Sonic 2009 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... through an intercom speaker system. A smiling Carhop delivers the customer's order car-side. Customers also may enjoy patio dining or drive-thru service at many Sonic locations. Sonic Drive-Ins feature signature menu items, offering made-when-you-order Extra-Long Chili Cheese Coneys, hamburgers...

  • Page 3
    ... partner drive-in and franchise drive-in information, is a non-GAAP measure. We believe systemwide information is useful in analyzing the growth of the Sonic brand as well as our revenues, since franchisees pay royalties based on a percentage of sales. 4 Changes in same-store sales based on drive...

  • Page 4
    ... for value. Our belief is that improved same-store sales will come from an increase in traffic, loyalty and check. We call it TLC, and our first priority was to focus on driving traffic, getting more people to visit Sonic more often. We implemented our Happy Hour promotion in the prior fiscal year...

  • Page 5
    ... feedback, our service has improved substantially this past year, but the improvements won't end there. We continue to look for ways to take our service to a higher level, and surprise and delight our customers as only Sonic can do. On a separate note, as it relates to our Partner Drive-Ins (those...

  • Page 6
    4

  • Page 7
    ... Value Menu at the end of 2008 to offer economy-sized portions of 11 unique items that appeal at all day parts. The addition of these selections, combined with the success of Happy Hour and other product promotions, enabled Sonic to maintain relatively level customer traffic throughout the past year...

  • Page 8
    To the frenzied delight of both Bay Staters and one extraordinarily passionate customer from Maine, Sonic marked its expansion into Massachusetts with the opening of this drive-in in Peabody on August 26, 2009. 6

  • Page 9
    ... waited for hours, and navigated traffic-controlled grand openings to get their very first glimpse of a skating Sonic Carhop, their first taste of our unique style of fast food, and a great feel for the drive-in experience that is quintessentially Sonic. The pace of drive-in openings in fiscal 2009...

  • Page 10
    Liz and Gary Simons, Sonic franchisees for 30 years and operators of Sonic Drive-Ins in the Kansas City area, along with their crew bound for the 2009 Dr Pepper Sonic Games. 8

  • Page 11
    .... The long-term success of our brand explains why franchisees remain so enthusiastic about Sonic's future prospects, and this passion is contagious. It propels the prosperity of hundreds of small business owners, sustains a solid level of drive-in development given current economic conditions, draws...

  • Page 12
    10

  • Page 13
    ... on skating. Skating Carhops increase the entertainment value of the Sonic experience and resonate with customers in creating a more satisfying dining occasion. As an added benefit, this translates into better drive-in performance from a sales and profit perspective. So in the coming year, you...

  • Page 14
    ...Sonic at a glance. 04 09 1,800 1,200 600 Total Revenues (in millions) System-wide Average Sales Per Drive-In $800 700 600 500 400 300 200 100 400 200 800 600 (in thousands) $1,200 1,000 04 09 04 09 Net Income Per Diluted Share $0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 System-wide Marketing...

  • Page 15
    System-wide Drive-In Locations 8 1 7 12 19 4 14 23 23 83 46 136 206 85 29 41 29 42 5 55 1 4 4 6 2 7 20 9 1 97 71 268 195 122 171 950 228 74 110 124 96 New states entered since 2005 116 48% 13 % 71% Sonic Day Part Mix 48% Lunch/Dinner 22% Afternoon 17% After Dinner 13% Morning...

  • Page 16
    ...in this report. Year ended August 31, 2007 (In thousands, except per share data) 2009 2008 2006(1) 2005(1) Income Statement Data: Partner Drive-In sales Franchise Drive-Ins: Franchise royalties Franchise fees Gain on sale of Partner Drive-Ins Other Total revenues Cost of Partner Drive-In sales...

  • Page 17
    ...unit volume. System-wide information includes both Partner Drive-In and Franchise Drive-In information, which we believe is useful in analyzing the growth of the brand as well as the company's revenues since franchisees pay royalties based on a percentage of sales. System-wide Performance Year Ended...

  • Page 18
    ... fewer items per transaction and purchasing lower-priced items, such as items from our Everyday Value Menu. The company has initiated strategies to offset this trend including offering a free upgrade to a 44 ounce drink with the purchase of a combo meal during the summer of 2009 and increasing the...

  • Page 19
    Management's Discussion and Analysis of Financial Condition and Results of Operations ($ in thousands) Revenues Year Ended August 31, 2008 2007 Increase/ (Decrease) Percent Increase/ (Decrease) Revenues: Partner Drive-In sales Franchise revenues: Franchise royalties Franchise fees Gain on sale ...

  • Page 20
    Management's Discussion and Analysis of Financial Condition and Results of Operations The following table reflects the growth in franchise income (franchise royalties and franchise fees) as well as franchise sales, average unit volumes and the number of Franchise Drive-Ins. While we do not record ...

  • Page 21
    ... of cost of sales, in the table below, since it is directly related to Partner Drive-In operations. Restaurant-Level Margins Year ended August 31, 2009 2008 Percentage points Increase/ (Decrease) Costs and expenses: Partner Drive-Ins: Food and packaging Payroll and other employee benefits Minority...

  • Page 22
    ... matters change. Financial Position During fiscal year 2009, current assets increased 103.3% to $202.1 million compared to $99.4 million as of the end of fiscal year 2008. Cash balances increased by $93.3 million primarily as a result of refranchising Partner Drive-Ins and advances under the company...

  • Page 23
    ... interest rates in effect at August 31, 2009, the interest payments will be approximately $3 million on an annual basis through December 2013. Impact of Inflation We have experienced impact from inflation. Inflation has caused increased food, labor and benefits costs and has increased our operating...

  • Page 24
    ... 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 25
    ... 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...

  • Page 26
    ... rate change for the balance outstanding at year-end would be approximately $1.9 million before tax. At August 31, 2009, the fair value of the variable funding notes was estimated at $159.3 million versus carrying value of $187.3 million (including accrued interest). Should credit spreads increase...

  • Page 27
    ... year Total current liabilities Obligations under capital leases due after one year Long-term debt due after one year Other noncurrent liabilities Deferred income taxes Commitments and contingencies (Notes 7, 8, 15, 16 and 17) Stockholders' deficit: Preferred stock, par value $.01; 1,000,000 shares...

  • Page 28
    Consolidated Statements of Income (In thousands, except per share data) 2009 Year ended August 31, 2008 2007 Revenues: Partner Drive-In sales Franchise Drive-Ins: Franchise royalties Franchise fees Gain on sale of Partner Drive-Ins Other $ 567,436 126,706 5,006 13,154 6,487 718,789 $ 671,151...

  • Page 29
    ... Other Comprehensive Income Treasury Stock Shares Amount 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 in...

  • Page 30
    ... income taxes Provision for impairment of long-lived assets Excess tax benefit from exercise of employee stock options Debt extinguishment and other costs Payment for hedge termination Amortization of debt costs to interest expense Other Decrease (increase) in operating assets: Restricted cash...

  • Page 31
    ... Payments on long-term debt Purchases of treasury stock Debt issuance costs Restricted cash for debt obligations Payments on capital lease obligations Exercises of stock options Excess tax benefit from exercise of employee stock options Net cash used in financing activities Net increase in cash...

  • Page 32
    ... 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 33
    ... is tested annually for impairment under the provisions of SFAS No. 142. Revenue Recognition, Franchise Fees and Royalties Revenue from Partner Drive-In sales is recognized when food and beverage products are sold. We present Partner Drive-In sales net of sales tax and other sales-related taxes. 31

  • Page 34
    ... of the advertising cooperatives, the Sonic Brand Fund, or the System Marketing Fund are included in the company's consolidated financial statements. However, all advertising contributions by Partner Drive-Ins are recorded as expense on the company's financial statements. Stock-Based Compensation...

  • Page 35
    ... to unrecognized tax benefits are included in income tax expense. Additional information regarding the company's unrecognized tax benefits, including changes in such amounts during fiscal years 2009 and 2008, is provided in Note 12. Disclosures About Fair Value of Financial Instruments Effective...

  • Page 36
    ...financial statements. 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: 2009 2008 2007 Numerator: Net income Denominator: Weighted average shares outstanding - basic Effect of dilutive employee stock options...

  • Page 37
    ...as held and used and are reflected in "property, equipment and capital leases, net" and "goodwill, net" in the August 31, 2009 consolidated balance sheet. Depreciation has been retroactively applied to these assets. During the fiscal years ended August 31, 2009, 2008 and 2007, the company identified...

  • Page 38
    ... to four renewal options at the end of the initial term for periods of five years. The company classifies income from leasing operations as other revenue in the Consolidated Statements of Income. Certain Partner Drive-Ins lease land and buildings from third parties. These leases, which expire over...

  • Page 39
    ... to Consolidated Financial Statements August 31, 2009, 2008 and 2007 (In thousands, except per share data) Future minimum rental payments receivable as of August 31, 2009, are as follows: Operating Direct Financing Year ending August 31: 2010 2011 2012 2013 2014 Thereafter Less unearned income 10...

  • Page 40
    ...of August 31, 2009, the company had drive-ins under construction with costs to complete which aggregated $447. 9. Accrued Liabilities Accrued liabilities consist of the following at August 31, 2009 and 2008: 2009 2008 Wages and other employee benefits Taxes, other than income taxes Accrued interest...

  • Page 41
    ...,000, including receivables for royalties, Partner Drive-In real estate, intangible assets, loan origination costs and restricted cash balances of $35,369. 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...

  • Page 42
    ... in cash flows from operating activities on the Consolidated Statement of Cash Flows. The following table presents the components of comprehensive income for the years ended August 31, 2009, 2008 and 2007: 2009 2008 2007 Net Income Decrease (increase) in deferred hedging loss, net of tax Total...

  • Page 43
    ... and direct financing leases Capital loss carryover State net operating losses Property, equipment and capital leases Deferred income from affiliated franchise fees Accrued liabilities Intangibles and other assets Deferred income from franchisees Stock compensation Loss on cash flow hedge...

  • Page 44
    ...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 Incentive Plan...

  • Page 45
    ... Financial Statements August 31, 2009, 2008 and 2007 (In thousands, except per share data) The company estimates expected volatility based on historical daily price changes of the company's common stock for a period equal to the current expected term of the options. The risk-free interest rate...

  • Page 46
    ... discrete financial information is available as the basis for management to allocate resources and assess performance. Based on internal reporting and management structure, the company has determined that it has two reportable segments: Partner Drive-Ins and Franchise Operations. The Partner Drive...

  • Page 47
    ...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 an agreement with Irwin Franchise Capital Corporation ("Irwin...

  • Page 48
    ...in the current market. Market information available for public debt transactions for companies with ratings that are close to or lower than ratings for the company (without consideration for the third-party credit enhancement) was used in estimating fair value. Management believes this fair value is...

  • Page 49
    Notes to Consolidated Financial Statements August 31, 2009, 2008 and 2007 (In thousands, except per share data) Third Quarter 2009 2008 2009 Fourth Quarter 2008 2009 Full Year 2008 $ 144,279 10,727 36,897 191,903 119,807 16,420 7,490 11,453 155,170 36,733 - 9,911 26,822 10,049 ...

  • Page 50
    ... balance sheets of Sonic Corp. as of August 31, 2009 and 2008, and the related consolidated statements of income, stockholders' deficit, and cash flows for each of the three years in the period ended August 31, 2009. These financial statements are the responsibility of the company's management...

  • Page 51
    ... reasonable assurance with respect to financial statement preparation and presentation. The company's management assessed the effectiveness of the company's internal control over financial reporting as of August 31, 2009. In making this assessment, it used the criteria set forth by the Committee of...

  • Page 52
    ... Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sonic Corp. as of August 31, 2009 and 2008, and the related consolidated statements of income, stockholders' deficit, and cash flows for each of the three years in the period ended August 31, 2009 of Sonic...

  • Page 53
    ...Vice President of Franchise Operations (New Markets) Stephen P. Reed Vice President of Supply Chain Management 51 Margaret R. Ricks Vice President of Operations Jean-Pierre Salama Vice President of Training Claudia S. San Pedro Vice President of Investor Relations and Brand Strategies and Treasurer...

  • Page 54
    ...will be held at 1:30 p.m. Central Standard Time on January 14, 2010, 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 10-K for the year ended August 31, 2009, as filed with the Securities and Exchange...

  • Page 55
    ... customers with a Sonic peppermint. Troy led by example, and he convinced those who have come after him to embrace the notion of service with the speed of sound, the early-day tag line of the fledgling drive-in chain. His positive influence over generations of people associated with the Sonic brand...

  • Page 56
    Limeades for Learning ® Sonic and DonorsChoose.org have partnered to help public school teachers provide inspirational learning experiences for students in their classrooms. During September 2009, when Sonic customers ordered a drink, they were encouraged to visit a special Web site, ...