Sonic 2010 Annual Report Download

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Real. Different.
Annual Report 2010

Table of contents

  • Page 1
    Real. Different. Annual Report 2010

  • Page 2
    ... 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 Footlong Quarter Pound Coneys, loaded hamburgers, wraps and other sandwiches, freshmade Onion Rings, Tater Tots...

  • Page 3
    ... drive-in and franchise drive-in information, is a non-GAAP measure. We believe system-wide 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. Changes in same-store sales based on drive-ins open...

  • Page 4
    ..., and corporate systems. Danielle Vona also joined Sonic as chief marketing officer. Formerly vice president of marketing at PepsiCo, Danielle brings solid skills in brand marketing, positioning and communications, as well as extensive experience on the agency side. Further improvements in product...

  • Page 5
    ... anticipate from Sonic's 2010 rebuilding year as we move into fiscal 2011? We have traditionally talked about a multi-layered growth strategy that included improving same-store sales and drive-in level profitability, new drive-in development, increasing marketing expenditures, franchise acquisitions...

  • Page 6
    ... Drink Stop®, Sonic offers a virtually unlimited number of drink possibilities, now 398,929 and counting, including Sonic's signature Cherry Limeade (in both regular and low-calorie diet versions). We also serve up a hearty breakfast menu, including the best breakfast burritos in the business...

  • Page 7
    ...Southwest Loaded Burger. With portion and quality improvements now made to almost half of our food products, we think you'll agree, it just doesn't get any better, or more real, than this! way! Hungry for more? Our Footlong Quarter Pound Coney is the real deal. A full quarter-pound, 12-inch hot dog...

  • Page 8
    ...it's the extra attention our customers receive from friendly, personal Carhop service. Either way, in these tough times, quality food and outstanding customer service matter more than ever! Of course, at Sonic, the customer is always in complete control of the ordering process, proceeding quickly or...

  • Page 9
    ...in the rare occasions when this doesn't meet our customers' expectations, we're also ready to make it right. It's all part of our pledge to provide not only the most unique service in QSR, right down to the roller skates, but also the best service, right down to the last Sonic mint. order. Zoom. 7

  • Page 10
    ... car after a movie or the big game, pulling through our drive-thru for a quick lunch, grabbing a hot breakfast on the way to a job site, or dining on our patio on warm summer nights or brisk autumn afternoons to savor the season, Sonic offers a setting for pleasurable meals with family or friends...

  • Page 11
    Others Don't. 9

  • Page 12
    ... in leadership positions at several national restaurant brands - and a contagious passion for consistent operational excellence. Finding his stride quickly in fiscal 2010, Omar has shared a message for operational excellence with his team of company-owned drive-in operators for more than a year now...

  • Page 13
    ...levels of our business, like the performance of our drive-in crews. At the Dr Pepper Sonic Games, an annual Olympic-style competition in which more than 75% of the system participates, drive-in crews from across our chain go head to head in all phases of drive-in operations. Three teams from company...

  • Page 14
    ... for our chain has been instrumental in transforming Sonic into a brand that approaches a national scope, one that now extends to 43 states. As a testament to these efforts, many new market drive-ins are producing average unit sales that are well ahead of the system average, and one just surpassed...

  • Page 15
    ..., when Don Rogers gave up a career as an engineer to become a Sonic franchisee. Now led by Don's son, Darrell (center), Darrell's daughter, Shawn (right), and longtime business associate James Junkin (left), the company has grown to become the second largest franchise group in the Sonic system. 13

  • Page 16
    ...Share System-wide Average Sales Per Drive-In (in thousands) 1.00 $0.88 12.0 9.0 $0.481 $1,070 $1,023 0.75 0.50 0.25 0 2006 2010 6.0 3.0 0 2006 2010 1 Excludes special items of $0.14, net, associated with refranchising program, impairment provisions, and debt purchase. System-wide Marketing...

  • Page 17
    Day Part Mix Lunch/Dinner Afternoon After Dinner Morning 13% 6% 48% 7% 17% 17% 70% 22% Sonic QSR System-wide Drive-In Locations 10 1 7 13 18 4 12 24 22 80 54 138 204 80 97 229 94 72 271 195 122 108 118 170 961 74 28 46 ...

  • Page 18
    ... report. Year ended August 31, 2008(3) (In thousands, except per share data) 2010 2009(3) 2007(1) (3) 2006(1) (3) Income Statement Data: Company-owned Drive-In sales Franchise Drive-Ins: Franchise royalties Franchise fees Lease revenue Other Total revenues Cost of Company-owned Drive-In sales...

  • Page 19
    ...new products and service differentiation with skating carhops. The following table provides information regarding the number of Company-owned Drive-Ins and Franchise Drive-Ins in operation as of the end of the years indicated as well as the system-wide growth in sales and average unit volume. System...

  • Page 20
    ...the reported periods and the relative change between the comparable periods. Revenues Year Ended August 31, 2010 2009 Increase/ (Decrease) Percent Increase/ (Decrease) ($ in thousands) Revenues: Company-owned Drive-In sales Franchise revenues: Franchise royalties Franchise fees Lease revenue Other...

  • Page 21
    ...revised the compensation program at the drive-in level, and implemented a customer service initiative to improve sales and profits. During the second half of the year, Company-owned Drive-Ins showed improvement in closing the gap in same-store sales growth with the Franchise Drive-Ins. These efforts...

  • Page 22
    ... of Financial Condition and Results of Operations ($ in thousands) 2010 Franchise Information Year ended August 31, 2009 2008 Franchise fees and royalties (1) Percentage change Franchise Drive-Ins in operation (2): Total at beginning of period Opened Acquired from (sold to) company, net Closed...

  • Page 23
    ...Discussion and Analysis of Financial Condition and Results of Operations Restaurant-Level Margins Year ended August 31, 2010 2009 Percentage points Increase/ (Decrease) Costs and expenses: Company-owned Drive-Ins: Food and packaging Payroll and other employee benefits Other operating expenses 27...

  • Page 24
    ...of Financial Condition and Results of Operations In fiscal year 2010, we recorded a non-cash impairment of long-lived assets of $15.2 million to reduce the carrying cost of the related operating assets to an estimated fair value. This provision was attributable to lower sales and profits in Company...

  • Page 25
    ... cash flows from operations, along with existing cash balances, will be adequate for mandatory repayment of any long-term debt and funding of planned capital expenditures in fiscal year 2011. See Note 10 of the Notes to Consolidated Financial Statements for additional information regarding our long...

  • Page 26
    ... require us to estimate fair values of our drive-ins by making assumptions regarding future cash flows and other factors. During fiscal year 2010, we reviewed Company-owned Drive-Ins and other long-lived assets with combined carrying amounts of $57 million in property, equipment and capital leases...

  • Page 27
    ... initial franchise fees and area development fees are generally recognized upon the opening of a Franchise Drive-In or upon termination of the agreement between Sonic and the franchisee. Our franchisees are required under the provisions of the license agreements to pay royalties to Sonic each month...

  • Page 28
    Management's Discussion and Analysis of Financial Condition and Results of Operations Our estimates are based 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 ...

  • Page 29
    ...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' equity (deficit): Preferred stock, par value $.01; 1,000,000 shares authorized; none outstanding Common stock...

  • Page 30
    Consolidated Statements of Income (In thousands, except per share data) 2010 Year ended August 31, 2009 2008 Revenues: Company-owned Drive-In sales Franchise Drive-Ins: Franchise royalties Franchise fees Lease revenue Other Costs and expenses: Company-owned Drive-Ins: Food and packaging Payroll...

  • Page 31
    ... - Purchase of treasury stock - Net change in deferred hedging losses, net of tax of $428 - Purchases of noncontrolling interests in Company-owned Drive-Ins - Proceeds from sale of noncontrolling interests in Company-owned Drive-Ins - Changes to noncontrolling interests - Net income - Balance at...

  • Page 32
    ... Purchases of noncontrolling interests in Company-owned Drive-Ins Other Net cash used in financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year Supplemental cash flow information Cash...

  • Page 33
    ...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 Company-owned Drive-In sales and royalty fees from franchisees. The company also leases signs and real estate...

  • Page 34
    ...-owned Drive-Ins are drive-in operations in which the company's operating subsidiary, Sonic Restaurants, Inc. ("SRI"), owns a controlling ownership interest. Historically, Company-owned Drive-Ins have operated as individual limited liability companies or general partnerships in which the manager and...

  • Page 35
    ... Financial Statements August 31, 2010, 2009 and 2008 (In thousands, except per share data) Revenue Recognition, Franchise Fees and Royalties Revenue from Company-owned Drive-In sales is recognized when food and beverage products are sold. Company-owned Drive-In sales are presented net of sales tax...

  • Page 36
    ...the limitation on the tax benefit for incentive stock options, the tax benefit for stock-based compensation will generally be less than the company's overall tax rate, and will vary depending on the timing of employees' exercises and sales of stock. However, in fiscal year 2010, the company executed...

  • Page 37
    ... financial statements. Reclassifications The company buys and sells Company-owned Drive-Ins as a part of its ongoing business operations. Gains and losses derived from these transactions have historically been reported net in other revenues on the Consolidated Statements of Income. The company...

  • Page 38
    ... quarterly reviews of long-lived assets. The recoverability of Company-owned Drive-Ins is assessed by estimating the undiscounted net cash flows expected to be generated over the remaining life of the Company-owned Drive-Ins. This involves estimating same-store sales and margins for the cash flows...

  • Page 39
    ... of leasing land, building and signs for a period of 15 years and are classified as operating leases. There are four renewal options at the end of the primary term for periods of five years for property that is owned by the company. For property owned by third parties, the lease term runs concurrent...

  • Page 40
    ... obligations under capital leases and future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of August 31, 2010 are as follows: Operating Capital Years ending August 31: 2011 2012 2013 2014 2015 Thereafter...

  • Page 41
    ...617 at August 31, 2010 were leased under operating leases to franchisees or other parties. The accumulated depreciation related to these buildings and equipment was $44,915 at August 31, 2010. As of August 31, 2010, the company had drive-ins under construction with costs to complete which aggregated...

  • Page 42
    ...Drive-In real estate, intangible assets, loan origination costs and restricted cash balances of $22,231. The 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...

  • Page 43
    ... guarantees that note holders will receive timely payment of principal and interest. The insurance fee, which is included in the interest rate on the debt, is accrued monthly and included in interest expense in the Consolidated Statements of Income. Although Sonic Corp. does not guarantee the Class...

  • Page 44
    ...income tax rate due to the following for the years ended August 31: 2010 2009 2008 Amount computed by applying a tax rate of 35% State income taxes (net of federal income tax benefit) Employment related and other tax credits, net Benefit from stock option exchange program Other Provision for income...

  • Page 45
    ... 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 Debt extinguishment Valuation allowance Noncurrent deferred tax...

  • Page 46
    ...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 47
    ... equal to the market price of the company's stock at the date of the grant. A summary of the company's RSU activity during the year ended August 31, 2010 is presented in the following table: Restricted Share Units Weighted-Average Grant Date Fair Value Total Fair Value ($) Outstanding-beginning of...

  • Page 48
    ... used in measuring segment performance or allocating resources between segments. The following table presents the revenues and income from operations for each reportable segment, along with reconciliation to reported revenue and income from operations: 2010 2009 2008 Revenues: Company-owned Drive...

  • Page 49
    ... 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 First Franchise Capital Corporation ("FFCC...

  • Page 50
    ... Financial Data (Unaudited) First Quarter 2010 2009 2010 Second Quarter 2009 Income statement data: Company-owned Drive-In sales Franchise operations Other Total revenues Company-owned Drive-In operating expenses Selling, general and administrative Depreciation and amortization Impairment of long...

  • Page 51
    Notes to Consolidated Financial Statements August 31, 2010, 2009 and 2008 (In thousands, except per share data) Third Quarter 2010 2009 2010 Fourth Quarter 2009 2010 Full Year 2009 $ 108,752 35,925 1,367 146,044 93,278 17,096 10,645 188 121,207 (183) 24,654 314 8,785 15,555 3,450 ...

  • Page 52
    ... sheets of Sonic Corp. as of August 31, 2010 and 2009, and the related consolidated statements of income, stockholders' equity (deficit), and cash flows for each of the three years in the period ended August 31, 2010. These financial statements are the responsibility of the company's management...

  • Page 53
    ... control over financial reporting. The company's internal control system was designed to provide reasonable assurance to the company's management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well...

  • Page 54
    ... consolidated balance sheets of Sonic Corp. as of August 31, 2010 and 2009, and the related consolidated statements of income, stockholders' equity (deficit), and cash flows for each of the three years in the period ended August 31, 2010 of Sonic Corp. and our report dated October 29, 2010 expressed...

  • Page 55
    ...company's restaurant-operating subsidiary) and Executive Vice President of Operations of Sonic Industries Services Inc. Stephen C. Vaughan Executive Vice President and Chief Financial Officer Paige S. Bass Vice President and General Counsel Craig J. Miller Senior Vice President and Chief Information...

  • Page 56
    ... shares in nominee or "street" name. The table below sets forth our high and low sales prices for the company's common stock during each fiscal quarter within the two most recent fiscal years. Fiscal Year Ended August 31, 2010 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year...

  • Page 57

  • Page 58
    Real. Different. Sonic Corp. 300 Johnny Bench Drive Oklahoma City, Oklahoma 73104 405 / 225-5000 www.sonicdrivein.com