Sonic 2003 Annual Report Download - page 23

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Management’s Discussion and Analysis
attributable to company-owned restaurants. Company-owned restaurants require a lower level of selling, general and
administrative expenses, as a percentage of revenues, than our franchising operations since most expenses of company-
owned restaurant operations are reflected in restaurant cost of operations and minority interest in restaurant operations.
Depreciation and amortization expense increased 12.1% to $29.2 million during fiscal year 2003 compared to $26.1
million in fiscal year 2002, while remaining flat as a percentage of total revenue. The increase in depreciation resulted
primarily from new drive-in development and store acquisitions in the third fiscal quarter of 2003. Looking forward, we
expect depreciation to grow by approximately 10% for fiscal year 2004, including a higher rate of growth in the first half of
the year as a result of restaurants acquired in the San Antonio market. See Note 1 of the Notes to Consolidated Financial
Statements for additional information regarding the San Antonio acquisition.
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 two 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-ins’ carrying cost in excess of its estimated fair value. We adopted FAS 144 – “Accounting for the Impairment or
Disposal of Long-Lived Assets,” which superceded FAS 121, effective at the beginning of fiscal year 2003. During fiscal
year 2003, two drive-ins became impaired under the guidelines of FAS 144, which resulted in a provision for impairment of
$0.7 million to reduce the drive-ins’ carrying cost to estimated fair value. We continue 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 8.7% to $89.5 million during fiscal year 2003 from $82.3 million during fiscal year
2002, due primarily to the growth in revenues and other matters discussed above.
Net interest expense in fiscal year 2003 declined 1.6% to $6.2 million from $6.3 million in fiscal year 2002. The year-
over-year decline in short-term interest rates combined with the refinancing of $20.0 million in senior notes more than
offset the effect of the increase in amounts outstanding under the line of credit resulting from additional borrowings to
fund share repurchases of $26.5 million and capital expenditures of $90.0 million, including $35.6 million for acquisitions.
Going forward, we expect interest expense to continue to decline, particularly in the latter part of fiscal year 2004,
depending on the level of share repurchases and acquisition activity.
Provision for income taxes reflects an effective federal and state tax rate of 37.25% for fiscal year 2003 and 2002.
Net income increased 9.6% to $52.3 million during fiscal year 2003 from $47.7 million in fiscal year 2002. Diluted
earnings per share increased to $1.29 per share during fiscal year 2003, compared to $1.13 per share during fiscal year
2002, for an increase of 14.2%.
Comparison of Fiscal Year 2002 to Fiscal Year 2001. Total revenues increased 21.0% to $400.2 million during fiscal year
2002 from $330.6 million in fiscal year 2001. Company-owned restaurant sales increased 23.6% to $330.7 million during
fiscal year 2002 from $267.5 million in fiscal year 2001. Of the $63.2 million increase, $58.9 million was due to the net
addition of 140 company-owned restaurants since the beginning of fiscal year 2001 ($61.4 million from the addition of
74 newly constructed restaurants and 75 acquired restaurants since the beginning of fiscal year 2001, less $2.5 million
from nine stores sold or closed during the same period). Average sales increases of approximately 1.7% by stores open the
full reporting periods of fiscal year 2002 and 2001 accounted for $4.3 million of the increase.
Franchise royalties increased 13.2% to $61.4 million during fiscal year 2002, compared to $54.2 million in fiscal year
2001. Of the $7.2 million increase, approximately $3.9 million was attributable to franchise same-store sales growth of
3.2% combined with an increase in the effective royalty rate from 3.18% in fiscal year 2001 to 3.27% in fiscal year 2002.
Each of our license agreements contains an ascending royalty rate feature whereby the royalty rate increases as sales
volumes increase. The balance of the increase resulted from an increase in the number of franchise restaurants operating
in fiscal year 2002 compared to fiscal year 2001. Franchise fees decreased 8.8% as 142 franchise drive-ins opened during
fiscal year 2002 as compared to 157 in fiscal year 2001. However, the average franchise fee increased as a greater
percentage of stores opened under the newest form of license agreement, which has a higher franchise fee and royalty rate.
Restaurant cost of operations, as a percentage of company-owned restaurant sales, was 73.2% during fiscal year
2002 compared to 73.0% in fiscal year 2001. Food and packaging costs, as a percentage of company-owned restaurant