Sonic 2009 Annual Report Download - page 47

16. 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 $9,200 at August 31, 2009 due to loss of employment in the event of a change
in control (as defined in the contracts).
17. 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 an 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 $3,750. As of August 31, 2009, the total
amount guaranteed under the Irwin agreement was $724. 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 loan’s term. Existing loans under the program
have terms through 2016. 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 is not aware of any defaults under this program.
The company’s liability for this guarantee, which is based on fair value, is $283 as of August 31, 2009.
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, 2009, the total amount guaranteed under the GEC agreement was $1,304. 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 2013. 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. Based on the ending date for this program, no liability is required for these guarantees.
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, 2009, the amount remaining under guaranteed lease obligations for which no liability
has been provided totaled $11,405. In addition, capital lease obligations totaling $1,070 are still reflected as liabilities as of August 31,
2009 for properties sold to franchisees. At this time, the company has no reason to anticipate any default under the foregoing leases.
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, 2009, the balance of the loan was $377 and an immaterial liability has been provided for the fair value of
this guarantee.
Notes to Consolidated Financial Statements
August 31, 2009, 2008 and 2007 (In thousands, except per share data)
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