Sonic 2003 Annual Report Download - page 46

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p.44
Notes to Consolidated Financial Statements
August 31, 2003, 2002 and 2001 (In thousands, except share data)
15. Contingencies
The company is involved in various legal proceedings and has certain unresolved claims pending. The company’s
ultimate liability, if any, for the aggregate amounts claimed cannot be determined at this time. Management believes that
all claims currently pending are either adequately 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, 2003, the total amount guaranteed
under the GEC agreement was $5.0 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
company-owned stores 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, 2003, the amount remaining
under the guaranteed lease obligations totaled $1.7 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, 2003.
The company entered into an agreement with certain franchisees during fiscal year 2003, which provides the
franchisees with the option to sell 50 restaurants 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 $31 to $37 million and anticipates that the acquisition would be funded through operating cash flows and borrowings
under its existing line of credit.