Quarterly Report
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
Indicate
by check mark whether the registrant (1) has filed all reports required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
the reports), and (2) has been subject to such filing requirements for the
past
90 days.
Yes
X
.
No
.
Indicate
by check mark whether the Registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act).
Yes
X
.
No
.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act. Yes
.
No
X
.
As
of
November 30, 2005, the Registrant had 57,774,831 shares of common stock issued
and outstanding (excluding 18,117,173 shares of common stock held as treasury
stock).
SONIC
CORP.
Index
|
Page
Number
|
||
|
PART
I. FINANCIAL INFORMATION
|
||
|
|
||
|
PART
II. OTHER INFORMATION
|
||
PART
I - FINANCIAL
INFORMATION
|
SONIC
CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
|
|||||||
|
ASSETS
|
(Unaudited)
November
30,
2005
|
August
31,
2005*
|
|||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
9,528
|
$
|
6,431
|
|||
|
Accounts
and notes receivable, net
|
15,969
|
18,801
|
|||||
|
Other
current assets
|
10,099
|
10,017
|
|||||
|
Total
current assets
|
35,596
|
35,249
|
|||||
|
Property,
equipment and capital leases
|
605,335
|
587,558
|
|||||
|
Less
accumulated depreciation and amortization
|
(173,448
|
)
|
(164,733
|
)
|
|||
|
Property,
equipment and capital leases, net
|
431,887
|
422,825
|
|||||
|
Goodwill,
net
|
101,216
|
88,471
|
|||||
|
Trademarks,
trade names and other intangible assets, net
|
6,721
|
6,434
|
|||||
|
Investment
in direct financing leases and noncurrent portion of
|
|||||||
|
notes
receivable
|
7,808
|
8,171
|
|||||
|
Other
assets, net
|
2,065
|
2,166
|
|||||
|
Intangibles
and other assets, net
|
117,810
|
105,242
|
|||||
|
Total
assets
|
$
|
585,293
|
$
|
563,316
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
12,789
|
$
|
14,117
|
|||
|
Deposits
from franchisees
|
2,509
|
3,157
|
|||||
|
Accrued
liabilities
|
31,573
|
26,367
|
|||||
|
Income
taxes payable
|
13,142
|
15,174
|
|||||
|
Obligations
under capital leases and long-term debt
|
|||||||
|
due
within one year
|
5,853
|
6,527
|
|||||
|
Total
current liabilities
|
65,866
|
65,342
|
|||||
|
Obligations
under capital leases due after one year
|
40,239
|
36,259
|
|||||
|
Long-term
debt due after one year
|
100,960
|
55,934
|
|||||
|
Other
noncurrent liabilities
|
18,441
|
17,864
|
|||||
|
Stockholders’
equity:
|
|||||||
|
Preferred
stock, par value $.01; 1,000,000 shares
|
|||||||
|
authorized;
none outstanding
|
–
|
–
|
|||||
|
Common
stock, par value $.01; 100,000,000 shares
|
|||||||
|
authorized;
75,892,004 shares issued (75,766,006 shares
|
|||||||
|
issued
at August 31, 2005)
|
759
|
758
|
|||||
|
Paid-in
capital
|
157,387
|
154,154
|
|||||
|
Retained
earnings
|
414,419
|
397,989
|
|||||
|
572,565
|
552,901
|
||||||
|
Treasury
stock, at cost; 18,117,173 common shares (16,450,920
|
|||||||
|
shares
at August 31, 2005)
|
(212,778
|
)
|
(164,984
|
)
|
|||
|
Total
stockholders’ equity
|
359,787
|
387,917
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
585,293
|
$
|
563,316
|
|||
*
Adjusted to include the impact of stock-based compensation expense; see Note
5
for additional information.
See
accompanying notes.
|
SONIC
CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except per share data)
|
|||||||
|
(Unaudited)
Three
months ended
November
30,
|
|||||||
|
2005
|
2004*
|
||||||
|
Revenues:
|
|||||||
|
Partner
Drive-In sales
|
$
|
135,422
|
$
|
120,211
|
|||
|
Franchise
Drive-Ins:
|
|||||||
|
Franchise
royalties
|
22,253
|
20,106
|
|||||
|
Franchise
fees
|
941
|
935
|
|||||
|
Other
|
1,184
|
975
|
|||||
|
159,800
|
142,227
|
||||||
|
Costs
and expenses:
|
|||||||
|
Partner
Drive-Ins:
|
|||||||
|
Food
and packaging
|
36,107
|
32,573
|
|||||
|
Payroll
and other employee benefits
|
41,002
|
36,965
|
|||||
|
Minority
interest in earnings of Partner Drive-Ins
|
4,831
|
4,579
|
|||||
|
Other
operating expenses
|
28,185
|
23,667
|
|||||
|
110,125
|
97,784
|
||||||
|
Selling,
general and administrative
|
12,196
|
10,833
|
|||||
|
Depreciation
and amortization
|
9,897
|
8,406
|
|||||
|
132,218
|
117,023
|
||||||
|
Income
from operations
|
27,582
|
25,204
|
|||||
|
Interest
expense
|
1,847
|
1,779
|
|||||
|
Interest
income
|
(540
|
)
|
(174
|
)
|
|||
|
Net
interest expense
|
1,307
|
1,605
|
|||||
|
Income
before income taxes
|
26,275
|
23,599
|
|||||
|
Provision
for income taxes
|
9,845
|
8,485
|
|||||
|
Net
income
|
$
|
16,430
|
$
|
15,114
|
|||
|
Net
income per share - basic
|
$
|
.28
|
$
|
.25
|
|||
|
Net
income per share - diluted
|
$
|
.27
|
$
|
.24
|
|||
* Adjusted to include the impact of stock-based compensation expense; see Note 5 for additional information.
See
accompanying notes.
|
SONIC
CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
|
|||||||
|
(Unaudited)
Three
months ended
November
30,
|
|||||||
|
2005
|
2004*
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
16,430
|
$
|
15,114
|
|||
|
Adjustments
to reconcile net income to net cash provided by
|
|||||||
|
operating
activities:
|
|||||||
|
Depreciation
and amortization
|
9,897
|
8,406
|
|||||
|
Stock-based
compensation expense
|
1,636
|
1,340
|
|||||
|
Excess
tax benefit from exercise of employee stock options
|
(538
|
)
|
(2,130
|
)
|
|||
|
Provision
for deferred income taxes
|
(261
|
)
|
298
|
||||
|
Other
|
127
|
650
|
|||||
|
Increase
in operating assets
|
3,235
|
1,329
|
|||||
|
Increase
(decrease) in operating liabilities
|
2,572
|
3,784
|
|||||
|
Total
adjustments
|
16,668
|
13,677
|
|||||
|
Net
cash provided by operating activities
|
33,098
|
28,791
|
|||||
|
Cash
flows from investing activities:
|
|||||||
|
Purchases
of property and equipment
|
(12,670
|
)
|
(14,147
|
)
|
|||
|
Acquisition
of businesses, net of cash received
|
(14,592
|
)
|
–
|
||||
|
Proceeds
from collection of long-term notes receivable
|
216
|
3,845
|
|||||
|
Acquisition
of intangibles and other assets
|
(412
|
)
|
–
|
||||
|
Other
|
(127
|
)
|
578
|
||||
|
Net
cash used in investing activities
|
(27,585
|
)
|
(9,724
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Payments
on long-term debt
|
(64,652
|
)
|
(22,334
|
)
|
|||
|
Proceeds
from long-term borrowings
|
109,040
|
8,250
|
|||||
|
Purchases
of treasury stock
|
(47,685
|
)
|
–
|
||||
|
Proceeds
from exercise of stock options
|
951
|
5,412
|
|||||
|
Excess
tax benefit from exercise of employee stock options
|
538
|
2,130
|
|||||
|
Other
|
(608
|
)
|
(525
|
)
|
|||
|
Net
cash used in financing activities
|
(2,416
|
)
|
(7,067
|
)
|
|||
|
Net
increase in cash and cash equivalents
|
3,097
|
12,000
|
|||||
|
Cash
and cash equivalents at beginning of period
|
6,431
|
7,993
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
9,528
|
$
|
19,993
|
|||
|
Supplemental
Cash Flow Information:
|
|||||||
|
Additions
to capital lease obligations
|
$
|
4,958
|
$
|
–
|
|||
|
Stock
options exercised by stock swap
|
110
|
–
|
|||||
*
Adjusted to include the impact of stock-based compensation expense; see Note
5
for additional information.
See
accompanying notes.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
Note
1
The
unaudited Condensed Consolidated Financial Statements include all adjustments,
consisting of normal, recurring accruals, which Sonic Corp. (the “Company”)
considers necessary for a fair presentation of the financial position and the
results of operations for the indicated periods. In certain situations, these
accruals, including franchise royalties, are based on more limited information
at interim reporting dates than at the Company’s fiscal year end due to the
abbreviated reporting period. Actual results may differ from these estimates.
The notes to the condensed consolidated financial statements should be read
in
conjunction with the notes to the consolidated financial statements contained
in
the Company’s Form 10-K for the fiscal year ended August 31, 2005. The results
of operations for the three months ended November 30, 2005, are not necessarily
indicative of the results to be expected for the full year ending August 31,
2006.
Note
2
Certain
amounts have been reclassified on the condensed consolidated financial
statements to conform to the fiscal year 2006 presentation.
Note
3
The
following table sets forth the computation of basic and diluted earnings per
share:
|
Three
months ended
November
30,
|
|||||||
|
2005
|
2004
|
||||||
|
Numerator:
|
|||||||
|
Net
income
|
$
|
16,430
|
$
|
15,114
|
|||
|
Denominator:
|
|||||||
|
Weighted
average shares outstanding - basic
|
58,277
|
60,010
|
|||||
|
Effect
of dilutive employee stock options
|
2,070
|
2,376
|
|||||
|
Weighted
average shares - diluted
|
60,347
|
62,386
|
|||||
|
Net
income per share - basic
|
$
|
.28
|
$
|
.25
|
|||
|
Net
income per share - diluted
|
$
|
.27
|
$
|
.24
|
|||
Note
4
The
Company has entered into agreements with various lenders and 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 November 30, 2005, the total amount
guaranteed under the GEC agreement was $3,686. 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 2012. 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.
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 November
30,
2005, the amount remaining under the guaranteed lease obligations totaled
$4,724.
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 November 30, 2005, the balance of the loan was $3,195.
The
Company has not recorded a liability for its obligations under the guarantees,
other than an immaterial amount related to the fair value of the guarantee
associated with the note purchase agreement, and none of the notes or leases
related to the guarantees were in default as of November 30, 2005.
Note
5
Effective
September 1, 2005, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”). Under the provisions of SFAS 123R, stock-based compensation is measured
at the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the requisite employee service period (generally
the vesting period of the grant). The Company adopted SFAS 123R using the
modified retrospective application method and, as a result, financial statement
amounts for the prior periods presented in this Form 10-Q have been adjusted
to
reflect the fair value method of expensing prescribed by SFAS 123R. The Company
believes that the modified retrospective application of this standard achieves
the highest level of clarity and comparability among the presented
periods.
Stock-based
compensation expense, net of related income tax benefits, resulted in a decrease
of $.02 in basic and diluted earnings per share for the three months ended
November 30, 2005 and 2004. The following table shows total stock-based
compensation expense and the tax benefit included in the Condensed Consolidated
Statements of Income:
|
Three
months ended November 30,
|
|||||||
|
2005
|
2004
|
||||||
|
Selling,
general and administrative
|
$
|
1,636
|
$
|
1,340
|
|||
|
Income
tax benefits
|
(474
|
)
|
(454
|
)
|
|||
|
Net
stock-based compensation expense
|
$
|
1,162
|
$
|
886
|
|||
As
a
result of adopting SFAS 123R retrospectively, financial statements for the
prior
periods presented in this Form 10-Q have been adjusted to reflect the fair
value
method of expensing stock options. The following table details the impact of
retrospective application on previously reported results:
|
Adjusted
|
As
Previously Reported
|
||||||
|
Income
Statement items for the three months ended November 30,
2004
:
|
|||||||
|
Income
before income taxes
|
$
|
23,599
|
$
|
24,939
|
|||
|
Net
income
|
15,114
|
16,000
|
|||||
|
Net
income per share - basic
|
$
|
.25
|
$
|
.27
|
|||
|
Net
income per share - diluted
|
$
|
.24
|
$
|
.26
|
|||
|
Cash
Flow items for the three months ended November 30,
2004:
|
|||||||
|
Net
cash provided by operating activities
|
$
|
28,791
|
$
|
30,921
|
|||
|
Net
cash used in financing activities
|
(7,067
|
)
|
(9,197
|
)
|
|||
|
Balance
Sheet items as of August 31, 2005
:
|
|||||||
|
Other
noncurrent liabilities
|
$
|
17,864
|
$
|
21,242
|
|||
|
Paid-in
capital
|
154,154
|
121,982
|
|||||
|
Retained
earnings
|
397,989
|
426,783
|
|||||
|
Total
stockholders’ equity
|
387,917
|
384,539
|
|||||
|
Total
liabilities and stockholders’ equity
|
563,316
|
563,316
|
|||||
The
Company has two share-based compensation plans for employees and non-employee
directors, which authorize the granting of stock options (see Note 12 of Notes
to Consolidated Financial Statements in the Company’s form 10-K for the fiscal
year ended August 31, 2005 for more information). The number of shares
authorized for issuance under the Company’s existing plans as of November 30,
2005 totals 4,725,000, of which 897,226 shares were available for future
issuance. In connection with Sonic’s annual meeting of stockholders to be held
January 31, 2006, we are submitting for stockholder approval the Sonic Corp.
2006 Long-Term Incentive Plan to authorize 4,500,000 additional shares for
awards to employees and non-employee directors in various forms, including
stock
options, stock appreciation rights, performance shares, restricted stock and
other stock-based awards. Stock options historically granted under the existing
plans were granted with an exercise price equal to the market price of the
Company’s stock at the date of grant, a contractual term of ten years, and
generally a vesting period of three years. The Company’s policy is to recognize
compensation cost for these options on a straight-line basis over the requisite
service period for the entire award. Additionally, the Company’s policy is to
issue new shares of common stock to satisfy stock option exercises.
The
Company measures the compensation cost associated with share-based payments
by
estimating the fair value of stock options as of the grant date using the
Black-Scholes option pricing model. The Company believes 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 options
granted during the three months ended November 30, 2005. Estimates of fair
value
are not intended to predict actual future events or the value ultimately
realized by the employees who receive equity awards.
The
per
share weighted average fair value of stock options granted during the three
months ended November 30, 2005 and 2004 was $10.71 and $13.12, respectively.
In
addition to the exercise and grant date prices of the awards, certain weighted
average assumptions that were used to estimate the fair value of stock option
grants in the respective periods are listed in the table below:
|
Three
months ended November 30,
|
|||||||
|
2005
|
2004
|
||||||
|
Expected
volatility
|
35
|
%
|
44
|
%
|
|||
|
Expected
term (years)
|
4.7
|
5.3
|
|||||
|
Risk-free
interest rate
|
4.5
|
%
|
3.6
|
%
|
|||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
|||
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 is based on the United States
treasury yields in effect at the time of grant corresponding with the
expected term of the options. The expected option term is the number of
years the Company estimates that options will be outstanding prior to exercise
considering vesting schedules and our historical exercise patterns.
SFAS
123R
requires the cash flows resulting from the tax benefits for tax deductions
in
excess of the compensation expense recorded for those options (excess tax
benefits) to be classified as financing cash flows. These excess tax benefits
were $538 for the three months ended November 30, 2005 and are classified as
a
financing cash inflow in the Company’s Condensed Consolidated Statements of Cash
Flows.
A
summary
of stock option activity under the Company’s share-based compensation plans for
the three months ended November 30, 2005 is presented in the following
table:
|
Options
|
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life (Yrs.) |
Aggregate
Intrinsic Value (000’s) |
||||||||||
|
Outstanding-beginning
of year
|
5,216,919
|
$
|
14.87
|
||||||||||
|
Granted
|
34,568
|
29.01
|
|||||||||||
|
Exercised
|
(125,998
|
)
|
8.42
|
||||||||||
|
Forfeited
or expired
|
(13,736
|
)
|
26.15
|
||||||||||
|
Outstanding
November 30, 2005
|
5,111,753
|
$
|
15.09
|
5.57
|
$
|
73,572
|
|||||||
|
Exercisable
November 30, 2005
|
3,758,921
|
$
|
11.11
|
4.47
|
$
|
67,706
|
|||||||
The
total
intrinsic value of options exercised during the three months ended November
30,
2005 and 2004 was $2,557 and $10,448, respectively. At November 30, 2005, total
remaining unrecognized compensation cost related to unvested stock-based
arrangements was $11,039 and is expected to be recognized over a weighted
average period of 1.5 years.
Note
6
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.
Note
7
Pursuant
to the Company’s Board-approved share repurchase program, 1.7 million shares
were acquired at an average price of $28.69 per share for a total cost of
$47,685 during the first fiscal quarter of 2006. The total remaining amount
authorized for repurchase as of November 30, 2005 was $59,992. Largely as a
result of this share repurchase activity, the Company took additional advances
on its available line of credit. The balance outstanding under the Company’s
line of credit as of November 30, 2005 was $75,050, an increase of $44,900
from
the balance outstanding as of August 31, 2005.
Overview
Description
of the Business
.
Sonic
operates and franchises the largest chain of drive-in restaurants in the United
States. As of November 30, 2005, the Sonic system was comprised of 3,065
drive-ins, of which 19% or 592 were Partner Drive-Ins and 81% or 2,473 were
Franchise Drive-Ins. Sonic Drive-Ins feature Sonic signature items, such as
specialty soft drinks including cherry limeades and slushes, frozen desserts,
made-to-order sandwiches and hamburgers, extra-long cheese coneys, hand-battered
onion rings, tater tots, salads and wraps. We derive our revenues primarily
from
Partner Drive-In sales and royalties from franchisees. We also receive revenues
from initial franchise fees. To a lesser extent, we also receive income from
the
selling and leasing of signs and real estate, as well as from a minority
interests in a few Franchise Drive-Ins.
Costs
of
Partner Drive-In sales, including minority interest in earnings of drive-ins,
relate directly to Partner Drive-In sales. Other expenses, such as depreciation,
amortization, and general and administrative expenses, relate to the Company’s
franchising operations, as well as Partner Drive-In operations. Our revenues
and
expenses are directly affected by the number and sales volumes of Partner
Drive-Ins. Our revenues and, to a lesser extent, expenses also are affected
by
the number and sales volumes of Franchise Drive-Ins. Initial franchise fees
and
franchise royalties are directly affected by the number of Franchise Drive-In
openings.
Overview
of Business Performance
.
Our
strong business performance continued during our first fiscal quarter ended
in
November 2005. Net income increased 8.7% and earnings per share increased 12.5%
to $0.27 per diluted share from $0.24 in the year earlier period, which is
adjusted for the retrospective adoption of SFAS 123R for expensing stock-based
compensation. Stock-based compensation, net of related income tax benefits,
resulted in a decrease of $0.02 per diluted and basic share for each of the
three month periods ended November 30, 2005 and 2004. We believe these results
reflect our multi-layered growth strategy that features the following
components:
| · |
Solid
same-store sales growth;
|
| · |
Increased
franchising income stemming from the solid same-store sales growth
and our
unique ascending royalty rate;
|
| · |
Expansion
of the Sonic brand through new unit growth, particularly by franchisees;
|
| · |
Operating
leverage at both the drive-in level and the corporate level;
and
|
| · |
The
use of excess operating cash flow for franchise acquisitions and
share
repurchases.
|
The
following table provides information regarding the number of Partner Drive-Ins
and Franchise Drive-Ins in operation as of the end of the periods indicated
as
well as the system-wide growth in sales and average unit volume. System-wide
information includes both Partner and Franchise Drive-In information, which
we
believe is useful in analyzing the growth of the brand as well as the Company’s
revenues since franchisees pay royalties based on a percentage of
sales.
|
System-Wide
Performance
($
in thousands)
|
||||||||||
|
Three
months ended
November
30,
|
||||||||||
|
2005
|
2004
|
|||||||||
|
Percentage
increase in sales
|
9.9
|
%
|
15.2
|
%
|
||||||
|
System-wide
drive-ins in operation
(1)
:
|
||||||||||
|
Total
at beginning of period
|
3,039
|
2,885
|
||||||||
|
Opened
|
33
|
34
|
||||||||
|
Closed
(net of re-openings)
|
(7
|
)
|
(2
|
)
|
||||||
|
Total
at end of period
|
3,065
|
2,917
|
||||||||
|
Core
markets
|
2,178
|
2,076
|
||||||||
|
Developing
markets
|
887
|
841
|
||||||||
|
All
markets
|
3,065
|
2,917
|
||||||||
System-wide
same-store sales increased 4.7% during the first quarter of fiscal year 2006,
primarily as a result of growth in average check. This increase was the result
of price increases, as well as the success of the PAYS program that has
increased credit and debit card transactions that, on average, exceed the
average cash transaction. We believe this solid sales performance resulted
from
our specific sales driving initiatives including:
| · |
Use
of technology to reach customers and improve the customer
experience;
|
| · |
Strong
promotions and new product news focused on quality and expanded choice
for
our customers;
|
| · |
Continued
growth of our business in non-traditional day parts including the
morning,
afternoon, and evening day parts, which saw solid increases in sales;
and
|
| · |
Growth
in brand awareness through increased media spending and greater use
of
network cable advertising.
|
Looking
forward, our estimated system-wide same-store sales growth for December 2005
is
within our targeted growth rate range of 2% to 4% when comparing to the very
solid growth of the second quarter of fiscal year 2005. We continue to believe
our business has considerable momentum as a result of our sales-driving
initiatives and are maintaining our targeted sales growth range at 2% to 4%
over
the long term, despite the potentially adverse impact of weather during the
second quarter. We expect this solid increase in same-store sales to translate
to revenue growth in the 11% to 13% range for the second quarter, increasing
to
the 12% to 14% range in the second half of fiscal year 2006. As it relates
to
the ongoing effect of stock-based compensation under SFAS 123R, we estimate
total stock compensation expense for fiscal year 2006 in the range of $8 million
to $9 million in selling, general and administrative expense. As of November
30,
2005, total remaining unrecognized compensation cost related to unvested
stock-based arrangements was $11.0 million and is expected to be recognized
over
a weighted average period of 1.5 years.
Implementation
of the PAYS program, which began in the fall of 2003, was completed in the
remainder of our Partner Drive-Ins during the second quarter of 2005. Under
the
PAYS program, a credit card terminal is added to each drive-in stall to
facilitate credit and debit card transactions. Rollout to Franchise Drive-Ins
began in February 2005 and is expected to be completed system-wide by the end
of
the calendar year 2006. Over 50% of Franchise Drive-Ins and over 60% of
drive-ins system-wide now have the PAYS system in place.
We
continue to use our monthly promotions to highlight our distinctive food
offerings and to feature new products.
We
also
use our promotions and product news to create a strong emotional link with
consumers and to align closely with consumer trends for fresh ingredients,
customization, menu variety and choice. During the last quarter, our new product
offerings included an Extra-Long Philly Cheesesteak Coney, Steak and Egg
Burrito, Tuscan Grilled Chicken Sandwich, Breakfast Bistro Sandwich and
Raspberry Limeade. We will continue to have new product news in the coming
months, all designed to meet customers’ evolving taste preferences including the
growing desire for fresh, quality product offerings and healthier
alternatives.
We
continue to promote expansion of business in our non-traditional day parts
(morning, afternoon, and evening). Through the first quarter of fiscal year
2006, we saw continued growth in sales in our non-traditional day parts, and
we
believe we have continued opportunity to grow these day parts throughout fiscal
year 2006.
During
fiscal year 2006, our total system-wide media expenditures are expected to
be
approximately $145 million as compared to approximately $125 million in fiscal
year 2005, which we believe will continue to increase overall brand awareness
and strengthen our share of voice relative to our competitors. We will also
continue to refine our system-wide marketing fund efforts, which comprise
approximately one-half of our media expenditures and are largely used for
network cable television advertising. Our national cable strategy has proven
to
be beneficial in raising overall brand awareness as we develop new markets
and
in attracting new franchisees to the brand.
Hurricanes
Katrina and Rita affected a significant number of the Company’s Franchise and
Partner Drive-Ins early in the first quarter; however, only eight Franchise
Drive-Ins damaged by the hurricanes remain closed. We believe that three of
these stores are unlikely to reopen and have included them as closed stores
in
the reported store count. While we continue to assess the potential reopening
dates of damaged drive-ins, we currently expect the other 5 drive-ins to reopen.
We estimate that first quarter revenues were impacted by approximately 1%,
with
lost royalty revenues of approximately $300 thousand. Some of the lost revenue
was covered by business interruption insurance, somewhat mitigating the net
impact to our financial performance.
We
opened
33 drive-ins during the first quarter, consisting of three Partner Drive-Ins
and
30 Franchise Drive-Ins, comparable to the 34 drive-in openings during the first
quarter a year ago. Looking forward, despite the impact the hurricanes may
cause
in construction material costs and availability of construction labor, the
Company continues to expect to open 180 to 190 new drive-ins for fiscal year
2006, including 150 to 160 by franchisees.
Results
of Operations
Revenues
.
Total
revenues increased 12.4% to $159.8 million in the first fiscal quarter of 2006.
The increase in revenues primarily relates to strong sales growth for Partner
Drive-Ins and, to a lesser extent, a rise in franchising income.
|
Revenues
|
||||||||||||||||
|
($
in thousands)
|
||||||||||||||||
|
Three
Months Ended
November 30, |
Increase/
(Decrease)
|
Percent
Increase/
(Decrease)
|
||||||||||||||
|
2005
|
2004
|
|||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Partner
Drive-In sales
|
$
|
135,422
|
$
|
120,211
|
$
|
15,211
|
12.7
|
%
|
||||||||
|
Franchise
revenues:
|
||||||||||||||||
|
Franchise
royalties
|
22,253
|
20,106
|
2,147
|
10.7
|
%
|
|||||||||||
|
Franchise
fees
|
941
|
935
|
6
|
0.6
|
%
|
|||||||||||
|
Other
|
1,184
|
975
|
209
|
21.4
|
%
|
|||||||||||
|
Total
revenues
|
$
|
159,800
|
$
|
142,227
|
$
|
17,573
|
12.4
|
%
|
||||||||
The
following table reflects the growth in Partner Drive-In sales and changes in
comparable drive-in sales for Partner Drive-Ins. It also presents information
about average unit volumes and the number of Partner Drive-Ins, which is useful
in analyzing the growth of Partner Drive-In sales.
Effective
September 1, 2005, we acquired 15 Franchise Drive-Ins located in the Tennessee
and Kentucky markets. We expect this acquisition to add approximately 2.5%
to
our revenue growth during fiscal year 2006. Over the past several years, we
have
completed the acquisition of several Franchise Drive-Ins in various markets.
These acquisitions have added and are expected to continue to add to revenue
growth and are expected to continue to be accretive to earnings over time.
Our
acquisitions are typically focused on higher volume stores with strong
store-level management already in place. In addition, the selling franchisee
usually retains a significant drive-in base and continues growing with us in
other areas. We view these types of acquisitions of drive-ins with proven track
records as a very good, lower-risk use of our capital and they remain a very
viable potential use of our excess cash flow in future years.
The
following table reflects the growth in franchise revenues (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 Franchise Drive-In sales
as revenues, we believe this information is important in understanding our
financial performance since these sales are the basis on which we calculate
and
record franchise royalties. This information is also indicative of the financial
health of our Franchise Drive-Ins.
Franchise
income, which consists of franchise royalties and franchise fees, increased
10.2% to $23.2 million in the first fiscal quarter of 2006.
Franchise
royalties increased 10.7% to $22.3 million in the first fiscal quarter of 2006,
compared to $20.1 million in the first fiscal quarter of 2005. Of the $2.2
million increase, approximately $1.2 million resulted from Franchise Drive-Ins’
same-store sales growth of 5.1% in the first fiscal quarter of 2006, combined
with an increase in the effective royalty rate to 3.50% during the first fiscal
quarter of 2006 compared to 3.46% during the same period in fiscal year 2005.
Each of our license agreements contain an ascending royalty rate whereby
royalties, as a percentage of sales, increase as sales increase. The balance
of
the increase was primarily attributable to growth in the number of franchise
units over the prior period.
Franchise
fees were virtually unchanged as franchisees opened 30 new drive-ins in the
first fiscal quarter of 2006 and fiscal year 2005. Our franchise development
pipeline continues to strengthen and we anticipate 150 to 160 drive-in openings
by franchisees this fiscal year. We do, however, expect that openings may be
constrained in the first six months of this fiscal year as a result of the
lingering effects of Hurricanes Katrina and Rita. As a result, we are expecting
25 to 30 openings in the second quarter with the balance opening in the latter
part of the year. Substantially all of these new drive-ins will open under
our
newest form of license agreement, which contains a higher average royalty rate
and initial opening fee. As a result of these new Franchise Drive-In openings
and the continued benefit of the ascending royalty rate, we expect approximately
$10 million in incremental franchise income in fiscal year 2006.
Operating
Expenses
.
Overall,
drive-in cost of operations, as a percentage of Partner Drive-In sales, was
unchanged at 81.3% in the first fiscal quarter of 2006 and in the same period
of
fiscal year 2005. Minority interest in earnings of drive-ins is included as
a
part of cost of sales, in the table below, since it is directly related to
Partner Drive-In operations.
Food
and
packaging costs decreased 0.4 percentage points during the first quarter
of
fiscal year 2006 primarily as a result of relief from pricing pressures on
commodity costs that were occurring in the first quarter of fiscal year 2005,
particularly for beef, dairy and tomato costs. Looking forward, dairy costs
are
expected to continue to be favorable in the second quarter, however beef
costs
have increased somewhat from the first quarter and will be up low single
digits
on a year-over-year basis. Collectively, commodity prices are expected to
be
stable resulting in flat to slightly favorable food and packaging costs,
as a
percentage of sales, on a year-over-year basis for the second
quarter.
Labor
costs decreased by 0.5 percentage points during the first quarter of fiscal
year
2006 compared to the same period in fiscal year 2005. This decrease was a result
of leverage from sales growth during the quarter as well as lower payouts under
the Company’s sales incentive program. Looking forward, we expect leverage from
sales growth to keep labor costs, as a percentage of sales, flat to slightly
favorable on a year-over-year basis for the next several quarters.
Minority
interest, which reflects our store-level partners’ pro-rata share of earnings
from our partnership program, increased by $0.3 million during the first fiscal
quarter of 2006 reflecting the increase in average profit per store. We continue
to view the partnership program as an integral part of our culture at Sonic
and
a large factor in the success of our business, and we are pleased that profit
distributions to our partners increased during the quarter. Since we expect
our
average store level profits to continue to grow in fiscal year 2006, we would
expect minority interest to increase in dollar terms but stay relatively flat
as
a percentage of Partner Drive-In sales.
Other
operating expenses increased by 1.1 percentage points during the first quarter
of fiscal year 2006 compared to the same period in fiscal year 2005. The
increase is related primarily to increases in utility costs as a result of
higher energy costs. This increase is reflected in utility costs that increased
by 0.7 percentage points during the first quarter of fiscal year 2006 compared
to the same period in fiscal year 2005. In addition, credit card charges
continue to increase as a result of the success of the PAYS program and property
taxes and repairs and maintenance costs contributed to the higher costs. Looking
forward, we expect higher energy costs to continue the trend for higher utility
costs. We have lapped over the rollout of PAYS to approximately 2/3 of our
Partner Drive-Ins, however, credit card usage continues to increase so credit
card charges are expected to continue to exceed prior year amounts.
Collectively, we expect .75 to 1.0 percentage points of higher other operating
expenses in the second quarter, with a lower increase in the second half of
fiscal year 2006, depending on future swings in energy costs.
To
summarize, because of continued pressure on other operating costs, we believe
that our restaurant-level margins will be unfavorable, on a year-over-year
basis
during the second quarter by .50 to .75 percentage points.
However,
we are expecting margins to improve somewhat in the second half of the year,
depending on the variability in energy costs.
Selling,
General and Administrative
.
Selling,
general and administrative expenses increased 12.6% to $12.2 million during
the
first fiscal quarter of 2006 compared to the same period of fiscal year 2005.
Sonic adopted SFAS 123R effective with the beginning of the first quarter of
this fiscal year, therefore, we are now expensing the estimated fair value
of
stock options over their vesting period. We have chosen to adopt the new
standard using the modified retrospective application method, as provided for
in
the standard. This method of adoption requires us to adjust all prior periods
to
reflect expense for the fair value of stock options that was previously only
disclosed in the footnotes to the financial statements. Excluding stock-based
compensation expense, we continue to see leverage as the growth in these
expenses was less than the growth in revenues and anticipate that these costs
will increase in the range of 10% to 12% for fiscal year 2006 as compared to
the
prior year. This increase relates to increased headcount additions to support
continued growth in our business.
Depreciation
and Amortization
.
Depreciation and amortization expense increased 17.7% to $9.9 million in the
first quarter due in part to additional depreciation stemming from the Tennessee
and Kentucky acquisitions, which will continue through August 2006, as well
as
the reduction in remaining useful life for certain assets related to the
retrofit of Partner Drive-Ins in the late 1990s as a result of re-evaluating
the
remaining life of such assets. Capital expenditures during the first three
months of fiscal year 2006 were $27.3 million, including $14.6 million related
to the acquisition of drive-ins. Looking forward, planned capital expenditures
for fiscal year 2006 of approximately $75 million, along with the items
discussed above, are expected to result in depreciation growth of 16% to 18%
for
fiscal year 2006.
Interest
Expense
.
Net
interest expense decreased 18.6% to $1.3 million as compared to the same period
in fiscal year 2005, despite the impact of $90.0 million in share repurchases
since the first quarter of 2005. The decrease was attributable to interest
earned on a federal tax refund received during the quarter. Going forward,
we
expect our continued repurchase of stock to produce higher interest expense
in
future quarters, depending on our level of share repurchase activity or
additional franchise acquisitions.
Income
Taxes
.
The
provision for income taxes reflects an effective federal and state tax rate
of
37.5% for the first quarter of fiscal year 2006 as compared to 36.0% in the
same
period of 2005. Income taxes are impacted by the adoption of SFAS 123R, as
many
of the options granted by Sonic are incentive stock options for which a tax
benefit results only if the option holder has a disqualifying disposition.
For
grants of non-qualified stock options, the Company expects to recognize a tax
benefit on exercise of the option, so the full tax benefit is recognized on
the
related stock-based compensation expense. As a result of the limitation on
the
tax benefit for incentive stock options, the tax benefit for stock-based
compensation will generally be less than our overall tax rate and is estimated
at 25%, but may vary significantly depending on the timing of employees’
exercise and sale of stock. Considering the current variables discussed above,
we anticipate that our effective tax rate will be in the range of 37.5% to
38.0%
going forward and to vary from quarter to quarter as circumstances on individual
tax matters change.
Financial
Position
During
the first three months of fiscal year 2006, current assets increased 1.0% to
$35.6 million compared to $35.2 million as of the prior fiscal year end. Net
property and equipment increased approximately $9.1 million and goodwill
increased by $12.7 million, which combined with the increase in current assets
to produce a 3.9% increase in total assets to $585.3 million as of the end
of
the first quarter of fiscal year 2006.
Total
current liabilities increased $0.5 million or 0.8% during the first three months
of fiscal year 2006. Long-term debt increased $45.0 million or 80.5% as a result
of advances on the Company’s available line of credit to fund portions of the
share repurchases, capital expenditures and the Tennessee and Kentucky
acquisition. Overall, total liabilities increased $50.1 million or 28.6% as
a
result of the items discussed above.
Shareholders’
equity decreased $28.1 million or 7.3% during the first three months of fiscal
year 2006 primarily resulting from stock repurchases of $47.7 million, offset
by
earnings during the period of $16.4 million and proceeds and the related tax
benefits from the exercise of stock options. At the end of the first fiscal
quarter of 2006,
our
debt-to-total capital was 29.0%, up from 20.3% at the end of fiscal year 2005.
For the twelve months ended November 30, 2005, return on average stockholders’
equity was 19.9% and return on average assets was 12.9%.
Liquidity
and Sources of Capital
Net
cash
provided by operating activities increased $4.3 million or 14.9% to $33.1
million in the first three months of fiscal year 2006 as compared to $28.8
million in the same period of fiscal year 2005, primarily as a result of an
increase in operating profit before depreciation and amortization and decreases
in operating assets. We also anticipate continuing to generate increasing
positive free cash flow going forward. We believe free cash flow, which we
define as net income plus depreciation and amortization and stock-based
compensation expense less capital expenditures, is useful in evaluating the
liquidity of the Company by assessing the level of funds available for share
repurchases, acquisitions of Franchise Drive-Ins, and repayment of debt. This
year we expect free cash flow to approach $50 million.
Under
the
share repurchase program authorized by our Board of Directors, the Company
acquired 1.7 million shares at an average price of $28.69 per share for a
total cost of $47.7 million during the first fiscal quarter of 2006. As of
November 30, 2005, we had approximately $60.0 million available under the
program.
We
opened
three newly constructed Partner Drive-Ins and acquired 15 drive-ins from
franchisees during the first fiscal quarter of 2006. During the first three
months of this fiscal year, we used cash generated by operating activities
and
borrowings under our line of credit to fund capital additions totaling $27.3
million, which included the cost of newly opened drive-ins, new equipment for
existing drive-ins, drive-ins under construction, the acquisition of Franchise
Drive-Ins, and other capital expenditures. During the three months ended
November 30, 2005, we purchased the real estate for 2 of the 18 newly
constructed and acquired drive-ins.
We
plan
capital expenditures of approximately $75 million in fiscal year 2006, excluding
acquisitions and share repurchases. These capital expenditures primarily relate
to the development of additional Partner Drive-Ins, stall additions, remodels
and relocations of older drive-ins, store equipment and point-of-sale system
upgrades, enhancements to existing financial and operating information systems.
We expect to fund these capital expenditures through cash flow from operations
and borrowings under our existing line of credit.
We
have
an agreement with a group of banks that provides us with a $150.0 million line
of credit expiring in July 2010. As of November 30, 2005, our outstanding
borrowings under the line of credit were $75.1 million at an effective borrowing
rate of 4.64%, as well as $0.7 million in outstanding letters of credit. The
amount available under the line of credit as of November 30, 2005, was $74.2
million. We have long-term debt maturing in fiscal years 2006 and 2007 of $8.1
million and $4.7 million, respectively. Of the $8.1 million maturing in fiscal
2006, $4.6 million relates to our senior unsecured notes that will be maturing
in August 2006, and is classified as long-term because we intend to utilize
amounts available under our line of credit to fund this obligation. We believe
that free cash flow will be adequate for repayment of any long-term debt that
does not get refinanced or extended. We plan to use the line of credit to
finance the opening of newly constructed drive-ins, acquisitions of existing
drive-ins, purchases of the Company’s common stock and for other general
corporate purposes, as needed. See Note 9 of the Notes to Consolidated Financial
Statements in the Company’s Form 10-K for the fiscal year ended August 31, 2005
for additional information regarding our long-term debt.
As
of
November 30, 2005, our total cash balance of $9.5 million reflected the impact
of the cash generated from operating activities, borrowing activity, and capital
expenditures mentioned above. We believe that existing cash and funds generated
from operations, as well as borrowings under the line of credit, will meet
our
needs for the foreseeable future.
Impact
of Inflation
Though
increases in labor, food or other operating costs could adversely affect our
operations, we do not believe that inflation has had a material effect on income
during the past several years.
Seasonality
We
do not
expect seasonality to affect our operations in a materially adverse manner.
Our
results during the second fiscal quarter (the months of December, January and
February) generally are lower than other quarters because of the climate of
the
locations of a number of Partner and Franchise Drive-Ins.
Critical
Accounting Policies and Estimates
The
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in this document contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to use its
judgment to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities.
These assumptions and estimates could have a material effect on our financial
statements. We evaluate our assumptions and estimates on an ongoing basis using
historical experience and various other factors that are believed to be relevant
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
We
annually review our financial reporting and disclosure practices and accounting
policies to ensure that our financial reporting and disclosures provide accurate
and transparent information relative to the current economic and business
environment. We believe that of our significant accounting policies (see Note
1
of Notes to Consolidated Financial Statements in the Company’s Form 10-K for the
fiscal year ending August 31, 2005), the following policies involve a higher
degree of risk, judgment and/or complexity.
Impairment
of Long-Lived Assets
.
We
review
each Partner Drive-In for impairment when events or circumstances indicate
it
might be impaired. We test for impairment using historical cash flows and other
relevant facts and circumstances as the primary basis for our estimates of
future cash flows. This process requires the use of estimates and assumptions,
which are subject to a high degree of judgment. In addition, at least annually,
we assess the recoverability of goodwill and other intangible assets related
to
our brand and drive-ins. These impairment tests require us to estimate fair
values of our brand and our drive-ins by making assumptions regarding future
cash flows and other factors. If these assumptions change in the future, we
may
be required to record impairment charges for these assets.
Ownership
Program
.
Our
drive-in philosophy stresses an ownership relationship with supervisors and
drive-in managers. Most supervisors and managers of Partner Drive-Ins purchase
and own an equity interest in the drive-in, which is typically financed by
a
third-party bank. Supervisors and managers are neither employees of Sonic nor
of
the drive-in in which they have an ownership interest.
The
investments made by managers and supervisors in each partnership or limited
liability company are accounted for as minority interests in the financial
statements. The ownership agreements contain provisions, which give Sonic the
right, but not the obligation, to purchase the minority interest of the
supervisor or manager in a drive-in. The amount of the investment made by a
partner and the amount of the buy-out are based on a number of factors,
primarily upon the drive-in’s financial performance for the preceding 12 months,
and are intended to approximate the fair value of a minority interest in the
drive-in.
The
net
book value of a minority interest acquired by the Company in a Partner Drive-In
is recorded as an investment in partnership, which results in a reduction in
the
minority interest liability on the Consolidated Balance Sheet. If the purchase
price exceeds the net book value of the assets underlying the partnership
interest, the excess is recorded as goodwill. The acquisition of a minority
interest for less than book value results in a decrease in purchased goodwill.
Any subsequent sale of the minority interest to another minority partner is
recorded as a pro-rata reduction of goodwill and investment, and no gain or
loss
is recognized on the sale of the minority ownership interest. Goodwill created
as a result of the acquisition of minority interests in Partner Drive-Ins is
not
amortized but is tested annually for impairment under the provisions of FAS
142,
“Goodwill and Other Intangible Assets.”
Revenue
Recognition Related to Franchise Fees and Royalties
.
Initial
franchise fees are nonrefundable and are recognized in income when we have
substantially performed or satisfied all material services or conditions
relating to the sale of the franchise. Area development fees are nonrefundable
and are recognized in income on a
pro-rata
basis when the conditions for revenue recognition under the individual
development agreements are met. Both 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 based on a percentage of actual net sales.
However, the royalty payments and supporting financial statements are not due
until the 20
th
of the
following month. As a result, we accrue royalty revenue in the month earned
based on estimates of Franchise Drive-Ins sales. These estimates are based
on
actual sales at Partner Drive-Ins and projections of average unit volume growth
at Franchise Drive-Ins.
Accounting
for Stock-Based Compensation
.
As
discussed further in Note 5 of Notes to Condensed Consolidated Financial
Statements in this Form 10-Q, we adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) effective
September 1, 2005 using the modified retrospective application method. As
a
result, financial statement amounts for prior periods presented in this Form
10-Q have been adjusted to reflect the expensing of stock options based upon
fair value as prescribed by SFAS 123R.
We
estimate the fair value of options granted using the Black-Scholes option
pricing model along with the assumptions shown in Note 5 to the financial
statements. The assumptions used in computing the fair value of share-based
payments reflect our best estimates, but involve uncertainties relating to
market and other conditions, many of which are outside of our control. We
estimate expected volatility based on historical daily price changes of the
Company’s stock for a period equal to the current expected term of the options.
The expected option term is the number of years the Company estimates that
options will be outstanding prior to exercise considering vesting schedules
and
our historical exercise patterns. If other assumptions or estimates had been
used, the stock-based compensation expense that was recorded for the first
fiscal quarter of 2006 could have been materially different. Furthermore,
if
different assumptions are used in future periods, stock-based compensation
expense could be materially impacted in the future.
Income
Taxes
.
We
estimate certain components of our provision for income taxes. These estimates
include, among other items, depreciation and amortization expense allowable
for
tax purposes, allowable tax credits for items such as wages paid to certain
employees, effective rates for state and local income taxes and the tax
deductibility of certain other items.
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 after our fiscal
year end. Income tax returns are subject to audit by federal, state and local
governments, typically several years after the returns are filed. These returns
could be subject to material adjustments or differing interpretations of the
tax
laws. Adjustments to these estimates or returns can result in significant
variability in the tax rate from period to period.
Forward-looking
Statements
This
annual report contains various "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the
Securities Exchange Act of 1934, as amended. Forward-looking statements
represent our expectations or beliefs concerning future events, including the
following: any statements regarding future sales or expenses, any statements
regarding the continuation of historical trends, and any statements regarding
the sufficiency of our working capital and cash generated from operating and
financing activities for our future liquidity and capital resource needs.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. We caution that the following important economic and competitive
factors, among others, could cause the actual results to differ materially
from
those in the forward-looking statements made in this report and from time to
time in news releases, reports, proxy statements, registration statements,
and
other written or electronic communication, as well as verbal forward-looking
statements made from time to time by representatives of the Company. Factors
that may cause actual results to differ materially from forward-looking
statements include, without limitation, risks of the restaurant industry,
including risks of and publicity surrounding food-borne illnesses, a highly
competitive industry and the impact of changes in consumer spending patterns,
consumer tastes, local, regional, and national economic conditions, weather,
demographic trends, traffic patterns, employee availability, increases in
utility costs, and cost
increases
or shortages in raw food products. In addition, the opening and success of
new
drive-ins will depend on various factors, including weather, strikes, the
availability of suitable sites for new drive-ins, the negotiation of acceptable
lease or purchase terms for new locations, local permitting and regulatory
compliance, our ability to manage the anticipated expansion and hire and train
personnel, the financial viability of our franchisees, particularly multi-unit
operators, and general economic and business conditions. Accordingly, such
forward-looking statements do not purport to be predictions of future events
or
circumstances and may not be realized. For these reasons, you should not place
undue reliance on forward-looking statements. We undertake no obligation to
publicly update or revise them.
There
were no material changes in the Company’s exposure to market risk for the
quarter ended November 30, 2005.
As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company’s disclosure
controls and procedures (as defined in Rule 13a-14 under the Securities Exchange
Act of 1934). Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective. There were no significant changes in the Company’s
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART
II - OTHER INFORMATION
During
the fiscal quarter ended November 30, 2005, Sonic Corp. (the “Company”) did not
have any new material legal proceedings brought against it, its subsidiaries
or
their properties. In addition, no material developments occurred in connection
with any previously reported legal proceedings against the Company, its
subsidiaries or their properties during the last fiscal quarter.
(c)
Issuer Purchases of Equity Securities
Shares
repurchased during the first quarter of fiscal 2006 are as follows (in
thousands, except share and per share amounts):
|
Period
|
Total
Number of Shares
Purchased
|
Average
Price Paid per
Share
|
Total
Number of
Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
Maximum
Dollar Value that May Yet Be Purchased Under the Program |
|||||||||
|
September
1, 2005 through September 30, 2005
|
1,170,000
|
$
|
28.98
|
1,170,000
|
$
|
73,772
|
|||||||
|
October
1, 2005 through October 31, 2005
|
225,773
|
$
|
27.18
|
225,773
|
$
|
67,636
|
|||||||
|
November
1, 2005 through November 30, 2005
|
266,500
|
$
|
28.69
|
266,500
|
$
|
59,992
|
|||||||
|
Total
|
1,662,273
|
$
|
28.69
|
1,662,273
|
|||||||||
(1)
All
of the shares purchased during the first quarter of fiscal 2006 were purchased
as part of the Company’s share repurchase program which was first publicly
announced on April 14, 1997. In April 2005, the Company’s Board of Directors
approved an increase in the share repurchase authorization from $60,000 to
$150,000 and extended the program to August 31, 2006.
None.
None.
None.
31.01
Certification of Chief Executive Officer Pursuant to SEC Rule
13a-14
31.02
Certification of Chief Financial Officer Pursuant to SEC Rule
13a-14
32.01
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350
32.02
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1934, the Company has caused the
undersigned, duly authorized, to sign this report on behalf of the
Company.
|
|
|
SONIC
CORP.
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Stephen C. Vaughan
|
|
|
|
Stephen
C. Vaughan, Vice President
|
|
|
|
and
Chief Financial Officer
|
Date:
January 6, 2006
EXHIBIT
INDEX
Exhibit
Number and Description
EXHIBIT
31.01
CERTIFICATION
PURSUANT TO
SEC
RULE
13a-14
I,
J.
Clifford Hudson, certify that:
1.
I have
reviewed this quarterly report on Form 10-Q of Sonic Corp.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.
The
registrant's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
the
registrant’s internal control over financial reporting; and
5.
The
registrant's other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a)
all
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b)
any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant's internal control over financial
reporting.
Date:
January 6, 2006
|
|
|
|
|
|
|
/s/
J. Clifford Hudson
|
|
|
|
J.
Clifford Hudson
|
|
|
|
Chief
Executive Officer
|
EXHIBIT
31.02
CERTIFICATION
PURSUANT TO
SEC
RULE
13a-14
I,
Stephen C. Vaughan, certify that:
1.
I have
reviewed this quarterly report on Form 10-Q of Sonic Corp.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.
The
registrant's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
the
registrant’s internal control over financial reporting; and
5.
The
registrant's other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a)
all
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b)
any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant's internal control over financial
reporting.
Date:
January 6, 2006
|
|
|
|
|
|
|
/s/
Stephen C. Vaughan
|
|
|
|
Stephen
C. Vaughan
|
|
|
|
Chief Financial
Officer
|
EXHIBIT
32.01
CERTIFICATION
PURSUANT TO
18
U.S.C.
SECTION 1350
The
undersigned hereby certifies that to his knowledge the quarterly report of
Sonic
Corp. (the “Company”) filed with the Securities and Exchange Commission on the
date hereof fully complies with the requirements of section 13(a) or 15(d)
of
the Securities Exchange Act of 1934 and that the information contained in such
report fairly represents, in all material respects, the financial condition
and
results of operations of the Company.
Date:
January 6, 2006
|
|
|
|
|
|
|
/s/
J. Clifford Hudson
|
|
|
|
J.
Clifford Hudson
|
|
|
|
Chief
Executive Officer
|
EXHIBIT
32.02
CERTIFICATION
PURSUANT TO
18
U.S.C.
SECTION 1350
The
undersigned hereby certifies that to his knowledge the quarterly report of
Sonic
Corp. (the “Company”) filed with the Securities and Exchange Commission on the
date hereof fully complies with the requirements of section 13(a) or 15(d)
of
the Securities Exchange Act of 1934 and that the information contained in
such
report fairly represents, in all material respects, the financial condition
and
results of operations of the Company.
Date:
January 6, 2006
|
|
|
|
|
|
|
/s/
Stephen C. Vaughan
|
|
|
|
Stephen
C. Vaughan
|
|
|
|
Chief Financial
Officer
|