Sonic 2002 Annual Report Download - page 18

Sonic 02 16
Management’s Discussion and Analysis
Depreciation and amortization expense increased 9.3% to $26.1 million during fiscal year 2002 compared to 17.6%
in fiscal year 2001 while declining as a percentage of revenue to 6.5% as compared to 7.2% the prior year. The increase in
depreciation resulted primarily from new drive-in development and store acquisitions in the third fiscal quarter of 2002.
The company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective September 1, 2001 which
resulted in a reduction in amortization expense of $2.2 million during fiscal year 2002 as compared to fiscal year 2001,
excluding any related tax effects. See Note 1 of Notes to Consolidated Financial Statements for a discussion of the new
Accounting Statement. Management expects depreciation and amortization to grow by approximately 12% to 14%
during fiscal year 2003 and to continue to decline as a percentage of total revenues.
During fiscal year 2002, two drive-ins in developing markets became impaired under the guidelines of FAS 121 –
“Accounting for the Impairment of Long-Lived Assets,” and estimates were revised on three stores which were
previously impaired under FAS 121. As a result, a provision for impairment of long-lived assets of $1.3 million was
recorded for the drive-in’s carrying cost in excess of its estimated fair value. During fiscal year 2001, two drive-ins
became impaired under FAS 121 resulting in an impairment of $0.8 million. The company continues to perform
quarterly analyses of certain underperforming restaurants. It is reasonably possible that the estimate of future cash flows
associated with these restaurants may change in the near future resulting in the need to write-down assets associated
with one or more of these restaurants to fair value.
Income from operations increased 21.8% to $82.3 million during fiscal year 2002 from $67.6 million in fiscal year
2001 due primarily to the growth in revenues and other matters discussed above.
Net interest expense during fiscal year 2002 increased 14.4% to $6.3 million from $5.5 million in fiscal year 2001.
This increase was the result of additional borrowings to fund share repurchases of $26.0 million and capital expenditures
of $71.1 million, including $20.5 million for acquisitions. The company expects interest expense to increase slightly in
fiscal year 2003, excluding the impact of potential acquisitions and share repurchases.
Provision for income taxes reflects an effective federal and state tax rate of 37.25% for fiscal year 2002 and 2001.
Net income increased 22.4% to $47.7 million in fiscal year 2002 compared to $39.0 million in fiscal year 2001. Diluted
earnings per share increased to $1.13 per share during fiscal year 2002, compared to $0.93 per share in fiscal year 2001, for
an increase of 21.5%. The company expects diluted earnings per share to grow by 18% to 20% during fiscal year 2003.
Comparison of Fiscal Year 2001 to Fiscal Year 2000. Total revenues increased 18.1% to $330.6 million during fiscal
year 2001 from $280.1 million in fiscal year 2000. Company-owned restaurant sales increased 18.9% to $267.5 million
in fiscal year 2001 from $224.9 million in fiscal year 2000. Of the $42.6 million increase in company-owned restaurant
sales, $39.3 million was due to the net addition of 97 company-owned restaurants since the beginning of fiscal 2000
($42.1 million from the addition of 58 newly constructed restaurants and 52 acquired restaurants since the beginning of
fiscal year 2000 less $2.8 million from 13 stores sold or closed during the same period). Average sales increases of
approximately 1.8% by stores open throughout the full reporting periods of fiscal year 2001 and 2000 accounted for $3.3
million of the increase.
Franchise royalties increased 13.9% to $54.2 million in fiscal year 2001, compared to $47.6 million in fiscal year
2000. Of the $6.6 million increase, approximately $3.4 million was attributable to additional franchise restaurants in
operation and an increase in royalty rates caused by the conversion of some of the company’s older license agreements to
newer agreements, and the automatic royalty rate step-up feature contained in many of the company’s older license
agreements. The balance of the increase resulted from franchise same-store sales growth of 1.8% in fiscal year 2001.
Each of the company’s license agreements contains an ascending royalty rate feature whereby the royalty rate increases as
sales volumes increase As a result of this feature and the majority of new stores opening under the most current form of
license agreement, which contains higher rates, as well as the conversion and automatic step-up features described above,
the company’s average royalty rate grew to 3.18% during fiscal 2001 from 3.06% during fiscal 2000. One hundred fifty-
seven franchise drive-ins opened in fiscal year 2001 compared to 150 in fiscal year 2000, resulting in an 18.6% increase
in franchise fee revenues.
Restaurant cost of operations, as a percentage of company-owned restaurant sales, was 73.0% in fiscal year 2001,
compared to 72.7% in fiscal year 2000. Food and packaging costs decreased 10 basis points, as a percentage of company-
owned restaurant sales, primarily as a result of a lower rate of discounting from standard menu pricing, which combined