Sonic 2007 Annual Report Download - page 37

Land, buildings and equipment with a carrying amount of $29,245 at August 31, 2007,
were leased under operating leases to franchisees or other parties. The accumulated
depreciation related to these buildings and equipment was $6,085 at August 31, 2007. As of
August 31, 2007, the company had drive-ins under construction with costs to complete which
aggregated $12,793.
8. Accrued Liabilities
Accrued liabilities consist of the following at August 31, 2007 and 2006:
2007 2006
Wages and other employee benefits $ 8,178 $ 9,707
Taxes, other than income taxes 15,296 13,476
Accrued interest 1,122 389
Minority interest in consolidated drive-ins 3,690 2,610
Obligation to acquire treasury stock 14,432 –
Unredeemed gift cards and gift certificates 5,997 4,400
Other 6,992 3,292
$ 55,707 $ 33,874
9. Long-Term Debt
Long-term debt consists of the following at August 31, 2007 and 2006:
2007 2006
5.7% Class A-2 senior notes, due December 2031 $ 593,440 $–
6.58% Series A senior unsecured notes, due August 2008 –2,000
6.87% Series B senior unsecured notes, due August 2011 –17,857
Class A-1 senior variable funding notes 116,000 –
Line of credit –101,150
Other 1,303 1,392
710,743 122,399
Less long-term debt due within one year 20,306 5,227
Long-term debt due after one year $ 690,437 $ 117,172
Maturities of long-term debt for each of the five years after August 31, 2007, are $20,306
in 2008, $38,472 in 2009, $55,143 in 2010, $73,437 in 2011, $93,416 in 2012, and $429,969
thereafter.
In October 2006, the company refinanced its senior unsecured notes and line of credit and
funded a tender offer to repurchase shares of its common stock with proceeds from a senior
secured credit facility until the Class A-2 senior notes were financed in December 2006. Loan
origination costs associated with this debt totaled $4,631 and the unamortized loan
origination costs of $4,544 were expensed as debt extinguishment costs when the financing
was closed in December 2006.
In December 2006, various subsidiaries of the company issued $600,000 of Class A-2 senior
notes in a private transaction. The proceeds were used to refinance the outstanding balance
under the senior secured credit facility, along with costs associated with the transaction. The
Class A-2 notes are the first issuance under a facility that will allow Sonic to issue additional
series of notes in the future subject to certain conditions. These notes have a fixed interest
rate of 5.7%, subject to upward adjustment after the expected six-year repayment term. Loan
origination costs associated with this debt totaled $24,329, and the unamortized balance is
categorized as debt origination costs, net, on the Consolidated Balance Sheet as of August 31,
2007. Amortization of these loan costs and the hedge loss discussed below produces an
overall weighted average interest cost of 6.8%. The Class A-2 notes have an expected life of
six years, with a legal final repayment date in December 2031. If the debt extends beyond the
expected life, rapid amortization and cash trapping provisions of the debt agreements will be
triggered which will cause the remaining principal balance to be given higher priority of
payment from the secured sources. The company anticipates paying the debt in full based on
the expected life.
In connection with issuance of the Class A-2 notes, various subsidiaries of the company
also completed a securitized financing facility of Class A-1 senior variable funding notes. This
facility allows for the issuance of up to $200,000 of notes and certain other credit instruments,
including letters of credit. Considering the $116,000 outstanding at August 31, 2007, and $325
in outstanding letters of credit, $83,675 was unused and available under the Class A-2 notes.
The effective interest rate on the $116,000 outstanding at August 31, 2007, was 6.44%, and
there is a commitment fee on the unused portion of the Class A-1 notes of 0.5%.
The Class A-1 and Class A-2 senior notes were issued by special purpose, bankruptcy
remote, indirect subsidiaries of the company that hold substantially all of Sonic’s franchising
assets and Partner Drive-In real estate used in operation of the company’s existing business.
As of August 31, 2007, total assets for these combined indirect subsidiaries were
approximately $410,000, including receivables for royalties, Partner Drive-In real estate,
intangible assets, loan origination costs and restricted cash balances of $24,875. The Class A-
1 and Class A-2 notes are secured by Sonic’s franchise royalty payments, certain lease and other
payments and fees and, as a result, the repayment of these notes is expected to be made solely
from the income derived from these indirect subsidiaries’ assets. Sonic Industries LLC, which is
the subsidiary that acts as franchisor, has guaranteed the obligations of the co-issuers and
pledged substantially all of its assets to secure such obligations.
Although the company does not guarantee the Class A-1 and Class A-2 notes, the
company has agreed to cause the performance of certain obligations of its subsidiaries,
principally related to the servicing of the assets included as collateral for the notes and certain
indemnity obligations.
In August 2006, the company entered into a forward starting swap agreement with a
financial institution to hedge part of the exposure to changing interest rates until new
financing was closed in December 2006. The forward starting swap was designated as a cash
flow hedge, and was subsequently settled in conjunction with the closing of the Class A-2
notes, as planned. The loss resulting from settlement of $5,640 ($3,483, net of tax) was
recorded in accumulated other comprehensive income and is being amortized to interest
Pg. 35
Sonic Corp. 2007 Annual Report
Notes to Consolidated Financial Statements
August 31, 2007, 2006 and 2005 (In thousands, except per share data)