Sonic 2006 Annual Report Download - page 28

Liquidity and Sources of Capital
Operating Cash Flows. Net cash provided by operating activities decreased $0.2 million or 0.2% to $127.5 million
in fiscal year 2006 as compared to $127.7 million in fiscal year 2005. The increase in operating profit before
depreciation and amortization was offset by a less significant increase in operating liabilities related to the amount
and timing of tax and other liability payments and a decrease in benefit from deferred income taxes. We anticipate
continuing to generate positive free cash flow going forward.We believe free cash flow, which we define as net
income plus depreciation, amortization and stock-based compensation expense less capital expenditures, is useful in
evaluating the liquidity of the company by assessing the level of funds available for share repurchases, acquisitions of
Franchise Drive-Ins, and repayment of debt.
Investing Cash Flows. We opened 35 newly constructed Partner Drive-Ins and acquired 15 drive-ins from franchisees
during fiscal year 2006.We funded total capital additions for fiscal year 2006 of $113.6 million, which included the cost of
newly opened drive-ins, new equipment for existing drive-ins, drive-ins under construction, the acquisition of Franchise
Drive-Ins and real estate, and other capital expenditures, from cash generated by operating activities and borrowings
under our line of credit. During fiscal year 2006, we purchased the real estate for 24 of the 35 newly constructed and 12
of the 15 acquired drive-ins.Subsequent to year-end, we entered into a sale-leaseback agreement to dispose of the real
estate underlying the acquired drive-ins at an amount roughly equal to the purchase price of the real estate. Sales of real
estate relating to drive-ins previously sold to franchisees are a component of cash from investing activities and totaled
$2.3 million during fiscal year 2006 compared to $1.3 million during fiscal year 2005.
Financing Cash Flows. At August 31, 2006 we had an agreement with a group of banks that provided us with a
$150.0 million line of credit expiring in July 2010. As of August 31, 2006, our outstanding borrowings under the line of
credit were $101.2 million at an effective borrowing rate of 6.1%, as well as $0.7 million in outstanding letters of credit.
Subsequent to year end, the new senior secured credit facility, described further below, was used to refinance the
existing line of credit and the senior unsecured notes balance of $19.9 million. As a result of the subsequent credit
facility, the amount classified as a current liability is based upon the $5.1 million due by the end of fiscal year 2007
under the new credit facility rather than upon amounts due under the line of credit and senior unsecured notes
because the new facility was utilized to repay those obligations. After funding of the tender offer described below, we
plan to use the new revolving credit facility to finance the opening of newly constructed drive-ins and other planned
capital expenditures, acquisitions of existing drive-ins, purchases of the company’s common stock and for other
general corporate purposes, as needed. See Note 9 of the Notes to Consolidated Financial Statements for additional
information regarding our long-term debt.
On April 7, 2006, the Board of Directors approved an increase in the company’s share repurchase program from
$34.6 million to $110.0 million and extended the program through August 31, 2007. Pursuant to this program, the
company acquired 4.8 million shares at an average price of $19.57 for a total cost of $93.7 million during fiscal year
2006. Of the amount repurchased during the year, $20.6 million was repurchased after the program’s extension
leaving $89.4 million available under the program as of August 31, 2006. See Tender Offer below.
Tender Offer. On August 15, 2006, we commenced a “modified Dutch auction”tender offer, initially offering to
purchase 25.5 million shares of our common stock at a price not less than $19.50 and not greater than $22.00 per share,
for a maximum aggregate purchase price of $560 million. On September 25, 2006, we decreased the number of shares
sought in the tender offer to 24.3 million, and increased the purchase price to not less than $19.50 and not greater than
$23.00 per share. On October 13, 2006, we repurchased 15.9 million shares of our common stock that were properly
tendered and not withdrawn, at a purchase price of $23.00 per share for a total purchase price of $366.1 million.
Senior Secured Credit Facilities.We funded the repurchase of the shares of our common stock with the proceeds
from new senior secured credit facilities with a syndicate of financial institutions led by Banc of America Securities LLC
and Lehman Brothers Inc. The new senior secured credit facilities consist of a $100 million, five-year revolving credit
facility and a $486 million, seven-year term loan facility. As of October 13, 2006, we had borrowed $486 million under
the term loan facility and no advances were outstanding under the revolving credit facility, to fund the purchase of the
shares in the tender offer, as well as refinance certain of our existing indebtedness and pay related fees and expenses.
Sonic Corp. 2006 Annual Report
26
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations