Sonic 2004 Annual Report Download - page 35

Stockholder Rights Plan
The Company has a stockholder rights plan which is designed to deter coercive
takeover tactics and to prevent a potential acquirer from gaining control of the Company
without offering a fair price to all of the Company’s stockholders.
The plan provided for the issuance of one common stock purchase right for each
outstanding share of the Company’s common stock. Each right initially entitles
stockholders to buy one unit of a share of preferred stock for $85. The rights will be
exercisable only if a person or group acquires beneficial ownership of 15% or more of the
Company’s common stock or commences a tender or exchange offer upon consummation
of which such person or group would beneficially own 15% or more of the Company’s
common stock. At August 31, 2004, 50,000 shares of preferred stock have been reserved
for issuance upon exercise of these rights.
If any person becomes the beneficial owner of 15% or more of the Company’s
common stock, other than pursuant to a tender or exchange offer for all outstanding
shares of the Company approved by a majority of the independent directors not affiliated
with a 15%-or-more stockholder, then each right not owned by a 15%-or-more
stockholder or related parties will then entitle its holder to purchase, at the right’s then
current exercise price, shares of the Company’s common stock having a value of twice the
right’s then current exercise price. In addition, if, after any person has become a 15%-or-
more stockholder, the Company is involved in a merger or other business combination
transaction with another person in which the Company does not survive or in which its
common stock is changed or exchanged, or sells 50% or more of its assets or earning
power to another person, each right will entitle its holder to purchase, at the right’s then
current exercise price, shares of common stock of such other person having a value of
twice the right’s then current exercise price. Unless a triggering event occurs, the rights
will not trade separately from the common stock.
The Company will generally be entitled to redeem the rights at $0.01 per right at any
time until 10 days (subject to extension) following a public announcement that a 15%
position has been acquired. The rights expire on June 16, 2007.
13. Net Revenue Incentive Plan
The Company has a Net Revenue Incentive Plan (the “Incentive Plan”), as amended,
which applies to certain members of management and is at all times discretionary with
the Company’s board of directors. If certain predetermined earnings goals are met, the
Incentive Plan provides that a predetermined percentage of the employee’s salary may be
paid in the form of a bonus. The Company recognized as expense incentive bonuses of
$3,070, $2,038, and $2,264 during fiscal years 2004, 2003 and 2002, respectively.
14. Employment Agreements
The Company has employment contracts with its Chairman and Chief Executive
Officer and several members of its senior management.These contracts provide for use of
Company automobiles or related allowances, medical, life and disability insurance, annual
base salaries, as well as an incentive bonus. These contracts also contain provisions for
payments in the event of the termination of employment and provide for payments
aggregating $6,934 at August 31,2004 due to loss of employment in the event of a change
in control (as defined in the contracts).
15. Contingencies
The Company is involved in various legal proceedings and has certain unresolved
claims pending. Based on the information currently available, management believes that
all claims currently pending are either covered by insurance or would not have a material
adverse effect on the Company’s business or financial condition.
The Company has an agreement with GE Capital Franchise Finance Corporation
(“GEC”), pursuant to which GEC made loans to existing Sonic franchisees who met certain
underwriting criteria set by GEC. Under the terms of the agreement with GEC, the
Company provided a guarantee of 10% of the outstanding balance of loans from GEC to
the Sonic franchisees,limited to a maximum amount of $5.0 million. As of August 31,2004,
the total amount guaranteed under the GEC agreement was $4.6 million. The Company
ceased guaranteeing new loans under the program during fiscal year 2002 and has not
been required to make any payments under its agreement with GEC. Existing loans under
guarantee will expire through 2012. In the event of default by a franchisee, the Company
has the option to fulfill the franchisee’s obligations under the note or to become the note
holder, which would provide an avenue of recourse with the franchisee under the notes.
The Company has obligations under various lease agreements with third party lessors
related to the real estate for Partner Drive-Ins that were sold to franchisees. Under these
agreements, the Company remains secondarily liable for the lease payments for which it
was responsible as the original lessee. As of August 31, 2004,the amount remaining under
the guaranteed lease obligations totaled $3.1 million.
The Company has not recorded a liability for its obligations under the guarantees and
none of the notes or leases related to the guarantees were in default as of August 31,2004.
The Company entered into an agreement with certain franchisees during fiscal year
2003, which provides the franchisees with the option to sell 50 drive-ins to the Company
anytime during the period commencing January 1, 2004 and ending June 30, 2005. The
Company estimates that the cost of the acquisition, if it were to occur, would be in the
range of $32 to $38 million and anticipates that the acquisition would be funded through
operating cash flows and borrowings under its existing line of credit.
Notes to Consolidated Financial Statements
August 31, 2004, 2003 and 2002 (In thousands, except share data)
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