Sonic 2007 Annual Report Download - page 40

Stock Repurchase Program
The company has a stock repurchase program that is authorized by the Board of Directors.
In addition to the ongoing stock repurchase program, the Board authorized a “modified
Dutch auction” tender offer that resulted in the repurchase of 15,918 shares of common stock
at a purchase price of $23.00 per share for a total purchase price of $366,117 in October 2006.
Costs incurred in relation to the tender offer totaled $1,205 and are included in treasury stock,
resulting in an average cost of $23.08 per share for the tender offer shares. Subsequent to the
tender offer, the Board authorized the continuation of the stock repurchase program. On
January 31, 2007, the Board of Directors approved an increase in the stock repurchase
program from $10,705 to $100,000, followed by an additional authorization on August 2,
2007 of $75,000 and extension of the program through August 31, 2008. Pursuant to this
program, the company acquired 9,574 shares for a total cost of $211,135 during fiscal year
2007. The total remaining amount authorized for repurchase as of August 31, 2007, was
$42,571 and is scheduled to expire August 31, 2008.
Accumulated Other Comprehensive Income
In August 2006, the company entered into a forward starting swap agreement with a
financial institution to hedge part of the interest rate risk associated with the pending
securitized debt transaction. 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 was recorded net of tax in accumulated other
comprehensive income and is being amortized to interest expense over the expected term of
the debt. See Note 9 for additional information.
13. Net Revenue Incentive Plan
The company has a Net Revenue Incentive Plan (the “Incentive Plan”), as amended, which
applies to certain members of management and is at all times discretionary with the
company’s board of directors. If certain predetermined earnings goals are met, the Incentive
Plan provides that a predetermined percentage of the employee’s salary may be paid in the
form of a bonus. The company recognized as expense incentive bonuses of $2,943, $3,247,
and $2,997 during fiscal years 2007, 2006 and 2005, respectively.
14. Employment Agreements
The company has employment contracts with its Chairman and Chief Executive Officer
and several members of its senior management. These contracts provide for use of company
automobiles or related allowances, medical, life and disability insurance, annual base salaries,
as well as an incentive bonus. These contracts also contain provisions for payments in the
event of the termination of employment and provide for payments aggregating $8,710 at
August 31, 2007, due to loss of employment in the event of a change in control (as defined
in the contracts).
15. Contingencies
The company is involved in various legal proceedings and has certain unresolved claims
pending. Based on the information currently available, management believes that all claims
currently pending are either covered by insurance or would not have a material adverse effect
on the company’s business or financial condition.
The company initiated a new agreement with Irwin Franchise Capital Corporation
(“Irwin”) in September 2006, pursuant to which existing Sonic franchisees may qualify with
Irwin to finance drive-in retrofit projects. The agreement provides that Sonic will guarantee
at least $250 of such financing, limited to 5% of the aggregate amount of loans, not to exceed
$2,500. As of August 31, 2007, the total amount guaranteed under the Irwin agreement was
$250. The agreement provides for release of Sonic’s guarantee on individual loans under the
program that meet certain payment history criteria at the mid-point of each loans’ term.
Existing loans under the program have terms through 2014. In the event of default by a
franchisee, the company is obligated to pay Irwin the outstanding balances, plus limited
interest and charges up to Sonic’s guarantee limitation. Irwin is obligated to pursue
collections as if Sonic’s guarantee were not in place, therefore, providing recourse with the
franchisee under the notes.
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 $5,000. As of August 31, 2007, the total amount guaranteed
under the GEC agreement was $2,201. 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 Partner Drive-Ins 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, 2007, the amount remaining under the
guaranteed lease obligations totaled $3,653.
Effective November 30, 2005, the company extended a note purchase agreement to a
bank that serves to guarantee the repayment of a franchisee loan and also benefits the
franchisee with a lower financing rate. In the event of default by the franchisee, the company
would purchase the franchisee loan from the bank, thereby becoming the note holder and
providing an avenue of recourse with the franchisee. As of August 31, 2007, the balance of
the loan was $1,880.
The company has not recorded a liability for its obligations under the guarantees, other
than immaterial amounts related to the fair value of the Irwin guarantee and the guarantee
associated with the note purchase agreement, and has not been required to make any
payments under any of these guarantees.
Pg. 38
Sonic Corp. 2007 Annual Report
Notes to Consolidated Financial Statements
August 31, 2007, 2006 and 2005 (In thousands, except per share data)