-----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, Hjap+AEAohoWnss9QGhF7yPVJmUohAyt9/5F7vQ/vmqnmyKf9owHhMW9yRxwFFxl 3J6FL1vXRTZPXG/gQHcM9g== 0000912057-96-029991.txt : 19961224 0000912057-96-029991.hdr.sgml : 19961224 ACCESSION NUMBER: 0000912057-96-029991 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961223 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/A SEC ACT: SEC FILE NUMBER: 000-18859 FILM NUMBER: 96684713 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/A 1 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Amendment No. 1) /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 II of this report incorporates by reference certain portions of the Company's Annual Report to Stockholders for the fiscal year ended August 31, 1996. THE COMPANY HEREBY AMENDS ITEM 14 OF ITS FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED AUGUST 31, 1996, TO READ (IN ITS ENTIRETY) AS FOLLOWS: ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT 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 (*). Exhibits marked with a plus sign (+) represent exhibits previously filed with the Form 10-K being amended by this Form 10-K/A. 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. 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.+ 2 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.+ 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. 3 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 $.39 per share) and included $5,720 ($3,560 after-tax or $.26 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 amendment on its behalf on this 20th day of December, 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 amendment on behalf of the Company, in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ J. Clifford Hudson President, Chief Executive December 20, 1996 - ----------------------------- Officer, and Director J. Clifford Hudson, Principal Executive Officer /s/ Lewis B. Kilbourne Senior Vice President and December 20, 1996 - ----------------------------- Chief Financial Officer Lewis B. Kilbourne, Principal Financial Officer /s/ Stephen C. Vaughan Controller December 20, 1996 - ----------------------------- Stephen C. Vaughan, Principal Accounting Officer *** Chairman of the Board December 20, 1996 - ----------------------------- and Director E. Dean Werries *** Director December 20, 1996 - ----------------------------- Dennis H. Clark *** Director December 20, 1996 - ----------------------------- Leonard Lieberman *** Director December 20, 1996 - ----------------------------- H.E. Rainbolt *** Director December 20, 1996 - ----------------------------- Frank E. Richardson III *** Director December 20, 1996 - ----------------------------- Robert M. Rosenberg *** By: /s/ Ronald L. Matlock ----------------------------------- Ronald L. Matlock, Attorney-in-Fact EX-23.1 2 EXHIBIT 23.1 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/A) for the year ended August 31, 1996. /s/ ERNST & YOUNG LLP ------------------------------- ERNST & YOUNG LLP Oklahoma City, Oklahoma December 20, 1996 -----END PRIVACY-ENHANCED MESSAGE-----