<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 14(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number
May 31, 1996 0-18859
- - ------------------------------ ----------------------
SONIC CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 73-1371046
------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
101 Park Avenue
Oklahoma City, Oklahoma 73102
--------------------------------------------- ---------
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (405) 280-7654
--------------
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 the shorter period that the Registrant has had
to file the reports), and (2) has been subject to the filing requirement for the
past 90 days. Yes X . No .
------- -------
As of May 31, 1996, the Registrant had 13,424,429 shares of common stock
issued and outstanding (excluding 7,580 shares of common stock held as treasury
stock).
1
<PAGE>
SONIC CORP.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
- - ------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at May 31, 1996
and August 31, 1995 3
Consolidated Statements of Income for the three months
and nine months ended May 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended May 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Independent Accountants' Review Report 7
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Part II. OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
2
<PAGE>
SONIC CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at May 31, 1996 is Unaudited)
<TABLE>
<CAPTION>
ASSETS MAY 31, AUGUST 31,
1996 1995
------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,171,200 $ 3,777,400
Accounts and notes receivable, net 5,976,600 5,181,300
Other current assets 3,283,900 3,754,900
------------------------------------
Total current assets 16,431,700 12,713,600
Property, equipment and capital leases (Note 3) 114,916,700 84,295,400
Less accumulated depreciation, amortization
and allowance for losses (18,837,800) (14,124,600)
------------------------------------
Property, equipment and capital leases, net 96,078,900 70,170,800
Trademarks, tradenames and other goodwill (Note 3) 20,148,500 14,980,400
Other intangibles and other assets 11,595,600 11,410,200
Less accumulated amortization (4,200,300) (3,944,100)
------------------------------------
Intangibles and other assets, net 27,543,800 22,446,500
------------------------------------
Total assets $ 140,054,400 $ 105,330,900
------------------------------------
------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,909,400 $ 1,691,700
Deposits from franchisees 773,000 833,000
Accrued liabilities 6,666,800 5,353,000
Obligations under capital leases and long-term
debt due within one year 868,100 587,200
------------------------------------
Total current liabilities 12,217,300 8,464,900
Obligations under capital leases due after one year 8,840,900 5,793,400
Long-term debt due after one year (Note 2) 6,679,600 24,794,800
Other noncurrent liabilities 3,580,400 2,921,200
Contingencies (Note 4)
Stockholders' equity (Note 2):
Preferred stock, par value $.01; 1,000,000 shares
authorized; none outstanding - -
Common stock, par value $.01; 40,000,000 shares
authorized; 13,432,009 shares issued
(12,079,886 shares issued at August 31, 1995) 134,300 120,800
Paid in capital 58,496,400 30,354,600
Retained earnings 50,248,900 39,340,600
------------------------------------
108,879,600 69,816,000
Treasury stock, at cost; 7,580 common shares
(428,026 common shares at August 31, 1995) (143,400) (6,459,400)
------------------------------------
Total stockholders' equity 108,736,200 63,356,600
------------------------------------
Total liabilities and stockholders' equity $ 140,054,400 $ 105,330,900
------------------------------------
------------------------------------
</TABLE>
See accompanying notes.
3
<PAGE>
SONIC CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
1996 1995 1996 1995
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues:
Sales by Company-owned restaurants $ 33,641,900 $ 25,153,000 $ 82,359,900 $ 64,390,300
Franchised restaurants:
Franchise fees 287,500 228,500 1,102,500 831,700
Franchise royalties 5,716,700 5,283,900 16,420,300 14,514,700
Equipment sales - 2,704,800 3,742,600 6,597,900
Other 479,300 398,800 1,483,400 1,025,500
------------------------------- -------------------------------
40,125,400 33,769,000 105,108,700 87,360,100
Cost and expenses:
Company-owned restaurants:
Food and packaging 10,315,100 8,311,200 26,191,200 21,113,700
Payroll and other employee benefits 8,941,400 7,546,600 23,630,200 19,343,000
Other operating expenses 5,348,100 3,796,100 14,147,400 10,374,200
------------------------------- -------------------------------
24,604,600 19,653,900 63,968,800 50,830,900
Equipment cost of sales - 2,207,400 3,101,400 5,326,400
Selling, general and administrative 3,776,500 3,482,800 10,449,100 10,136,100
Depreciation and amortization 2,393,600 1,520,500 6,505,600 4,155,600
Provision for restaurant closings and
disposals 15,900 17,700 65,100 51,000
Minority interest in earnings of
restaurant partnerships 1,800,200 965,100 3,208,900 2,210,400
------------------------------- -------------------------------
32,590,800 27,847,400 87,298,900 72,710,400
------------------------------- -------------------------------
Income from operations 7,534,600 5,921,600 17,809,800 14,649,700
Interest expense 258,400 543,200 889,400 1,275,500
Interest income (137,500) (93,800) (603,000) (315,900)
------------------------------- -------------------------------
Net interest expense 120,900 449,400 286,400 959,600
------------------------------- -------------------------------
Income before income taxes 7,413,700 5,472,200 17,523,400 13,690,100
Provision for income taxes 2,798,700 2,093,000 6,615,100 5,236,600
------------------------------- -------------------------------
Net income $ 4,615,000 $ 3,379,200 $ 10,908,300 $ 8,453,500
------------------------------- -------------------------------
------------------------------- -------------------------------
Net income per share $0.34 $0.29 $0.82 $0.71
------------------------------- -------------------------------
------------------------------- -------------------------------
Weighted average shares outstanding 13,606,430 11,778,378 13,353,183 11,834,228
------------------------------- -------------------------------
------------------------------- -------------------------------
</TABLE>
See accompanying notes.
4
<PAGE>
SONIC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31, MAY 31,
1996 1995
------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,908,300 $ 8,453,500
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,505,600 4,155,600
Other (171,000) 39,000
Increase in operating assets (1,182,700) (1,149,400)
Increase in operating liabilities 3,531,700 1,294,600
------------------------------------
Total adjustments 8,683,600 4,339,800
------------------------------------
Net cash provided by operating activities 19,591,900 12,793,300
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (20,371,400) (26,016,800)
Acquisition of existing restaurants (13,093,900) -
Proceeds from sale of assets 1,357,300 -
Purchases of intangibles and other assets - (1,153,400)
Other (126,400) 510,500
------------------------------------
Net cash used in investing activities (32,234,400) (26,659,700)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 33,186,600 -
Proceeds from exercise of stock options 1,288,900 -
Proceeds from (payments on) long term borrowings (18,000,000) 13,466,300
Purchases of treasury stock (4,200) (4,019,900)
Other (435,000) 98,900
------------------------------------
Net cash provided by financing activities 16,036,300 9,545,300
Net increase (decrease) in cash and cash equivalents 3,393,800 (4,321,100)
Cash and cash equivalents at beginning of period 3,777,400 6,013,000
------------------------------------
Cash and cash equivalents at end of period $ 7,171,200 $ 1,691,900
------------------------------------
------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Purchase of treasury stock in connection with exercise of
common stock options $ 139,200 $ 1,648,800
Additions to capital lease obligations $ 3,648,100 $ -
</TABLE>
See accompanying notes.
5
<PAGE>
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995
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. The results of
operations for the nine months ended May 31, 1996, are not necessarily
indicative of the results to be expected for the full year ending August 31,
1996. Certain reclassifications have been made in the August 31, 1995 balance
sheet to conform to the classifications used at May 31, 1996.
NOTE 2
In October of 1995, the Company issued an additional 1,668,826 shares of common
stock (including 428,026 shares of common stock previously held as treasury
stock) through a public offering. Net proceeds from the offering, after
deducting the underwriting discount and offering expenses, were approximately
$33.2 million. A portion of the proceeds ($23 million) was used to repay
borrowings under the Company's line of credit.
The Company has reached an agreement with its lender to increase its line of
credit from $40 million to $60 million.
NOTE 3
During the third fiscal quarter of 1996, the Company acquired a majority
interest in 25 Sonic Drive-In restaurants from its franchisees. The
acquisitions have been accounted for by the purchase method of accounting and
the net investment of approximately $11.8 million consists of certain real
estate, the drive-ins' operating assets, goodwill and loans to existing
partners.
NOTE 4
On April 18, 1996, the Texas court of appeals reversed the district court's
judgment notwithstanding the verdict and reinstated the jury's verdict in the
amount of $781,600 of actual damages, $1,000,000 of punitive damages and pre and
post judgment interest in an action in which the plaintiffs claim subsidiaries
of the Company interfered with contractual relations of the plaintiffs. The
Company has appealed the court of appeals reversal to the Supreme Court of
Texas. The Company continues to believe that the findings of the jury had no
merit and will defend its position vigorously during the appellate process. The
Company cannot predict the ultimate outcome of the appellate process. A final
resolution is not expected to have a material adverse effect on the Company's
financial position or future results of operations.
The Company is a party to several additional legal actions arising in the
conduct of its business. Management of the Company believes that the ultimate
resolution of these actions will not have a material adverse effect on the
Company's financial position or results of operations.
6
<PAGE>
Independent Accountants' Review Report
The Board of Directors
Sonic Corp.
We have reviewed the accompanying condensed consolidated balance sheet of Sonic
Corp. as of May 31, 1996, and the related consolidated statements of income for
the three-month and nine-month periods ended May 31, 1996 and 1995, and the
condensed consolidated statements of cash flows for nine-month periods ended May
31, 1996 and 1995. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Sonic Corp. as of August 31, 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for the year then ended (not presented herein) and in our report
dated October 17, 1995, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of August 31, 1995, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
July 3, 1996
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's revenues are derived primarily from sales by Company-owned
restaurants and royalty fees from franchisees. The Company also receives
revenues from initial franchise fees, area development fees, and the leasing of
signs and real estate. Costs of Company-owned restaurant sales and minority
interest in earnings of restaurant partnerships relate directly to Company-owned
restaurant sales. Other expenses, such as depreciation, amortization and
general and administrative expenses, relate to both Company-owned restaurant
operations, as well as the Company's franchising operations. The Company's
revenues and expenses are directly affected by the number and sales volumes of
Company-owned restaurants. The Company's revenues and, to a lesser extent,
expenses are also affected by the number and sales volumes of franchised
restaurants. Initial franchise fees are directly affected by the number of
franchised restaurant openings.
The following table sets forth the percentage relationship to total
revenues, unless otherwise indicated, of certain items included in the Company's
statements of income. The table also sets forth certain restaurant data for the
periods indicated.
Percentage Results of Operations and Restaurant Data
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
May 31, May 31, May 31, May 31,
------------------------- ------------------------
1996 1995 1996 1995
------------------------- ------------------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Sales by Company-owned restaurants 83.8% 74.5% 78.4% 73.7%
Franchised restaurants:
Franchise fees and royalties 15.0 16.3 16.7 17.6
Equipment sales - 8.0 3.5 7.5
Other 1.2 1.2 1.4 1.2
------------------------- ------------------------
100.0% 100.0% 100.0% 100.0%
------------------------- ------------------------
------------------------- ------------------------
Costs and expenses:
Company-owned restaurants (1) 73.1% 78.1% 77.7% 78.9%
Equipment sales (2) - 81.6 82.9 80.7
Selling, general and administrative 9.4 10.3 9.9 11.6
Depreciation and amortization 6.0 4.5 6.2 4.8
Minority interest in earnings of restaurant partnerships (1) 5.4 3.8 3.9 3.4
Other - - .1 .1
Income from operations 18.8 17.5 16.9 16.8
Net interest expense .3 1.3 .3 1.1
Net income 11.5 10.0 10.4 9.7
RESTAURANT OPERATING DATA:
Company-owned restaurants (3) 225 169 225 169
Franchised restaurants (3) 1,310 1,269 1,310 1,269
------------------------- ------------------------
Total 1,535 1,438 1,535 1,438
System-wide sales $267,028 $237,769 $698,271 $630,362
Percentage increase 12.3% 12.7% 10.8% 12.6%
Average sales per restaurant:
Company-owned $161 $154 $428 $420
Franchise 178 167 472 450
System-wide 175 167 464 447
Change in comparable restaurant sales (4):
Company-owned 5.2% 2.6% 3.1% .9%
Franchise 5.2 4.8 3.9 3.6
System-wide 5.2 3.9 3.5 3.1
</TABLE>
- - --------------------
(1) As a percentage of Sales by Company-owned restaurants.
(2) As a percentage of equipment sales.
(3) Number of restaurants open at end of period.
(4) Represents percentage increase for restaurants open in both the reported
and prior years.
8
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THE THIRD FISCAL QUARTER OF 1996 TO THE THIRD FISCAL QUARTER
OF 1995. Total revenues increased 18.8% to $40.1 million in the third fiscal
quarter of 1996 from $33.8 million in the third fiscal quarter of 1995. Sales by
Company-owned restaurants increased 33.7% to $33.6 million in the third fiscal
quarter of 1996 from $25.1 million in the third fiscal quarter of 1995. The net
addition of 66 Company-owned restaurants since the beginning of the third fiscal
quarter in 1995 accounted for an increase in revenues of approximately $7.4
million. Sales by existing Company-owned restaurants in operation for the
entire reporting periods of 1996 and 1995 increased 5.2% and accounted for
approximately $1.1 million of the $8.5 million increase. Approximately one-half
of this increase is attributed to a 2.5% price increase implemented near the end
of the second fiscal quarter of 1996. Franchise royalties increased 8.2% to
$5.7 million in the third fiscal quarter of 1996 from $5.3 million in the same
period in 1995. Increased sales by comparable franchised restaurants resulted
in an increase in royalties of approximately $280,000 and resulted primarily
from the franchise comparable store sales growth of 5.2% over the third fiscal
quarter of 1995. The $280,000 increase included approximately $100,000
resulting from the progressive nature of the Company's franchise agreements that
require a higher royalty percentage as monthly sales volumes increase.
Additional restaurants in operation resulted in an increase in royalties of
approximately $150,000. Initial franchise and option fees were $287,500 in the
third fiscal quarter of 1996, compared with $228,500 in the same period in 1995.
The increase was due primarily to the opening of 18 new franchise restaurants in
the third fiscal quarter of 1996 compared to 15 openings in the comparable
quarter of 1995. The restaurant equipment sales division was sold in the second
fiscal quarter of 1996.
Restaurant cost of operations, as a percentage of sales, decreased to 73.1%
in the third fiscal quarter of 1996 from 78.1% in the comparable quarter of
1995. Management believes the improvement in restaurant operating margins
resulted from (1) a 2.5% average price increase implemented during the second
fiscal quarter of 1996 (2) reductions in the percentage of promotional
discounting from standard menu prices, as a percentage of sales, of
approximately 20% (3) reductions in cost of food due to declining beef prices,
and (4) improved operational cost controls through the implementation of a
standard ideal food cost program. Minority interest in earnings of restaurant
partnerships, as a percentage of sales, increased as compared with the third
fiscal quarter of 1995 due primarily to the favorable variance in restaurant
operating margins discussed above.
Selling, general and administrative expenses, as a percentage of total
revenues, decreased to 9.4% in the third fiscal quarter of 1996 from 10.3% in
the same period in 1995 because revenues grew at a higher rate than expenses.
Company-owned restaurants require a lower level of selling, general and
administrative expenses than the Company's franchising operations since, for
Company-owned restaurants, most of these expenses are reflected in restaurant
cost of operations and minority interest in restaurant operations. Many of the
managers and supervisors of Company-owned restaurants own a minority interest in
the restaurant, and their compensation flows through the minority interest in
earnings of restaurant partnerships. Depreciation and amortization expense
increased approximately $873,000 due to the purchase of buildings, equipment and
intangibles for new, acquired and existing restaurants, corporate furniture and
information systems upgrades. Income from operations increased approximately
$1.6 million or 27.2%, to $7.5 million in the third fiscal quarter of 1996 from
$5.9 million in the same period in fiscal 1995.
Net interest expense decreased approximately $328,000 versus the comparable
period in fiscal 1995. This decrease is due to the payoff of borrowings under
the Company's line of credit and increased interest income derived from the
investment of excess proceeds from the Company's sale of additional common
stock. Provision for income taxes reflects an effective federal and state tax
rate of approximately 37.75% for the quarter ended May 31, 1996, compared to
38.25% for the comparable period ended May 31, 1995. Net income for the period
increased 36.6% to $4.6 million or $.34 per share.
9
<PAGE>
COMPARISON OF THE FIRST THREE FISCAL QUARTERS OF 1996 TO THE FIRST THREE
FISCAL QUARTERS OF 1995. Total revenues increased 20.3% to $105.1 million in
the first three fiscal quarters of 1996 from $87.4 million in the first three
fiscal quarters of 1995. Sales by Company-owned restaurants increased 27.9% to
$82.4 million in the first three fiscal quarters of 1996 from $64.4 million in
the first three fiscal quarters of 1995. The net addition of 83 Company-owned
restaurants since the beginning of fiscal 1995 accounted for an increase in
revenues of approximately $16.2 million. Sales by existing Company-owned
restaurants in operation for the entire reporting periods of 1996 and 1995
increased 3.1% and accounted for approximately $1.8 of the $18.0 million
increase. Franchise royalties increased 13.1% to $16.4 million in the third
fiscal quarter of 1996 from $14.5 million in the same period in 1995. Increased
sales by comparable franchised restaurants resulted in an increase in royalties
of approximately $1.1 million and resulted from the franchise comparable store
sales growth of 3.9% over the first three fiscal quarters of 1995. The $1.1
million increase included approximately $300,000 resulting from the progressive
nature of the Company's franchise agreements that require a higher royalty
percentage as monthly sales volumes increase. Additional restaurants in
operation resulted in an increase in royalties of approximately $800,000.
Initial franchise and option fees were $1.1 million in the first three fiscal
quarters of 1996, compared with $832,000 in the same period in 1995. The
increase was due primarily to the expiration of options renewable annually which
were acquired by certain franchisees in December 1994 at a purchase price of
$1,000 per option. The options give the franchisee the right to develop new
restaurants under the terms of the 1988 form of franchise agreement.
Restaurant cost of operations, as a percentage of sales, decreased to 77.7%
in the first three fiscal quarters of 1996 from 78.9% in the comparable quarters
of 1995. The improvement in margins is primarily a result of the improved
margins in the third fiscal quarter of 1996, discussed earlier. Minority
interest in earnings of restaurant partnerships, as a percentage of sales,
increased as compared with the first three fiscal quarters of 1995 due primarily
to the favorable variance in restaurant operating margins discussed above.
Selling, general and administrative expenses, as a percentage of total
revenues, decreased to 9.9% in the first three fiscal quarters of 1996 from
11.6% in 1995 because revenues grew at a higher rate than expenses. Company-
owned restaurants require a lower level of selling, general and administrative
expenses than the Company's franchising operations since, for Company-owned
restaurants, most of these expenses are reflected in restaurant cost of
operations and minority interest in restaurant operations. Many of the managers
and supervisors of Company-owned restaurants own a minority interest in the
restaurant, and their compensation flows through the minority interest in
earnings of restaurant partnerships. Depreciation and amortization expense
increased approximately $2.35 million due to the purchase of buildings,
equipment and intangibles for new, acquired, and existing restaurants, corporate
furniture and information systems upgrades. Income from operations increased
approximately $3.2 million or 21.6%, to $17.8 million in the first three fiscal
quarters of 1996 from $14.6 million in the same period in fiscal 1995.
Net interest expense decreased approximately $673,000 versus the comparable
period in fiscal 1995. This decrease is due to the payoff of borrowings under
the Company's line of credit and increased interest income derived from the
investment of excess proceeds from the Company's sale of additional common
stock. Provision for income taxes reflects an effective federal and state tax
rate of 37.75% for the nine months ended May 31, 1996, compared to 38.25% for
the comparable period ended May 31, 1995. Net income for the period increased
29.0% to $10.9 million or $.82 per share.
LIQUIDITY AND SOURCES OF CAPITAL
In October of 1995, the Company issued an additional 1,668,826 shares of
common stock (including 428,026 common shares of treasury stock) through a
public offering. Net proceeds to the Company of approximately $33.2 million
were used partially to repay $23 million outstanding under the Company's line of
credit and the excess proceeds were invested in temporary investments. Capital
10
<PAGE>
resources available at May 31, 1996, include $7.2 million in cash and cash
equivalents and $35 million available under the Company's revolving credit
facility (there was $5 million in outstanding borrowings at May 31, 1996). An
additional $20 million is expected to be available under an increased revolving
credit facility as discussed in Note 2 to the Condensed Consolidated Financial
Statements.
During the first three fiscal quarters of 1996, the Company acquired 27
existing restaurants from its franchisees, opened 21 new restaurants, and closed
one restaurant as the result of a lease expiration. Total capital expenditures
for the first three fiscal quarters of 1996 of $33.5 million included $13
million for the construction of the 21 newly-opened restaurants, and $13.1
million for the acquisition of 27 franchised restaurants. The $13.1 million
includes two separate acquisitions totaling 25 franchised restaurants located in
Tennessee and Virginia. The Company's investment in these restaurants,
including loans to remaining partners and payoff of existing debt was
approximately $11.8 million. During the first three fiscal quarters of 1996,
the Company purchased the real estate on 14 newly constructed Company-owned
restaurants, entered into ground leases on seven new restaurants, purchased the
real estate on seven acquired restaurants, and leased the real estate on the
remaining 18 acquired restaurants. Total capital expenditures also include
expenditures for restaurants under construction, restaurants relocated to better
sites and new furniture and equipment for existing restaurants and corporate
use. It is the intent of the Company to own the land and buildings for most of
the new restaurants it opens during fiscal 1996.
The Company plans capital expenditures of approximately $8 million in the
fourth quarter of fiscal 1996 and $50 million in fiscal 1997, excluding
acquisitions of existing restaurants. The planned capital expenditures are
primarily for the development of newly-constructed Company-owned stores,
maintenance and remodeling of existing Company-owned stores, and enhancements to
existing financial and operating information systems, including the development
and installation of a PC-based point-of-sale system. Additionally, a key
element of the Company's growth strategy is the acquisition of existing Sonic
drive-ins from franchisees, and the Company plans to continue pursuing this
growth option. The Company expects to fund these capital expenditures through
the use of existing cash, cash flow from operations, and borrowings under its
revolving credit facility.
IMPACT OF INFLATION
Though increases in labor, food or other operating costs could adversely
affect the Company's operations, management does not believe that inflation has
had a material effect on income during the past several years.
SEASONALITY
The Company does not expect seasonality to affect its operations in a
materially adverse manner. However, the Company's results during its second
fiscal quarter (the months of December, January and February) generally are
lower than its other quarters due to the climate at the locations of a number of
its restaurants.
11
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
During the fiscal quarter ended May 31, 1996, Sonic Corp. (the "Company")
did not have any new material legal proceedings brought against it, its
subsidiaries, or their properties. In addition, except as set forth below, no
material developments occurred in connection with any previously reported legal
proceeding against the Company, its subsidiaries, or their properties during the
last fiscal quarter.
In April of 1996, the appellate court in the previously reported case
involving L & G Restaurants, Inc., Lucky Ott and William Owen reinstated the
jury's verdict against Sonic Land Corporation for tortious interference with
contract. The damages, as found by the jury and reinstated by the appellate
court, consist of actual damages of $52,500 for Mr. Ott and $729,070 for Mr.
Owens, as well as punitive damages of $500,000 for Mr. Ott and $500,000 for Mr.
Owens. The appellate court affirmed that part of the previous judgment
notwithstanding the verdict which threw out the jury's original finding that
Sonic Land had violated the Texas Deceptive Trade Practices Act. In addition,
the appellate court itself threw out a $32,000 claim by Carolyn Ott for
intentional infliction of emotional distress by Sonic Restaurants, Inc. The
Company has appealed the decision to the Texas Supreme Court, continues to
believe that the findings of the jury had no merit, and will continue to defend
its position vigorously during the appellate process. However, the Company
cannot guarantee that the Texas Supreme Court will decide to review the case or,
if it does, that the Company will receive a favorable outcome from the appeal.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS. The Company has filed the following exhibit with this
report:
15.1. Letter re: Unaudited Interim Financial
Information.
FORM 8-K REPORTS. The Company did not file any Form 8-K reports
during the fiscal quarter ended May 31, 1996.
12
<PAGE>
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:
-----------------------------------
Lewis B. Kilbourne, Senior Vice
President and Principal Financial
Officer
Date:
---------------
13
<PAGE>
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\Lewis B. Kilbourne
-----------------------------------
Lewis B. Kilbourne, Senior Vice
President and Principal Financial
Officer
Date:
---------------
<PAGE>
Exhibit 15.1
The Board of Directors
Sonic Corp.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-40987) pertaining to the 1991 Sonic Corp. Directors' Stock
Option Plan, the Registration Statement (Form S-8 No. 33-40988) pertaining to
the 1991 Sonic Corp. Stock Purchase Plan, the Registration Statements (Forms S-8
No. 33-40989 and No. 33-78576) pertaining to the 1991 Sonic Corp. Stock Option
Plan and the Registration Statement (Form S-3 No. 33-95716) for the registration
of 1,420,000 shares of its common stock, and the related Prospectuses of our
report dated July 3, 1996 relating to the unaudited condensed consolidated
interim financial statements of Sonic Corp. which are included in its Form 10-Q
for the quarter ended May 31, 1996.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
July 3, 1996
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES
3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 7,171,200
<SECURITIES> 0
<RECEIVABLES> 5,976,600
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,431,700
<PP&E> 114,916,700
<DEPRECIATION> (18,837,800)
<TOTAL-ASSETS> 140,054,400
<CURRENT-LIABILITIES> 12,217,300
<BONDS> 16,388,600
0
0
<COMMON> 134,300
<OTHER-SE> 108,601,900
<TOTAL-LIABILITY-AND-EQUITY> 140,054,400
<SALES> 86,102,500
<TOTAL-REVENUES> 105,108,700
<CGS> 67,070,200
<TOTAL-COSTS> 87,298,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 286,400
<INCOME-PRETAX> 17,523,400
<INCOME-TAX> 6,615,100
<INCOME-CONTINUING> 10,908,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,908,300
<EPS-PRIMARY> .82
<EPS-DILUTED> .82
</TABLE>
