key Employees are participating in the Plan. 7.6 ADJUSTMENT ON RECAPITALIZATION. In case of a recapitalization, stock split, merger, stock dividend, reorganization, combination, liquidation, or other change in the Common Stock of the Company, the Committee shall make such adjustment, if any, as it deems appropriate in the number or kind of shares of Common Stock which remain available under the Plan for further Awards. Unvested shares of Restricted Stock held by the Escrow Agent for the benefit of a Participant shall participate in any of such events to the same extent as any other issued and outstanding shares of Common Stock of the Company, but appropriate adjustments, if required, shall be made by the Committee, so that after giving effect to the occurrence of any of such events, the Escrow Agent shall continue to hold such unvested shares and/or any other securities delivered in respect thereof for the benefit of such Participant to the extent practicable upon the same terms and conditions of this Plan and of his Award, subject to the Change of Control provisions of Article IX. ARTICLE VIII PROVISIONS RELATING TO PARTICIPANTS 8.1 INFORMATION REQUIRED OF PARTICIPANTS. Payment of Awards shall be made as provided in this Plan and no formal claim shall be required therefor; provided, in the interests of orderly administration of the Plan, the Committee may make reasonable requests of Participants and Beneficiaries to furnish information which is reasonably necessary and appropriate to the orderly administration of the Plan, and, to that limited extent, payments under the Plan are conditioned upon the Participants and Beneficiaries promptly furnishing true, full and complete information as the Committee may reasonably request. 8.2 BENEFITS PAYABLE TO INCOMPETENTS. Any benefits payable hereunder to a minor or other person under legal disability may be made, at the discretion of the Committee, (i) directly to the said person, or (ii) to a parent, spouse, relative by blood or marriage, or the legal representative of the said person. The Committee shall not be required to see to the application of any such payment, and the payee's receipt shall be a full and final discharge of the Committee's responsibility hereunder. 8.3 CONDITIONS OF EMPLOYMENT NOT AFFECTED BY PLAN. The establishment and maintenance of the Plan shall not be construed as conferring any legal rights upon any Participant to the continuation of employment with the Employer, nor shall the Plan interfere with the rights of the Employer to discharge any Participant with or without cause. 7 ARTICLE IX STATUS OF AWARDS ON CHANGE OF CONTROL 9.1 CHANGE OF CONTROL. In the event there has been a Change of Control which: (i) has not been approved by the Incumbent Board of Directors or (ii) is the result of a tender offer or proxy solicitation not recommended or approved by the Incumbent Board of Directors, then the vesting of any Award shall be accelerated to the time of such Change of Control. In the event of any other Change of Control, the Committee, in its sole discretion, may accelerate the vesting of any Award, or terminate or cause the forfeiture of any unvested Awards. For the purposes of this Plan, the term "Change of Control" shall mean: (a) Any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's capital stock would convert into cash, securities or other property, other than a merger of the Company in which the holders of the Company's capital stock immediately prior to the merger have the same proportionate ownership of capital stock of the surviving corporation immediately after the merger; (b) Any sale, lease, exchange or other transfer (whether in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; (c) The stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; (d) Any person (as used in Section 13(d) and 14(d)(2) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) becomes the beneficial owner (within the meaning of Rule 13D-3 under the Exchange Act) of 50% or more of the Company's outstanding capital stock; (e) During any period of two consecutive years, individuals who at the beginning of that period constitute the entire Board of the Company cease for any reason to constitute a majority of the Board unless the election or the nomination for election by the Company's stockholders of each new director received the approval of the Board by a vote of at least two-thirds of the directors then and still in office and who served as directors at the beginning of the period; or (f) The Company becomes a subsidiary of any other corporation. ARTICLE X ADMINISTRATION AND COMMITTEE 10.1 ALLOCATION OF RESPONSIBILITY FOR PLAN ADMINISTRATION. The members of the Committee shall serve at the pleasure of the Board and shall be the same as the Stock Plan Committee appointed by the Board. Any member may serve concurrently as a member of any other administrative committee of any other plan of the Company or any of its affiliates entitling participants therein to acquire stock, stock options or deferred compensation rights (including stock appreciation rights). A member of the Committee may not be eligible to become a Participant in the Plan. The Committee shall have the power where consistent with the general purpose and intent of the Plan to (i) modify the requirements of the Plan to conform with the law or to meet in special 8 circumstances not anticipated or covered in the Plan, (ii) suspend or discontinue the Plan, (iii) establish policies and (iv) adopt rules and regulations and prescribe forms for carrying out the purposes and provisions of the Plan including the form of any Agreements. Unless otherwise provided in the Plan, the Committee shall have the authority to interpret and construe the Plan, and determine all questions arising under the Plan and any Agreement made pursuant to the Plan. Any interpretation, decision or determination made by the Committee shall be final, binding and conclusive. A majority of the Committee shall constitute a quorum, and an act of the majority of the members present at any meeting at which a quorum is present shall be the act of the Committee. 10.2 APPOINTMENT OF COMMITTEE. The Plan shall be administered by the Committee. All usual and reasonable expenses of the Committee incurred in administering the Plan may be paid in whole or in part by the Company. 10.3 RECORDS AND REPORTS. The Committee shall exercise such authority and responsibility as it deems appropriate in order to comply with governmental laws and regulations. 10.4 OTHER COMMITTEE POWERS AND DUTIES. The Committee shall have such duties and powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following: (a) to construe and interpret the Plan, decide all questions of eligibility and determine the amount, manner and time of payment of any Awards hereunder; (b) to establish the Performance Goals and any other factors relating to the Performance Vesting Schedule and the Service Vesting Schedule as such relate to the Awards; (c) to prepare and distribute, in such manner as the Committee determines to be appropriate, information explaining the Plan; (d) to receive from the Company and from Participants and Beneficiaries such information as shall be necessary for the proper administration of the Plan; (e) to furnish the Company upon request, such reports with respect to the administration of the Plan as are reasonable and appropriate; and (f) to appoint and employ individuals and any other agents it deems advisable, including legal counsel, to assist in the administration of the Plan and to render advice with respect to any responsibility of the Committee, or any of its individual members, under the Plan. 10.5 RULES AND DECISIONS. The Committee may adopt such rules as it deems necessary, desirable, or appropriate. When making a determination or calculation, the Committee shall be entitled to rely upon information furnished by a Participant or Beneficiary, the Employer, the accountants of the Company or the legal counsel of the Company. 9 ARTICLE XI AMENDMENT AND TERMINATION 11.1 RIGHT TO AMEND OR ALTER PLAN. The Plan may be amended by the Company from time to time in any respect whatever by resolution of the Board. Any amendments may be made, which in the judgment of the Committee are necessary or advisable, provided that such amendments do not deprive a Participant, without his consent, of a right to receive his Award hereunder which has been previously vested by such Participant at the applicable point in time. 11.2 RIGHT TO TERMINATE PLAN. This Plan shall continue until terminated as provided in this Section 11.2. The Company expressly reserves the right to terminate this Plan in whole or in part at any time. Unless sooner terminated, this Plan shall terminate on August 31, 2005 (the "Termination Date"). Provided, if the Company elects to terminate the Plan prior to the Termination Date, the Company shall determine a proposed date of termination, and the Committee shall notify the Participants. Provided further, the termination of the Plan shall not cause a termination of any previously vested Award. ARTICLE XII RESOLUTION OF DISPUTES 12.1 RESOLUTION OF DISPUTES. The following provisions shall apply to any controversy between the Company and its Subsidiaries and the Participant (including any director, officer, employee, agent or affiliate of the Company and its Subsidiaries) relating to this Plan or any Award granted pursuant to this Plan. (a) NEGOTIATION. The parties first shall use their reasonable efforts to discuss and negotiate a resolution of the controversy. (b) ARBITRATION. If the efforts to negotiate a resolution do not succeed, the parties shall resolve the controversy by final and binding arbitration in accordance with the Rules for Commercial Arbitration (the "Rules") of the American Arbitration Association in effect at the time of the adoption of this Plan and pursuant to the following additional provisions: (1) APPLICABLE LAW. The Federal Arbitration Act (the "Federal Act"), as supplemented by the Oklahoma Arbitration Act (to the extent not inconsistent with the Federal Act), shall apply to the arbitration and all procedural matters relating to the arbitration. (2) SELECTION OF ARBITRATORS. The parties shall select one arbitrator within ten days after filing of a demand and submission in accordance with the Rules. If the parties fail to agree on an arbitrator within that ten day period or fail to agree to an extension of that period, the arbitration shall take place before an arbitrator selected in accordance with the Rules. (3) LOCATION OF ARBITRATION. The arbitration shall take place in Oklahoma City, Oklahoma, and the arbitrator shall issue any award at the place of arbitration. The arbitrator may conduct hearings and meetings at any place 10 agreeable to the parties or, upon the motion of a party, determined by the arbitrator as necessary to obtain significant testimony or evidence. (4) DISCOVERY. The arbitrator shall have the power to authorize all forms of discovery (including depositions, interrogatories and document production) upon the showing of (i) a specific need for the discovery, (ii) that the discovery likely will lead to material evidence needed to resolve the controversy, and (iii) that the scope, timing and cost of the discovery is not excessive. (5) AUTHORITY OF ARBITRATOR. The arbitrator shall not have the power (i) to alter, modify, amend, add to, or subtract from any term or provision of this Agreement; (ii) to rule upon or grant any extension, renewal or continuance of this Agreement; or (iii) to grant interim injunctive relief prior to the award. (6) ENFORCEMENT OF AWARD. The prevailing party shall have the right to enter the award of the arbitrator in any court having jurisdiction over one or more of the parties or their assets. The parties specifically waive any right they may have to apply to any court for relief from the provisions of this Agreement or from any decision of the arbitrator made prior to the award. (c) ATTORNEYS' FEES AND COSTS. The prevailing party to the arbitration shall have the right to an award of its reasonable attorneys' fees and costs (including the cost of the arbitrator) incurred after the filing of the demand and submission. If the Company prevails, the award shall include an amount for that portion of the administrative overhead reasonably allocable to the time devoted by the in-house legal staff of the Company. (d) OTHER RIGHTS. The provisions of this Section 12.1 shall not prevent the Company, its Subsidiaries, or the Participant from exercising any of their rights under this Plan, the Agreement, or under the common law, including (without limitation) the right to terminate any agreement between the parties or to end or change the party's legal relationship. ARTICLE XIII MISCELLANEOUS PROVISIONS 13.1 ARTICLES AND SECTION TITLES AND HEADINGS. The titles and headings at the beginning of each Article and Section shall not be considered in construing the meaning of any provisions in this Plan. 13.2 LAWS OF OKLAHOMA TO GOVERN. The provisions of this Plan shall be construed, administered and enforced according to the laws of the State of Oklahoma. 13.3 EFFECTIVE DATE OF PLAN. This Plan shall be effective as of the Effective Date. 11 EX-10.16 3 EMPLOYMENT AGREEMENT Exhibit 10.16 Form of Employment Agreement and Schedule of Material Differences for the Executive Officers of the Company EMPLOYMENT AGREEMENT This Agreement is entered into effective as of the ______ day of __________, 1996, by and between __________ (the "Corporation"), a ___________ corporation, and __________________ (the "Employee"). RECITALS Whereas, the Employee is currently serving as the ________________________ of the Corporation and is an integral part of its management; and Whereas, the Corporation's Board of Directors (the "Board") has determined that it is appropriate to reinforce and encourage the continued attention and dedication of certain key members of the Corporation's management, including Employee, to their assigned duties without distraction and potentially disturbing circumstances arising from the possibility of a Change in Control (herein defined) of Sonic Corp.; and Whereas, the Corporation desires to continue the services of Employee, whose experience, knowledge and abilities with respect to the business and affairs of the Corporation are extremely valuable to the Corporation; and Whereas, the Board of Sonic Corp. on the _____ day of ______________, 19__, ratified and approved this Agreement; and Whereas, the parties hereto desire to enter into this Agreement setting forth the terms and conditions of the continued employment relationship of the Corporation and Employee. Now, therefore, it is agreed as follows: ARTICLE I TERM OF EMPLOYMENT 1.1 TERM OF EMPLOYMENT. The Corporation shall employ Employee for a period of _______ year from the date hereof (the "Initial Term"). 1.2 EXTENSION OF INITIAL TERM. Upon each __________ anniversary date of this Agreement, this Agreement shall be extended automatically for successive terms of one year each, unless either the Corporation or the Employee gives contrary written notice to the other not later than the __________ anniversary date. 1.3 TERMINATION OF AGREEMENT AND EMPLOYMENT. The Corporation may terminate this Agreement and the Employee's employment at any time effective upon written notice to the Employee. The Corporation, in its sole discretion, may terminate this Agreement without terminating the employment of the Employee. The Employee may terminate this Agreement and the Employee's employment only after at least 30 days' written notice to the Corporation, unless otherwise agreed by the Corporation. ARTICLE II DUTIES OF THE EMPLOYEE Employee shall serve as the ______________________ of the Corporation. Employee shall do and perform all services, acts, or things necessary or advisable to manage and conduct the business of the Corporation consistent with such position subject to such policies and procedures as may be established by the Board. ARTICLE III COMPENSATION 3.1 SALARY. For Employee's services to the Corporation as the ______________________, Employee shall be paid a salary at the annual rate of $____________ (herein referred to as "Salary"), payable in twenty-four equal installments on the first and fifteenth day of each month. On the first day of each calendar year during the term of this Agreement with the Corporation, Employee shall be eligible for an increase in Salary based on an evaluation of Employee's performance during the past year with the Corporation. During the term of this Agreement, the Salary of the Employee shall not be decreased at any time from the Salary then in effect unless agreed to in writing by the Employee. 3.2 BONUS. The Employee shall be entitled to participate in an equitable manner with other officers of the Corporation in discretionary cash bonuses as authorized by the Board. ARTICLE IV EMPLOYEE BENEFITS 4.1 USE OF AUTOMOBILE. The Corporation shall provide Employee, at the option of Employee, with either the use of a __________automobile for business and personal use (or a different make automobile with a comparable initial retail value) or a cash car allowance of $__________ per month. The Corporation shall pay all expenses of operating, maintaining and repairing the automobile and shall procure and maintain automobile liability insurance in respect thereof, with such coverage insuring each Employee for bodily injury and property damage. 4.2 MEDICAL, LIFE AND DISABILITY INSURANCE BENEFITS. The Corporation shall provide Employee with medical, life and disability insurance benefits in accordance with the established benefit policies of the Corporation. 4.3 WORKING FACILITIES. Employee shall be provided adequate office space, secretarial assistance, and such other facilities and services suitable to Employee's position and adequate for the performance of Employee's duties. 2 4.4 BUSINESS EXPENSES. Employee shall be authorized to incur reasonable expenses for promoting the business of the Corporation, including expenses for entertainment, travel, and similar items. The Corporation shall reimburse Employee for all such expenses upon the presentation by Employee, from time to time, of an itemized account of such expenditures. 4.5 VACATIONS. Employee shall be entitled to an annual paid vacation commensurate with the Corporation's established vacation policy for officers. The timing of paid vacations shall be scheduled in a reasonable manner by the Employee. 4.6 DISABILITY. Upon disability (as defined herein) of the Employee, the Employee shall be entitled to receive an amount equal to 50% of Employee's Salary (in addition to any disability insurance benefits received pursuant to Section 4.2 herein), such amount being paid semi-monthly in twelve equal installments. 4.7 TERM LIFE INSURANCE. The Corporation shall purchase term life insurance on the life of the Employee having a face value of four times the Employee's Salary (to be changed as salary adjustments are made) or the face value of life insurance that can be purchased based upon the Employee's health history with the Corporation paying the standard premium rate for term insurance under its then current insurance program at the Employee's age and assuming good health, whichever amount is lesser; provided further that, such insurance can be obtained by the Corporation in a manner which meets the requirements for deductibility by the Corporation under Section 79 of the Internal Revenue Code of 1986, or as hereafter amended. 4.8 COMPENSATION DEFINED. Compensation shall be defined as all monetary compensation and all benefits described in Articles III and IV hereunder (as adjusted during the term hereof). ARTICLE V TERMINATION 5.1 DEATH. Employee's employment hereunder shall be terminated upon the Employee's death. 5.2 DISABILITY. The Corporation may terminate Employee's employment hereunder in the event Employee is disabled and such disability continues for more than 180 days. Disability shall be defined as the inability of Employee to render the services required of him, with or without a reasonable accommodation, under this Agreement as a result of physical or mental incapacity. 5.3 CAUSE. (a) The Corporation may terminate Employee's employment hereunder for cause. For the purpose of this Agreement, "Cause" shall mean (i) the willful and intentional failure by Employee to substantially perform Employee's duties hereunder, other than any failure resulting from Employee's incapacity due to physical or mental incapacity, or (ii) commission by Employee, 3 in connection with Employee's employment by the Corporation, of an illegal act or any act (though not illegal) which is not in the ordinary course of the Employee's responsibilities and exposes the Corporation to a significant level of undue liability. For purposes of this paragraph, no act or failure to act on Employee's part shall be considered to have met either of the preceding tests unless done or omitted to be done by Employee not in good faith without a reasonable belief that Employee's action or omission was in the best interest of the Corporation. (b) Notwithstanding the foregoing, Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to Employee a copy of a resolution, duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting held within 30 days of such termination (after reasonable notice to Employee and an opportunity for Employee to be heard by members of the Board) confirming that Employee was guilty of the conduct set forth in this Section 5.3. 5.4 COMPENSATION UPON TERMINATION FOR CAUSE OR UPON RESIGNATION BY EMPLOYEE. Except as otherwise set forth in Section 5.7 hereof, if Employee's employment shall be terminated for Cause or if Employee shall resign Employee's position with the Corporation, the Corporation shall pay Employee's Compensation only through the last day of Employee's employment by the Corporation. The Corporation shall then have no further obligation to Employee under this Agreement. 5.5 COMPENSATION UPON TERMINATION OTHER THAN FOR CAUSE OR DISABILITY. Except as otherwise set forth in Section 5.7 hereof, if the Company shall terminate Employee's employment other than for Cause or Disability, the Company shall continue to be obligated to pay Employee's Salary for a period of _____ year, beginning on the date of termination, but shall not be obligated to provide any other benefits described in Articles III and IV hereof, except to the extent required by law. 5.6 COMPENSATION UPON NON-RENEWAL OF AGREEMENT. Except as otherwise set forth in Section 5.7 hereof, if the Company shall give notice to Employee in accordance with Section 1.2 hereof that this Agreement will not be renewed but Employee's employment is not terminated, the Company shall continue to be obligated to pay Employee's Compensation for a period of _____ year beginning on the date notice of non-renewal is given. 5.7 TERMINATION OF EMPLOYEE OR RESIGNATION BY EMPLOYEE FOR GOOD REASON. If at any time within the first twelve months subsequent to a Change in Control, the Employee's employment with the Corporation is terminated other than as provided for in Section 5.1, 5.2 or 5.3 hereof, or the Corporation violates any provision of this Agreement or Employee shall resign Employee's employment for Good Reason (as defined herein), the Corporation shall be obligated to pay to Employee a lump sum payment upon the effective date of such termination or resignation or breach (as determined in Employee's sole discretion), in an amount equal to _____ times the Employee's compensation payable under paragraph 5.5 above, but in no event to exceed an amount equal to $1.00 less than three (3) times the mean average annual compensation paid to Employee by the Corporation and any of its subsidiaries during the five calendar years ending before the date on 4 which the Change in Control occurred (or if Employee was not employed for that entire five year period, then the mean average annual compensation paid to employee during such shorter period, with the Employee's compensation annualized for any calendar year during which the employee was not employed for the entire calendar year); provided, however, that if the lump-sum severance payment under this Section 5.7, either alone or together with any other payments or compensation which Employee has a right to receive from the Corporation, would constitute a "parachute payment" (as defined in Section 280G (or any equivalent term defined in any successor or equivalent provision) of the Internal Revenue Code of 1986, as amended (the "Code")), then such lump-sum severance payment shall be reduced to the largest amount as will result in no portion of the lump-sum severance payment under this Section 5.7 being subject to the excise tax imposed by Section 4999 (or any successor or equivalent provision) of the Code. For the purpose of this Section 5.7, the Employee's annual compensation from the Corporation and its subsidiaries for a given year shall equal Employee's compensation as reflected on Employee's Form W-2 for that year (unless the Employee was not employed for the entire calendar year, in which case Employee's Form W-2 compensation for such year shall be annualized). The determination of any reduction in lump-sum severance payment under this Section 5.7 pursuant to the foregoing provision shall be conclusive and binding on the Corporation. Notwithstanding any other provision of this Section 5.7, Employee may elect to have the lump sum severance payment hereunder paid in equal monthly installments over a period not to exceed 12 consecutive months. "Good Reason" shall mean any of the following which occur during the term of this Agreement without Employee's express written consent: In the Event of a Change in Control: (a) the assignment to Employee of duties inconsistent with Employee's position, office, duties, responsibilities and status with the Corporation immediately prior to a Change in Control; or, a change in Employee's titles or offices as in effect immediately prior to a Change in Control; or, any removal of Employee from or any failure to reelect Employee to any such position or office, except in connection with the termination of Employee's employment by the Corporation for Disability or Cause or as a result of Employee's death or by Employee other than for Good Reason as set forth in this Section 5.7(a); OR (b) a reduction by the Corporation in Employee's Salary as in effect as of the date of this Agreement or as the same may be increased from time-to-time during the term of this Agreement or the Corporation's failure to increase (within twelve months of the Employee's last increase in Salary) Employee's Salary after a Change in Control in an amount which at least equals, on a percentage basis, the highest percentage increase in salary for all officers of the Corporation or any parent or affiliated company effected in the preceding twelve months; OR (c) the failure of the Corporation to provide Employee with the same fringe benefits (including, without limitation, life insurance plans, medical or 5 disability plans, retirement plans, incentive plans, stock option plans, stock purchase plans, stock ownership plans, or bonus plans) that were provided to Employee immediately prior to the Change in Control, or with a package of fringe benefits that, if one or more of such benefits varies from those in effect immediately prior to such Change in Control, is in Employee's sole judgment substantially comparable in all material respects to such fringe benefits taken as a whole; OR (d) relocation of the Corporation's principal executive offices to a location outside of Oklahoma City, Oklahoma, or Employee's relocation to any place other than the location at which Employee performed Employee's duties prior to a Change in Control, except for required travel by Employee on the Corporation's business to an extent substantially consistent with Employee's business travel obligations at the time of the Change in Control; OR (e) any failure by the Corporation to provide Employee with the same number of paid vacation days to which Employee is entitled at the time of the Change in Control; OR (f) the failure of a successor to the Corporation to assume the obligation of this Agreement as set forth in Section 7.1 herein. 5.8. CHANGE IN CONTROL. For the purposes of this Agreement, the phrase "change in control" shall mean any of the following events: (a) Any consolidation or merger of Sonic Corp. in which Sonic Corp. is not the continuing or surviving corporation or pursuant to which shares of the Corporation's capital stock would convert into cash, securities or other property, other than a merger of Sonic Corp. in which the holders of Sonic Corp.'s capital stock immediately prior to the merger have the same proportionate ownership of capital stock of the surviving corporation immediately after the merger; (b) Any sale, lease, exchange or other transfer (whether in one transaction or a series of related transactions) of all or substantially all of the assets of the Corporation; (c) The stockholders of Sonic Corp. approve any plan or proposal for the liquidation or dissolution of Sonic Corp.; (d) Any person (as used in Section 13(d) and 14(d)(2) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) becomes the beneficial owner (within the meaning of Rule 13D-3 under the Exchange Act) of 50% or more of Sonic Corp.'s outstanding capital stock; 6 (e) During any period of two consecutive years, individuals who at the beginning of that period constitute the entire Board of Directors of Sonic Corp. cease for any reason to constitute a majority of the Board of Directors unless the election or the nomination for election by Sonic Corp.'s stockholders of each new director received the approval of the Board of Directors by a vote of at least two-thirds of the directors then and still in office and who served as directors at the beginning of the period; or (f) Sonic Corp. becomes a subsidiary of any other corporation. ARTICLE VI OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER CONTRACTUAL RIGHTS 6.1 MITIGATION. The Employee shall not have any obligation to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise. However, all payments required under the terms of this Agreement shall cease 30 days after the acceptance by the Employee of employment by another employer; provided that, this limitation shall not apply to payments due under paragraph 5.7, above. 6.2 OTHER CONTRACTUAL RIGHTS. The provisions of this Agreement, and any payment provided for hereunder shall not reduce any amount otherwise payable, or in any way diminish Employee's existing rights, or rights which would accrue solely as a result of passage of time under any employee benefit plan or other contract, plan or arrangement of which Employee is a beneficiary or in which Employee participates. ARTICLE VII SUCCESSORS TO THE CORPORATION 7.1 ASSUMPTION. The Corporation will require any successor or assignee (whether direct or indirect, by purchase, merger, consolidation or otherwise) of all or substantially all of the business and/or assets of the Corporation, by agreement in form and substance reasonably satisfactory to Employee, to expressly, absolutely and unconditionally assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession or assignment had taken place. Any failure by the Corporation to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement. 7.2 EMPLOYEE'S SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be enforceable by Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts are still payable to Employee hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee or other designee or, if there is no such designee, to Employee's estate. 7 ARTICLE VIII RESTRICTIONS ON EMPLOYEE 8.1 CONFIDENTIAL INFORMATION. During the term of the Employee's employment and for a period of twelve months thereafter, the Employee shall not divulge or make accessible to any party any Confidential Information, as defined below, of Sonic Corp. or any of its subsidiaries, except to the extent authorized in writing by the Corporation or otherwise required by law. The phrase "Confidential Information" shall mean the unique, proprietary and confidential information of Sonic Corp. and its subsidiaries, consisting of: (1) confidential financial information regarding Sonic Corp. or its subsidiaries, (2) confidential recipes for food products; (3) confidential and copyrighted plans and specifications for interior and exterior signs, designs, layouts and color schemes; (4) confidential methods, techniques, formats, systems, specifications, procedures, information, trade secrets, sales and marketing programs; (5) knowledge and experience regarding the operation and franchising of Sonic drive-in restaurants; (6) the identities and locations of Sonic's franchisees, Sonic drive-in restaurants, and suppliers to Sonic's franchisees and drive-in restaurants; (7) knowledge, financial information, and other information regarding the development of franchised and company-store restaurants; (8) knowledge, financial information, and other information regarding potential acquisitions and dispositions; and (9) any other confidential business information of Sonic Corp. or any of its subsidiaries. The Employee shall give the Corporation written notice of any circumstances in which Employee has actual notice of any access, possession or use of the Confidential Information not authorized by this Agreement. 8.2 RESTRICTIVE COVENANT. During the term of Employee's employment, the Employee shall not engage in or have any interest, directly or indirectly, in any business competing with the business being conducted by Sonic Corp. or any of its subsidiaries, without the Corporation's prior written consent. For the six month period immediately following the termination of Employee's employment, the Employee shall not engage in or have any interest, directly or indirectly, in any fast food restaurant business that has a menu similar to that of a Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings and similar items customarily sold by Sonic drive-in restaurants), or which has an appearance similar to that of a Sonic drive-in restaurant (such as color pattern, use of canopies, use of speakers and menu housings for ordering food, or other items that are customarily used by a Sonic drive-in restaurant), and which operates such restaurants within a three mile radius of any Sonic drive-in restaurant. ARTICLE IX MISCELLANEOUS 9.1 INDEMNIFICATION. To the full extent permitted by law, the Board shall authorize the payment of expenses incurred by or shall satisfy judgments or fines rendered or levied against Employee in any action brought by a third-party against Employee (whether or not the Corporation is joined as a party defendant) to impose any liability or penalty on Employee for any act alleged to have been committed by Employee while employed by the Corporation unless Employee was 8 acting with gross negligence or willful misconduct. Payments authorized hereunder shall include amounts paid and expenses incurred in settling any such action or threatened action. 9.2 RESOLUTION OF DISPUTES. The following provisions shall apply to any controversy between the Employee and Sonic Corp. and its subsidiaries and the Employee (including any director, officer, employee, agent or affiliate of Sonic Corp. and its subsidiaries) whether or not relating to this Agreement. (a) ARBITRATION. The parties shall resolve all controversies by final and binding arbitration in accordance with the Rules for Commercial Arbitration (the "Rules") of the American Arbitration Association in effect at the time of the execution of this Agreement and pursuant to the following additional provisions: (1) APPLICABLE LAW. The Federal Arbitration Act (the "Federal Act"), as supplemented by the Oklahoma Arbitration Act (to the extent not inconsistent with the Federal Act), shall apply to the arbitration and all procedural matters relating to the arbitration. (2) SELECTION OF ARBITRATORS. The parties shall select one arbitrator within 10 days after the filing of a demand and submission in accordance with the Rules. If the parties fail to agree on an arbitrator within that 10-day period or fail to agree to an extension of that period, the arbitration shall take place before an arbitrator selected in accordance with the Rules. (3) LOCATION OF ARBITRATION. The arbitration shall take place in Oklahoma City, Oklahoma, and the arbitrator shall issue any award at the place of arbitration. The arbitrator may conduct hearings and meetings at any other place agreeable to the parties or, upon the motion of a party, determined by the arbitrator as necessary to obtain significant testimony or evidence. (4) DISCOVERY. The arbitrator shall have the power to authorize all forms of discovery (including depositions, interrogatories and document production) upon the showing of (a) a specific need for the discovery, (b) that the discovery likely will lead to material evidence needed to resolve the controversy, and (c) that the scope, timing and cost of the discovery is not excessive. (5) AUTHORITY OF ARBITRATOR. The arbitrator shall not have the power (a) to alter, modify, amend, add to, or subtract from any term or provision of this Agreement; (b) to rule upon or grant any 9 extension, renewal or continuance of this Agreement; or (c) to grant interim injunctive relief prior to the award. (6) ENFORCEMENT OF AWARD. The prevailing party shall have the right to enter the award of the arbitrator in any court having jurisdiction over one or more of the parties or their assets. The parties specifically waive any right they may have to apply to any court for relief from the provisions of this Agreement or from any decision of the arbitrator made prior to the award. (b) ATTORNEYS' FEES AND COSTS. The prevailing party to the arbitration shall have the right to an award of its reasonable attorneys' fees and costs (including the cost of the arbitrator) incurred after the filing of the demand and submission. If the Corporation or any of its subsidiaries prevails, the award shall include an amount for that portion of the administrative overhead reasonably allocable to the time devoted by the in-house legal staff of Sonic Corp. or any subsidiary. (c) EXCLUDED CONTROVERSIES. At the election of the Corporation or its subsidiaries, the provisions of this Section 9.2 shall not apply to any controversies relating to the enforcement of the covenant not to compete or the use and protection of the trademarks, service marks, tradenames, copyrights, patents, confidential information and trade secrets of Sonic Corp. or its subsidiaries, including (without limitation) the right of Sonic Corp. or its subsidiaries to apply to any court of competent jurisdiction for appropriate injunctive relief for the infringement of the rights of Sonic Corp. or its subsidiaries. (d) OTHER RIGHTS. The provisions of this Section 9.2 shall not prevent the Corporation, its subsidiaries, or the Employee from exercising any of their rights under this agreement, any other agreement, or under the common law, including (without limitation) the right to terminate any agreement between the parties or to end or change the party's legal relationship. 9.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with regard to the subject matter of this Agreement and replaces and supersedes all other written and oral agreements and statements of the parties relating to the subject matter of this Agreement. 9.4 NOTICES. Any notices required or permitted to be given under this Agreement shall be sufficient if in writing and sent by mail to Employee's residence, in the case of Employee, or to its principal office, in the case of the Corporation. 9.5 WAIVER OF BREACH. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any party. 10 9.6 AMENDMENT. No amendment or modification of this Agreement shall be deemed effective unless or until executed in writing by the parties hereto. 9.7 VALIDITY. This Agreement, having been executed and delivered in the State of Oklahoma, its validity, interpretation, performance and enforcement will be governed by the laws of that state. 9.8 SECTION HEADINGS. Section and other headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.9 COUNTERPART EXECUTION. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 9.10 EXCLUSIVITY. Specific arrangements referred to in this Agreement are not intended to exclude Employee's participation in any other benefits available to executive personnel generally or to preclude other compensation or benefits as may be authorized by the Board from time to time. 9.11 PARTIAL INVALIDITY. If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way. In witness whereof, the Corporation has caused this Agreement to be executed and its seal affixed hereto by its officers thereunto duly authorized; and the Employee has executed this Agreement, as of the day and year first above written. The Corporation: ---------------------------------------- By: ------------------------------------- (Vice) President Attest: - ------------------------------ (Assistant) Secretary The Employee: ---------------------------------------- 11 SCHEDULE OF MATERIAL DIFFERENCES FOR THE EXECUTIVE OFFICERS OF THE COMPANY PART I
TERM OF OFFICER TITLE CONTRACTING CORPORATION AGREEMENT - ------- ----- ----------------------- --------- J.C. Hudson President and CEO Sonic Corp. two years L.B. Kilbourne Senior Vice President and Chief Sonic Corp. one year Financial Officer K. Keymer President Sonic Industries Inc. one year M. Shumsky President Sonic Restaurants, Inc. one year P. Moore Senior Vice President of Marketing Sonic Corp. one year and Brand Development R. Matlock Vice President, Secretary and Sonic Corp. one year General Counsel D. Dolan Vice President of Administration Sonic Corp. one year and Corporate Human Resources L. Gadola Vice President of Corporate Development Sonic Restaurants, Inc. one year S. Jeska Vice President of Franchise Sonic Industries Inc. one year Development S. McLain Treasurer Sonic Corp. one year R. Moore Vice President of Operations Services Sonic Restaurants, Inc. one year D. Ritger Vice President of Purchasing Sonic Industries Inc. one year W. Van Sciver Vice President of Franchise Services Sonic Industries Inc. one year S. Vaughan Controller Sonic Corp. one year F. Young Vice President of Operations Sonic Restaurants, Inc. one year
SCHEDULE OF MATERIAL DIFFERENCES FOR THE EXECUTIVE OFFICERS OF THE COMPANY PART II
AUTOMOBILE SECTION SECTION SECTION OFFICER SALARY AUTOMOBILE ALLOWANCE 5.5 5.6 5.7 - ------- ------ ---------- --------- --- --- --- J.C. Hudson $250,000 Full-size $1,000 Two Years Two Years One and Luxury One-half L.B. Kilbourne $155,000 Luxury $850 One Year One Year Two K. Keymer $187,000 Full-size $1,000 One Year One Year Two Luxury M. Shumsky $170,000 Full-size $1,000 One Year One Year Two Luxury P. Moore $120,000 Luxury $850 One Year One Year Two R. Matlock $140,000 Luxury $850 One Year One Year Two D. Dolan $75,000 Luxury $850 Six Months Six Months Two L. Gadola $95,000 Luxury $850 Six Months Six Months Two S. Jeska $100,000 Luxury $850 Six Months Six Months Two S. McLain $95,004 Luxury $850 Six Months Six Months Two R. Moore $100,000 Luxury $850 Six Months Six Months Two D. Ritger $110,000 Luxury $850 Six Months Six Months Two W. Van Sciver $111,456 Luxury $850 Six Months Six Months Two S. Vaughan $60,000 Luxury $850 Six Months Six Months Two F. Young $101,760 Luxury $850 Six Months Six Months Two
EX-10.18 4 1ST AMENDMENT TO LOAN AGREEMENT Exhibit 10.18 First Amendment to Loan Agreement with Texas Commerce Bank National Association FIRST AMENDMENT TO LOAN AGREEMENT This FIRST AMENDMENT TO LOAN AGREEMENT (this "AMENDMENT"), dated as of August 16, 1996, is among SONIC CORP., a Delaware corporation (the "BORROWER"), each of the banks or other lending institutions which is or may from time to time become a signatory or party to the Agreement (hereinafter defined) or any successor or permitted assignee thereof (each a "BANK" and collectively, the "BANKS"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association ("TCB"), as agent for itself and the other Banks and as issuer of Letters of Credit under the Agreement (in such capacity, together with its successors in such capacity, the "AGENT"). RECITALS: A. Borrower, Agent and Banks have entered into that certain Loan Agreement dated as of July 12, 1995 (the "AGREEMENT"). B. Pursuant to the Agreement, the undersigned guarantors (each a "GUARANTOR" and, collectively, the "GUARANTORS") executed those certain Guaranty Agreements dated as of July 12, 1995 (each a "GUARANTY" and collectively, the "GUARANTIES"), which guarantee to Agent the payment and performance of the Obligations (as defined in the Agreement). C. Borrower, Agent and Banks now desire to amend the Agreement (i) to increase the commitments of the Banks to $60,000,000 in the aggregate, (ii) to reduce the interest rate margins applicable to Eurodollar Advances, (iii) to modify certain covenants, and (iii) as otherwise provided herein. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.1 DEFINITIONS. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the same meanings as in the Agreement, as amended hereby. ARTICLE II AMENDMENTS Section 2.1 BANKS. Concurrently herewith, Bank of Oklahoma, N.A. ("BOK") is assigning to UMB Oklahoma Bank ("UMB") all of BOK's rights and obligations under the Agreement and the other Loan Documents pursuant to that certain Assignment and Acceptance of even date herewith between BOK as Assignor and UMB as Assignee. Thereafter, one or more Banks shall make offsetting payments to the other Banks as requested by the Agent in order to cause the outstanding principal balance of each Bank's Note to correspond to its Commitment as amended herein. Section 2.2 AMENDMENT TO COMMITMENTS. Effective as of the date hereof, the Commitment amounts set forth on the signature pages to the Agreement are hereby amended to be the amounts set forth below for the respective Banks: Texas Commerce Bank National Association $ 22,500,000 UMB Oklahoma Bank 11,250,000 Bank IV Oklahoma, N.A. 11,250,000 BancFirst 7,500,000 Summit Bank 7,500,000 --------------- TOTAL $ 60,000,000 --------------- --------------- Section 2.3 AMENDMENT TO DEFINITION OF APPLICABLE PERCENTAGE. Effective as of the date hereof, the table appearing in the definition of "APPLICABLE PERCENTAGE" set forth in Section 1.1 of the Agreement is hereby amended to read in its entirety as follows:
RATIO OF CONSOLIDATED APPLICABLE MARGIN APPLICABLE APPLICABLE FUNDED DEBT TO OR EURODOLLAR COMMITMENT LETTER OF CONSOLIDATED EBITDA ADVANCES FEE CREDIT FEE - ------------------- ----------------- ----------- ----------- Less than or equal to .50 to .75% .125% .75% 1.00 Greater than .50 to 1.00 but 1.00% .20% 1.00% less than or equal to 1.50 to 1.00 Greater than 1.50 to 1.00 1.25% .25% 1.25%
Section 2.4 AMENDMENT TO DEFINITION OF CONSOLIDATED FUNDED DEBT. Effective as of the date hereof, clause (c) of the definition of "CONSOLIDATED FUNDED DEBT" set forth in Section 1.1 of the Agreement is hereby amended to read as follows: (c) all obligations for the deferred purchase price of property, including all Seller Financing, -2- Section 2.5 AMENDMENT TO DEFINITION OF ENGAGEMENT LETTER. Effective as of the date hereof, the definition of "ENGAGEMENT LETTER" set forth in Section 1.1 of the Agreement is hereby amended to read in its entirety as follows: "ENGAGEMENT LETTER" means that certain letter agreement dated May 21, 1996, among Borrower, Chase Securities Inc. and TCB. Section 2.6 AMENDMENT TO DEFINITION OF FIXED CHARGE COVERAGE RATIO. Effective as of the date hereof, the definition of "FIXED CHARGE COVERAGE RATIO" set forth in Section 1.1 of the Agreement is hereby amended to read in its entirety as follows: "FIXED CHARGE COVERAGE RATIO" means, at the end of each fiscal quarter of the Borrower for the most recent four (4) fiscal quarters then ended, the ratio of (a) Consolidated EBITDA minus Income Taxes paid by the Borrower and the Subsidiaries, TO (b) the sum of the following for the Borrower and the Subsidiaries on a consolidated basis: (i) Operating Capital Expenditures, PLUS (ii) cash interest expense (including the interest portion of Capital Lease Obligations and Seller Financing), PLUS (iii) scheduled principal payments of Consolidated Funded Debt (including, without limitation, Capital Lease Obligations and Seller Financing), PLUS (iv) the aggregate amount of cash dividends paid, PLUS (v) the aggregate amount paid for repurchases by the Borrower or any Subsidiary of stock of such Person, PLUS (vi) the amount equal to one-seventh (1/7) of the aggregate amount of all Advances outstanding hereunder on the last day of such fiscal quarter. Section 2.7 NEW DEFINITIONS. Effective as of the date hereof, Section 1.1 of the Agreement is hereby amended to add the following definitions of "L/C SUBLIMIT," "PERMITTED GUARANTEE AMOUNT" and "SELLER FINANCING," which definitions shall read in their respective entireties as follows: "L/C SUBLIMIT" means $2,000,000; provided, however, that the L/C Sublimit may be increased to $12,000,000 at the Borrower's election, provided that (a) such election is made on or before December 31, 1996, (b) such election is made by written notice to the Agent, and such notice states the effective date of the increased L/C Sublimit which shall be a date not later than December 31, 1996, (c) the aggregate amount of all Guarantees by the Borrower or any Subsidiary of any Debt or other obligations shall not be in excess of $5,000,000, and (d) no Event of Default or event or condition which with notice or lapse of time or both would become an Event of Default is existing on the date of the election notice or the effective date of the increase and no such event or condition will result from the increase. "PERMITTED GUARANTEE AMOUNT" means $12,000,000; provided, however, that if the L/C Sublimit is increased to $12,000,000 in accordance with this agreement, the Permitted Guarantee Amount shall automatically reduce to $5,000,000 effective immediately upon the effective date of such increase of the L/C Sublimit. -3- "SELLER FINANCING" means Debt of the Borrower or any Subsidiary incurred in connection with the purchase or acquisition of, and representing the price of, all or any part of the assets of any Person or any shares or other evidence of beneficial ownership of any Person. Section 2.8 AMENDMENT TO LETTER OF CREDIT SUBLIMIT. Effective as of the date hereof, clause (a) of Section 3.1 of the Agreement is hereby amended to read in its entirety as follows: "(a) the L/C Sublimit, or" Section 2.9 AMENDMENT TO REPORTING REQUIREMENTS. Effective as of the date hereof, subsection (g) of Section 8.1 of the Agreement is hereby amended to read in its entirety as follows: (g) GUARANTEES OF DEBT. Promptly, and in any event within five (5) days after the date on which the Borrower or any of the Subsidiaries enters into a Guarantee of Debt or of other obligations in the amount of $500,000 or more, written notice stating such fact and the nature of such Guarantee; and Section 2.10 AMENDMENTS TO COVENANT REGARDING DEBT AND CONTINGENT OBLIGATIONS. Effective as of the date hereof, Section 9.1 of the Agreement is hereby amended as follows: (a) the amount "Five Million Dollars ($5,000,000)" appearing in subsection (d) is amended to read "Ten Million Dollars ($10,000,000)"; (b) subsection (f) is amended to read in its entirety as follows: (f) unsecured Debt of the Borrower or any Subsidiary evidenced by any promissory note payable to any seller, representing a portion of the purchase price for any acquisition permitted under this Agreement, provided that such Debt shall not exceed Thirty-Five Million Dollars ($35,000,000) in the aggregate at any time outstanding; (c) subsection (h) is amended to read in its entirety as follows: (h) Guarantees of Debt and of other obligations, in an aggregate amount outstanding at any time not to exceed the Permitted Guarantee Amount. Section 2.11 AMENDMENT TO LIMITATION ON ACQUISITIONS. Effective as of the date hereof, the amount "Fifteen Million and No/100 Dollars ($15,000,000.00)" appearing in clause (a) of Section 9.3 of the Agreement is hereby amended to read "Thirty-Five Million and No/100 Dollars ($35,000,000.00)". Section 2.12 AMENDMENT TO MINIMUM CONSOLIDATED NET WORTH. Effective as of the date hereof, Section 10.2 of the Agreement is hereby amended to read in its entirety as follows: -4- Section 10.2. MINIMUM CONSOLIDATED NET WORTH. The Borrower will not permit the Consolidated Net Worth to be less than the sum of (a) $103,000,000, PLUS (b) for each fiscal quarter of the Borrower ended through the date of determination, beginning with the fiscal quarter ending May 31, 1996, (i) 100% of the positive consolidated net income of the Borrower and the Subsidiaries for such quarter, MINUS (ii) all cash dividends declared and paid by the Borrower for such quarter, and MINUS (iii) the amount of all stock of the Borrower repurchased by the Borrower during such quarter, PLUS (c) 100% of the Net Proceeds received by the Borrower from any issuance, sale or other disposition of any shares of capital stock or other equity securities of the Borrower of any class (or any securities convertible or exchangeable for any such shares, or any rights, warrants, or options to subscribe for or purchase any such shares), but in no event shall the sum of (a), (b) and (c) above be less than $103,000,000. Section 2.13 AMENDMENT TO FUNDED DEBT TO EBITDA RATIO. Effective as of the date hereof, Section 10.4 of the Agreement is hereby amended to read in its entirety as follows: Section 10.4. CONSOLIDATED FUNDED DEBT TO CONSOLIDATED EBITDA RATIO. The Borrower will maintain or cause to be maintained, as of the end of each quarter of each fiscal year of the Borrower, a ratio of Consolidated Funded Debt to Consolidated EBITDA of not greater than 2.00 to 1.00 for the most recent four (4) fiscal quarters then ended. Section 2.14 AMENDMENTS TO COMPLIANCE CERTIFICATE AND LETTER OF CREDIT REQUEST FORM. Effective as of the date hereof, (a) Exhibit "B-2" to the Agreement is hereby amended to read in its entirety as set forth on Annex II hereto, and (b) Exhibit "D" to the Agreement is hereby amended to read in its entirety as set forth on Annex III hereto. Section 2.15 AMENDMENT TO LITIGATION SCHEDULE. Effective as of the date hereof, Schedule 1 to the Agreement is hereby amended to read in its entirety as set forth on Annex IV hereto. ARTICLE III CONDITIONS PRECEDENT Section 3.1 CONDITIONS. The effectiveness of this Amendment is subject to the satisfaction of each of the following conditions precedent: (a) DOCUMENTS. Agent shall have received all of the following, each dated (unless otherwise indicated) the date of this Amendment, in form and substance satisfactory to Agent: (1) RESOLUTIONS. Resolutions of the Board of Directors of Borrower and each Guarantor (other than the Partnerships), certified by the Secretary or an Assistant Secretary of such Person, which authorize the execution, delivery, and -5- performance by such Person of this Amendment and the other Loan Documents to which such Person is or is to be a party hereunder; (2) INCUMBENCY CERTIFICATE. A certificate of incumbency certified by the Secretary or an Assistant Secretary of Borrower and each Guarantor (other than the Partnerships), respectively, certifying the names of the officers of such Person authorized to sign this Amendment and each of the other Loan Documents to which such Person is or is to be a party hereunder (including the certificates contemplated herein) together with specimen signatures of such officers; (3) CERTIFICATES OF INCORPORATION. The certificates of incorporation of Borrower and each Guarantor which is a corporation, certified by the Secretary of State of its state of incorporation and dated within ten (10) days prior to the date hereof; (4) BYLAWS. The bylaws of Borrower and each Guarantor which is a corporation, certified by the Secretary or an Assistant Secretary of such Person; (5) GOVERNMENTAL CERTIFICATES. (a) Certificates of the appropriate government officials of the respective states of incorporation of the Borrower and each Guarantor (other than the Partnerships) as to the existence and good standing of such Persons, and (b) with respect to the Borrower, Sonic Restaurants, Inc., Sonic Service Corp. and Sonic Industries Inc. only, certificates of the appropriate governmental officials of each state where the nature of such Person's business in such state makes qualification to do business necessary and where failure to so qualify would have a Material Adverse Effect, as to the qualification and good standing of such Person in such state, each dated within ten (10) days prior to the date hereof; (6) BUSINESS TRUST DOCUMENTATION. Appropriate organizational documents and agreements relating to America's Drive-In Trust, as the Agent may request, all certified to the satisfaction of the Agent; (7) PARTNERSHIP CERTIFICATE. A certificate of an authorized officer of Sonic Restaurants, Inc., certifying that (i) each of the Partnerships has been duly formed and is validly existing, (ii) the Partnerships have the power and authority to execute, deliver and perform this Amendment and the other Loan Documents to which they are a party, and (iii) Sonic Restaurants, Inc. has the power and authority to execute this Amendment and such Loan Documents on behalf of the Partnerships, as the managing general partner of each of the Partnerships, and to thereby bind the Partnerships; (8) NOTES. Promissory Notes, each in the form of Annex V hereto, executed by the Borrower and payable to the order of the respective Banks, each in the amount of the respective Bank's Commitment, which Promissory Notes shall be in renewal and modification of the Notes executed at the closing of the Agreement; -6- (9) OPINION OF COUNSEL. A favorable opinion of Phillips McFall McCaffrey McVay & Murrah, P.C., legal counsel to Borrower and the Subsidiaries, as to the matters set forth in Annex VI hereto, and such other matters as Agent may reasonably request; and (10) ADDITIONAL INFORMATION. Agent shall have received such additional documents, instruments and information as Agent or its legal counsel, Winstead Sechrest & Minick P.C., may request; (b) ATTORNEYS' FEES AND EXPENSES. The Borrower shall have paid the costs and expenses (including reasonable attorneys' fees) of the Agent, incurred in connection with the preparation, negotiation, execution and closing of this Amendment; (c) REPRESENTATIONS AND WARRANTIES. The representations and warranties contained herein and in all other Loan Documents, as amended hereby, shall be true and correct as of the date hereof as if made on the date hereof; (d) NO DEFAULT. No Event of Default shall have occurred and be continuing and no event or condition shall have occurred that with the giving of notice or lapse of time or both would be an Event of Default. (e) ADJUSTMENT OF PRINCIPAL BALANCES. One or more Banks shall have made offsetting payments to the other Banks as requested by the Agent in order to cause the outstanding principal balance of each Bank's Note to correspond to its Commitment as amended herein. (f) CORPORATE MATTERS. All corporate proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments, and other legal matters incident thereto shall be satisfactory to Agent and its legal counsel, Winstead Sechrest & Minick P.C. ARTICLE IV RATIFICATIONS, REPRESENTATIONS AND WARRANTIES Section 4.1 RATIFICATIONS. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Agreement and except as expressly modified and superseded by this Amendment, the terms and provisions of the Agreement are ratified and confirmed and shall continue in full force and effect. Borrower, Agent and the Banks agree that the Agreement as amended hereby shall continue to be legal, valid, binding and enforceable in accordance with its terms. Section 4.2 OUTSTANDING PRINCIPAL BALANCES. The parties hereto acknowledge that the aggregate outstanding principal balance of the Advances as of the date hereof is $4,000,000 and that the outstanding principal amount of Advances held by each Bank is specified below: -7- BANK OUTSTANDING ADVANCES Texas Commerce Bank National Association $ 1,500,000 UMB Oklahoma Bank 750,000 Bank IV Oklahoma, N.A. 750,000 BancFirst 500,000 Summit Bank 500,000 -------------- TOTAL $ 4,000,000 -------------- -------------- Section 4.3 RELEASE OF CLAIMS. The Borrower and the Guarantors each hereby acknowledge and agree that none of them has any and there are no claims or offsets against or defenses or counterclaims to the terms and provisions of or the obligations of the Borrower, any Guarantor or any Subsidiary created or evidenced by the Agreement or any of the other Loan Documents, and to the extent any such claims, offsets, defenses or counterclaims exist, the Borrower and the Guarantors each hereby waive, and hereby release the Agent and each of the Banks from, any and all claims, offsets, defenses and counterclaims, whether known or unknown, such waiver and release being with full knowledge and understanding of the circumstances and effects of such waiver and release and after having consulted legal counsel with respect thereto. Section 4.4 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Agent and the Banks that (i) the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and/or delivered in connection herewith have been authorized by all requisite corporate, partnership and trust action on the part of Borrower and the Guarantors and will not violate the articles of incorporation, bylaws, partnership agreement or other organizational documents of Borrower or the Guarantors, (ii) the representations and warranties contained in the Agreement, as amended hereby, and any other Loan Document are true and correct on and as of the date hereof as though made on and as of the date hereof, (iii) no Event of Default has occurred and is continuing and no event or condition has occurred that with the giving of notice or lapse of time or both would be an Event of Default, and (iv) Borrower is in full compliance with all covenants and agreements contained in the Agreement as amended hereby. ARTICLE V MISCELLANEOUS Section 5.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Amendment or any other Loan Document including any Loan Document furnished in connection with this Amendment shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Agent or any Bank or any closing shall affect the representations and warranties or the right of Agent and the Banks to rely upon them. Section 5.2 REFERENCE TO AGREEMENT. Each of the Loan Documents, including the Agreement and any and all other agreements, documents, or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Agreement -8- as amended hereby, are hereby amended so that any reference in such Loan Documents to the Agreement shall mean a reference to the Agreement as amended hereby. Section 5.3 EXPENSES OF AGENT. As provided in the Agreement, Borrower agrees to pay on demand all costs and expenses incurred by Agent in connection with the preparation, negotiation, and execution of this Amendment and the other Loan Documents executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including without limitation the costs and fees of Agent's legal counsel. Section 5.4 SEVERABILITY. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section 5.5 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN DALLAS, DALLAS COUNTY, TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. Section 5.6 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall inure to the benefit of Borrower, Agent and the Banks and their respective successors and permitted assigns, except Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Agent. Section 5.7 COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. Section 5.8 EFFECT OF WAIVER. No consent or waiver, express or implied, by Agent or any Bank to or for any breach of or deviation from any covenant, condition or duty by Borrower or any Guarantor shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. Section 5.9 HEADINGS. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. Section 5.10 NON-APPLICATION OF CHAPTER 15 OF TEXAS CREDIT CODE. The provisions of Chapter 15 of the Texas Credit Code (Vernon's Annotated Texas Statutes, Article 5069-15) are specifically declared by the parties not to be applicable to this Amendment or any of the Loan Documents or the transactions contemplated hereby. Section 5.11 ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO REGARDING THIS AMENDMENT AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND -9- UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. Executed as of the date first written above. BORROWER: SONIC CORP. By: /s/ W. Scott McLain ------------------------------------ W. Scott McLain Treasurer AGENT AND BANKS: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent and as a Bank By: /s/ Matthew H. Hildreth ------------------------------------ Name: Matthew H. Hildreth ------------------------------ Title: Vice President ------------------------------ UMB OKLAHOMA BANK By: /s/ David R. Schaefer ------------------------------------ Name: David R. Schaefer ------------------------------ Title: Senior Vice President ------------------------------ BANK IV OKLAHOMA, N.A. By: /s/ Richard A. Horton ------------------------------------ Name: Richard A. Horton ------------------------------ Title: Senior Vice President ------------------------------ -10- BANCFIRST By: /s/ E. G. Alexander ------------------------------------ Name: E. G. Alexander ------------------------------ Title: Senior Vice President ------------------------------ SUMMIT BANK (formerly UNITED JERSEY BANK) By: /s/ Arty C. Zulawski ------------------------------------ Name: Arty C. Zulawski ------------------------------ Title: Senior Vice President ------------------------------ Each Guarantor hereby (a) consents and agrees to this Amendment, (b) agrees that its respective Guaranty shall continue to be the legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms, and (c) represents and warrants that each of the representations and warranties set forth in this Amendment with regard to each such Guarantor are true and correct in all respects. GUARANTORS: SONIC RESTAURANTS, INC. By: /s/ W. Scott McLain ------------------------------------ W. Scott McLain Treasurer SONIC INDUSTRIES INC. By: /s/ W. Scott McLain ------------------------------------ W. Scott McLain Treasurer AMERICA'S DRIVE-IN CORP. By: /s/ Lewis B. Kilbourne ------------------------------------ Lewis B. Kilbourne President -11- AMERICA'S DRIVE-IN TRUST By: /s/ Lewis B. Kilbourne ------------------------------------ Lewis B. Kilbourne President EACH OF THE PARTNERSHIPS SPECIFIED ON ANNEX I HERETO, each an Oklahoma general partnership By: Sonic Restaurants, Inc., Managing General Partner of each of such partnerships By: /s/ W. Scott McLain ------------------------------------ W. Scott McLain Treasurer -12- EX-10.19 5 2ND AMENDMENT TO LOAN AGREEMENT Exhibit 10.19 Second Amendment to Loan Agreement with Texas Commerce Bank National Association SECOND AMENDMENT TO LOAN AGREEMENT This SECOND AMENDMENT TO LOAN AGREEMENT (this "AMENDMENT"), dated as of September 27, 1996, is among SONIC CORP., a Delaware corporation (the "BORROWER"), each of the banks or other lending institutions which is or may from time to time become a signatory or party to the Agreement (hereinafter defined) or any successor or permitted assignee thereof (each a "BANK" and collectively, the "BANKS"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association ("TCB"), as agent for itself and the other Banks and as issuer of Letters of Credit under the Agreement (in such capacity, together with its successors in such capacity, the "AGENT"). RECITALS: A. Borrower, Agent and Banks have entered into that certain Loan Agreement dated as of July 12, 1995, as amended by that certain First Amendment to Loan Agreement dated as of August 16, 1996 (the "AGREEMENT"). B. Pursuant to the Agreement, the undersigned guarantors (each a "GUARANTOR" and, collectively, the "GUARANTORS") executed those certain Guaranty Agreements dated as of July 12, 1995 (each a "GUARANTY" and collectively, the "GUARANTIES"), which guarantee to Agent the payment and performance of the Obligations (as defined in the Agreement). C. Borrower, Agent and Banks now desire to amend the Agreement to revise the minimum Consolidated Net Worth covenant as provided herein. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.1 DEFINITIONS. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the same meanings as in the Agreement, as amended hereby. ARTICLE II AMENDMENT Section 2.1 AMENDMENT TO MINIMUM CONSOLIDATED NET WORTH. Effective as of August 31, 1996 Section 10.2 of the Agreement is hereby amended to read in its entirety as follows: Section 10.2. MINIMUM CONSOLIDATED NET WORTH. The Borrower will not permit the Consolidated Net Worth to be less than the sum of (a) $103,000,000, MINUS (b) the amount of the non-cash after-tax charge to earnings for the fiscal quarter ending August 31, 1996 due to the Borrower's adoption of Statement of Financial Accounting Standards No. 121, not to exceed $5,300,000, PLUS (c) for each fiscal quarter of the Borrower ended through the date of determination, beginning with the fiscal quarter ending May 31, 1996, (i) 100% of the positive consolidated net income of the Borrower and the Subsidiaries for such quarter, MINUS (ii) all cash dividends declared and paid by the Borrower for such quarter, and MINUS (iii) the amount of all stock of the Borrower repurchased by the Borrower during such quarter, PLUS (d) 100% of the Net Proceeds received by the Borrower from any issuance, sale or other disposition of any shares of capital stock or other equity securities of the Borrower of any class (or any securities convertible or exchangeable for any such shares, or any rights, warrants, or options to subscribe for or purchase any such shares), but in no event shall the sum of (a), (b), (c) and (d) above be less than $103,000,000. ARTICLE III CONDITIONS PRECEDENT Section 3.1 CONDITIONS. The effectiveness of this Amendment is subject to the satisfaction of each of the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties contained herein and in all other Loan Documents, as amended hereby, shall be true and correct as of the date hereof as if made on the date hereof; and (b) NO DEFAULT. No Event of Default shall have occurred and be continuing and no event or condition shall have occurred that with the giving of notice or lapse of time or both would be an Event of Default. -2- ARTICLE IV RATIFICATIONS, REPRESENTATIONS AND WARRANTIES Section 4.1 RATIFICATIONS. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Agreement and except as expressly modified and superseded by this Amendment, the terms and provisions of the Agreement are ratified and confirmed and shall continue in full force and effect. Borrower, Agent and the Banks agree that the Agreement as amended hereby shall continue to be legal, valid, binding and enforceable in accordance with its terms. Section 4.2 RELEASE OF CLAIMS. The Borrower and the Guarantors each hereby acknowledge and agree that none of them has any and there are no claims or offsets against or defenses or counterclaims to the terms and provisions of or the obligations of the Borrower, any Guarantor or any Subsidiary created or evidenced by the Agreement or any of the other Loan Documents, and to the extent any such claims, offsets, defenses or counterclaims exist, the Borrower and the Guarantors each hereby waive, and hereby release the Agent and each of the Banks from, any and all claims, offsets, defenses and counterclaims, whether known or unknown, such waiver and release being with full knowledge and understanding of the circumstances and effects of such waiver and release and after having consulted legal counsel with respect thereto. Section 4.3 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Agent and the Banks that (i) the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and/or delivered in connection herewith have been authorized by all requisite corporate, partnership and trust action on the part of Borrower and the Guarantors and will not violate the articles of incorporation, bylaws, partnership agreement or other organizational documents of Borrower or the Guarantors, (ii) the representations and warranties contained in the Agreement, as amended hereby, and any other Loan Document are true and correct on and as of the date hereof as though made on and as of the date hereof, (iii) no Event of Default has occurred and is continuing and no event or condition has occurred that with the giving of notice or lapse of time or both would be an Event of Default, and (iv) Borrower is in full compliance with all covenants and agreements contained in the Agreement as amended hereby. ARTICLE V MISCELLANEOUS Section 5.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Amendment or any other Loan Document including any Loan Document furnished in connection with this Amendment shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Agent or any Bank or any -3- closing shall affect the representations and warranties or the right of Agent and the Banks to rely upon them. Section 5.2 REFERENCE TO AGREEMENT. Each of the Loan Documents, including the Agreement and any and all other agreements, documents, or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Agreement as amended hereby, are hereby amended so that any reference in such Loan Documents to the Agreement shall mean a reference to the Agreement as amended hereby. Section 5.3 EXPENSES OF AGENT. As provided in the Agreement, Borrower agrees to pay on demand all costs and expenses incurred by Agent in connection with the preparation, negotiation, and execution of this Amendment and the other Loan Documents executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including without limitation the costs and fees of Agent's legal counsel. Section 5.4 SEVERABILITY. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section 5.5 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN DALLAS, DALLAS COUNTY, TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. Section 5.6 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall inure to the benefit of Borrower, Agent and the Banks and their respective successors and permitted assigns, except Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Agent. Section 5.7 COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. Section 5.8 EFFECT OF WAIVER. No consent or waiver, express or implied, by Agent or any Bank to or for any breach of or deviation from any covenant, condition or duty by Borrower or any Guarantor shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. Section 5.9 HEADINGS. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. -4- Section 5.10 NON-APPLICATION OF CHAPTER 15 OF TEXAS CREDIT CODE. The provisions of Chapter 15 of the Texas Credit Code (Vernon's Annotated Texas Statutes, Article 5069-15) are specifically declared by the parties not to be applicable to this Amendment or any of the Loan Documents or the transactions contemplated hereby. Section 5.11 ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO REGARDING THIS AMENDMENT AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. [Remainder of page intentionally left blank] -5- Executed as of the date first written above. BORROWER: SONIC CORP. By: /s/ W. Scott McLain ------------------------------------- W. Scott McLain Treasurer AGENT AND BANKS: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent and as a Bank By: /s/ Matthew H. Hildreth ------------------------------------- Matthew H. Hildreth Vice President UMB OKLAHOMA BANK By: /s/ David Schaefer ------------------------------------- Name: David Schaefer -------------------------------- Title: Senior Vice President ------------------------------- BANK IV OKLAHOMA, N.A. By: Richard A. Horton ------------------------------------- Name: Richard A. Horton -------------------------------- Title: Senior Vice President ------------------------------- -6- BANCFIRST By: /s/ E.G. Alexander ------------------------------------- Name: E.G. Alexander ----------------------------------- Title: Senior Vice President ---------------------------------- SUMMIT BANK By: /s/ Christopher J. Annar ------------------------------------- Name: Christopher J. Annar ----------------------------------- Title: Regional Vice President ---------------------------------- Each Guarantor hereby (a) consents and agrees to this Amendment, (b) agrees that its respective Guaranty shall continue to be the legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms, and (c) represents and warrants that each of the representations and warranties set forth in this Amendment with regard to each such Guarantor are true and correct in all respects. GUARANTORS: SONIC RESTAURANTS, INC. By: /s/ W. Scott McLain ------------------------------------- W. Scott McLain Treasurer SONIC INDUSTRIES INC. By: /s/ W. Scott McLain ------------------------------------- W. Scott McLain Treasurer -7- AMERICA'S DRIVE-IN CORP. By: /s/ Lewis B. Kilbourne ------------------------------------- Lewis B. Kilbourne President AMERICA'S DRIVE-IN TRUST By: /s/ Lewis B. Kilbourne ------------------------------------- Lewis B. Kilbourne President EACH OF THE PARTNERSHIPS SPECIFIED ON ANNEX I HERETO, each an Oklahoma general partnership By: Sonic Restaurants, Inc., Managing General Partner of each of such partnerships By: /s/ W. Scott McLain ------------------------------------- W. Scott McLain Treasurer -8- EX-21.01 6 SUBSIDIARIES OF THE COMPANY Exhibit 21.01 Subsidiaries of the Company SUBSIDIARIES ------------ NAME OF SUBSIDIARY JURISDICTION ------------------ ------------ America's Drive-In Corp. Nevada America's Drive-In Trust Pennsylvania Sonic Industries Inc. Oklahoma Sonic Restaurants, Inc. Oklahoma Sonic, Inc. New Zealand EX-23.01 7 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.01 Consent of Independent Auditors Exhibit 23.01 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 333-09373, No. 33-40989 and No. 33-78576) pertaining to the 1991 Sonic Corp. Stock Option Plan, the Registration Statement (Form S-8 No. 33-40988) pertaining to the 1991 Sonic Corp. Stock Purchase Plan, the Registration Statement (Form S-8 No. 33-40987) pertaining to the 1991 Sonic Corp. Directors' Stock Option Plan and the Registration Statement (Form S-3 No. 33-95716) for the registration of 1,420,000 shares of its common stock, and the related Prospectuses of our report dated October 18, 1996, with respect to the consolidated financial statements and schedule of Sonic Corp. included in the Annual Report (Form 10-K) for the year ended August 31, 1996. /s/ ERNST & YOUNG LLP ------------------------------- ERNST & YOUNG LLP Oklahoma City, Oklahoma November 20, 1996 EX-24.01 8 POWER OF ATTORNEY Exhibit 24.01 Power of Attorney POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below hereby constitutes and appoints J. Clifford Hudson and Ronald L. Matlock, and each of them, his true and lawful attorney-in-fact, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the Form 10-K Annual Report of Sonic Corp. for the fiscal year ended August 31, 1996, and to file the amendments, with exhibits, with the Securities and Exchange Commission, granting to the foregoing attorney-in-fact, and his substitutes, the full power and authority to do and perform each and every act and thing necessary or appropriate to file the amendments as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that the attorney-in-fact, or his substitutes, lawfully may do by virtue of this instrument. Executed as of the 25th day of November, 1996. /s/ Dennis H. Clark ------------------------------- Dennis H. Clark /s/ Leonard Lieberman ------------------------------- Leonard Lieberman /s/ H. E. Rainbolt ------------------------------- H. E. Rainbolt /s/ Frank E. Richardson III ------------------------------- Frank E. Richardson III /s/ Robert M. Rosenberg ------------------------------- Robert M. Rosenberg /s/ E. Dean Werries ------------------------------- E. Dean Werries EX-27 9 FDS EXH.27
5 THE FOLLOWING SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY INCLUDED ELSEWHERE IN THIS REPORT. THE COMPANY HEREBY QUALIFIES THE FOLLOWING INFORMATION IN ITS ENTIRETY BY REFERENCE TO THOSE FINANCIAL STATEMENTS. 1,000 YEAR AUG-31-1996 SEP-01-1995 AUG-31-1996 7,706 0 5,362 (133) 1,868 16,177 118,914 (18,409) 147,444 12,686 22,209 0 0 135 109,548 147,444 124,443 151,130 95,764 132,467 0 124 476 18,063 6,819 11,244 0 0 0 11,244 .84 .84 TAG 29 INCLUDES A $8.541 MILLION INITIAL CHARGE UPON ADOPTION OF FAS 121.
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