Sonic 2005 Annual Report Download

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2005 Annual Report to Stockholders
3,000
20
1
One for the Record Books.
We opened our 3,000th drive-in.
Average unit volume broke the $1 million mark.
Same-store sales increased 6.0%.
Return on equity topped 20% for the 6th straight year.
6.0

Table of contents

  • Page 1
    6.0 1 3,000 2005 Annual Repor t One for the Record Books. We opened our 3,000th drive-in. Average unit volume broke the $1 million mark. Same-store sales increased 6.0%. Return on equity topped 20% for the 6th straight year. 20 to Stock holders

  • Page 2
    ... a drive-thru window at most Sonics. Financial Highlights Operations (for the year) 2005 2004 % Change ($ in thousands, except per share data) Total revenues Income from operations Net income Net income per diluted share Return on average stockholders' equity Financial Position (at year's end...

  • Page 3
    How did you do that?

  • Page 4
    ... 2005, financially and operationally, we achieved new performance milestones that underscore the success of our brand-building strategies and reveal the potential we have to sustain this momentum in the future. For instance, during the past year we crested an important mark, opening drive-in number...

  • Page 5
    Sonic is distinctively different. With an exciting blend of past and future, our drive-in setting makes Sonic one of the most highly differentiated concepts in QSR.

  • Page 6

  • Page 7
    ... and developing markets. Our strong development program is one of the key drivers accounting for Sonic's continued growth. In 2005, we opened 175 new drive-ins, including our 3,000th location, continuing an aggressive pace of new drive-in openings that began several years ago. In fact, in the past...

  • Page 8
    ... and interest of Sonic's menu and the variety continually introduced through our new product news. Looking across all quick-service restaurants, our menu stands out uniquely in a crowded market, and that's just the starting point. All of our menu items are available at any time of the day and can be...

  • Page 9
    We offer uncommon variety. From signature Tater Tots to Diet Cherry Limeades, from Grilled Chicken Salads to a Sonic Blast®, there's something for everyone at Sonic.

  • Page 10

  • Page 11
    ... unique thinking to the morning hours, bringing a Sonic attitude to our new breakfast menu to help build our business across the day. Lately, we have taken additional measures to stay in step with changing customer preferences, rolling out a new credit card payment system that's easy and convenient...

  • Page 12
    ... higher drive-in profits. With the success of our strategies over the past several years, our average drive-in level profit grew handsomely in 2005 to a record amount. With this in mind, our new drive-in pipeline is as strong as ever. In the coming year, we anticipate that new drive-in openings will...

  • Page 13
    Carhops deliver, with Sonic style. In true Sonic tradition, our carhops speed curbside with fresh, made-when-you-order food, just minutes after an order is placed.

  • Page 14

  • Page 15
    ... elsewhere. Carhop service at Sonic is about more than just food delivery. Sure, they make Sonic more fun to visit and add to a nostalgic setting, but carhops also are our notso-secret weapon when it comes to winning customers and building loyalty. Car-side delivery by our carhops provides surprise...

  • Page 16
    ... package together quite like Sonic. Before I end, allow me to reflect on one final record. During fiscal 2005, I marked my tenth year as Chief Executive Officer for Sonic. It's been a wonderful time for me personally, seeing this chain come together with an unparalleled level of trust and confidence...

  • Page 17
    We promote a culture of opportunity. Sonic pairs franchisor leadership with the entrepreneurial perspective of its franchisees to create opportunities for everyone associated with the brand.

  • Page 18

  • Page 19
    ... partner and franchise drive-ins. With a strong franchisorfranchisee relationship - perhaps the best in the industry - there has been plenty of success to go around as operators enjoyed another record year of sales and profits in 2005. These drivers remain in place to extend Sonic's growth in future...

  • Page 20
    ... Total Revenues (in millions) Net Income Per Diluted Share $536 $447 $400 $48 $331 $39 $.62 $.75 $.86 $52 $1.02 $63 $280 $33 $.52 $12 $15 01 $17 02 $20 03 2005 Menu Mix 2005 Day Part Mix 32% 19% 18% 7% 6% 6% 5% 7% Frozen/Fountain Burgers Faves and Craves Breakfast Chicken...

  • Page 21
    11 Selected Financial Data 2005 Income Statement Data: Partner Drive-In sales $525,988 Franchise Drive-Ins: Franchise royalties 88,027 Franchise fees 4,311 Other 4,740 Total revenues 623,066 Cost of Partner Drive-In sales 421,906 Selling, general and administrative 40,746 Depreciation and ...

  • Page 22
    ... by the number and sales volumes of Franchise Drive-Ins. Initial franchise fees and franchise royalties are directly affected by the number of Franchise Drive-In openings. Overview of Business Performance. Business performance was strong during fiscal year 2005 as net income increased 19.6% and...

  • Page 23
    ...Operations System-Wide Performance Year Ended August 31, 2005 2004 2003 ($ in thousands) Percentage increase in sales System-wide drive-ins in operation: Total at beginning of period Opened Closed (net of re-openings) Total at end of period Core markets Developing markets All markets Average sales...

  • Page 24
    ... positive trend of the last year and well ahead of the average unit volume increase in core markets which increased 5.5%. Another milestone reached during fiscal year 2005 was the opening of Sonic's 3,000th drive-in. We opened 175 new drive-ins during fiscal year 2005, consisting of 37 Partner Drive...

  • Page 25
    ... Year Ended August 31, 2005 2004 2003 ($ in thousands) Partner Drive-In sales Percentage increase Partner Drive-Ins in operation: Total at beginning of period Opened Acquired from (sold to) franchisees, net Closed Total at end of period Average sales per Partner Drive-In Percentage increase Change...

  • Page 26
    ... use of our excess cash flow in future years. The following table reflects the growth in franchise revenues (franchise royalties and franchise fees) as well as franchise sales, average unit volumes and the number of Franchise Drive-Ins. While we do not record Franchise DriveIn sales as revenues...

  • Page 27
    ... has been limited to a fewer number of markets at one time; we believe the brand awareness provided by our national cable advertising efforts will support this planned expansion to a greater number of markets. Twenty Franchise Drive-Ins were closed during fiscal year 2005, which was an increase from...

  • Page 28
    ...to view the partnership program as an integral part of our culture at Sonic and a large factor in the success of our business, and we are pleased that profit distributions to our partners increased during fiscal year 2005. Since we expect our average store level profits to continue to grow in fiscal...

  • Page 29
    ...Company by assessing the level of funds available for share repurchases, acquisitions of Franchise Drive-Ins, and repayment of debt. We expect free cash flow to approach $50 million for fiscal year 2006. We have an agreement with a group of banks that provides us with a $150.0 million line of credit...

  • Page 30
    ... of Franchise Drive-Ins, and other capital expenditures, from cash generated by operating activities and borrowings under our line of credit. During fiscal year 2005, we purchased the real estate for 31 of the 41 newly constructed and acquired drive-ins. Sales of real estate relating to drive-ins...

  • Page 31
    ... to pay royalties to Sonic each month based on a percentage of actual net sales. However, the royalty payments and supporting financial statements are not due until the 20th of the following month. As a result, we accrue royalty revenue in the month earned based on estimates of Franchise Drive-Ins...

  • Page 32
    ... best available information at the time that we prepare the provision, including legislative and judicial developments. We generally file our annual income tax returns several months after our fiscal year end. Income tax returns are subject to audit by federal, state and local governments, typically...

  • Page 33
    ... Balance Sheets August 31, 2005 2004 (In thousands) Assets: Current assets: Cash and cash equivalents Accounts and notes receivable, net Net investment in direct financing leases Inventories Deferred income taxes Prepaid expenses and other Total current assets Notes receivable, net Net investment...

  • Page 34
    ... Statements of Income 2005 Revenues: Partner Drive-In sales Franchise Drive-Ins: Franchise royalties Franchise fees Other Costs and expenses: Partner Drive-Ins: Food and packaging Payroll and other employee benefits Minority interest in earnings of Partner Drive-Ins Other operating expenses Year...

  • Page 35
    ...benefit related to exercise of employee stock options Purchase of treasury stock Three-for-two stock split Net income Balance at August 31, 2004 Exercise of common stock options Tax benefit related to exercise of employee stock options Purchase of treasury stock Net income Balance at August 31, 2005...

  • Page 36
    ...assets Amortization of franchise and development fees Franchise and development fees collected Provision for deferred income taxes Provision for impairment of long-lived assets Tax benefit related to exercise of employee stock options Other (Increase) decrease in operating assets: Accounts and notes...

  • Page 37
    ... Accounting Policies Operations Sonic Corp. (the "Company") operates and franchises a chain of quick-service drive-ins in the United States and Mexico. It derives its revenues primarily from Partner Drive-In sales and royalty fees from franchisees. The Company also leases signs and real estate...

  • Page 38
    ...interests in the financial statements. The ownership agreements contain provisions, which give the Company the right, but not the obligation, to purchase the minority interest of the supervisor or manager in a drive-in. The amount of the investment made by a partner and the amount of the buy-out are...

  • Page 39
    ...Such costs amounted to $28,216, $23,664, and $19,665 for fiscal years 2005, 2004 and 2003, respectively. Under the Company's license agreements, both Partner-Drive-Ins and Franchise Drive-Ins must contribute a minimum percentage of revenues to a national media production fund (Sonic Advertising Fund...

  • Page 40
    ... for income tax purposes but do not affect earnings. These benefits are principally generated from employee exercises of non-qualified stock options and disqualifying dispositions of incentive stock options. New Accounting Pronouncements In May 2005, the FASB issued Statement of Financial Accounting...

  • Page 41
    ... per share for the years ended August 31: 2005 Numerator: Net income Denominator: Weighted average shares outstanding - basic Effect of dilutive employee stock options Weighted average shares - diluted Net income per share - basic Net income per share - diluted Anti-dilutive employee stock options...

  • Page 42
    ... lives of the leases. Most of the leases contain one to four renewal options at the end of the initial term for periods of five years. The Company classifies income from leasing operations as other revenue in the Consolidated Statements of Income. Certain Partner Drive-Ins lease land and buildings...

  • Page 43
    ... Notes to Consolidated Financial Statements August 31, 2005, 2004 and 2003 (In thousands, except share data) Future minimum rental payments receivable as of August 31, 2005 are as follows: Direct Financing $ 1,968 1,912 1,765 1,274 669 1,031 8,619 2,412 6,207 Operating Year ending August 31: 2006...

  • Page 44
    ...the entire $30,000 through availability under its line of credit and had classified that amount as long-term debt on its balance sheet. However, as a result of strong cash flow from operations for the first nine months of fiscal year 2005, the Company repaid $19,525 using cash on hand and refinanced...

  • Page 45
    ...ability to refinance the required annual prepayments in 2006 through availability under its line of credit and has classified those amounts as long-term debt as of August 31, 2005 on the consolidated balance sheet. The related agreement requires, among other things, the Company to maintain equity of...

  • Page 46
    ... related to direct financing leases and different year ends for financial and tax reporting purposes Capital loss carryover State net operating losses Property, equipment and capital leases Allowance for doubtful accounts and notes receivable Deferred income from affiliated franchise fees...

  • Page 47
    ... common stock to the Company's independent directors. At August 31, 2005, 583,933 shares were available for grant under the 2001 Employee Plan and 334,125 shares were available for grant under the 2001 Director's Plan. The exercise price of the options to be granted is equal to the fair market value...

  • Page 48
    ...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. Stock Repurchase Program The Company has a stock repurchase program that is authorized by the Board of Directors. On April 7, 2005, the Board of...

  • Page 49
    ...2005 2004 Income statement data: Partner Drive-In sales Other Total revenues Partner Drive-In operating expenses Selling, general and administrative Other Total expenses Income from operations Interest expense, net Income before income taxes Provision for income taxes Net income Net income per share...

  • Page 50
    ... Franchise Drive-Ins in the Tennessee and Kentucky markets for approximately $13,895, excluding post-closing adjustments. Subsequent to August 31, 2005, the Company purchased an additional $40,039 of stock under the share repurchase program that was authorized by the Board of Directors in April 2005...

  • Page 51
    ... balance sheets of Sonic Corp. as of August 31, 2005 and 2004 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 2005. These financial statements are the responsibility of the Company's management...

  • Page 52
    ... Company's internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations...

  • Page 53
    ... the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sonic Corp. as of August 31, 2005 and 2004, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended August 31, 2005 of Sonic...

  • Page 54
    ... Chairman, Chief Executive Officer and President W. Scott McLain President Sonic Industries Inc. (the company's franchising subsidiary) Michael A. Perry President Sonic Restaurants, Inc. (the company's restaurant-operating subsidiary) Ronald L. Matlock Senior Vice President, General Counsel and...

  • Page 55
    ... our annual report on Form 10-K for the year ended August 31, 2005, as filed with the Securities and Exchange Commission, may be obtained without charge upon written request to Stephen C. Vaughan,Vice President and Chief Financial Officer, at our Headquarters. In addition, we make available free of...

  • Page 56
    300 Johnny Bench Drive Ok lahoma City, Ok lahoma 73104 405/225-5000 www.sonicdrivein.com