Sonic 2008 Annual Report Download

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Table of contents

  • Page 1

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    Na a e Sec o

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    ... Carhop delivers the customer's order car-side. Customers also may enjoy drive-thru service at many Sonic locations. Sonic Drive-Ins feature signature menu items, offering made-when-you-order Ex-Long Chili Cheese Coneys, hamburgers, wraps and other sandwiches, hand-battered Onion Rings, Tater Tots...

  • Page 5
    ... 2008 ($ in thousands, except per share data) 2007 Change Operations (for the year) Total revenues Income from operations Net income per diluted share Weighted average diluted shares outstanding System Information (for the year or at year's end) Partner drive-ins 2 Franchise drive-ins System...

  • Page 6
    ... franchising company with healthy operating cash flows, we are well positioned to face these challenges and adapt our strategy to meet today's consumer and business needs. Brand successes for 2008 included achieving our 22nd consecutive year of positive system-wide same-store sales, a noteworthy...

  • Page 7
    ... our partner drive-in and system performance. These changes include a renewed focus on customer service and products to meet consumers' changing tastes and price sensitivity. Increased media expenditures will continue to support new product news and emphasize Sonic's distinctive menu offerings...

  • Page 8
    ... and management of our capital. Generating strong cash flows is a key benefit of being a franchise company. In October 2006, we took advantage of our solid balance sheet, executing a recapitalization by purchasing more than 30 percent of our total outstanding shares. We financed this transaction...

  • Page 9
    ... markets in the foreseeable future. We plan to continue to maintain a strong cash flow, reflecting the strength of both our business model and our ability to adapt to changing times. As the theme of our annual report suggests, everybody's talkin' about our brand. Not only are they talking about food...

  • Page 10
    6

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    The thing about being a Sonic Carhop is the way your customers look up to you. es 7

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    8

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    9

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    ... better symbolizes the distinctive competitive position Sonic has achieved than its Carhops and the unique service and delivery system they signify. At Sonic, this means customers have ultimate control over the ordering process. Choosing whether to park in one of our drive-in spaces, use the drive...

  • Page 15
    ... to customers within seconds after they "push the red button," following that with quick, efficient and correct order preparation and delivery, and continually examining operations for ways to speed great Sonic food curbside. For more about Sonic, see WHAT IS SONIC®? at www.sonicdrivein.com 11

  • Page 16
    5:45pm Hon, got stuck @ the ofc, cnt mke dinner 2nite. mayB u could stop by Sonic n pick me up an XL coney n tots? Don't 4gt my fave, grape limeade. Ctch up w/u guys @ home l8r. 5:52pm Sure, no problem. :) 12

  • Page 17
    I can go to with a car full of picky kids, and everyone comes away happy. Sonic 13

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    ... and relevant to changing tastes and satisfy a broader range of customers - whether they are value-oriented or seeking our one-of-a-kind premium selections. Moreover, we constantly highlight and refresh our menu with steady new product news and limited-time offers. So for our customers, whether it...

  • Page 21
    ... our position as Your Ultimate Drink Stop®. At last count, we offer nearly 169,000 different combinations of drink flavors - including our quintessential Cherry Limeade along with other fruit variations and low-calorie diet versions. More recently, we've launched a new premium coffee program with...

  • Page 22
    18 Used with permission. Chicago Tribune, August 18, 2008 © 2008 Chicago Tribune. All rights reserved.

  • Page 23
    Wacky Pack toys for the grandkids sure will be easier since Sonic came to town. ® Collec n 19

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    ... market opportunities that still await Sonic in so many states, even those we've called home for years. Loyal longtime franchisees, as well as those new to our system, also see steadily rising average unit volumes and drive-in level profits, appreciate the brand leadership that Sonic corporate...

  • Page 27
    a Na ona . Along the way, we've increased our presence in traditional markets and, just as important, we've made a solid and successful push into new markets in the northern reaches of the United States. In these new places and cooler climates, we've received a warm welcome from consumers who are ...

  • Page 28
    24

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    I like Sonic's model. The engine that powers it is a 55-year history of franchising. usine 25

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    26

  • Page 31
    Andre ecipient Ke Watf inductee Dalla -are Je Wetse , ranchisee i P an , O ego , Sonic 2008 Ne comer A ar , consu w ( igh ), 2008 T o Sm Hal Fame etera chai ince 1966, a ne dri e-i . 27

  • Page 32
    ...the best small businesses in America! Their success is reflected in the performance of our drive-ins, where average unit volumes have increased 24 percent over the past five years. It's no surprise the way our franchisees have responded: Voting with their pocketbooks by committing to a record number...

  • Page 33
    ... drive-ins and continue to take the lead in new market development. Considering the current state of affairs in the credit markets, and the well-publicized retrenchment occurring among wellknown franchise lenders, it is impossible to predict whether this expansion pace can be sustained over the near...

  • Page 34
    30

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    more famous than Pete and TJ; we'll probably even set the record for most views! 31 Dude, we are going to be

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  • Page 38
    ...this building excitement reflects a ready-made and eager customer base, motivated by strong brand awareness, all waiting for the day when Sonic comes to town. Much of our growing fan base is directly attributable to a broad and concerted media program that has spanned the past several years. In 2008...

  • Page 39
    ... and help attract a growing number of qualified and seasoned new operators to our chain. Importantly, Sonic's media initiatives also are closely linked with our day-part strategy, as we seek to enhance sales and profits throughout the day. We view the way we communicate our messages to the market as...

  • Page 40
    System-wide Over the past three years, our new market penetration has gained significant momentum as we rolled into eight states, including Delaware, Oregon, Pennsylvania, and Washington in 2006, South Dakota in 2007 and, in the past year alone, Michigan, Minnesota, and New Jersey. D i e-I Loca on ...

  • Page 41
    What do you have to say?

  • Page 42
    300 Johnny Bench Drive • Oklahoma City, Oklahoma 73104 405/225-5000 • www.sonicdrivein.com

  • Page 43
    nancia Sec o

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  • Page 45
    ... to Sonic. May I take your order please?" "The best way to start the day is with a Java Chiller. No, wait, make that a Tropical Smoothie." "THE PATIO IS A GREAT PLACE TO MEET FRIENDS FOR A FROZEN TREAT. IT REALLY COOLS US OFF." " I like how everything on Sonic's menu is available all day long...

  • Page 46

  • Page 47
    ...in special items associated with Sonic's tender offer and subsequent . financing activities 2 Total Revenues Year $ in Millions 03 $447 04 $536 05 $623 06 $693 07 $770 08 $805 Net Income 03 $0.52 04 $0.63 05 06 $0.75 $0.88 07 08 $0.96 2 $0.97 Year Drive-Ins System-Wide System-Wide Average Sales...

  • Page 48
    2 Sonic Corp. 2008 Annual Report Selecte nancia Dat The following table sets forth selected financial data regarding the company's financial condition and operating results. One should read the following information in conjunction with "Management's Discussion and Analysis of Financial Condition ...

  • Page 49
    ... Drive-In sales and royalties from franchisees. We also receive revenues from initial franchise fees, and to a lesser extent, from the selling and leasing of signs and real estate. Costs of Partner Drive-In sales, including minority interest in earnings of drive-ins, relate directly to Partner Drive...

  • Page 50
    ... support. Market classifications are updated periodically. Represents percentage change for drive-ins open for a minimum of 15 months. System-wide same-store sales increased 0.9% during fiscal year 2008 as a result of slight increases in traffic (number of transactions per drive-in) and average...

  • Page 51
    ... revenue for the reported periods and the relative change between the comparable periods. Revenues Year Ended August 31, 2008 2007 ($ in thousands) Increase/ (Decrease) Percent Increase/ (Decrease) Revenues: Partner Drive-In sales Franchise revenues: Franchise royalties Franchise fees Other Total...

  • Page 52
    ...of Partner Drive-In sales. Partner Drive-In Sales Year ended August 31, 2007 ($ in thousands) 2008 2006 Partner Drive-In sales Percentage increase Partner Drive-Ins in operation (1): Total at beginning of period Opened Acquired from (sold to) franchisees, net Closed Total at end of period Average...

  • Page 53
    ...) 2008 2006 Franchise fees and royalties (1) Percentage increase Franchise Drive-Ins in operation (2): Total at beginning of period Opened Acquired from (sold to) company, net Closed Total at end of period Franchise Drive-In sales Percentage increase Effective royalty rate Average sales per...

  • Page 54
    ... it is directly related to Partner Drive-In operations. Restaurant-Level Margins Year ended August 31, 2008 2007 Percentage points Increase/ (Decrease) Costs and expenses: Partner Drive-Ins: Food and packaging Payroll and other employee benefits Minority interest in earnings of Partner Drive-Ins...

  • Page 55
    ... well as $6.1 million in debt extinguishment charges related to financing the company's tender offer and other share repurchase activities. Income taxes. The provision for income taxes increased for fiscal year 2008 with an effective federal and state tax rate of 37.4% compared with 36.4% in fiscal...

  • Page 56
    ... drive-ins Replacement equipment for existing drive-ins and other Total investing cash flows for capital additions $ 43.6 27.3 13.9 20.6 105.4 $ During fiscal year 2008, we purchased the real estate for 19 of the 29 newly constructed drive-ins. Financing Cash Flows. Net cash used in financing...

  • Page 57
    11 Sonic Corp. 2008 Annual Report Managemen ' Discu io Anal i nancia Cond o Resu Opera on Under the share repurchase program authorized by our Board of Directors, the company acquired 1.5 million shares for a total cost of $32.2 million during fiscal 2008. In addition to the current-year share...

  • Page 58
    ... in Partner Drive-Ins from time to time as managers and supervisors buy out and buy in to the partnerships or limited liability companies. If the purchase price of a minority interest that we acquire exceeds the net book value of the assets underlying the partnership interest, the excess is recorded...

  • Page 59
    ... 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...

  • Page 60
    14 Sonic Corp. 2008 Annual Report Managemen ' Discu io Anal i nancia Cond o Resu Opera on Quantitative and Qualitative Disclosures About Market Risk Sonic's use of debt directly exposes the company to interest rate risk. Floating rate debt, where the interest rate fluctuates periodically, ...

  • Page 61
    ... taxes Prepaid expenses and other Total current assets Noncurrent restricted cash Notes receivable, net Net investment in direct financing leases Property, equipment and capital leases, net Goodwill, net Trademarks, trade names and other intangibles, net Debt origination costs, net Other assets, net...

  • Page 62
    16 Sonic Corp. 2008 Annual Report Consolidate S atement Income 2008 Year ended August 31, 2007 (In thousands, except per share data) 2006 Revenues: Partner Drive-In sales Franchise Drive-Ins: Franchise royalties Franchise fees Other $ 671,151 121,944 5,167 6,451 804,713 $ 646,915 111,052 4,574...

  • Page 63
    ... stock split Deferred hedging losses, net of tax of $300 Net income Balance at August 31, 2006 Exercise of common stock options Stock-based compensation expense, including capitalized compensation of $232 Tax benefit related to exercise of employee stock options Purchase of treasury stock Net change...

  • Page 64
    ... adjustments Net cash provided by operating activities Cash flows from investing activities Purchases of property and equipment Acquisition of businesses, net of cash received Acquisition of real estate, net of cash received Proceeds from sale of real estate Investments in direct financing leases...

  • Page 65
    19 Sonic Corp. 2008 Annual Report 2008 Year ended August 31, 2007 (In thousands) 2006 Cash flows from financing activities Proceeds from borrowings Payments on long-term debt Purchases of treasury stock Debt issuance costs Restricted cash for debt obligations Payments on capital lease ...

  • Page 66
    ... Significant Accounting Policies Operations Sonic Corp. (the "company") operates and franchises a chain of quick-service drive-ins in the United States. It derives its revenues primarily from Partner Drive-In sales and royalty fees from franchisees. The company also leases signs and real estate, and...

  • Page 67
    ...Sonic Corp. 2008 Annual Report Note August 31, 2008, 2007 and 2006 (In thousands, except per share data) Consolidate nancia S atement Accounting for Long-Lived Assets In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the company reviews long-lived...

  • Page 68
    ... in Partner Drive-Ins from time to time as managers and supervisors buy out and buy in to the partnerships or limited liability companies. If the purchase price of a minority interest that we acquire exceeds the net book value of the assets underlying the partnership interest, the excess is recorded...

  • Page 69
    ... the period that includes the enactment date. Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax purposes but do not affect earnings. These benefits are principally generated from employee exercises of non-qualified stock options...

  • Page 70
    ... of operations. 2. Net Income Per Share The following table sets forth the computation of basic and diluted earnings per share for the years ended August 31: 2008 2007 2006 Numerator: Net income Denominator: Weighted average shares outstanding - basic Effect of dilutive employee stock options...

  • Page 71
    ... the company's goodwill relates to Partner Drive-Ins. The changes in the carrying amount of goodwill for fiscal years ending August 31, 2008 and 2007 were as follows: 2008 2007 Balance as of September 1, Goodwill acquired during the year Goodwill acquired for minority interests in Partner Drive-Ins...

  • Page 72
    26 Sonic Corp. 2008 Annual Report Note August 31, 2008, 2007 and 2006 (In thousands, except per share data) Consolidate nancia S atement Direct Financing Leases Components of net investment in direct financing leases are as follows at August 31, 2008 and 2007: 2008 2007 Minimum lease payments ...

  • Page 73
    27 Sonic Corp. 2008 Annual Report Note August 31, 2008, 2007 and 2006 (In thousands, except per share data) Consolidate nancia S atement Total rent expense for all operating leases and capital leases consists of the following for the years ended August 31: 2008 2007 2006 Operating leases: ...

  • Page 74
    ... origination costs, net, on the Consolidated Balance Sheet as of August 31, 2008. 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...

  • Page 75
    ... real estate used in operation of the company's existing business. As of August 31, 2008, total assets for these combined indirect subsidiaries were approximately $468,000, including receivables for royalties, Partner DriveIn real estate, intangible assets, loan origination costs and restricted cash...

  • Page 76
    30 Sonic Corp. 2008 Annual Report Note August 31, 2008, 2007 and 2006 (In thousands, except per share data) Consolidate nancia S atement The following table presents the components of comprehensive income for the years ended August 31, 2008, 2007 and 2006: 2008 2007 2006 Net Income Decrease (...

  • Page 77
    ... in partnerships, including differences in capitalization, depreciation and direct financing leases 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 Accrued...

  • Page 78
    .... The aggregate amount of stock that employees may purchase under this plan is limited to 1,139 shares. The purchase price will be between 85% and 100% of the stock's fair market value and will be determined by the company's Board of Directors. Stock-Based Compensation The Sonic Corp. 2006 Long-Term...

  • Page 79
    ...Sonic Corp. 2008 Annual Report Note August 31, 2008, 2007 and 2006 (In thousands, except per share data) Consolidate nancia S atement that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the company's stock...

  • Page 80
    ...Sonic Corp. 2008 Annual Report Note August 31, 2008, 2007 and 2006 (In thousands, except per share data) Consolidate nancia S atement 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...

  • Page 81
    35 Sonic Corp. 2008 Annual Report Note August 31, 2008, 2007 and 2006 (In thousands, except per share data) Consolidate nancia S atement 14. Net Revenue Incentive Plan The company has a Net Revenue Incentive Plan (the "Incentive Plan"), as amended, which applies to certain members of management ...

  • Page 82
    36 Sonic Corp. 2008 Annual Report Note August 31, 2008, 2007 and 2006 (In thousands, except per share data) Consolidate nancia S atement 17. Selected Quarterly Financial Data (Unaudited) First Quarter 2008 2007 2008 Second Quarter 2007 Income statement data: Partner Drive-In sales Other Total ...

  • Page 83
    37 Sonic Corp. 2008 Annual Report Note August 31, 2008, 2007 and 2006 (In thousands, except per share data) Consolidate nancia S atement Third Quarter 2008 2007 2008 Fourth Quarter 2007 2008 Full Year 2007 $ 178,338 34,660 212,998 144,514 15,716 13,044 173,274 39,724 - 11,968 27,756 10,517 ...

  • Page 84
    ... of the three years in the period ended August 31, 2008, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Sonic Corp.'s internal control over...

  • Page 85
    ... Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sonic Corp. as of August 31, 2008 and 2007, and the related consolidated statements of income, stockholders' deficit, and cash flows for each of the three years in the period ended August 31, 2008 of Sonic...

  • Page 86
    ... Sonic Corp. 2008 Annual Report Direct O cer Chairman Emeritus Troy N. Smith, Sr. Founder of Sonic Drive-Ins Director Emeritus E. Dean Werries Retired Chairman and Chief Executive Officer Fleming Companies, Inc. Board of Directors J. Clifford Hudson Chairman and Chief Executive Officer Sonic Corp...

  • Page 87
    ...Annual Meeting of Stockholders will be held at 1:30 p.m. Central Standard Time on January 15, 2009, at our Corporate Offices, 4th Floor, 300 Johnny Bench Drive, Oklahoma City, Oklahoma. Annual Report on Form 10-K A copy of our annual report on Form 10â€'K for the year ended August 31, 2008, as filed...

  • Page 88
    300 Johnny Bench Drive • Oklahoma City, Oklahoma 73104 405/225-5000 • www.sonicdrivein.com