Sonic 2010 Annual Report Download - page 42

The company sells gift cards that do not have expiration dates. The gift card balances are recorded as a liability on the balance
sheet. Breakage is the amount on a gift card that is not expected to be redeemed and that the company is not required to remit
to a state under unclaimed property laws. The company estimates breakage based upon the trend in redemption patterns from
previously sold gift cards utilizing our history with the program. The company’s policy is to recognize quarterly the breakage on
the delayed recognition method when it is apparent that there is a remote likelihood the gift card balance will be redeemed based
on our historical trends. The company reduces the gift card liability for the estimated breakage and uses that amount to help defray
the costs of operating the gift card program.
10. Long-Term Debt
Long-term debt consists of the following at August 31:
2010 2009
5.7% Class A-2 senior notes, due December 2031 $ 403,400 $ 511,107
Class A-1 senior variable funding notes 187,250 187,250
Other 971 1,193
591,621 699,550
Less long-term debt due within one year 61,749 52,699
Long-term debt due after one year $ 529,872 $ 646,851
Maturities of long-term debt as of August 31, 2010 are $61,749 in 2011, $78,585 in 2012, $450,949 in 2013 and $226 in 2014.
In December 2006, various subsidiaries of the company issued $600,000 of Class A-2 senior notes in a private transaction. The
Class A-2 senior notes are the first issuance under a facility that will allow Sonic to issue additional series of notes in the future
subject to certain conditions. These notes have a fixed interest rate of 5.7%, subject to upward adjustment after the expected six-
year repayment term. Loan origination costs associated with this debt totaled $20,564, and the unamortized balance is categorized
as debt origination costs, net, on the Consolidated Balance Sheet as of August 31, 2010. Amortization of these loan costs and the
hedge loss discussed below produces an overall weighted average interest cost of 6.7%.
In connection with issuance of the Class A-2 notes, various subsidiaries of the company also completed a securitized financing
facility of Class A-1 senior variable funding notes. This facility allows for the issuance of up to $200,000 of notes and certain other
credit instruments, including letters of credit. Considering the $187,250 outstanding at August 31, 2010 and $325 in outstanding
letters of credit, $12,425 was unused and available under the Class A-1 notes. The effective interest rate on the outstanding balance
for the Class A-1 notes at August 31, 2010 and 2009 was 1.41% and 1.42%, respectively. There is a commitment fee on the unused
portion of the Class A-1 notes of 0.5%. During fiscal year 2009, upon request of the company to draw down the remaining $12,250
in Class A-1 senior variable funding notes from the lender that committed to advance one-half of the funds for the variable funding
notes, the lender, which had previously filed for Chapter 11 bankruptcy, notified the company that it could not meet its obligation.
At this time, the company no longer considers the $12,250, to be available.
The Class A-1 and Class A-2 notes were issued by special purpose, bankruptcy remote, indirect subsidiaries of the company
that hold substantially all of Sonic’s franchising assets and Company-owned Drive-In real estate used in operation of the company’s
existing business. As of August 31, 2010, total assets for these combined indirect subsidiaries were approximately $420,000,
including receivables for royalties, Company-owned 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 derived from these indirect subsidiaries’
assets. Sonic Industries LLC, which is the subsidiary that acts as franchisor, has guaranteed the obligations of the co-issuers and
pledged substantially all of its assets to secure such obligations.
While the Class A-1 and A-2 notes have a legal final maturity date of December 2031, the notes are structured to provide for
a six-year life with full repayment expected to occur by December 20, 2012. The company expects to refinance the notes on or before
December 20, 2012. However, if the debt extends beyond December 20, 2012, the terms of the notes provide for a 1% increase in
the interest rate for the Class A-1 notes and an increase in the interest rate for the A-2 notes based on current market conditions.
In addition, principal payments will accelerate by applying all of the residual from the royalties, lease revenues and other fees
securing the debt, after the required debt service payments, until the debt is paid in full.
On March 24, 2010, the Office of the Commissioner of Insurance of the State of Wisconsin (“OCI”) commenced rehabilitation
proceedings with respect to a segregated account of certain insurance policies held by Ambac Assurance Corporation (“Ambac”),
the third-party insurance company that provides credit enhancements in the form of financial guaranties of our fixed and variable
Notes to Consolidated Financial Statements
August 31, 2010, 2009 and 2008 (In thousands, except per share data)
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