<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
February 28, 1997 0-18859
- ------------------------------ ----------------------
SONIC CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 73-1371046
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(State of Incorporation) (I.R.S. Employer
Identification No.)
101 Park Avenue
Oklahoma City, Oklahoma 73102
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(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (405) 280-7654
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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 .
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As of February 28, 1997, the Registrant had 13,502,268 shares of common
stock issued and outstanding (excluding 7,580 shares of common stock held as
treasury stock).
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SONIC CORP.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at February 28,
1997 and August 31, 1996 3
Consolidated Statements of Income for the three months and
six months ended February 28, 1997 and February 29, 1996 4
Condensed Consolidated Statements of Cash Flows for the six
months ended February 28, 1997 and February 29, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Independent Accountants' Review Report 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE>
SONIC CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
ASSETS FEBRUARY 28, AUGUST 31,
1997 1996
------------ ----------
Current assets:
Cash and cash equivalents $ 11,951 $ 7,706
Accounts and notes receivable, net 5,106 5,229
Other current assets 3,079 3,242
-------- --------
Total current assets 20,136 16,177
Property, equipment and capital leases 137,280 118,914
Less accumulated depreciation and amortization (22,156) (18,409)
-------- --------
Property, equipment and capital leases, net 115,124 100,505
Trademarks, tradenames and other goodwill 20,619 20,945
Other intangibles and other assets 16,052 14,313
Less accumulated amortization (5,053) (4,496)
-------- --------
Intangibles and other assets, net 31,618 30,762
-------- --------
Total assets $166,878 $147,444
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,695 $ 2,904
Deposits from franchisees 866 601
Accrued liabilities 5,367 7,841
Obligations under capital leases and long-term
debt due within one year 1,263 1,340
-------- --------
Total current liabilities 11,191 12,686
Obligations under capital leases due after one year 8,291 8,985
Long-term debt due after one year 26,376 11,884
Other noncurrent liabilities 3,276 4,206
Contingencies (Notes 3 and 4)
Stockholders' equity:
Preferred stock, par value $.01; 1,000,000 shares
authorized; none outstanding - -
Common stock, par value $.01; 40,000,000 shares
authorized; 13,509,848 shares issued
(13,475,078 shares issued at August 31, 1996) 135 135
Paid-in capital 59,601 59,107
Retained earnings 58,151 50,584
-------- --------
117,887 109,826
Treasury stock, at cost; 7,580 common shares (143) (143)
-------- --------
Total stockholders' equity 117,744 109,683
-------- --------
Total liabilities and stockholders' equity $166,878 $147,444
-------- --------
-------- --------
See accompanying notes.
3
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SONIC CORP.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
(Unaudited) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, February 29, FEBRUARY 28, February 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales by Company-owned restaurants $30,664 $23,274 $64,250 $48,718
Franchised restaurants:
Franchise fees 541 553 811 815
Franchise royalties 5,404 4,894 11,961 10,704
Equipment sales - 1,489 - 3,743
Other (Note 2) 1,524 631 2,084 1,004
------- ------- ------- -------
38,133 30,841 79,106 64,984
Cost and expenses:
Company-owned restaurants:
Food and packaging 8,796 7,582 18,564 15,876
Payroll and other employee benefits 9,039 7,061 18,843 14,689
Other operating expenses 5,625 4,327 11,728 8,799
------- ------- ------- -------
23,460 18,970 49,135 39,364
Equipment cost of sales - 1,210 - 3,101
Selling, general and administrative (Note 4) 5,264 3,375 9,150 6,674
Depreciation and amortization 2,955 2,123 5,770 4,112
Minority interest in earnings of
restaurant partnerships 1,084 615 2,441 1,409
Provision for impairment of long-lived assets 15 27 38 49
------- ------- ------- -------
32,778 26,320 66,534 54,709
------- ------- ------- -------
Income from operations 5,355 4,521 12,572 10,275
Interest expense 471 231 808 630
Interest income (149) (257) (295) (465)
------- ------- ------- -------
Net interest expense (income) 322 (26) 513 165
------- ------- ------- -------
Income before income taxes 5,033 4,547 12,059 10,110
Provision for income taxes 1,875 1,716 4,492 3,816
------- ------- ------- -------
Net income $ 3,158 $ 2,831 $ 7,567 $ 6,294
------- ------- ------- -------
------- ------- ------- -------
Net income per share $ 0.23 $ 0.21 $ 0.55 $ 0.48
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding 13,721 13,561 13,743 13,227
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes.
4
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SONIC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,567 $ 6,293
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,770 4,112
Other (1,778) (303)
Increase in operating assets (73) (157)
Decrease in operating liabilities (1,809) (677)
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Total adjustments 2,110 2,975
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Net cash provided by operating activities 9,677 9,268
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (21,982) (13,191)
Other 1,782 1,052
--------- ---------
Net cash used in investing activities (20,200) (12,139)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock - 33,187
Net change in revolving debt facilities 14,430 (23,000)
Other 338 423
--------- ---------
Net cash provided by financing activities 14,768 10,610
Net increase in cash and cash equivalents 4,245 7,739
Cash and cash equivalents at beginning of period 7,706 3,777
--------- ---------
Cash and cash equivalents at end of period $ 11,951 $ 11,516
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Notes receivable from sale of property, equipment
and intangibles $ 796 $ 139
See accompanying notes.
5
<PAGE>
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
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 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, as amended, for the fiscal year ended August 31, 1996.
The results of operations for the six months ended February 28, 1997, are not
necessarily indicative of the results to be expected for the full year ending
August 31, 1997.
NOTE 2
On February 27, 1997, the Company sold its minority investment in 10
restaurants for a pre-tax gain of approximately $1.1 million ($0.7 million net
of tax). The gain on this sale is included in other revenues for the current
reporting period. The loss of revenues from the investments that were sold is
not expected to have a significant impact on the Company's consolidated
revenues and earnings in future periods.
NOTE 3
On April 18, 1996, the Texas Court of Appeals reversed the district court's
judgment notwithstanding the verdict and reinstated the jury's verdict of
approximately $0.8 million of actual damages, $1 million of punitive damages,
and pre- and post-judgment interest in an action in which the plaintiffs claim
a subsidiary 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 and the court of appeals have no merit and will defend its position
vigorously during the appellate process.
NOTE 4
The Company is a party to lawsuits and claims arising in the ordinary course of
business. The Company has determined that developments during the second
quarter indicate a $1.1 million provision for existing contingent liabilities
is appropriate. The provision is included in selling, general and
administrative expenses for the current reporting period. Under the most
adverse circumstances, however, the aggregate potential liabilities could be
significantly higher. Management believes that the ultimate resolution of
these matters will not have a material adverse effect on the Company's
financial position or future results of operations.
6
<PAGE>
NOTE 5
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share", which is required to be adopted by the Company in the
reporting period ended February 28, 1998. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be excluded. The
Company has determined the impact of SFAS 128 on the calculation of earnings
per share for the second fiscal quarter and six months ended February 28, 1997
and February 29, 1996 would not be material.
7
<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 February 28, 1997, and the related consolidated statements of
income for the six-month periods ended February 28, 1997 and February 29, 1996,
and the condensed consolidated statements of cash flows for the six-month
periods ended February 28, 1997 and February 29, 1996. 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, 1996,
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 18, 1996, 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, 1996, 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
April 10, 1997
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From time to time, the Company may publish forward-looking statements relating
to certain matters, including anticipated financial performance, business
prospects, the future opening of Company-owned and franchised restaurants,
anticipated capital expenditures, and other similar matters. The Private
Securities Litigation Reform Act of 1996 provides a safe harbor for forward-
looking statements. In order to comply with the terms of that safe harbor, the
Company notes that a variety of factors could cause the Company's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward looking statements. In
addition, the Company disclaims any intent or obligation to update those
forward-looking statements.
RESULTS OF OPERATIONS
The Company derives its revenues 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 also are 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.
PERCENTAGE RESULTS OF OPERATIONS
<TABLE>
Three months ended Six months ended
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Sales by Company-owned restaurants 80.4 % 75.5 % 81.2 % 75.0 %
Franchised restaurants:
Franchise fees and royalties 15.6 17.7 16.2 17.7
Equipment sales - 4.8 - 5.8
Other 4.0 2.0 2.6 1.5
------- ------- ------- -------
100.0 % 100.0 % 100.0 % 100.0 %
------- ------- ------- -------
Cost and expenses:
Company-owned restaurants (1)
Food and packaging 28.7 % 32.6 % 28.9 % 32.6 %
Payroll and other employee benefits 29.5 30.3 29.3 30.2
Other operating expenses 18.3 18.6 18.3 18.0
------- ------- ------- -------
76.5 % 81.5 % 76.5 % 80.8 %
Equipment sales (2) - 81.3 - 82.9
Selling, general and administrative 13.8 10.9 11.6 10.3
Depreciation and amortization 7.7 6.9 7.3 6.3
Minority interest in earnings of restaurant partnerships (1) 3.5 2.6 3.8 2.9
Other - 0.1 - 0.1
Income from operations 14.0 14.7 15.9 15.8
Net interest expense 0.8 (0.1) 0.6 0.3
Net income 8.3 % 9.2 % 9.6 % 9.7 %
</TABLE>
- --------------------
(1) As a percentage of Sales by Company-owned restaurants.
(2) As a percentage of equipment sales.
9
<PAGE>
RESTAURANT OPERATING DATA ($ in thousands)
<TABLE>
Three months ended Six months ended
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
RESTAURANT COUNT (1):
Company owned restaurants:
Core markets 155 132 155 132
Developing markets 79 59 79 59
--------- --------- --------- ---------
All markets 234 191 234 191
Franchised restaurants 1,366 1,319 1,366 1,319
--------- --------- --------- ---------
System-wide restaurants 1,600 1,510 1,600 1,510
--------- --------- --------- ---------
--------- --------- --------- ---------
SALES DATA:
System-wide sales $ 236,058 $ 205,565 $ 492,880 $ 434,449
Percentage increase (2) 14.8 % 6.7 % 13.4 % 10.6 %
Average sales per restaurant:
Company-owned $ 133 $ 125 $ 280 $ 265
Franchise 153 138 318 294
System-wide 150 137 312 291
Change in comparable restaurant sales (3):
Company owned restaurants:
Core markets 6.7 % 1.4 % 5.7 % 3.4 %
Developing markets (6.2) (5.6) (7.9) (9.2)
--------- --------- --------- ---------
All markets 3.8 % 0.5 % 2.5 % 2.0 %
Franchise 10.2 0.5 7.5 3.2
System-wide 9.2 0.5 6.7 2.9
</TABLE>
- --------------------
(1) Number of restaurants open at end of period
(2) Represents percentage increase from the comparable period in the prior
year.
(3) Represents percentage increase (decrease) for restaurants open both in the
reported and prior years.
10
<PAGE>
COMPARISON OF THE SECOND FISCAL QUARTER OF 1997 TO THE SECOND FISCAL QUARTER
OF 1996.
Total revenues increased 23.6% to $38.1 million in the second fiscal quarter of
1997 from $30.8 million in the second fiscal quarter of 1996. Sales by Company-
owned restaurants increased 31.8% to $30.7 million in the second fiscal quarter
of 1997 from $23.3 million in the second fiscal quarter of 1996. Of the $7.4
million increase, $6.6 million was due to the net addition of 56 Company-owned
restaurants since the beginning of fiscal 1996. Average sales increases of
approximately 3.8% by stores open the full reporting periods of fiscal 1997 and
1996 accounted for $0.8 million of the increase. Franchise fee revenues were
unchanged in the second fiscal quarter of 1997 as compared to the second fiscal
quarter of 1996. Franchise royalties increased 10.4% to $5.4 million in the
second fiscal quarter of 1997, compared to $4.9 million in the second fiscal
quarter of 1996. Increased sales by comparable franchised restaurants resulted
in an increase in royalties of approximately $0.5 million and resulted from the
franchise same-store sales growth of 10.2% over the second fiscal quarter of
1996. The decrease in equipment sales was due to the sale of the Company's
restaurant equipment division in the second fiscal quarter of 1996. The
increase in other revenues of approximately $0.9 million resulted primarily
from a gain on the sale of the Company's minority interest in 10 restaurants.
The sale of these interests is not expected to have a material impact on income
in the future.
Restaurant cost of operations, as a percentage of sales by Company-owned
restaurants, was 76.5% in the second fiscal quarter of 1997, compared to 81.5%
in the second fiscal quarter of 1996. Management believes the improvement in
restaurant operating margins resulted from (1) reductions in food costs due to
declining beef prices, consolidation of purchasing distribution functions, and
renegotiation of pricing terms; (2) improved operational cost controls through
the implementation of a standard ideal food cost program; (3) a 3.5% average
price increase implemented October 1, 1996, along with a 2.5% average price
increase implemented during the second fiscal quarter of 1996; and (4)
reductions in the percentage of promotional discounting from standard menu
prices, as a percentage of sales, of approximately 10%. The improvements
mentioned above were partially offset by the minimum wage increase which was
effective on October 1, 1996, and increased marketing expenditures, which
reflect the Company's commitment to increased media penetration through its
system of advertising cooperatives. Restaurant management bonuses also
increased, as a percentage of sales, due largely to the improved operating
margins. Minority interest in earnings of restaurant partnerships increased,
as a percentage of sales by Company-owned restaurants, to 3.5% in the second
fiscal quarter of 1997, compared to 2.6% in the second fiscal quarter of 1996.
This increase occurred primarily due to the improvements in operating margins
discussed above.
Selling, general and administrative expenses, as a percentage of total
revenues, increased to 13.8% in the second fiscal quarter of 1997, compared
with 10.9% in the second fiscal quarter of 1996. This increase resulted
primarily from a $1.1 million reserve for expected litigation costs recorded
during the second fiscal quarter of 1997. Management expects selling, general
and administrative expenses, as a percentage of revenues, to decline in future
periods because the Company expects a significant portion of future revenue
growth to be attributable to Company-owned restaurants. Company-owned
restaurants require a lower level of selling, general and
11
<PAGE>
administrative expenses, as a percentage of revenues, than the Company's
franchising operations since 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 restaurants, and their compensation flows through the minority interest
in earnings of restaurant partnerships. Depreciation and amortization expense
increased approximately $0.8 million due to the purchase of buildings and
equipment for new and existing restaurants and corporate furniture and
information systems upgrades. Management expects this trend to continue due to
increased capital expenditures planned for fiscal 1997.
Income from operations increased 18.4% to $5.4 million from $4.5 million in the
second fiscal quarter of 1996. Net interest expense in the second fiscal
quarter of 1997 increased $0.3 million over second fiscal quarter of 1996 due to
increased borrowing to fund capital additions. The Company expects interest
expense to continue to increase, as a percentage of sales, due to the Company's
restaurant expansion plans.
Provision for income taxes reflects an effective federal and state tax rate of
37.25% for the second fiscal quarter of 1997, compared to 37.75% for the
comparable period in fiscal 1996. Net income for the second fiscal quarter of
1997 increased 11.6% to $3.2 million, compared to $2.8 million in the
comparable period of fiscal 1996. Earnings per share increased to $.23 per
share in the second fiscal quarter of 1997, compared to $.21 per share in the
second fiscal quarter of 1996, for an increase of 9.5%.
COMPARISON OF THE FIRST TWO FISCAL QUARTERS OF 1997 TO THE FIRST TWO FISCAL
QUARTERS OF 1996.
Total revenues increased 21.7% to $79.1 million in the first two fiscal
quarters of 1997 from $65.0 million in the first two fiscal quarters of 1996.
Sales by Company-owned restaurants increased 31.9% to $64.2 million in the
first two fiscal quarters of 1997 from $48.7 million in the first two fiscal
quarters of 1996. Of the $15.5 million increase, $14.4 million was due to the
net addition of 56 Company-owned restaurants since the beginning of fiscal
1996. Average sales increases of approximately 2.5% by stores open the full
reporting periods of fiscal 1997 and 1996 accounted for $1.1 million of the
increase. Franchise fee revenues were unchanged in the first two fiscal
quarters of 1997 as compared to the first two fiscal quarters of 1996.
Franchise royalties increased 11.7% to $12.0 million in the first two fiscal
quarters of 1997, compared to $10.7 million in the first two fiscal quarters of
1996. Increased sales by comparable franchised restaurants resulted in an
increase in royalties of approximately $1.0 million and resulted from the
franchise same-store sales growth of 7.5% over the first two fiscal quarters of
1996. Additional franchised restaurants in operation resulted in an increase
in royalties of $0.3 million. The decrease in equipment sales was due to the
sale of the Company's restaurant equipment division in the second fiscal
quarter of 1996. The increase in other revenues of $1.1 million resulted
primarily from a $1.1 million gain recognized on the sale of the Company's
minority interest in 10 restaurants. The sale of these interests is not
expected to have a material impact on income in the future.
12
<PAGE>
Restaurant cost of operations, as a percentage of sales by Company-owned
restaurants, was 76.5% in the first two fiscal quarters of 1997, compared to
80.8% in the first two fiscal quarters of 1996. Management believes the
improvement in restaurant operating margins resulted from (1) reductions in
food costs due to declining beef prices, consolidation of purchasing
distribution functions, and renegotiation of pricing terms; (2) improved
operational cost controls through the implementation of a standard ideal food
cost program; (3) a 3.5% average price increase implemented October 1, 1996,
along with a 2.5% average price increase implemented during the first two
fiscal quarters of 1996; and (4) reductions in the percentage of promotional
discounting from standard menu prices, as a percentage of sales, of
approximately 10%. The improvements mentioned above were partially offset by
the minimum wage increase which was effective on October 1, 1996, and increased
marketing expenditures, which reflect the Company's commitment to increased
media penetration through its system of advertising cooperatives. Restaurant
management bonuses also increased, as a percentage of sales, due largely to the
improved operating margins. Minority interest in earnings of restaurant
partnerships increased, as a percentage of sales by Company-owned restaurants,
to 3.8% in the first two fiscal quarters of 1997, compared to 2.9% in the first
two fiscal quarters of 1996. This increase occurred primarily due to the
improvements in operating margins discussed above.
Selling, general and administrative expenses, as a percentage of total
revenues, increased to 11.6% in the first two fiscal quarters of 1997, compared
with 10.3% in the first two fiscal quarters of 1996. This increase resulted
primarily from a $1.1 million reserve for expected litigation costs recorded
during the second fiscal quarter of 1997. Management expects selling, general
and administrative expenses, as a percentage of revenues, to decline in future
periods because the Company expects a significant portion of future revenue
growth to be attributable to Company-owned restaurants. Company-owned
restaurants require a lower level of selling, general and administrative
expenses, as a percentage of revenues, than the Company's franchising operations
since 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
restaurants, and their compensation flows through the minority interest in
earnings of restaurant partnerships. Depreciation and amortization expense
increased approximately $1.7 million due to the purchase of buildings and
equipment for new and existing restaurants and corporate furniture and
information systems upgrades. Management expects this trend to continue due to
increased capital expenditures planned for fiscal 1997.
Income from operations increased 22.4% to $12.6 million from $10.3 million in
the first two fiscal quarters of 1996. Net interest expense in the first two
fiscal quarters of 1997 increased $0.3 million due to increased borrowings to
fund capital additions. The Company expects interest expense to continue to
increase, as a percentage of sales, due to the Company's restaurant expansion
plans.
Provision for income taxes reflects an effective federal and state tax rate of
37.25% for the first two fiscal quarters of 1997, compared to 37.75% for the
comparable period in fiscal 1996. Net
13
<PAGE>
income for the first two fiscal quarters of 1997 increased 20.2% to $7.6
million, compared to $6.3 million in the comparable period of fiscal 1996.
Earnings per share increased to $.55 per share in the first two fiscal quarters
of 1997, compared to $.48 per share in the first two fiscal quarters of 1996,
for an increase of 14.6%.
LIQUIDITY AND SOURCES OF CAPITAL
During the first six months of fiscal 1997, the Company opened 13 newly-
constructed restaurants, sold four restaurants to a franchisee, and closed six
restaurants. The Company funded the total capital additions for the first six
months of 1997 of $22.0 million (which included the cost of newly-opened
restaurants, restaurants under construction, new furniture and equipment for
existing restaurants, and general corporate use) internally by cash from
operating activities and through borrowing under the Company's line of credit.
During the six months ended February 28, 1997, the Company purchased the real
estate on all 13 newly-constructed restaurants. The Company expects to own the
land and building for most of its future newly-constructed restaurants.
The Company has an agreement with a group of banks which provides the Company
with a $60.0 million line of credit expiring in June of 1998. The Company will
use the line of credit to finance the opening of newly-constructed restaurants,
acquisitions of existing restaurants, and other general corporate purposes. As
of February 28, 1997, the Company's outstanding borrowings under the line of
credit were $26.0 million, as well as $0.1 million in outstanding letters of
credit. The available line of credit as of February 28, 1997, was $33.9
million. As of February 28, 1997, the Company's total cash balance of $12.0
million reflected the impact of the cash generated from operating activities,
line of credit activity, and capital expenditures mentioned above.
The Company plans capital expenditures of approximately $45 million in fiscal
1997, excluding potential acquisitions. Those capital expenditures primarily
relate to the development of additional Company-owned restaurants,
maintenance and remodeling of Company-owned restaurants, and enhancements to
existing financial and operating information systems, including further
development and installation of a point-of-sale system. The Company expects
to fund those capital expenditures through borrowings under its existing
unsecured revolving credit facility and cash flow from operations. The
Company believes that existing cash and funds generated from internal
operations, as well as borrowings under the line of credit, will meet the
Company's needs for the foreseeable future.
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. During the first
fiscal quarter of 1997, however, the Company increased prices for its Company-
owned restaurants primarily because of higher labor costs resulting from
increases in the federal minimum wage.
14
<PAGE>
SEASONALITY
The Company does not expect seasonality to affect its operations in a
materially adverse manner. The Company's results during its 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 Company-
owned and franchised restaurants.
15
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
During the fiscal quarter ended February 28, 1997, 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.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 22, 1997, the Company held its annual meeting of stockholders,
at which the stockholders re-elected Dennis Clark, Leonard Lieberman, and Frank
E. Richardson for the three-year terms ending in January of 2000. The
following table sets forth the voting results for those three directors.
DIRECTOR VOTES FOR VOTES WITHHELD
-------- ---------- --------------
Dennis Clark 11,163,425 57,740
Leonard Lieberman 11,173,528 47,637
Frank E. Richardson 11,194,467 26,698
Other directors of the Company whose terms continued after the meeting
consist of Dean Werries, Clifford Hudson, H.E. Rainbolt, and Robert Rosenberg.
The stockholders also approved and ratified an amendment to the 1991 Sonic
Corp. Stock Option Plan ("Plan") to increase the number of shares of common
stock reserved for issuance pursuant to the Plan by an additional 530,000
shares of common stock. The stockholders approved the amendment by a vote of
10,769,635 shares of common stock in favor, 356,360 opposed, and 7,920
abstaining.
In addition, the stockholders approved and ratified the Sonic Corp. 1995
Stock Incentive Plan ("Incentive Plan") to provide additional incentives and
financially reward certain executive officers of the Company who contribute to
the long-term growth and profitability of the Company. The stockholders
approved the Incentive Plan by a vote of 10,829,439 shares of common stock in
favor, 298,769 opposed, and 7,707 abstaining.
Finally, the stockholders approved and ratified the selection of Ernst &
Young, LLP, as the Company's independent auditors by a vote of 11,211,779
shares of common stock in favor, 4,606 shares opposed, and 4,780 shares
abstaining.
16
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS. The Company has filed the following exhibits with this report:
15.01. Letter re: Unaudited Interim Financial Information.
27.01. Financial Data Schedules
FORM 8-K REPORTS. The Company did not file any Form 8-K reports during
the fiscal quarter ended February 28, 1997.
17
<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: April 11, 1997
<PAGE>
Exhibit 15.01
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 February 28, 1997.
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
April 10, 1997
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