Sonic 2005 Annual Report Download - page 32

Our estimates are based on the 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 several
years after the returns are filed. These returns could be subject to material adjustments or differing interpretations
of the tax laws. Adjustments to these estimates or returns can result in significant variability in the tax rate from
period to period.
Forward-looking Statements
This annual report contains various ”forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-
looking statements represent our expectations or beliefs concerning future events, including the following: any
statements regarding future sales or expenses, any statements regarding the continuation of historical trends, and any
statements regarding the sufficiency of our working capital and cash generated from operating and financing
activities for our future liquidity and capital resource needs. Without limiting the foregoing, the words ”believes,”
”anticipates,” ”plans,” ”expects,” and similar expressions are intended to identify forward-looking statements. We
caution that the following important economic and competitive factors, among others, could cause the actual results
to differ materially from those in the forward-looking statements made in this report and from time to time in news
releases, reports, proxy statements, registration statements, and other written or electronic communication, as well as
verbal forward-looking statements made from time to time by representatives of the Company. Factors that may
cause actual results to differ materially from forward-looking statements include, without limitation, risks of the
restaurant industry, including risks of and publicity surrounding food-borne illnesses, a highly competitive industry
and the impact of changes in consumer spending patterns, consumer tastes, local, regional, and national economic
conditions, weather, demographic trends, traffic patterns, employee availability, increases in utility costs, and cost
increases or shortages in raw food products. In addition, the opening and success of new drive-ins will depend on
various factors, including weather, strikes, the availability of suitable sites for new drive-ins, the negotiation of
acceptable lease or purchase terms for new locations, local permitting and regulatory compliance, our ability to
manage the anticipated expansion and hire and train personnel, the financial viability of our franchisees, particularly
multi-unit operators, and general economic and business conditions. Accordingly, such forward-looking statements
do not purport to be predictions of future events or circumstances and may not be realized. For these reasons, you
should not place undue reliance on forward-looking statements. We undertake no obligation to publicly update or
revise them.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest rates on debt and notes receivable, as well as changes in
commodity prices.
Our exposure to interest rate risk currently consists of our senior notes, outstanding line of credit, and notes
receivable. The senior notes bear interest at fixed rates which average 6.8%. The aggregate balance outstanding
under the senior notes as of August 31, 2005 was $24.4 million. Should interest rates increase or decrease, the
estimated fair value of these notes would decrease or increase, respectively. As of August 31, 2005, the estimated fair
value of the senior notes exceeded the carrying amount by approximately $0.6 million. The line of credit bears
interest at a rate benchmarked to U.S. and European short-term interest rates. The balance outstanding under the line
of credit was $30.2 million as of August 31, 2005. The impact on our results of operations of a one-point interest rate
change on the average outstanding balance under the line of credit during fiscal year 2005 would be approximately
$0.1 million. We have made certain loans to our franchisees totaling $3.5 million as of August 31, 2005. The interest
rates on these notes are generally between 6.0% and 10.5%. We believe the fair market value of these notes
approximates their carrying amount.
The Company and its franchisees purchase certain commodities such as beef, potatoes, chicken and dairy
products. These commodities are generally purchased based upon market prices established with vendors. These
purchase arrangements may contain contractual features that limit the price paid by establishing price floors or caps;
however, we have not made any long-term commitments to purchase any minimum quantities under these
arrangements.We do not use financial instruments to hedge commodity prices because these purchase agreements
help control the ultimate cost and any commodity price aberrations are generally short term in nature.
This market risk discussion contains forward-looking statements. Actual results may differ materially from this
discussion based upon general market conditions and changes in financial markets.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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