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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
August 31, 1997 0-18859
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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
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $.01
Rights to Purchase Series A Junior Preferred Stock, Par Value $.01
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 requirements
for the past 90 days. YES /X/. No / /.
Indicate by check mark if this Form 10-K does not contain and, to the
best of the Registrant's knowledge, the Registrant's definitive proxy
statement or information statement incorporated by reference in Part III of
this Form 10-K will not contain a disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K. YES /X/. No / /.
As of November 7, 1997, the aggregate market value of the 11,820,122
shares of common stock of the Company held by non-affiliates of the Company
equaled approximately $307 million, based on the closing sales price for the
common stock as reported for that date. As of November 7, 1997, the
Registrant had 12,812,505 shares of common stock issued and outstanding
(excluding 807,080 shares of common stock held as treasury stock).
(Facing Sheet Continued)
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Documents Incorporated by Reference
-----------------------------------
Part III of this report incorporates by reference certain portions of the
definitive proxy statement which the Registrant will file with the Securities
and Exchange Commission in connection with the Company's annual meeting of
stockholders following the fiscal year ended August 31, 1997.
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FORM 10-K OF SONIC CORP.
TABLE OF CONTENTS
PART I
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Page
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Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 4A. Executive Officers of the Company 11
PART II
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Item 5 Market for the Company's Common Stock and Related Stockholder
Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 19
PART III
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(Incorporated by reference from the Company's definitive
proxy statement for its annual meeting of stockholders
following the fiscal year ended August 31, 1997)
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
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FORM 10-K
SONIC CORP.
PART I
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ITEM 1. BUSINESS
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GENERAL
Sonic Corp. (the "Company") operates and franchises the largest chain of
drive-in restaurants in the United States. As of August 31, 1997, the
Company had 1,680 restaurants in operation, consisting of 256 Company-owned
restaurants and 1,424 franchised restaurants, principally in the south
central and southeastern United States. Sonic restaurants offer
made-to-order hamburgers and other sandwiches and feature Sonic signature
items, such as footlong coney cheese dogs, hand-battered onion rings, tater
tots, specialty soft drinks, including cherry limeades and slushes, and
frozen desserts. At a typical Sonic restaurant, a customer drives into one
of 24 to 36 covered drive-in spaces, orders through an intercom, and has the
food delivered by a carhop within an average of four minutes.
In September of 1995, the Company reorganized its operating subsidiaries
into two, directly-held subsidiaries consisting of Sonic Industries Inc. and
Sonic Restaurants, Inc. Sonic Industries Inc. serves as the franchisor of
the Sonic restaurant chain, as well as the insurance and administrative
services center for the Company. Sonic Restaurants, Inc. develops and
operates the Company's Company-owned restaurants. In February of 1996, the
Company sold its equipment sales division to N. Wasserstrom & Sons, Inc. of
Columbus, Ohio, and discontinued that line of business. The Company continues
to rent the Sonic pole signs to its franchisees.
The Company's objective is to maintain its position as, or to become, a
leading operator in terms of the number of quick-service restaurants within
each of its core and developing markets. The Company has developed and is
implementing a strategy designed to build the Sonic brand and to continue to
achieve high levels of customer satisfaction and repeat business. The key
elements of that strategy are (1) a unique drive-in concept focusing on a
menu of quality made-to-order and signature food items; (2) a commitment to
customer service featuring the quick delivery of food by carhops; (3) the
expansion of Company-owned and franchised restaurants within the Company's
core and developing markets; (4) an owner/operator philosophy, in which
managers have an equity interest in their restaurant, thereby providing an
incentive for managers to operate Company-owned restaurants profitably and
efficiently; and (5) a commitment to support the Sonic system.
The Company has its principal executive offices at 101 Park Avenue,
Oklahoma City, Oklahoma 73102. Its telephone number is (405) 280-7654. As
used in this report, the word "Company" means Sonic Corp. and each of its
subsidiaries and predecessors, unless the context indicates otherwise.
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RESTAURANT LOCATIONS
As of August 31, 1997, the Company owned or franchised 1,680 drive-in
restaurants, principally in the south central and southeastern United States.
The Company's core markets, consisting of the nine contiguous states of
Texas, Oklahoma, Tennessee, Missouri, Arkansas, Kansas, Louisiana,
Mississippi, and New Mexico, contained approximately 84% of all Sonic
restaurants as of August 31, 1997. Developing markets primarily are located
in Alabama, Arizona, Colorado, Florida, Georgia, Kentucky, North Carolina,
and South Carolina. The following table sets forth the number of
Company-owned and franchised restaurants by core and developing markets as of
August 31, 1997:
COMPANY-OWNED FRANCHISED
CORE MARKET RESTAURANTS RESTAURANTS TOTAL
----------- ------------- ----------- -----
Texas 63 433 496
Oklahoma 22 168 190
Tennessee 26 113 139
Missouri 28 99 127
Arkansas 15 103 118
Kansas 7 88 95
Louisiana 15 80 95
Mississippi 0 88 88
New Mexico 0 56 56
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Total 176 1,228 1,404
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COMPANY-OWNED FRANCHISED
DEVELOPING MARKETS RESTAURANTS RESTAURANTS TOTAL
------------------ ------------- ----------- -----
Alabama 35 20 55
Arizona 0 33 33
California 0 4 4
Colorado 0 21 21
Florida 11 2 13
Georgia 2 23 25
Illinois 0 5 5
Indiana 0 3 3
Iowa 0 1 1
Kentucky 9 23 32
Nebraska 0 2 2
Nevada 0 7 7
North Carolina 16 14 30
Ohio 0 3 3
South Carolina 0 31 31
Utah 0 1 1
Virginia 7 2 9
West Virginia 0 1 1
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Total 80 196 276
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Total System 256 1,424 1,680
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EXPANSION
During fiscal 1997, the Company opened 37 Company-owned restaurants and
its franchisees opened 92 restaurants. During fiscal 1998, the Company plans
to open at least 50 Company-owned restaurants and anticipates that its
franchisees will open at least 90 restaurants. That expansion plan involves
the opening of new restaurants by franchisees under existing area development
agreements, single-store development by existing franchisees, and development
by new franchisees. The Company believes that its existing core and
developing markets offer a significant growth opportunity for both
Company-owned and franchised restaurant expansion. However, the ability of
the Company and its franchisees to open the anticipated number of Sonic
drive-in restaurants during fiscal 1998 necessarily will depend on various
factors. Those factors include (among others) the availability of suitable
sites, the negotiation of acceptable lease or purchase terms for new
locations, local permitting and regulatory compliance, the financial
resources of the Company's franchisees, and the general economic and business
conditions to be faced in fiscal 1998.
The Company's expansion strategy for Company-owned restaurants involves
three principal components: (1) the building-out of existing core markets,
(2) the further penetration of developing markets, and (3) the acquisition by
the Company of existing Sonic franchised restaurants. In addition, the
Company may consider the acquisition of other similar concepts for conversion
to Sonic restaurants.
RESTAURANT DESIGN AND CONSTRUCTION
GENERAL. The typical Sonic drive-in restaurant consists of a kitchen
housed in a one-story building flanked by two canopy-covered rows of 24 to 36
parking spaces, with each space having its own intercom and menu board. In
addition, since the first half of fiscal 1995, the Company has incorporated a
drive-through window and patio seating area in almost all new Company-owned
restaurants. Sonic restaurants generally do not provide an indoor seating
area.
RETROFIT PROGRAM. In fiscal 1997, the Company began implementing a
program to retrofit all Sonic drive-in restaurants over the next several
years. The retrofit includes new signage, new menu and speaker housings, and
significant trade dress modifications to the exterior of each restaurant's
building. The Company currently estimates the cost to make a standard
retrofit at approximately $58,000 to $65,000 per restaurant. The Company is
implementing the program on a market-by-market basis, beginning with the
Houston, Texas market. In addition, all new restaurants being built in all
markets now feature the new retrofit signage and trade dress style. As of
November 5, 1997, the Company had retrofitted approximately 28 Company-owned
restaurants and had built six new Company-owned restaurants with the new
retrofit signage and trade dress.
MARKETING
The Company has designed its marketing program to differentiate Sonic
drive-in restaurants from the Company's competitors by emphasizing five key
areas of customer satisfaction: (1) the personal manner of service by
carhops, (2) made-to-order menu items, (3) speed of service, (4) quality, and
(5) value. The marketing plan includes monthly promotions for use throughout
the Sonic chain. The Company supports those promotions with television and
radio commercials and point-of-sale materials. Those promotions center on a
"meal deal" which highlights signature menu items of Sonic drive-in
restaurants.
Each year the Company and its advertising agency (with involvement of the
Sonic Franchisee Advisory Council) develop a marketing plan. The Company
requires the formation of advertising cooperatives among restaurant owners to
pool and direct advertising expenditures in local markets. Under each of the
Company's license agreements, the franchisee must contribute a minimum
percentage of the franchisee's gross revenues to a national media production
fund and spend an additional minimum percentage of gross revenues on local
advertising, either directly or through the Company-required participation in
advertising cooperatives. Depending on the type of license agreement, the
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minimum percentages of gross revenues contributed by franchisees for local
advertising cooperative funds range from 1.125% to 3.25% and, for the Sonic
Advertising Fund (the national fund directed by the Company), the franchisees
contribute a range of 0.375% to 0.75% of gross revenues. Franchisees may
elect and frequently do elect to contribute more than the minimum percentage
of gross revenues to their local advertising cooperative funds.
For fiscal 1997, franchisees participating in cooperatives contributed an
average of 2.89% of gross revenues to Sonic advertising cooperatives,
exceeding the required 2.375% under most license agreements in effect during
that period. As of August 31, 1997, 1,615 Sonic restaurants (approximately
96% of the chain) participated in advertising cooperatives. The Company
estimates that the total amount spent on media and media production
(principally television) exceeded $33 million for fiscal 1997 and should
exceed $42 million for fiscal 1998.
PURCHASING
The Company negotiates with suppliers for its primary food products
(hamburger patties, hot dogs, french fries, tater tots, cooking oil, fountain
syrup, and other products) and packaging supplies to ensure adequate
quantities of food and supplies and to obtain competitive prices. The
Company seeks competitive bids from suppliers on many of its food products.
The Company approves suppliers of those products and requires them to adhere
to product specifications established by the Company. Suppliers manufacture
several key products for the Company under private label and sell them to
authorized distributors for resale to Company-owned and franchised
restaurants. The Company and its franchisees purchase a majority of their
food and beverage products from authorized local or national distributors.
The Company requires its Company-owned and franchised restaurants to
participate in purchasing cooperatives. Those cooperatives have achieved
cost savings, improved food quality and consistency, and helped decrease the
volatility of food and supply costs for Sonic restaurants. For fiscal 1997,
the average cost of food and paper supplies for a Sonic restaurant, as
reported to the Company by its franchisees, equaled approximately 29.9% of
revenues. The Company believes that food purchasing cooperatives have
allowed Sonic restaurants to avoid menu price increases that otherwise might
have occurred. A planned reduction in the number of food and paper product
distributors to the Sonic chain has improved the ability of the Company to
negotiate more advantageous purchasing terms and to maintain more uniform
products.
COMPANY OPERATIONS
RESTAURANT PERSONNEL. A typical Sonic restaurant employs a manager, an
assistant manager, and approximately 23 hourly employees, most of whom work
part-time. The manager has responsibility for the day-to-day operations of
the restaurant.
The Company initially forms a partnership (or limited liability company
in some cases) with its supervising partners or members, each of whom on
average has the responsibility of overseeing four to six Company-owned
restaurants. Those supervising partners or members derive their income out of
their share of the net profits of the restaurants they supervise. Supervising
partners or members generally may own up to 20% of the restaurants they
supervise.
The Company also employs six regional directors who oversee supervising
partners or members within their respective regions, and the Company has a
Vice President of Operations based in Oklahoma City who oversees the
operations of all Company-owned restaurants.
OWNERSHIP PROGRAM. The Sonic restaurant philosophy stresses an ownership
relationship between restaurant owners and managers, in which most managers
of Company-owned and franchised restaurants own an equity interest in the
restaurant. The Company believes that its ownership structure provides a
substantial incentive for restaurant managers to operate their restaurants
profitably and efficiently.
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Under the ownership program, a separate general partnership or limited
liability company owns and operates each Company-owned restaurant. The
Company, as the general partner or managing member, owns a majority interest
and the managers involved in the day-to-day management and operation of the
restaurant own a minority interest in the partnership or company. Ownership
equity of a typical established Company-owned restaurant generally is
distributed 60% to the Company, 20% to the manager, and 20% to the
supervising partner or member. The Company records other partners' or
members' interests as a minority interest in earnings of restaurant
partnerships on its financial statements. Under the standard partnership or
operating agreement, the Company has the right to purchase the interest of
any other partner or member on short notice. Each supervising and managing
partner or member contributes his or her pro rata portion of all start-up
costs, which include the required franchise fee, opening inventory,
advertising and promotion costs; initial training and insurance costs; and
some amounts for working capital. The amount of capital contribution by a
supervising and managing partner or member for a restaurant typically equals
approximately $10,000 for a 20% interest. Each partnership or company
usually purchases equipment with funds borrowed from the Company at
competitive rates. In most cases, the Company alone guarantees any
third-party lease entered into for the site. The partnerships and companies
distribute available cash flow to the partners or members on a monthly basis
pursuant to the terms of the partnership and operating agreements.
POINT-OF-SALE SYSTEMS. The Company has developed and is implementing a
point-of-sale system in Company-owned restaurants. The Company believes the
point-of-sale system will increase speed and accuracy in order-taking and
pricing and reduce paper work. In the future, the system will have polling
capabilities to allow the Company to obtain current restaurant reporting
information, thereby improving the accuracy and efficiency of store-level
reporting on a next-day basis. The Company believes the system also should
enhance marketing capabilities through the capture of information on
customers and their buying habits with respect to the Company's products. As
of August 31, 1997, the Company had installed the point-of-sale system in all
but two of its Company-owned restaurants.
HOURS OF OPERATION. Sonic restaurants operate seven days a week,
typically from 10:30 a.m. to 11:00 p.m.
COMPANY-OWNED RESTAURANT DATA. The following table provides certain
financial information relating to Company-owned restaurants and the number of
Company-owned restaurants opened and closed during the past five fiscal years.
1997 1996 1995 1994 1993
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Average Sales per
Company-owned Restaurant $649,000 $601,000 $577,000 $558,000 $547,000
Number of Restaurants
Total Open at Beginning of Year 231 178 142 120 91
Newly-Opened and Re-Opened 37 30 31 20 10
Purchased from Franchisees -- 28 6 13 20
Sold or Closed (12) (5) (1) (11) (1)
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Total Open at Year End 256 231 178 142 120
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FRANCHISE PROGRAM
GENERAL. During its more than 40 years in operation, the Sonic system
has produced a large number of successful multi-unit franchisee groups.
Those franchisees continue to develop new restaurants in their franchise
territories either through area development agreements or single site
development. The Company considers its franchisees a vital part of the
Company's continued growth and believes its relationship with its franchisees
is good.
As of August 31, 1997, the Company had 1,424 franchised restaurants
operating in 27 states and the Company had development agreements which
contemplate the opening of 64 additional restaurants during fiscal 1998.
However,
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the Company cannot give any assurance that the Company's franchisees will
achieve that number of new restaurants for fiscal 1998. During fiscal 1997,
the Company's franchisees opened 92 Sonic drive-in restaurants.
FRANCHISE AGREEMENTS. Each Sonic restaurant, including each
Company-owned restaurant, operates under a franchise agreement that provides
for payments to the Company of an initial franchise fee and a graduated
percentage of the gross revenues of the restaurant. In September of 1994,
the Company began offering a new Number 6 License Agreement, which provides
for a franchise fee of $30,000 and an ascending royalty rate beginning at
1.0% of gross revenues and increasing to 5.0% as the level of gross revenues
increases. Pursuant to the terms of existing area development agreements and
the outstanding license option agreements described below, approximately 86%
of all Sonic restaurants opening in fiscal 1998 will open under either the
Number 5 License Agreement (13%) or the Number 5.1 License Agreement (73%).
Those agreements each provide for a franchisee fee of $15,000 and an
ascending royalty rate beginning at 1.0% of gross revenues and increasing to
4.0% as the level of gross revenues increases. For fiscal 1997, the Company's
average royalty rate equaled 2.7%. The Number 5 License Agreement provides
for a term of 15 years, with an option to renew pursuant to the terms of the
then current license agreement. The Number 5.1 License Agreement and the
Number 6 License Agreement provide for a term of 20 years, with one 10-year
renewal option. The Company has the right to terminate any franchise
agreement for a variety of reasons, including a franchisee's failure to make
payments when due or failure to adhere to the Company's policies and
standards. Many state franchise laws limit the ability of the Company to
terminate or refuse to renew a franchise.
Beginning in fiscal year 1999 and continuing through fiscal year 2010, a
total of 886 franchised restaurants currently operating under the Number 4.2
License Agreement will have their royalty rates increase to the same rate as
set forth in the Number 5 License Agreement. In addition, beginning in
fiscal year 2000 and continuing through fiscal year 2010, the terms of the
remaining Number 4 License Agreements will expire and the licensed
restaurants either will cease operations or renew their licenses pursuant to
the terms of the then current license agreement (currently the Number 6
License Agreement). The Company expects that the automatic conversion of the
Number 4.2 License Agreements and the renewals of the expiring Number 4
License Agreements will result in an incremental increase in the Company's
royalty revenues attributable to the change in royalty rate. For the 5-year
period beginning in fiscal year 2000, the Company expects that process to
generate in excess of $10 million in incremental royalty revenue, which will
build in a stair-stepped fashion. The actual amount of revenue will depend on
a number of factors, including (among others) the average unit volumes of the
affected restaurants and the extent to which the expiring Number 4 License
Agreements in fact renew and convert to the Number 6 License Agreement.
DEVELOPMENT AGREEMENTS. The Company uses area development agreements to
facilitate the planned expansion of the Sonic drive-in restaurant chain
through multiple unit development. While existing franchisees continue to
expand on a single restaurant basis, approximately 46% of the new franchised
restaurants opened during fiscal 1997 occurred as a result of then-existing
area development agreements. Each area development agreement gives a
developer the exclusive right to construct, own and operate Sonic restaurants
within a defined area. In exchange, each developer agrees to open a minimum
number of Sonic restaurants in the area within a prescribed time period. If
the developer does not meet the minimum opening requirements, the Company has
the right to terminate the area development agreement and grant a new area
development agreement to other franchisees for the area previously covered by
the terminated area development agreement.
During fiscal 1997, the Company entered into 16 new area development
agreements calling for the opening of 86 Sonic drive-in restaurants during
the next six years. As of August 31, 1997, the Company had a total of 50
area development agreements in effect, calling for the development of 216
additional Sonic drive-in restaurants during the next six years. Of the 55
restaurants scheduled to open during fiscal 1997 under area development
agreements in place at the beginning of that fiscal year, 42 (or 76%) opened
during the period.
Realization by the Company of the expected benefits under various
existing and future area development agreements currently depends and will
continue to depend upon the ability of franchisees to open the minimum number
of restaurants within the time periods required by the agreements. The
financial resources of the developers, as well as
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their experience in managing quick-service restaurant franchises, represent
critical factors in the success of area development agreements. Although the
Company grants area development agreements only to those developers whom the
Company believes possess those qualities, the Company cannot give any
assurances that the future performance by developers will result in the
opening of the minimum number of restaurants contemplated by the development
agreements or reach the compliance rate previously experienced by the Company.
OPTION AGREEMENTS. In connection with the Company's introduction of a
new Number 6 License Agreement in fiscal 1995, the Company offered its
existing franchisees the opportunity to acquire options to purchase the
Number 5.1 License Agreement for new Sonic drive-in restaurants developed by
the franchisee (the "Number 5.1 Options"). The Number 5.1 License Agreement
has a lower initial franchise fee and royalty rate than the Number 6 License
Agreement. All outstanding Number 5.1 Options have terms ending on December
31, 1997, with the right to renew for up to three additional years upon the
payment of $1,000 on each anniversary date of the option. Unlike the area
development agreements described above, the options do not cover any specific
location. The Company currently is not offering additional option agreements
to its franchisees and, as the options expire or the franchisees exercise
them, the number of outstanding options will decrease over time. As of
August 31, 1997, the Company had 163 Number 5.1 Options outstanding.
FRANCHISED RESTAURANT DEVELOPMENT. The Company furnishes each franchisee
with assistance in selecting sites and developing restaurants. Each
franchisee has responsibility for selecting the franchisee's restaurant
locations but must obtain Company approval of each restaurant design and each
location based on accessibility and visibility of the site and targeted
demographic factors, including population, density, income, age and traffic.
The Company provides its franchisees with the physical specifications for the
typical Sonic drive-in restaurants.
FRANCHISEE FINANCING. The Company has entered into an agreement with
Franchise Finance Company of America ("FFCA"), pursuant to which FFCA may
make loans to Sonic franchisees who meet certain underwriting criteria set by
FFCA. Under the terms of the agreement with FFCA, the Company may provide a
guaranty of 10% of the outstanding balance of a loan from FFCA to a Sonic
franchisee. The Company retains the absolute right to determine which loans
it will guarantee and to impose any conditions the Company may deem
appropriate.
The Company also has entered into agreements with NationsBank, N.A. and
STI Credit Corporation, pursuant to which each of those lenders may provide
financing for the Company's franchisees to implement the retrofit of their
existing restaurants. Under the terms of those agreements, the Company has
given each lender a limited guaranty of up to $250,000 with regard to all
loans made pursuant to the terms of each agreement with the lenders.
FRANCHISEE TRAINING. Each franchisee must have at least one individual
working full time at the Sonic drive-in restaurant who has completed the
Sonic Management Development Program before opening or operating the Sonic
drive-in restaurant. The program consists of six weeks of on-the-job
training and one week of classroom development. The program emphasizes food
safety, quality food preparation, quick service, cleanliness of restaurants,
and consistency of service.
FRANCHISEE SUPPORT. In addition to training, advertising and food
purchasing cooperatives, and marketing programs, the Company provides various
other services to its franchisees. Those services include (1) assistance
with quality control through area field representatives, to ensure that each
franchisee consistently delivers high quality food and service; (2)
assistance in selecting sites for new restaurants using demographic data and
studies of traffic patterns; (3) financing through third party sources to
qualified franchisees for purchasing restaurant equipment; and (4) one-stop
shopping for all equipment needed to open a new restaurant through N.
Wasserstrom & Sons, Inc. in Columbus, Ohio. The Company's field services
organization consists of 16 field representatives, five field marketing
representatives, and four real estate directors and managers, all with
responsibility for defined geographic areas. The field representatives
provide operational services and support for the Company's franchisees, while
the field marketing representatives assist the franchisees with point-of-sale
and local marketing programs. The real estate directors and managers assist
the
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franchisees with the identification of trade areas for new restaurants, the
franchisees' selection of sites for their restaurants, and the approval of
those sites by the Company.
FRANCHISE OPERATIONS. All franchisees must operate their Sonic drive-in
restaurants in compliance with the Company's policies, standards and
specifications, including matters such as menu items, materials, supplies,
services, fixtures, furnishings, decor and signs. Each franchisee has full
discretion to determine the prices charged to its customers. All restaurants
must display a Sonic drive-in restaurant sign manufactured in accordance with
Company specifications. In most cases, the Company owns the sign and leases
it to the franchisee and, if the franchisee breaches its franchise agreement,
the Company may remove the sign.
FRANCHISEE ADVISORY COUNCIL. The Company has established a Franchisee
Advisory Council that primarily consists of franchisee representatives. The
Franchisee Advisory Council holds periodic meetings to discuss new marketing
ideas, operations, growth and other relevant issues.
REPORTING. The Company collects weekly and monthly sales and other
operating information from its franchisees. The Company has agreements with
many of its franchisees permitting the Company to debit electronically the
franchisees' bank accounts for the payment of royalties and advertising fund
contributions. That system significantly reduces the resources needed to
process receivables, improves cash flow, and reduces past-due accounts
receivable.
FRANCHISED RESTAURANT DATA. The following table provides certain
financial information relating to franchised restaurants and the number of
franchised restaurants opened, purchased from or sold to the Company, and
closed during the Company's last five fiscal years.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Average Sales Per
Franchised Restaurant $720,000 $657,000 $620,000 $592,000 $568,000
Number of Restaurants:
Total Open at Beginning
of Year 1,336 1,286 1,227 1,154 1,100
New Restaurants 92 81 80 80 82
Sold to the Company -- (28) (6) (13) (20)
Purchased from the Company 5 4 1 10 --
Closed and Terminated,
Net of Re-openings (9) (7) (16) (4) (8)
----- ----- ----- ----- -----
Total Open at Year End 1,424 1,336 1,286 1,227 1,154
----- ----- ----- ----- -----
----- ----- ----- ----- -----
EQUIPMENT SALES
In fiscal 1996, the Company sold its restaurant equipment division and
discontinued that operation. As a result, the Company had no revenues from
equipment sales during fiscal 1997, compared to approximately $3.7 million
during fiscal 1996 (an amount equal to 2.5% of the Company's total
consolidated revenues) and approximately $9.1 million (or 7.3% of total
consolidated revenues) for fiscal 1995.
COMPETITION
The Company competes in the quick-service restaurant industry, a highly
competitive industry in terms of price, service, restaurant location, and
food quality, and an industry often affected by changes in consumer trends,
economic conditions, demographics, traffic patterns, and concerns about the
nutritional content of quick-service foods. The Company competes on the basis
of speed and quality of service, method of food preparation (made-to-order),
food quality, signature food items, and monthly promotions. The quality of
service, featuring the Sonic carhops, constitutes one of the Company's
primary marketable points of difference with the competition. Several major
chains, many of
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which have substantially greater financial resources than the Company,
dominate the quick-service restaurant industry. A significant change in
pricing or other marketing strategies by one or more of those competitors
could have an adverse impact on the Company's sales, earnings and growth. In
selling franchises, the Company also competes with many franchisors of
fast-food and other restaurants and other business opportunities.
EMPLOYEES
As of August 31, 1997, the Company had 198 full-time employees. No
collective bargaining agreement covers any of its employees. Company-owned
restaurants (operated as separate partnerships or limited liability
companies) employed 692 full-time and 7,134 part-time employees as of August
31, 1997, none of whom constitute employees of the Company. The Company
believes that it has good labor relations with its employees.
TRADEMARKS AND SERVICE MARKS
The Company, through a wholly-owned subsidiary, owns numerous trademarks
and service marks. The Company has registered many of those marks, including
the "Sonic" logo and trademark, with the United States Patent and Trademark
Office. The Company believes that its trademarks and service marks have
significant value and play an important role in its marketing efforts.
GOVERNMENT REGULATION
The Company must comply with regulations adopted by the Federal Trade
Commission (the "FTC") and with several state laws that regulate the offer
and sale of franchises. The Company also must comply with a number of state
laws that regulate certain substantive aspects of the franchisor-franchisee
relationship. The FTC's Trade Regulation Rule on Franchising (the "FTC
Rule") requires that the Company furnish prospective franchisees with a
franchise offering circular containing information prescribed by the FTC Rule.
State laws that regulate the franchisor-franchisee relationship presently
exist in a substantial number of states. Those laws regulate the franchise
relationship, for example, by requiring the franchisor to deal with its
franchisees in good faith, by prohibiting interference with the right of free
association among franchisees, by regulating discrimination among franchisees
with regard to charges, royalties or fees, and by restricting the development
of other restaurants within certain proscribed distances from existing
franchised restaurants. Those laws also restrict a franchisor's rights with
regard to the termination of a franchise agreement (for example, by requiring
"good cause" to exist as a basis for the termination), by requiring the
franchisor to give advance notice and the opportunity to cure the default to
the franchisee, and by requiring the franchisor to repurchase the
franchisee's inventory or provide other compensation upon termination. To
date, those laws have not precluded the Company from seeking franchisees in
any given area and have not had a significant effect on the Company's
operations.
Each Sonic restaurant must comply with regulations adopted by federal
agencies and with licensing and other regulations enforced by state and local
health, sanitation, safety, fire and other departments. Difficulties or
failures in obtaining the required licenses or approvals can delay and
sometimes prevent the opening of a new restaurant.
Sonic restaurants must comply with federal and state environmental
regulations, but those regulations have not had a material effect on their
operations. More stringent and varied requirements of local governmental
bodies with respect to zoning, land use, and environmental factors can delay
and sometimes prevent development of new restaurants in particular locations.
The owners of Sonic restaurants must comply with the Fair Labor Standards
Act and various state laws governing various matters, such as minimum wages,
overtime and other working conditions. Significant numbers of the food
service personnel in Sonic restaurants receive compensation at rates related
to the federal minimum wage and, accordingly, increases in the minimum wage
will increase labor costs at those locations.
9
<PAGE>
The owners of Sonic restaurants also must comply with the provisions of
the Americans with Disabilities Act (the "ADA"), which requires the owners to
provide reasonable accommodation for employees with disabilities and to make
their restaurants accessible to customers with disabilities. The Company has
made certain modifications to the design and construction of its restaurants
in order to comply with the ADA. However, the ADA has not had a material
impact on the Company, primarily because of a drive-in restaurant's inherent
accessibility to all customers.
Many owners of Sonic restaurants also must comply with the Family Medical
Leave Act (the "Family Leave Act"), which covers employers of 50 or more
persons at locations within any 75-mile radius. The Family Leave Act
requires covered employers to grant eligible employees up to 12 weeks of
unpaid leave for family and medical reasons and to reinstate the employee to
the same or an equivalent position at the end of the leave. An employee may
take leave for the birth, adoption, or foster care of a child; for any
serious health condition of a spouse, sibling, child or parent; or for an
employee's own serious health condition.
ITEM 2. PROPERTIES
- ------- ----------
Of the 256 Company-owned restaurants operating as of August 31, 1997, the
Company operated 119 of them on property leased from third parties and 137 of
them on property owned by the Company. The leases expire on dates ranging
from 1998 to 2017, with the majority of the leases providing for renewal
options. All leases provide for specified periodic rental payments, and some
leases call for additional rentals based on sales volume. Most leases
require the Company to maintain the property and pay the cost of insurance
and taxes.
The Company has its principal office located in approximately 50,000
square feet of leased office space in Oklahoma City, Oklahoma, at an
effective annual rental rate of $9.15 per square foot. The lease for that
property expires in October of 2002. The Company also leases approximately
10,000 square feet of warehouse space in Oklahoma City, Oklahoma, at an
annual rental rate of $3.75 per square foot. The Company believes that its
leased office and warehouse space provides an adequate amount of space and
will meet the Company's needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
Except as set forth below, the Company does not have any material legal
proceedings pending against the Company, any of its subsidiaries, or any of
their properties.
In July of 1996, the Company filed an appeal with the Texas Supreme Court
in a case involving L & G Restaurants, Inc., Lucky Ott, and William Owen.
The appeal seeks to reverse the ruling of the court of appeals which
reinstated a jury verdict against Sonic Land Corporation for tortious
interference with contract in that case. The damages, as originally 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. Owen, as well as punitive damages of
$500,000 for Mr. Ott and $500,000 for Mr. Owen. The appellate court affirmed
that part of the previous judgment notwithstanding the verdict which threw
out the jury's original finding that Sonic Land Corporation 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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
The Company did not submit any matter during the fourth quarter of the
Company's last fiscal year to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise.
10
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
- -------- ---------------------------------
IDENTIFICATION OF EXECUTIVE OFFICERS
The following table identifies the executive officers of the Company.
NAME AGE POSITION OFFICER SINCE
- ---- --- -------- -------------
J. Clifford Hudson 43 President, Chief Executive June of 1985
Officer and Director
Kenneth L. Keymer 49 President of Sonic Industries Inc. August of 1996
Michael R. Shumsky 46 President of Sonic Restaurants, October of 1994
Inc.
Pattye T. Moore 39 Senior Vice President of Marketing June of 1992
and Brand Development
Ronald L. Matlock 46 Vice President, General Counsel April of 1996
and Secretary
W. Scott McLain 35 Vice President of Finance, April of 1996
Treasurer and Chief Financial
Officer
Stephen C. Vaughan 31 Vice President and Controller January of 1996
Diane C. Dolan 35 Vice President of Administration August of 1996
and Corporate Human Resources
Donald E. Foringer 45 Vice President of Information August of 1997
Technology
Stanley S. Jeska 57 Vice President of Franchise September of 1993
Development of Sonic Industries Inc.
Andrew G. Ritger, Jr. 40 Vice President of Purchasing of January of 1996
Sonic Industries Inc.
Warner Van Sciver 58 Vice President of Franchise April of 1988
Relations of Sonic Industries Inc.
Frank B. Young, Jr. 46 Vice President of Operations of October of 1994
Sonic Restaurants, Inc.
BUSINESS EXPERIENCE
The following material sets forth the business experience of the
executive officers of the Company for at least the past five years.
J. Clifford Hudson has served as President and Chief Executive Officer of
the Company since April of 1995 and has served as a director of the Company
since August of 1993. He served as President and Chief Operating Officer of
the Company from August of 1994 until April of 1995, and he served as
Executive Vice President and Chief Operating Officer from August of 1993
until August of 1994. From August of 1992 until August of 1993, Mr. Hudson
served as Senior Vice President and Chief Financial Officer of the Company.
Since October of 1994, Mr. Hudson has served as Chairman of the Board of
Securities Investor Protection Corporation, the federally-chartered
organization which serves as the insurer of customer accounts with brokerage
firms.
Kenneth L. Keymer has served as President and a director of Sonic
Industries Inc., the Company's franchise operations subsidiary, since August
of 1996. From June of 1994 to August of 1996, Mr. Keymer served as Executive
Vice President of Operations for the Memphis, Tennessee region of Perkins
Family Restaurants, a subsidiary of Tennessee Restaurant Corporation of
Itasca, Illinois. From March of 1993 to June of 1994, Mr. Keymer served as
Senior Vice President of Operations for the then Chicago-based Boston
Chicken, Inc. From August of 1990 to March of 1993, he served as the Zone
Vice President in Chicago, Illinois, for Taco Bell.
11
<PAGE>
Michael R. Shumsky has served as President and a director of Sonic
Restaurants, Inc., the Company's restaurant operations subsidiary, since
October of 1994. Prior to joining the Company, Mr. Shumsky spent 15 years
with Taco Bell, serving most recently as a Zone Vice President in Atlanta,
Georgia.
Pattye T. Moore has served as Senior Vice President of Marketing and
Brand Development of the Company since April of 1996. From August of 1995
until April of 1996, Mrs. Moore served as Senior Vice President of Marketing
and Brand Development for Sonic Industries Inc. and served as Vice President
of Marketing of Sonic Industries Inc. from June of 1992 to August of 1995.
Ronald L. Matlock has served as Vice President, General Counsel and
Secretary of the Company since April of 1996. Prior to joining the Company,
Mr. Matlock practiced law from January of 1995 to April of 1996 with the
Matlock Law Firm in Oklahoma City, Oklahoma, concentrating in corporate,
securities and franchise law. From November of 1987 to December of 1994, Mr.
Matlock was a shareholder and director of the law firm of Hastie & Kirschner
in Oklahoma City, Oklahoma.
W. Scott McLain has served as Vice President of Finance, Chief Financial
Officer, and Treasurer of the Company since August of 1997. From April of
1996 to August of 1997, he served as Vice President of Finance and Treasurer
of the Company. From August of 1993 until joining the Company, Mr. McLain
served as Treasurer of Stevens International, Inc. in Fort Worth, Texas.
From March of 1991 until August of 1993, he served as a Manager - Corporate
Recovery for Price Waterhouse in Dallas, Texas.
Stephen C. Vaughan has served as Vice President and Controller of the
Company since August of 1997 and as Controller of the Company since January
of 1996. Mr. Vaughan joined the Company in March of 1992 as an internal
auditor and became Assistant Controller of the Company in March of 1993.
Diane C. Dolan has served as Vice President of Administration and
Corporate Human Resources of the Company since August of 1996. Ms. Dolan
served as a human resources consultant for Sonic Restaurants, Inc. from
January of 1995 until joining Sonic Restaurants, Inc. as Director of Field
Human Resources in July of 1995. From November of 1993 until July of 1995,
Ms. Dolan served as a human resources consultant for the American Red Cross
in St. Louis, Missouri. From June of 1993 to November of 1993, Ms. Dolan
served as a co-instructor of cross-cultural/global management training
programs as part of a graduate internship with Training Management
Corporation in Princeton, New Jersey. From June of 1991 until June of 1993,
Ms. Dolan attended school full time at American Graduate School of
International Management in Glendale, Arizona.
Donald E. Foringer has served as Vice President of Information Technology
since August of 1997. Prior to joining the Company, Mr. Foringer served as
the Director of Information Services for Del Taco, Inc. of Laguna Hills,
California. From May of 1992 until joining Del Taco, Inc. in January of 1993,
Mr. Foringer served as a general partner of Novare Group of Newport Beach,
California, a retail systems consulting firm.
Stanley S. Jeska has served as Vice President of Franchise Development of
Sonic Industries Inc. since July of 1996 and also served in that capacity
from September of 1993 until August of 1994. Mr. Jeska served as Vice
President of Corporate Development for Sonic Restaurants, Inc. from August of
1994 until July of 1996. From April of 1990 until joining the Company, Mr.
Jeska founded and served as President of Corporate Real Estate Advisors of
Worthington, Ohio, a management consultant firm.
Andrew G. Ritger, Jr. has served as Vice President of Purchasing of Sonic
Industries Inc. since January of 1996. From May of 1993 until joining the
Company, Mr. Ritger served as Vice President of Purchasing of Fast Food
Merchandisers, Inc., a subsidiary of Hardees, Inc. of Rocky Mount, North
Carolina. From August of 1987 until May of 1993, he served as General
Manager of Logistics of H.J. Heinz, Inc. in Nashville, Tennessee.
12
<PAGE>
Warner L. Van Sciver has served as Vice President of Franchise Relations
for Sonic Industries Inc. since April of 1997. From April of 1988 to April
of 1997, Mr. Van Sciver served as Vice President of Franchise Services for
Sonic Industries Inc.
Frank B. Young, Jr. has served as Vice President of Operations of Sonic
Restaurants, Inc. since October of 1994. From April of 1993 until joining
the Company, Mr. Young served as the President and sole shareholder of
Wendco, Inc. of Madison, Wisconsin, a business consulting firm. From October
of 1989 through March of 1993, Mr. Young engaged in business as a franchisee
for three Wendy's restaurants in the Madison area.
PART II
-------
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- ------ ---------------------------------------------------------------------
MARKET INFORMATION
The Company's common stock trades on the Nasdaq National Market
("Nasdaq") under the symbol "SONC." The following table sets forth the high
and low closing bids for the Company's common stock during each fiscal
quarter within the two most recent fiscal years as reported on Nasdaq.
QUARTER ENDED HIGH LOW QUARTER ENDED HIGH LOW
------------- ---- --- ------------- ---- ---
November 30, 1995 $23.875 $20.125 November 30, 1996 $25.875 $21.000
February 28, 1996 21.500 15.062 February 29, 1997 25.375 17.625
May 31, 1996 24.062 18.750 May 31, 1997 20.250 12.625
August 31, 1996 25.000 20.875 August 31, 1997 25.000 17.375
STOCKHOLDERS
As of November 7, 1997, the Company had 279 record holders of its common
stock. As of that date, the Company had approximately 2,600 stockholders,
including beneficial owners holding shares in street or nominee names.
DIVIDENDS
The Company did not pay any dividends on its common stock during its two
most recent fiscal years and does not intend to pay any dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following table sets forth selected financial data regarding the
financial condition and operating results of the Company. One should read
the following information in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operation," below, and the
Company's Consolidated Financial Statements included elsewhere in this report.
13
<PAGE>
<TABLE>
Year ended August 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales by Company-owned restaurants $152,739 $120,700 $91,438 $72,629 $58,228
Franchised restaurants:
Franchise fees 1,702 1,453 1,409 1,144 1,513
Franchise royalties 26,764 23,315 20,392 14,703 12,872
Equipment and sign sales - 3,743 9,076 9,602 9,797
Other 2,813 1,919 1,445 1,626 1,380
- ----------------------------------------------------------------------------------------------------------
Total revenues 184,018 151,130 123,760 99,704 83,790
- ----------------------------------------------------------------------------------------------------------
Cost of restaurant sales 112,588 92,663 72,275 56,966 45,961
Cost of equipment and sign sales - 3,101 7,354 7,775 8,082
Selling, general and administrative 19,318 14,498 13,260 10,918 9,872
Depreciation and amortization 12,320 8,896 5,910 4,165 2,918
Minority interest in earnings of
restaurant partnerships 7,558 4,806 3,259 2,723 2,640
Provision for impairment of long-lived assets 266 8,627 71 4,153 246
- ----------------------------------------------------------------------------------------------------------
Total expenses 152,050 132,591 102,129 86,700 69,719
- ----------------------------------------------------------------------------------------------------------
Income from operations 31,968 18,539 21,631 13,004 14,071
Interest expense 2,154 1,184 1,823 1,084 799
Interest income (596) (708) (409) (308) (383)
- ----------------------------------------------------------------------------------------------------------
Income before income taxes $ 30,410 $ 18,063 $ 20,217 $12,228 $13,655
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Net income $ 19,082 $ 11,244 $ 12,484 $ 7,643 $ 8,644
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Net income per share $ 1.42 $ 0.84 $ 1.05 $ 0.64 $ 0.72
- ----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 13,434 13,449 11,842 11,954 11,970
BALANCE SHEET DATA:
Working capital $ 3,509 $ 3,491 $ 4,249 $ 7,314 $ 7,383
Property, equipment and capital leases, net 136,522 100,505 70,171 40,979 31,695
Total assets 184,841 147,444 105,331 76,982 63,517
Obligations under capital leases (including
current portion) 9,183 9,808 6,274 6,823 5,836
Long-term debt (including current portion) 37,633 12,401 24,902 6,419 1,243
Stockholders' equity 118,174 109,683 63,357 54,377 46,750
</TABLE>
14
<PAGE>
ITEM 7. 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 1995 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 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
($ IN THOUSANDS)
YEAR ENDED AUGUST 31,
--------------------------
1997 1996 1995
------ ------ ------
INCOME STATEMENT DATA:
Revenues:
Sales by Company-owned restaurants 83.0% 79.9% 73.9%
Franchised restaurants:
Franchise fees and royalties 15.5 16.4 17.6
Equipment and sign sales - 2.5 7.3
Other 1.5 1.2 1.2
------ ------ ------
100.0% 100.0% 100.0%
------ ------ ------
------ ------ ------
Costs and expenses:
Company-owned restaurants (1) 73.7% 76.8% 79.0%
Equipment and sign sales (2) - 82.8 81.0
Selling, general and administrative 10.5 9.6 10.7
Depreciation and amortization 6.7 5.9 4.8
Minority interest in earnings of restaurant
partnerships (1) 4.9 4.0 3.6
Provision for impairment of long-lived assets .1 5.7 .1
Income from operations 17.4 12.3 17.5
Net interest expense .8 .3 1.1
Net income 10.4% 7.4% 10.1%
15
<PAGE>
----------------------------------
1997 1996 1995
---------- -------- --------
RESTAURANT OPERATING DATA:
Company-owned restaurants:
Core markets 165 158 128
Developing markets 91 73 50
---------- -------- --------
All markets (3) 256 231 178
Franchised restaurants (3) 1,424 1,336 1,286
---------- -------- --------
Total 1,680 1,567 1,464
---------- -------- --------
---------- -------- --------
System-wide sales $1,142,636 $984,784 $880,521
Percentage increase (4) 16.0% 11.8% 13.4%
Average sales per restaurant:
Company owned $649 $601 $577
Franchise 720 657 620
System-wide 707 648 615
Change in comparable restaurant sales (5):
Company-owned restaurants:
Core markets 8.7% 5.9% 1.9%
Developing markets (2.1) (1.0) 1.9
---------- -------- --------
All markets 6.3% 4.9% 1.9%
Franchise 8.5 5.1 3.9
System-wide 8.0 5.0 3.6
- ----------------
(1) As a percentage of sales by Company-owned restaurants.
(2) As a percentage of equipment and sign sales.
(3) Number of restaurants open at end of year. (The allocation of Company-owned
restaurants by core and developing markets differs from the table on page 2
because that table sets forth the numbers by state rather than by television
market.)
(4) Represents percentage increase from the comparable period in the prior year.
(5) Represents percentage increase for restaurants open in both the reported and
prior years.
COMPARISON OF FISCAL 1997 TO FISCAL 1996. Total revenues increased 21.8%
to $184.0 million in fiscal 1997 from $151.1 million in fiscal 1996. Sales
by Company-owned restaurants increased 26.5% to $152.7 million in fiscal 1997
from $120.7 million in fiscal 1996. Of the $32.0 million increase in sales
by Company-owned restaurants, $25.8 million was due to the net addition of 78
Company-owned restaurants since the beginning of fiscal 1996. Average sales
increases of approximately 6.3% by stores open the full reporting periods of
fiscal 1997 and fiscal 1996 accounted for $6.2 million of the increase.
Franchise fee revenues increased to $1.7 million during fiscal 1997 as
compared to $1.5 million during fiscal 1996, primarily resulting from the
opening of 92 new franchise restaurants in fiscal 1997 versus 81 in fiscal
1996. Franchise royalties increased 14.8% to $26.8 million in fiscal 1997
compared to $23.3 million in fiscal 1996. Increased sales by comparable
franchised restaurants resulted in an increase in royalties of approximately
$2.3 million and resulted from the franchise same store sales growth of 8.5%
over fiscal 1996. Additional franchise restaurants in operation resulted in
an increase in royalties of $1.1 million. The decrease in equipment sales was
due to the sale of the restaurant equipment division in fiscal 1996. The
increase in other revenues of approximately $0.9 million resulted primarily
from the 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 73.7% in fiscal 1997, compared to 76.8% in fiscal 1996.
Management believes the improvement in restaurant operating margins resulted
from (1) a 3.5% average price increase implemented October 1, 1996, along
with a 2.5% average price increase implemented during the second quarter of
fiscal 1996, (2) reductions in food and packaging costs due to consolidation
of purchasing distribution functions and renegotiation of pricing terms, and
(3) improved operational
16
<PAGE>
cost controls through the implementation of a standard ideal food cost
program in fiscal 1996. The improvements mentioned above were partially
offset by a minimum wage increase which was effective on October 1, 1996, and
an increase in marketing expenditures, which reflects the Company's
commitment to increased media penetration through its system of advertising
cooperatives. Another minimum wage increase became effective September 1,
1997 and is expected to have a negative impact on payroll and employee
benefits expense of approximately one percentage point, as a percentage of
sales by Company-owned restaurants. Minority interest in earnings of
restaurant partnerships increased, as a percentage of sales by Company-owned
restaurants, to 4.9% in fiscal 1997 as compared to 4.0% in fiscal 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 10.5% in fiscal 1997 compared with 9.6% in fiscal
1996. This increase resulted primarily from a provision for expected
litigation costs of approximately $1 million recorded in fiscal 1997.
Management expects selling, general and administrative expenses to decline in
future periods, as a percentage of total revenues, 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 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 $3.4 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 1998.
Income from operations increased to $32.0 million from $18.5 million in
fiscal 1996. Excluding the provision for adoption of a new accounting
standard recorded in fiscal 1996 and discussed below, income from operations
increased 18.1%.
Net interest expense increased to $1.6 million in fiscal 1997 from $0.5
million in fiscal 1996. This increase was the result of additional
borrowings to partially fund the Company's capital additions of $48.6 million
and stock repurchases of $11.4 million. The Company expects interest expense
to continue to increase in fiscal 1998.
Provision for income taxes reflects an effective federal and state tax
rate of 37.25% for fiscal 1997, compared to 37.75% for the comparable period
in fiscal 1996. Net income for the period increased 15.2% to $19.1 million
and earnings per share increased 15.4% to $1.42, excluding the after-tax
effect of the provision for adoption of a new accounting standard recorded in
fiscal 1996.
COMPARISON OF FISCAL 1996 TO FISCAL 1995. Total revenues increased 22.1%
to $151.1 million in fiscal 1996 from $123.8 million in fiscal 1995. Sales
by Company-owned restaurants increased 32.0% to $120.7 million in fiscal 1996
from $91.4 million in fiscal 1995. Of the $29.3 million increase, $25.3
million was due to the net addition of 89 Company-owned restaurants since the
beginning of fiscal 1995. Average sales increases of approximately 4.9% by
stores open the full reporting periods of fiscal 1996 and fiscal 1995
accounted for $4.0 million of the increase. Franchise fee revenues increased
to $1.5 million during fiscal 1996 as compared to $1.4 million during fiscal
1995. Franchise royalties increased 14.3% to $23.3 million in fiscal 1996,
compared to $20.4 million in fiscal 1995. Increased sales by comparable
franchised restaurants resulted in an increase in royalties of approximately
$1.2 million and resulted from the franchise same store sales growth of 5.1%
over fiscal 1995. Approximately $1.0 million of the $2.9 million increase
resulted from the progressive nature of the Company's franchise agreements
that require a higher royalty percentage as average monthly sales volumes
increase. Additional franchise restaurants in operation resulted in an
increase in royalties of $0.7 million. Restaurant equipment sales decreased
58.8% to $3.7 million in fiscal 1996 from $9.1 million in fiscal 1995,
because of the sale of the restaurant equipment division in the second
quarter of fiscal 1996.
17
<PAGE>
Restaurant cost of operations, as a percentage of sales by Company-owned
restaurants, was 76.8% in fiscal 1996, compared to 79.0% in fiscal 1995.
Management believes the improvement in restaurant operating margins resulted
from (1) a 2.5% average price increase implemented during the second quarter
of fiscal 1996, (2) reductions in the percentage of promotional discounting
from standard menu prices, as a percentage of sales, of approximately 10%,
(3) reductions in cost of food and paper items due to declining beef prices
and consolidation of purchasing distribution functions, and (4) improved
operational cost controls through the implementation of a standard ideal food
cost program. The improvements mentioned above were partially offset by an
increase in marketing expenditures which reflects the Company's commitment
to increased media penetration through its system of advertising
cooperatives. 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 4.0% in fiscal 1996 as compared to 3.6% in
fiscal 1995. This increase occurred primarily due to the improvements in
operating margins discussed above.
Selling, general and administrative expenses, as a percentage of total
revenues, decreased to 9.6% in fiscal 1996 compared with 10.7% in fiscal
1995. That decrease occurred as a result of the increase in the number of
Company-owned restaurants. Company-owned restaurants require a lower level
of selling, general and administrative expenses 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 $3.0 million due to the
purchase of buildings and equipment for new and existing restaurants and
corporate furniture and information systems upgrades.
Effective June 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and Assets To Be Disposed Of" (SFAS 121). The provision for adoption
of SFAS 121 was $8.5 million ($5.3 million after-tax or $.39 per share). For
an additional explanation of this provision, see Note 2 in the Notes To
Consolidated Financial Statements.
Income from operations decreased to $18.5 million from $21.6 million in
fiscal 1995. Excluding the provision for impairment of long-lived assets
discussed above, income from operations increased 25.2% to $27.1 million.
Net interest expense decreased to $0.5 million in fiscal 1996 from $1.4
million in fiscal 1995. This decrease was the result of the pay down on the
revolving credit facility with the proceeds from a secondary stock offering,
as well as increased interest income from the investment of excess offering
proceeds during the year.
Provision for income taxes reflects an effective federal and state tax
rate of 37.75% for fiscal 1996, compared to 38.25% for the comparable period
in fiscal 1995. Net income for the period increased 32.7% to $16.6 million
and earnings per share increased 17.1% to $1.23, excluding the after-tax
effect of the provision for impairment of long-lived assets discussed above.
LIQUIDITY AND SOURCES OF CAPITAL
During fiscal 1997, the Company opened 37 new restaurants, closed seven
restaurants, and sold five restaurants to franchisees. The Company funded
total capital additions for fiscal 1997 of $48.6 million (which included the
cost of newly-opened restaurants, restaurants under construction, new
furniture and equipment for existing restaurants and corporate use)
internally from cash generated by operating activities, through borrowings
under the Company's line of credit and through the use of capital leases.
During fiscal 1997, the Company elected to own the real estate on 34 of the
37 newly-constructed restaurants. The Company expects to own the land and
building for approximately 80% of its future newly-constructed restaurants.
In addition to the capital expenditures mentioned above, the Company
repurchased 799,500 shares of common stock for approximately $11.4 million
18
<PAGE>
during fiscal 1997 with funds from the Company's line of credit. The Company
may purchase additional shares of its common stock in the future when
appropriate and justified by market conditions at the time.
In June 1997, the Company entered into an agreement with a group of banks
to increase its existing $60 million line of credit to $80 million. The
Company will use the line of credit to finance the opening of
newly-constructed restaurants, acquisitions of existing restaurants and for
other general corporate purposes. As of August 31, 1997, the Company's
outstanding borrowings under the line of credit were $37 million as well as
$0.1 million in outstanding letters of credit. The available line of credit
as of August 31, 1997 was $42.9 million. As of August 31, 1997, the
Company's total cash balance of $7.3 million reflected the impact of the line
of credit activity, the treasury stock purchases, and capital expenditures
mentioned above.
The Company expects capital expenditures of approximately $50 million in
fiscal 1998, excluding potential acquisitions. These capital expenditures
are primarily for the development of additional Company-owned stores,
remodeling of Company-owned stores and enhancements to existing financial and
operating information systems. The Company expects to fund these 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 be sufficient to 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
fiscal 1997, however, Company-owned restaurants increased prices due
primarily to higher labor costs resulting from increases in the federal
minimum wage.
SEASONALITY
The Company does not expect seasonality to affect its operations in a
materially adverse manner. The Company's results during its second quarter,
comprising the months of December, January and February, will generally be
lower than its other quarters due to the climate of the locations of a number
of its restaurants.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The Company has included the financial statements and supplementary
financial information required by this item immediately following Part IV of
this report and hereby incorporates by reference the relevant portions of
those statements and information into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------- -----------------------------------------------------------------
No disagreements between the Company and its accountants have occurred
within the 24-month period prior to the date of the Company's most recent
financial statements.
PART III
Except for the information on the Company's executive officers set forth
under Item 4A of Part I of this report, the Company hereby incorporates by
reference the information required by Part III of this report from the
definitive proxy statement which the Company must file with the Securities
and Exchange Commission in connection with the Company's annual meeting of
stockholders following the fiscal year ended August 31, 1997.
19
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
FINANCIAL STATEMENTS
The following consolidated financial statements of the Company appear
immediately following this Item 14:
Pages
-----
Report of Independent Auditors F-1
Consolidated Balance Sheets at August 31, 1997 and 1996 F-2
Consolidated Statements of Income for each of the three years
in the period ended August 31, 1997 F-4
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended August 31, 1997 F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended August 31, 1997 F-6
Notes to Consolidated Financial Statements F-8
FINANCIAL STATEMENT SCHEDULES
The Company has included the following schedules immediately following
this Item 14:
Page
----
Schedule II - Valuation and Qualifying Accounts F-29
The Company has omitted all other schedules because the conditions
requiring their filing do not exist or because the required information
appears in the Company's Consolidated Financial Statements, including the
notes to those statements.
EXHIBITS
The Company has filed the exhibits listed below with this report. The
Company has marked all employment contracts and compensatory plans or
arrangements with an asterisk (*).
3.01. Certificate of Incorporation of the Company, which the Company
hereby incorporates by reference from Exhibit 3.1 to the
Company's Form S-1 Registration Statement No. 33-37158.
3.02. Bylaws of the Company, which the Company hereby incorporates by
reference from Exhibit 3.2 to the Company's Form S-1 Registration
Statement No. 33-37158.
3.03. Certificate of Designations of Series A Junior Preferred Stock,
which the Company hereby incorporates by reference from Exhibit
99.1 to the Company's Form 8-K filed on June 17, 1997.
3.04. Rights Agreement, which the Company hereby incorporates by
reference from Exhibit 99.1 to the Company's Form 8-K filed on
June 17, 1997.
4.01. Specimen Certificate for Common Stock, which the Company hereby
incorporates by reference from Exhibit 4.01 to the Company's Form
10-K for the fiscal year ended August 31, 1995.
20
<PAGE>
4.02. Specimen Certificate for Rights, which the Company hereby
incorporates by reference from Exhibit 99.1 to the Company's Form
8-K filed on June 17, 1997.
10.01. Form of Sonic Industries Inc. License Agreement (the Number 4
License Agreement), which the Company hereby incorporates by
reference from Exhibit 10.1 to the Company's Form S-1
Registration Statement No. 33-37158.
10.02. Form of Sonic Industries Inc. License Agreement (the Number 5
License Agreement), which the Company hereby incorporates by
reference from Exhibit 10.2 to the Company's Form S-1
Registration Statement No. 33-37158.
10.03. Form of Sonic Industries Inc. License Agreement (the Number 4.2
License Agreement and Number 5.1 License Agreement), which the
Company hereby incorporates by reference from Exhibit 10.03 to
the Company's Form 10-K for the fiscal year ended August 31,
1994.
10.04. Form of Sonic Industries Inc. License Agreement (the Number 6
License Agreement), which the Company hereby incorporates by
reference from Exhibit 10.04 to the Company's Form 10-K for the
fiscal year ended August 31, 1994.
10.05. Form of Sonic Industries Inc. Area Development Agreement, which
the Company hereby incorporates by reference from Exhibit 10.05
to the Company's Form 10-K for the fiscal year ended August 31,
1995.
10.06. Form of Sonic Industries Inc. Sign Lease Agreement, which the
Company hereby incorporates by reference from Exhibit 10.4 to the
Company's Form S-1 Registration Statement No. 33-37158.
10.07. Form of General Partnership Agreement, Limited Liability Company
Operating Agreement, Partnership Master Agreement, and Limited
Liability Company Master Agreement.
10.08. 1991 Sonic Corp. Stock Option Plan, which the Company hereby
incorporates by reference from Exhibit 10.5 to the Company's Form
S-1 Registration Statement No. 33-37158.*
10.09. 1991 Sonic Corp. Stock Purchase Plan, which the Company hereby
incorporates by reference from Exhibit 10.6 to the Company's Form
S-1 Registration Statement No. 33-37158.*
10.10. 1991 Sonic Corp. Directors' Stock Option Plan, which the Company
hereby incorporates by reference from Exhibit 10.08 to the
Company's Form 10-K for the fiscal year ended August 31, 1991.*
10.11. Sonic Corp. Savings and Profit Sharing Plan, which the Company
hereby incorporates by reference from Exhibit 10.8 to the
Company's Form S-1 Registration Statement No. 33-37158.*
10.12. Net Revenue Incentive Plan, which the Company hereby incorporates
by reference from Exhibit 10.19 to the Company's Form S-1
Registration Statement No. 33-37158.*
10.13. Form of Indemnification Agreement for Directors, which the
Company hereby incorporates by reference from Exhibit 10.7 to the
Company's Form S-1 Registration Statement No. 33-37158.*
10.14. Form of Indemnification Agreement for Officers, which the Company
hereby incorporates by reference from Exhibit 10.14 to the
Company's Form 10-K for the fiscal year ended August 31, 1995.*
10.15. Sonic Corp. 1995 Stock Incentive Plan, which the Company hereby
incorporates by reference from Exhibit 10.15 to the Company's
Form 10-K for the fiscal year ended August 31, 1996.*
21
<PAGE>
10.16. Form of Employment Agreement and Schedule of Material Differences
for the Executive Officers of the Company.*
10.17. Loan Agreement with Texas Commerce Bank National Association
dated July 31, 1995, which the Company hereby incorporates by
reference from Exhibit 10.26 to the Company's Form 10-K for the
fiscal year ended August 31, 1995.
10.18. First Amendment to Loan Agreement with Texas Commerce Bank
National Association, which the Company hereby incorporates by
reference from Exhibit 10.18 to the Company's Form 10-K for the
fiscal year ended August 31, 1996.
10.19. Second Amendment to Loan Agreement with Texas Commerce Bank
National Association, which the Company hereby incorporates by
reference from Exhibit 10.19 to the Company's Form 10-K for the
fiscal year ended August 31, 1996.
10.20. Third Amendment to Loan Agreement with Texas Commerce Bank
National Association, which the Company hereby incorporates by
reference from Exhibit 10.01 to the Company's Form 10-Q for the
fiscal quarter ended May 31, 1997.
21.01. Subsidiaries of the Company, which the Company hereby
incorporates by reference from Exhibit 21.01 to the Company's
Form 10-K for the fiscal year ended August 31, 1996.
23.01. Consent of Independent Auditors.
24.01. Power of Attorney.
27.01. Financial Data Schedule
REPORTS ON FORM 8-K
The Company filed a Form 8-K on June 17, 1997, to report the declaration
of a dividend distribution of one right for each outstanding share of common
stock of the Company. Upon the occurrence of certain specified events, each
right entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series A Junior Preferred Stock, par value $.01
per share, at a price of $85 per one-one thousandth share, subject to
adjustment. The description and terms of the rights appear in the Rights
Agreement listed above as Exhibit 3.04.
22
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Sonic Corp.
We have audited the accompanying consolidated balance sheets of Sonic Corp. as
of August 31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended August 31, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sonic Corp. at
August 31, 1997 and 1996, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended August 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 2 to the accompanying consolidated financial statements, in
fiscal year 1996 Sonic Corp. changed its method of accounting for impairment of
long-lived assets by adopting Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
October 17, 1997
F-1
<PAGE>
Sonic Corp.
Consolidated Balance Sheets
AUGUST 31,
1997 1996
---------------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 7,334 $ 7,706
Accounts and notes receivable, net (NOTE 4) 5,890 5,229
Refundable income taxes 2,489 -
Net investment in direct financing and
sales-type leases (NOTE 6) 856 783
Inventories 1,239 1,868
Deferred income taxes (NOTE 11) 100 110
Prepaid expenses and other 791 481
---------------------
Total current assets 18,699 16,177
Notes receivable, net (NOTE 4) 3,314 3,063
Net investment in direct financing and sales-type
leases (NOTE 6) 3,361 3,421
Deferred income taxes (NOTE 11) - 2,184
Property, equipment and capital leases, net
(NOTES 2, 6 AND 7) 136,522 100,505
Intangibles and other assets, net (NOTE 5) 22,945 22,094
---------------------
Total assets $184,841 $147,444
---------------------
---------------------
F-2
<PAGE>
Sonic Corp.
Consolidated Balance Sheets (continued)
AUGUST 31,
1997 1996
--------------------
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,635 $ 2,904
Deposits from franchisees 780 601
Accrued liabilities (NOTE 8) 8,629 7,841
Obligations under capital leases due within
one year (NOTE 6) 1,030 823
Long-term debt due within one year (NOTE 9) 116 517
--------------------
Total current liabilities 15,190 12,686
Obligations under capital leases due after
one year (NOTE 6) 8,153 8,985
Long-term debt due after one year (NOTE 9) 37,517 11,884
Other noncurrent liabilities (NOTE 10) 5,051 4,206
Deferred income taxes (NOTE 11) 756 -
Commitments and contingencies (NOTES 3, 6, 14 AND 15)
Stockholders' equity (NOTE 12):
Preferred stock, par value $.01; 1,000,000 shares
authorized; none outstanding - -
Common stock, par value $.01; 40,000,000 shares
authorized; shares issued--13,531,593 in 1997 and
13,475,078 in 1996 135 135
Paid-in capital 59,891 59,107
Retained earnings 69,666 50,584
--------------------
129,692 109,826
Treasury stock, at cost; 807,080 shares in 1997 and
7,580 shares in 1996 (11,518) (143)
--------------------
Total stockholders' equity 118,174 109,683
--------------------
Total liabilities and stockholders' equity $184,841 $147,444
--------------------
--------------------
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Sonic Corp.
Consolidated Statements of Income
YEAR ENDED AUGUST 31,
1997 1996 1995
------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Sales by Company-owned restaurants $152,739 $120,700 $ 91,438
Franchised restaurants:
Franchise fees 1,702 1,453 1,409
Franchise royalties 26,764 23,315 20,392
Equipment and sign sales (NOTE 1) - 3,743 9,076
Other 2,813 1,919 1,445
------------------------------
184,018 151,130 123,760
Costs and expenses:
Company-owned restaurants:
Food and packaging 43,661 37,463 30,073
Payroll and other employee benefits 42,508 34,555 27,265
Other operating expenses 26,419 20,645 14,937
------------------------------
112,588 92,663 72,275
Equipment and sign cost of sales (NOTE 1) - 3,101 7,354
Selling, general and administrative 19,318 14,498 13,260
Depreciation and amortization 12,320 8,896 5,910
Minority interest in earnings of
restaurant partnerships 7,558 4,806 3,259
Provision for impairment of long-lived
assets (NOTE 2) 266 8,627 71
------------------------------
152,050 132,591 102,129
------------------------------
Income from operations 31,968 18,539 21,631
Interest expense 2,154 1,184 1,823
Interest income (596) (708) (409)
------------------------------
Net interest expense 1,558 476 1,414
------------------------------
Income before income taxes 30,410 18,063 20,217
Provision for income taxes (NOTE 11) 11,328 6,819 7,733
------------------------------
Net income $ 19,082 $ 11,244 $ 12,484
------------------------------
------------------------------
Net income per share (NOTE 12) $ 1.42 $ .84 $ 1.05
------------------------------
------------------------------
Weighted average shares outstanding (NOTE 12) 13,434 13,449 11,842
------------------------------
------------------------------
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Sonic Corp.
Consolidated Statements of Stockholders' Equity
<TABLE>
COMMON STOCK TREASURY STOCK
---------------- PAID-IN RETAINED ----------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
-------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1994 7,926 $ 79 $28,152 $26,856 28 $ (710)
Exercise of common stock options 134 1 2,244 - - -
Purchase of treasury stock - - - - 400 (5,749)
Three-for-two stock split, including
$1 paid in cash for fractional
shares (NOTE 12) 4,020 41 (41) - - -
Net income - - - 12,484 - -
-------------------------------------------------------
Balance at August 31, 1995 12,080 121 30,355 39,340 428 (6,459)
Exercise of common stock options 154 2 2,037 - - -
Purchase of treasury stock - - - - 8 (143)
Sale of common stock (NOTE 12) 1,241 12 26,715 - (428) 6,459
Net income - - - 11,244 - -
-------------------------------------------------------
Balance at August 31, 1996 13,475 135 59,107 50,584 8 (143)
Exercise of common stock options 57 - 784 - - -
Purchase of treasury stock - - - - 799 (11,375)
Net income - - - 19,082 - -
-------------------------------------------------------
Balance at August 31, 1997 13,532 $135 $59,891 $69,666 807 $(11,518)
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Sonic Corp.
Consolidated Statements of Cash Flows
YEAR ENDED AUGUST 31,
1997 1996 1995
----------------------------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 19,082 $ 11,244 $ 12,484
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 10,099 7,166 4,689
Amortization 2,221 1,730 1,221
Gains on dispositions of assets (1,491) (309) (52)
Amortization of franchise and
development fees (1,702) (1,453) (1,409)
Franchise and development fees collected 1,768 1,460 1,376
Provision (credit) for deferred
income taxes 2,950 (1,905) 370
Provision for impairment of long-lived
assets 266 8,627 71
(Increase) decrease in operating assets:
Accounts and notes receivable (5) (380) (448)
Refundable income taxes (2,489) - -
Inventories and prepaid expenses
and other 62 (766) (331)
Increase (decrease) in operating
liabilities:
Accounts payable 1,709 1,213 (741)
Accrued and other liabilities 1,649 2,154 2,209
Other 24 74 100
----------------------------------
Total adjustments 15,061 17,611 7,055
----------------------------------
Net cash provided by operating activities 34,143 28,855 19,539
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (48,048) (41,107) (34,208)
Investment in direct financing leases (935) (1,235) (1,016)
Collections on direct financing leases 922 987 902
Proceeds from dispositions of assets 3,025 2,450 346
Increase in intangibles and other assets:
Goodwill resulting from acquisitions
of restaurants - (5,964) (181)
Other (3,455) (1,721) (1,592)
----------------------------------
Net cash used in investing activities (48,491) (46,590) (35,749)
(CONTINUED ON FOLLOWING PAGE)
F-6
<PAGE>
Sonic Corp.
Consolidated Statements of Cash Flows (continued)
YEAR ENDED AUGUST 31,
1997 1996 1995
----------------------------------
(IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings $ 59,750 $ 11,500 $18,250
Payments on long-term debt (34,542) (24,250) (222)
Purchases of treasury stock (11,375) (4) (4,054)
Payments on capital lease obligations (641) (669) (549)
Exercises of stock options 784 1,900 550
Proceeds from sale of common stock - 33,186 -
----------------------------------
Net cash provided by financing activities 13,976 21,663 13,975
----------------------------------
Net increase (decrease) in cash and cash
equivalents (372) 3,928 (2,235)
Cash and cash equivalents at beginning
of the year 7,706 3,778 6,013
----------------------------------
Cash and cash equivalents at end
of the year $ 7,334 $ 7,706 $ 3,778
----------------------------------
----------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2,254 $ 1,369 $ 1,794
Income taxes (net of refunds) 11,942 8,192 5,581
Additions to capital lease obligations 569 4,203 -
Purchases of treasury stock in connection
with exercises of stock options - 139 1,695
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements
August 31, 1997, 1996 and 1995
(In Thousands, Except Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Sonic Corp. (the "Company") operates and franchises a chain of quick-service
drive-in restaurants in the United States. In addition, the Company sells and
leases restaurant equipment and signs. In February 1997, the Company sold, for
cash, its minority investment in 10 restaurants and recognized a pre-tax gain of
$1,145. In February 1996, the Company sold its restaurant equipment division,
including restaurant equipment inventories of approximately $1,500, for $1,747
in cash and recognized a pre-tax gain of $250. The Company grants credit to its
franchisees, all of whom are in the restaurant business. Substantially all of
the notes receivable and direct financing leases are collateralized by real
estate or equipment.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries and its majority-owned, Company-operated
restaurants, organized principally as general partnerships. All significant
intercompany accounts and transactions have been eliminated. Investments in
minority-owned restaurants, organized principally as general partnerships, and
other minority investments are carried at equity and are included in other
assets.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported and contingent assets and
liabilities disclosed in the financial statements and accompanying notes. Actual
results inevitably will differ from those estimates, and such differences may be
material to the financial statements.
INVENTORIES
Inventories consist principally of food and supplies which are carried at the
lower of cost (first-in, first-out basis) or market and used restaurant
equipment held for sale which is carried at the lower of weighted average cost
or market.
F-8
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY, EQUIPMENT AND CAPITAL LEASES
Property and equipment are recorded at cost, and leased assets under capital
leases are recorded at the present value of future minimum lease payments.
Depreciation of property and equipment and amortization of capital leases are
computed by the straight-line method over the estimated useful lives or initial
terms of the leases, respectively.
ACCOUNTING FOR LONG-LIVED ASSETS
Prior to the fourth quarter of fiscal year 1996, certain restaurants which were
nonoperating and were either held for disposition or were under short-term
subleases were carried at the lower of depreciated cost or estimated net
realizable values. Estimated net realizable values were determined annually
based upon appraisals or other independent assessments of the restaurants'
estimated sales values. Subsequent to restaurant closings, the related
restaurant buildings and equipment were not depreciated and the related leased
restaurant buildings under capital leases were not amortized. All estimated
costs which were expected to be incurred in the closings and disposals of
Company-owned and certain other restaurants were accrued when the decisions were
made to close such restaurants. These estimated costs included accruals for
future occupancy costs, estimated direct disposal costs and reductions of the
carrying values of property, equipment and capital leases to estimated net
realizable values. Allowances for impairment and accrued carrying costs for
restaurant closings and disposals were adjusted when necessary based on
subsequent information and events.
Effective June 1, 1996 (NOTE 2), the Company reviews long-lived assets,
identifiable intangibles, and goodwill related to those assets whenever events
or changes in circumstances indicate that the carrying amount of an asset might
not be recoverable. Assets are grouped and evaluated for impairment at the
lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. The Company has
determined that an individual restaurant is the level at which this review will
be applied. The Company's primary test for an indicator of potential impairment
is operating losses. If an indication of impairment is determined to be present,
the Company estimates the future cash flows expected to be generated from the
use of the asset and its eventual disposal. If the sum of undiscounted future
cash flows is less than the carrying amount of the asset, an impairment loss is
recognized. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. The fair value of the asset is measured by
calculating the present value of estimated future cash flows using a discount
rate equivalent to the rate of return the Company expects to achieve from its
investment in newly-constructed restaurants.
F-9
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-lived assets and identifiable intangibles held for disposal are carried at
the lower of depreciated cost or fair value less cost to sell. Fair values are
estimated based upon appraisals or other independent assessments of the assets'
estimated sales values. During the period in which assets are being held for
disposal, depreciation and amortization of such assets are not recognized.
PRE-OPENING COSTS
The costs of hiring, training and other direct costs associated with opening new
restaurants are capitalized and amortized over the first twelve months of
restaurant operations.
TRADEMARKS, TRADE NAMES AND OTHER GOODWILL
Trademarks, trade names and other goodwill are amortized on the straight-line
method over periods not exceeding 40 years.
OTHER INTANGIBLES
Other intangibles and deferred costs included in other assets are amortized on
the straight-line method over the expected period of benefit, not exceeding 15
years.
FRANCHISE FEES AND ROYALTIES
Initial franchise fees are nonrefundable and are recognized in income when all
material services or conditions relating to the sale of the franchise have been
substantially performed or satisfied by the Company. 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. Royalties from franchise operations are recognized in income as earned.
ADVERTISING COSTS
Costs incurred in connection with advertising and promotion of the Company's
products are expensed as incurred. Such costs amounted to $6,983, $4,956 and
$4,204 for the years ended August 31, 1997, 1996 and 1995, respectively.
F-10
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
Net income per share is based upon the weighted average number of common shares
and dilutive common stock equivalent shares outstanding during each year (NOTE
12).
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 that the impact of SFAS 128 on the calculation of
earnings per share for the years ended August 31, 1997, 1996 and 1995 would not
be material.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of three
months or less from date of purchase.
2. IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," at the beginning of the
fourth quarter of fiscal year 1996. Based on an evaluation of all restaurants
which had incurred operating losses through May 31, 1996, the Company determined
that certain restaurants and other assets with carrying amounts of $12,553 were
impaired and wrote them down to their fair values. The initial charge upon
adoption of SFAS 121 was $8,541 ($5,316 after-tax or $.39 per share) and
included $5,720
F-11
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
2. IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
($3,560 after-tax or $.26 per share) related to restaurants and other assets
held for disposal with an estimated sales value, net of related costs to sell of
$2,651 and $2,821 ($1,756 after-tax or $.13 per share) related to restaurants to
be held and used. The difference in the Company's previous policy and fair value
under SFAS 121 for assets held for disposal at the beginning of the fourth
quarter of fiscal year 1996 was not material. Certain of these properties with
a carrying value of $1,207 were disposed of in fiscal 1997 with net proceeds to
the Company of $1,258. The Company plans to dispose of the remaining assets
during fiscal year 1998 and has estimated the sales value, net of related costs
to sell, at approximately $1,400. The initial charge upon adoption primarily
relates to the write-down of certain restaurants to fair value consistent with
the earnings expectations of each restaurant using discounted estimated future
cash flows. Considerable management judgment is necessary to estimate future
discounted cash flows. Accordingly, actual results could vary significantly from
management's estimates. The evaluation for impairment is done for each
individual restaurant, rather than all restaurants as a group. The initial
charge resulted from the Company grouping assets at a lower level than under its
previous accounting policy for evaluating and measuring impairment. Prior to
adoption of this new standard, a write-down of a restaurant only took place when
a decision was made to close or dispose of the restaurant.
3. RESTAURANT TRANSACTIONS WITH RELATED PARTY
In March 1994, the Company entered into an agreement with a director and former
officer of the Company in connection with his leaving the Company and returning
to his career as a Sonic franchisee. Under that agreement, the director
exchanged certain rights under his employment agreement, including the right to
purchase six existing Sonic restaurants, for the right to purchase the Company's
interest in two existing Sonic restaurants (with financing provided by the
Company) and to acquire certain development rights for future Sonic restaurants.
As part of the agreement, the Company also agreed to assist the director with
obtaining development financing for up to six Sonic restaurants. Since March
1994, the Company has entered into certain agreements with the director and the
director's lender which provide that in the event of a default by the director
under the terms of the director's restaurant development loans (aggregating
$3,556 as of August 31, 1997 and $3,460 as of August 31, 1996), the Company is
required to purchase the collateral (shares of the Company's common stock and
real estate related to Sonic restaurants) securing the director's loans at fair
market value as specified in the repurchase agreements. At August 31, 1997, the
Company's repurchase obligations under these agreements expire in 1999 ($1,567),
2000 ($82) and 2001 ($1,907).
F-12
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
4. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following at August 31, 1997 and
1996:
1997 1996
--------------------
Trade receivables $ 3,208 $ 2,878
Notes receivable--current 874 846
Other 1,907 1,638
--------------------
5,989 5,362
Less allowance for doubtful accounts and
notes receivable 99 133
--------------------
$ 5,890 $ 5,229
--------------------
--------------------
Notes receivable--noncurrent $ 3,488 $ 3,193
Less allowance for doubtful notes receivable 174 130
--------------------
$ 3,314 $ 3,063
--------------------
--------------------
5. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following at August 31, 1997 and
1996:
1997 1996
--------------------
Trademarks, trade names, and other goodwill $21,124 $20,945
Franchise agreements 1,870 1,870
Other intangibles and other assets 6,547 3,775
--------------------
29,541 26,590
Less accumulated amortization 6,596 4,496
--------------------
$22,945 $22,094
--------------------
--------------------
F-13
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
6. LEASES
DESCRIPTION OF LEASING ARRANGEMENTS
The Company's leasing operations consist principally of leasing certain land,
buildings and equipment (including signs) and subleasing certain buildings to
franchise operators. The land portions of these leases are classified as
operating leases and expire over the next six years. The buildings and equipment
portions of these leases are classified principally as direct financing or
sales-type leases and expire principally over the next six years. These leases
include provisions for contingent rentals which may be received on the basis of
a percentage of sales in excess of stipulated amounts. Some leases contain
escalation clauses over the lives of the leases.
Certain Company-owned restaurants lease land and buildings from third parties.
These leases, which expire over the next fourteen years, include provisions for
contingent rentals which may be paid on the basis of a percentage of sales in
excess of stipulated amounts. The land portions of these leases are classified
as operating leases and the buildings portions are classified as capital leases.
DIRECT FINANCING AND SALES-TYPE LEASES
Components of net investment in direct financing and sales-type leases are as
follows at August 31, 1997 and 1996:
1997 1996
------------------
Minimum lease payments receivable $5,441 $5,670
Less unearned income 1,224 1,466
------------------
Net investment in direct financing and
sales-type leases 4,217 4,204
Less amount due within one year 856 783
------------------
Amount due after one year $3,361 $3,421
------------------
------------------
Minimum lease payments receivable for each of the five years after August 31,
1997 are $1,367 in 1998, $1,249 in 1999, $1,013 in 2000, $807 in 2001, $611 in
2002 and $394 thereafter. Initial direct costs incurred in the negotiation and
consummation of direct financing and sales-type lease transactions have not been
material during fiscal years 1997 and 1996. Accordingly, no portion of unearned
income has been recognized to offset those costs.
F-14
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
6. LEASES (CONTINUED)
Other revenues include $768, $1,340 and $1,163 for the years ended August 31,
1997, 1996 and 1995, respectively, related to sign lease transactions that have
been accounted for as sales-type leases.
CAPITAL LEASES
Components of obligations under capital leases are as follows at August 31, 1997
and 1996:
1997 1996
------------------
Total minimum lease payments $14,793 $16,701
Less amount representing interest 5,610 6,893
------------------
Present value of net minimum lease payments 9,183 9,808
Less amount due within one year 1,030 823
------------------
Amount due after one year $ 8,153 $ 8,985
------------------
------------------
Maturities of these obligations under capital leases, including interest, at
rates averaging approximately 12% in 1997 and 13% in 1996 and future minimum
rental payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year are as follows:
OPERATING CAPITAL
--------- -------
Year ending August 31:
1998 $ 2,579 $ 1,960
1999 2,473 1,790
2000 2,403 1,505
2001 2,358 1,357
2002 2,241 1,283
Thereafter 12,261 6,898
------------------
24,315 14,793
Less amount representing interest - 5,610
------------------
$24,315 $ 9,183
------------------
------------------
F-15
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
6. LEASES (CONTINUED)
Total minimum lease payments do not include contingent rentals. Contingent
rentals on capital leases were $387, $334 and $291 for the years ended
August 31, 1997, 1996 and 1995, respectively.
Rent expense on all operating leases was $2,715, $2,443 and $1,918 for the years
ended August 31, 1997, 1996 and 1995, respectively.
7. PROPERTY, EQUIPMENT AND CAPITAL LEASES
Property, equipment and capital leases consist of the following at August 31,
1997 and 1996:
1997 1996
------------------
Home office:
Land and leasehold improvements $ 1,262 $ 1,041
Furniture and equipment 17,768 13,165
Restaurants, including those leased to others:
Land 33,739 24,184
Buildings, including property held for disposition 53,582 38,013
Equipment 47,884 31,702
------------------
Property and equipment, at cost 154,235 108,105
Less accumulated depreciation 24,335 15,497
------------------
Property and equipment, net 129,900 92,608
Leased restaurant buildings and equipment under
capital leases, including those held for sublease 10,101 10,809
Less accumulated amortization 3,479 2,912
------------------
Capital leases, net 6,622 7,897
------------------
Property, equipment and capital leases, net $136,522 $100,505
------------------
------------------
Property and equipment include land, buildings and equipment with a carrying
amount of $2,734 at August 31, 1997 which were leased under operating leases to
franchisees or other parties. The accumulated depreciation related to these
buildings and equipment was $461 at August 31, 1997.
Property, equipment and capital leases also include assets held for disposal or
sublease with aggregate net carrying amounts, exclusive of certain carrying
costs reflected in liabilities, of $1,464 at August 31, 1997 and $3,571 at
August 31, 1996.
F-16
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following at August 31, 1997 and 1996:
1997 1996
------------------
Wages and other employee benefits (NOTE 13) $1,383 $1,422
Income taxes payable (NOTE 11) 1,560 2,635
Taxes, other than income taxes 3,487 2,717
Accrued carrying costs for restaurant closings
and disposals 370 592
Other 1,829 475
------------------
$8,629 $7,841
------------------
------------------
9. LONG-TERM DEBT
Long-term debt consists of the following at August 31, 1997 and 1996:
1997 1996
------------------
Borrowings under line of credit (A) $37,000 $11,500
Non-interest bearing obligation, paid in 1997 - 422
8.5% notes payable, due in monthly installments
until 2011 384 399
Other 249 80
------------------
37,633 12,401
Less long-term debt due within one year 116 517
------------------
Long-term debt due after one year $37,517 $11,884
------------------
------------------
F-17
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
9. LONG-TERM DEBT (CONTINUED)
(A) The Company has an agreement (as amended) with a group of banks which
provides for a $80,000 line of credit expiring in July 2000. The agreement
allows for annual renewal options, subject to approval by the banks,
which has not currently been exercised by the Company. The Company uses
the line of credit to finance the opening of newly-constructed
restaurants, acquisition of existing restaurants and for general
corporate purposes. Borrowings under the line of credit are unsecured
and bear interest at a specified bank's prime rate or, at the Company's
option, LIBOR plus 0.75% to 1.25%. In addition, the Company pays an
annual commitment fee ranging from .125% to .25% on the unused portion
of the line of credit. As of August 31, 1997, the Company's effective
borrowing rate was 7%. Under its line of credit, the Company may borrow
up to $80,000 in the form of direct borrowings and letters of credit
with a $2,000 sub-limit for letters of credit. As of August 31, 1997
there were $100 in letters of credit outstanding under the line of
credit. Borrowings under the line of credit are subject to various
restrictive financial covenants.
Maturities of long-term debt for each of the five years after August 31, 1997
are $116 in 1998, $117 in 1999, $37,069 in 2000, $21 in 2001, $23 in 2002 and
$287 thereafter.
10. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following at August 31, 1997 and
1996:
1997 1996
------------------
Deferred area development fees $ 495 $ 608
Minority interest in consolidated restaurant
partnerships 2,948 2,589
Accrued carrying costs for restaurant closings
and disposals 756 870
Other 852 139
------------------
$5,051 $4,206
------------------
------------------
F-18
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
11. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED AUGUST 31,
1997 1996 1995
---------------------------
Current:
Federal $ 8,070 $8,371 $6,744
State 308 353 619
---------------------------
8,378 8,724 7,363
Deferred:
Federal 2,847 (1,839) 357
State 103 (66) 13
---------------------------
2,950 (1,905) 370
---------------------------
Provision for income taxes $11,328 $ 6,819 $7,733
---------------------------
---------------------------
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate due to the following:
YEAR ENDED AUGUST 31,
1997 1996 1995
---------------------------
Amount computed by applying a tax rate of 35% $10,643 $ 6,322 $7,076
State income taxes (net of federal income
tax benefit) 267 187 411
Permanent differences in expenses for
financial and income tax reporting
purposes (69) (283) (56)
Other 487 593 302
---------------------------
Provision for income taxes $11,328 $ 6,819 $7,733
---------------------------
---------------------------
F-19
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
11. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities consist of the following at August 31, 1997
and 1996:
1997 1996
------------------
Deferred tax assets:
Property, equipment and capital leases $ 499 $ 2,160
Accrued litigation costs 338 18
Investment in partnerships, including differences
in capitalization and depreciation related to
direct financing and sales-type leases and different
year ends for financial and tax reporting purposes - 1,095
Allowance for doubtful accounts and notes receivable 98 94
Other 337 63
------------------
1,272 3,430
Valuation allowance - -
------------------
Deferred tax assets 1,272 3,430
Less deferred tax liabilities:
Accumulated amortization of license agreements,
management contracts and other intangibles 736 409
Net investment in direct financing and
sales-type leases, including differences
related to capitalization and amortization 890 639
Investment in partnerships, including
differences in capitalization and depreciation
related to direct financing and sales-type
leases and different year ends for financial
and tax reporting purposes 299 -
Other 3 88
------------------
Deferred tax liabilities 1,928 1,136
------------------
Net deferred tax assets (liabilities) $ (656) $ 2,294
------------------
------------------
F-20
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
12. STOCKHOLDERS' EQUITY
In July 1995, the Company's board of directors authorized a three-for-two
stock split in the form of a stock dividend. A total of 4,019,321 shares of
common stock were issued in connection with the split. The stated par value
of each share was not changed from $.01. A total of $41 was reclassified from
paid-in capital to common stock. All references in the accompanying
consolidated financial statements to average numbers of shares outstanding,
per share amounts and Stock Purchase Plan and Stock Options share data have
been restated to reflect the split.
In October 1995, the Company completed a public offering of 1,668,826 shares
of common stock at $21.25 per share. The offering included 428,026 shares of
treasury stock which had a cost of $6,459. The proceeds of the offering,
after deducting the underwriting discount and offering expenses, were
$33,186. A portion of the proceeds ($23,000) was used to repay the borrowings
under the Company's line of credit.
STOCK PURCHASE PLAN
The Company has an employee stock purchase plan for all full-time regular
employees of the Company. Employees are eligible to purchase shares of common
stock each year through a payroll deduction not in excess of the lesser of
10% of compensation or $25. The aggregate amount of stock that employees may
purchase each calendar year under this plan is limited to 150,000 shares. The
purchase price will be between 85% and 100% of the stock's fair market value.
Such price will be determined by the Company's board of directors.
STOCK OPTIONS
The Company has an Incentive Stock Option Plan (the "Incentive Plan") and a
Directors' Stock Option Plan (the "Directors' Plan"). Under the Incentive
Plan, the Company is authorized to grant options to purchase up to 1,870,000
shares of the Company's common stock to officers and key employees of the
Company and its subsidiaries. Under the Directors' Plan, the Company is
authorized to grant options to purchase up to 225,000 shares of the Company's
common stock to the Company's outside directors. The exercise price of the
options to be granted is equal to the fair market value of the Company's
common stock on the date of grant. Unless otherwise provided by the Company's
Stock Plan Committee, options under both plans become exercisable ratably
over a three-year period or immediately upon change in control of the
Company, as defined by the plans. All options expire at the earlier of
termination of employment or ten years after the date of grant.
F-21
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
12. STOCKHOLDERS' EQUITY (CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing such stock options. Under APB
25, because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and net income per share is required
by Statement 123, which also requires that the information be determined as if
the Company has accounted for its stock options granted subsequent to August 31,
1995 under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for fiscal years 1997 and
1996, respectively: risk-free interest rates of 6.3% and 6.0%; a dividend yield
of 0%; volatility factors of the expected market price of the Company's common
stock of 39.9% and 29.5%; and a weighted average expected life of the option of
five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information for the years ended August 31 follows:
1997 1996
------------------
Pro forma net income $18,435 $11,058
Pro forma net income per share $ 1.37 $ .82
Because Statement 123 is applicable only to options granted subsequent to
August 31, 1995, its pro forma effect will not be fully reflected until
fiscal year 1998.
F-22
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
12. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity, and related information for
the years ended August 31 follows:
<TABLE>
1997 1996 1995
------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year 1,014,890 $16.70 940,438 1,148,934
Granted 354,168 17.85 378,444 275,342
Exercised (56,515) 13.87 (154,392) $13.21 (190,321) $11.80
Forfeited (115,720) 17.45 (149,600) (293,517)
--------- --------- ---------
Outstanding--end of year 1,196,823 $17.10 1,014,890 $16.70 940,438 $14.90
--------- --------- ---------
--------- --------- ---------
Exercisable at end of year 589,264 406,533 381,981
--------- --------- ---------
--------- --------- ---------
Weighted average fair value of
options granted during the year $7.97 $7.34
A summary of the Company's options as of August 31, 1997 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Options Life (Yrs.) Price Options Price
- --------------------------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
$10.00 to $14.67 302,022 6.0 $ 12.86 286,022 $ 12.84
$15.12 to $18.00 538,271 8.5 17.03 180,535 17.52
$19.25 to $24.32 356,530 8.5 20.49 122,707 19.91
--------- -------- --------- --------- --------
$10.00 to $24.32 1,196,823 7.9 $ 17.10 589,264 $ 15.75
--------- -------- --------- --------- --------
--------- -------- --------- --------- --------
</TABLE>
F-23
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
12. STOCKHOLDERS' EQUITY (CONTINUED)
STOCKHOLDER RIGHTS PLAN
On June 16, 1997, the Company announced that its Board of Directors had
adopted a stockholder rights plan (the "Rights Plan"). The Rights Plan is
designed to deter coercive takeover tactics and to prevent a potential
acquirer from gaining control of the Company without offering a fair price to
all of the Company's stockholders. The rights were issued to stockholders of
record as of June 27, 1997 and expire on June 16, 2007.
The plan provided for the issuance of one common stock purchase right for
each outstanding share of the Company's common stock. Each right initially
entitles stockholders to buy one unit of a share of preferred stock for
$85.00. The rights will be exercisable only if a person or group acquires
beneficial ownership of 15% or more of the Company's common stock or
commences a tender or exchange offer upon consummation of which such person
or group would beneficially own 15% or more of the Company's common stock.
At August 31, 1997, 50,000 shares of preferred stock have been reserved for
issuance upon exercise of these rights.
If any person becomes the beneficial owner of 15% or more of the Company's
common stock, other than pursuant to a tender or exchange offer for all
outstanding shares of the Company approved by a majority of the independent
directors not affiliated with a 15%-or-more stockholder, then each right not
owned by a 15%-or-more stockholder or related parties will then entitle its
holder to purchase, at the right's then current exercise price, shares of the
Company's common stock having a value of twice the right's then current
exercise price. In addition, if, after any person has become a 15%-or-more
stockholder, the company is involved in a merger or other business
combination transaction with another person in which the company does not
survive or in which its common stock is changed or exchanged, or sells 50% or
more of its assets or earning power to another person, each right will
entitle its holder to purchase, at the right's then current exercise price,
shares of common stock of such other person having a value of twice the
right's then current exercise price. Unless a triggering event occurs, the
rights will not trade separately from the common stock.
The company will generally be entitled to redeem the rights at $0.01 per
right at any time until 10 days (subject to extension) following a public
announcement that a 15% position has been acquired.
STOCK INCENTIVE PLAN
In November 1995, the Company adopted the Sonic Corp. 1995 Stock Incentive
Plan (the "Stock Incentive Plan") whereby the Company may issue up to 120,000
shares of common stock to certain key employees. Participants in the Stock
Incentive Plan receive awards of shares of restricted common stock (the
"Restricted Stock"), subject to not vesting if the Company does not meet
certain annual performance criteria. If the Company meets the performance
criteria, the portion of the award tied to the criteria will vest. Until the
Restricted Stock vests, an escrow
F-24
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
12. STOCKHOLDERS' EQUITY (CONTINUED)
agent holds the Restricted Stock. If the Company does not meet the
performance criteria, the portion of the award tied to that criteria will not
vest and the related shares are available for future awards. Upon vesting,
the participant will have the right to receive certificates representing the
shares of vested Restricted Stock.
During fiscal year 1996, the Company awarded 87,000 shares of Restricted
Stock which vest over a three-year period if specified performance goals are
met (no shares were awarded in fiscal year 1997). The Company did not meet
the specified performance criteria in fiscal years 1997 and 1996 which
resulted in 24,000 shares and 20,000 shares, respectively, not vesting. In
addition, 10,000 shares were forfeited in fiscal year 1997 due to termination
of employment. Shares applicable to awards which have not vested are not
reflected as shares issued in the accompanying financial statements.
13. EMPLOYEE BENEFIT PLANS
SAVINGS AND PROFIT SHARING PLAN
The Company has a Savings and Profit Sharing Plan (the "Plan"), as amended,
for eligible employees. Employees who have completed one year of service with
the Company are eligible to participate in the Plan. Under the Plan,
participating employees may authorize payroll deductions up to 11% of their
earnings. The Company may elect to contribute a percentage of participants'
contributions to the Plan. Additional amounts may be contributed at the
option of the Company's board of directors. Company contributions are subject
to vesting at the rate of 20% each year upon completion of two years of
service, with 100% vesting after six years. Matching contributions of $142,
$114 and $101 were made by the Company during fiscal years ended 1997, 1996
and 1995, respectively. For fiscal year 1997, a discretionary contribution of
$75 was accrued ($35 and $50 for fiscal years 1996 and 1995, respectively).
NET REVENUE INCENTIVE PLAN
The Company has a Net Revenue Incentive Plan (the "Incentive Plan"), as
amended, which applies to certain members of management and is at all times
discretionary with the Company's board of directors. If certain predetermined
earnings goals are met, the Incentive Plan provides that a predetermined
percentage of the employee's salary may be paid in the form of a bonus. The
Company accrued incentive bonuses of $804, $341 and $367 during fiscal years
1997, 1996 and 1995, respectively.
F-25
<PAGE>
Sonic Corp.
Notes to Consolidated Financial Statements (continued)
14. EMPLOYMENT AGREEMENTS
The Company has employment contracts with its President and several members
of its senior management. These contracts provide for use of Company
automobiles or related allowances, medical, life and disability insurance,
annual base salaries, as well as an incentive bonus (NOTE 13). These
contracts also contain provisions for payments in the event of the
termination of employment and provide for payments aggregating $3,308 at
August 31, 1997 due to loss of employment in the event of a change in control
(as defined in the contracts).
15. CONTINGENCIES
In October 1993, following a jury trial, the District Court of Jefferson
County, Texas (the "District Court") entered a judgment against two
subsidiaries of the Company in the amount of $935 of actual damages and
prejudgment interest, and $1,000 of punitive damages in an action in which
the plaintiffs claim the subsidiaries interfered with contractual relations
of the plaintiffs and were guilty of deceptive trade practices. In March
1994, the District Court granted a motion for judgment notwithstanding the
verdict filed by the two subsidiaries of the Company. The District Court's
judgment eliminated the award of actual and punitive damages in favor of
certain plaintiffs. The plaintiffs appealed the reversal of the previous
judgments. In April 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 $782 of actual damages, $1,000 of punitive damages,
and pre and post judgment interest. 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 had no merit
and will defend its position vigorously. The Company presently cannot predict
the ultimate outcome of this matter. A final resolution is not expected to
have a material adverse effect on the Company's financial position or 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.
F-26
<PAGE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
FIRST QUARTER SECOND QUARTER THIRD QUARTER
1997 1996 1997 1996 1997 1996
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income statement data:
Sales by Company-owned restaurants $33,586 $25,444 $30,664 $23,274 $41,411 $33,642
Franchised restaurants:
Franchise fees 270 262 541 553 460 287
Franchise royalties 6,557 5,810 5,404 4,894 6,620 5,717
Equipment and sign sales (a) - 2,254 - 1,489 - -
Other 560 373 1,524 631 327 479
---------------------------------------------------------
Total revenues 40,973 34,143 38,133 30,841 48,818 40,125
Company-owned restaurants:
Food and packaging 9,768 8,294 8,796 7,582 11,850 10,315
Payroll and other employee benefits 9,804 7,628 9,039 7,061 11,229 8,941
Other operating expenses 6,103 4,472 5,625 4,327 6,530 5,348
---------------------------------------------------------
25,675 20,394 23,460 18,970 29,609 24,604
Equipment and sign cost of sales (a) - 1,891 - 1,210 - -
Selling, general and administrative 3,886 3,299 5,264 3,375 4,960 3,776
Depreciation and amortization 2,815 1,989 2,955 2,123 3,074 2,394
Minority interest in earnings of
restaurant partnerships 1,357 794 1,084 615 2,437 1,800
Provision for impairment of long-lived
assets 23 22 15 27 15 16
---------------------------------------------------------
Income from operations 7,217 5,754 5,355 4,521 8,723 7,535
Interest expense 337 399 471 231 592 258
Interest income (146) (208) (149) (257) (141) (137)
---------------------------------------------------------
Income before income taxes $7,026 $5,563 $5,033 $4,547 $8,272 $7,414
---------------------------------------------------------
---------------------------------------------------------
Net income $4,409 $3,463 $3,158 $2,831 $5,191 $4,615
---------------------------------------------------------
---------------------------------------------------------
Net income per share (NOTE 12) $.32 $.27 $.23 $.21 $.39 $.34
---------------------------------------------------------
---------------------------------------------------------
FOURTH QUARTER FULL YEAR
1997 1996 1997 1996
--------------------------------------
<S> <C> <C> <C> <C>
Income statement data:
Sales by Company-owned restaurants $47,078 $38,340 $152,739 $120,700
Franchised restaurants:
Franchise fees 431 351 1,702 1,453
Franchise royalties 8,183 6,894 26,764 23,315
Equipment and sign sales (a) - - - 3,743
Other 402 436 2,813 1,919
---------------------------------------
Total revenues 56,094 46,021 184,018 151,130
Company-owned restaurants:
Food and packaging 13,247 11,272 43,661 37,463
Payroll and other employee benefits 12,436 10,925 42,508 34,555
Other operating expenses 8,161 6,498 26,419 20,645
---------------------------------------
33,844 28,695 112,588 92,663
Equipment and sign cost of sales (a) - - - 3,101
Selling, general and administrative 5,208 4,048 19,318 14,498
Depreciation and amortization 3,476 2,390 12,320 8,896
Minority interest in earnings of
restaurant partnerships 2,680 1,597 7,558 4,806
Provision for impairment of long-lived
assets (b) 213 8,562 266 8,627
---------------------------------------
Income from operations 10,673 729 31,968 18,539
Interest expense 754 296 2,154 1,184
Interest income (160) (106) (596) (708)
---------------------------------------
Income before income taxes $10,079 $ 539 $30,410 $ 18,063
---------------------------------------
---------------------------------------
Net income $ 6,324 $ 335 $19,082 $ 11,244
---------------------------------------
---------------------------------------
Net income per share (NOTE 12) $.48 $.02 $1.42 $.84
---------------------------------------
---------------------------------------
</TABLE>
(a) Restaurant equipment sales and cost of sales declined due to the sale of
the Company's equipment division in February 1996.
(b) The Company adopted Statement of Financial Accounting Standards No. 121
during the fourth quarter of 1996 resulting in a $8,541 pre-tax impairment
provision.
F-27
<PAGE>
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following discussion of fair values is not indicative of the overall fair
value of the Company's consolidated balance sheet since the provisions of
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," do not
apply to all assets, including intangibles.
The following methods and assumptions were used by the Company in estimating
its fair values of financial instruments:
CASH AND CASH EQUIVALENTS--Carrying value approximates fair value.
NOTES RECEIVABLE--For variable rate loans with no significant change in
credit risk since the loan origination, fair values approximate carrying
amounts. Fair values for fixed rate loans are estimated using discounted
cash flow analysis, using interest rates which would currently be
offered for loans with similar terms to borrowers of similar credit
quality and/or the same remaining maturities.
As of August 31, 1997 and 1996, carrying values approximate their
estimated fair values.
BORROWED FUNDS--Fair values for fixed rate borrowings are estimated
using a discounted cash flow analysis that applies interest rates
currently being offered on borrowings of similar amounts and terms to
those currently outstanding. Carrying values for variable rate
borrowings approximate their fair values.
As of August 31, 1997 and 1996, carrying values approximate their
estimated fair values.
F-28
<PAGE>
Sonic Corp.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
ADDITIONS AMOUNTS
BALANCE AT CHARGED TO WRITTEN OFF BALANCE
BEGINNING COSTS AND AGAINST THE AT END
DESCRIPTION OF YEAR EXPENSES ALLOWANCE RECOVERIES OF YEAR
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL
ACCOUNTS AND NOTES
RECEIVABLE
<S> <C> <C> <C> <C> <C>
Year ended:
August 31, 1997 $ 263 $ 125 $ 115 $ - $ 273
August 31, 1996 $ 177 $ 124 $ 93 $ 55 $ 263
August 31, 1995 $ 299 $ 99 $ 226 $ 5 $ 177
ACCRUED CARRYING COSTS
FOR RESTAURANT CLOSINGS
AND DISPOSALS
Year ended:
August 31, 1997 $1,462 $ 71 $ 407 $ - $1,126
August 31, 1996 $ 370 $1,354 $ 262 $ - $1,462
August 31, 1995 $ 596 $ 60 $ 286 $ - $ 370
</TABLE>
F-29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused the undersigned,
duly-authorized, to sign this report on its behalf on this 26th day of
November, 1997.
Sonic Corp.
By: /s/ J. Clifford Hudson
----------------------------------------
J. Clifford Hudson, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the undersigned have signed this report on behalf of the Company, in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ J. Clifford Hudson President, Chief November 26, 1997
- ------------------------------ Executive Officer and
J. Clifford Hudson, Principal Director
Executive Officer
/s/ W. Scott McLain Vice President, Chief November 26, 1997
- ------------------------------ Financial Officer
W. Scott McLain, Principal and Treasurer
Financial Officer
/s/ Stephen C. Vaughan Vice President and November 26, 1997
- ------------------------------ Controller
Stephen C. Vaughan, Principal
Accounting Officer
/s/ E. Dean Werries Chairman of the Board November 19, 1997
- ------------------------------ and Director
E. Dean Werries
/s/ Dennis H. Clark Director November 24, 1997
- ------------------------------
Dennis H. Clark
/s/ Leonard Lieberman Director November 26, 1997
- ------------------------------
Leonard Lieberman
/s/ H. E. Rainbolt Director November 24, 1997
- ------------------------------
H. E. Rainbolt
/s/ Frank E. Richardson Director November 25, 1997
- ------------------------------
Frank E. Richardson
/s/ Robert M. Rosenberg Director November 20, 1997
- ------------------------------
Robert M. Rosenberg
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
10.07. Form of General Partnership Agreement, Limited Liability Company
Operating Agreement, Partnership Master Agreement, and Limited
Liability Company Master Agreement.
10.16. Form of Employment Agreement and Schedule of Material Differences
for the Executive Officers of the Company
23.01. Consent of Independent Auditors
24.01. Power of Attorney
27.01. Financial Data Schedules
<PAGE>
GENERAL PARTNERSHIP AGREEMENT
OF
SDI OF ___________, _______________ PARTNERSHIP
CIF #____
Sonic Restaurants, Inc. (the "Managing Partner"), an Oklahoma corporation
and Sonic Industries Inc. (the "Supervising Partner"), an Oklahoma corporation,
enter into this General Partnership Agreement (this "Agreement") of SDI of
________, __________ Partnership (the "Partnership") as of the ___ day of
___________, 199_.
W I T N E S S E T H:
Whereas, the parties wish to form an Oklahoma general partnership to
operate the Sonic drive-in restaurant located at _____________________________,
__________________ (the "Restaurant"); and
Whereas, the parties wish to set forth the terms and conditions regarding
that general partnership.
Now, therefore, in consideration of the mutual covenants contained in this
Agreement, the parties agree as follows:
1. NAME OF PARTNERSHIP. The name of the Partnership is "SDI of
___________, _______________ Partnership."
2. BUSINESS OF THE PARTNERSHIP. The Partnership shall have the authority
to engage in the business of operating the Restaurant; to engage in any and all
general business activities relating to the operation of the Restaurant; and,
generally, to do all things necessary or appropriate for the operation of the
Partnership's business.
3. COMPLIANCE AND AGREEMENT WITH TERMS OF LICENSE AGREEMENT. The
Supervising Partner and the Working Partner (as defined in Section 12) shall
take all necessary and appropriate actions to have the Partnership comply with
the terms and conditions of the license agreement with Sonic Industries Inc.
("Sonic") for the Restaurant now in existence and as later amended, renewed,
converted or substituted (the "License Agreement"). In addition, the
Supervising Partner and the Working Partner agree to become personally bound by
and hereby agree to the terms and provisions of the License Agreement relating
to (a) the safeguarding of confidential information and (b) any covenants not to
compete.
4. OTHER ACTIVITIES OF THE MANAGING PARTNER. The Managing Partner shall
have the right to conduct other business activities outside the operation of the
Partnership, including activities which may compete with the Partnership. The
Managing Partner may conduct those activities separately, jointly with others,
or as a part of any other general or limited partnership, joint venture, limited
liability company, or business entity. Nothing in this Agreement shall prevent
the Managing Partner from dealing with the Partnership as an independent party
or through any business entity, including the performance of services or the
sale or leasing of real estate, improvements, equipment, materials or supplies
to the Partnership. Furthermore, nothing in this Agreement shall require the
Managing Partner or its affiliates to permit the Partnership to participate in
their outside activities or to present to the Partnership any particular
investment opportunity which comes to their attention even if the opportunity
may meet the investment objectives of the Partnership.
<PAGE>
5. PARTITION. The parties expressly waive any partition rights they may
have under any applicable partnership law.
6. TERM OF PARTNERSHIP. The Partnership shall commence on the date first
set forth above. This Agreement shall terminate and the Partnership shall
dissolve and terminate (a) upon the Managing Partner's election to terminate the
Partnership by giving written notice of termination to the other partners or (b)
upon the terms and conditions set forth below.
7. PRINCIPAL PLACE OF BUSINESS. The Partnership shall have its principal
place of business at the address of the Restaurant as set forth above.
8. PERCENTAGE INTERESTS AND CAPITAL CONTRIBUTION OF PARTNERS. The
parties shall have the following percentage interests in the Partnership and
shall contribute the following amounts to the capital of the Partnership:
PARTNER PERCENTAGE AMOUNT
------- ---------- ------
Managing Partner 99% $49,500.00
Supervising Partner 1% $500.00
9. DUTIES AND COMPENSATION OF THE MANAGING PARTNER. The Managing Partner
shall set the operating policies of the Partnership. The Partnership shall
reimburse the Managing Partner for all royalty payments, advertising fees, and
other payments it has the obligation to pay to Sonic Industries Inc. as the
licensee for the Restaurant. The Partnership shall treat that reimbursement as
an expense of the Partnership and shall pay the amounts whether or not the
Partnership operates at a profit. The Partnership shall not pay any other
compensation to the Managing Partner except as provided by Section 14 of this
Agreement.
10. SUPERVISING PARTNER. If, at any time, no person is serving as the
Supervising Partner, the Managing Partner may make available for transfer to a
Supervising Partner up to 20% of the total percentage interests in the
Partnership out of the Managing Partner's percentage interest in the Partnership
without the consent of the Working Partner. Any Supervising Partner who
receives the interest shall pay the Managing Partner a purchase price for the
interest in an amount determined by the Managing Partner, in its sole
discretion.
11. DUTIES AND COMPENSATION OF THE SUPERVISING PARTNER. The Supervising
Partner shall manage the Restaurant, subject to the advice and recommendations
of the Managing Partner. The Supervising Partner shall provide complete
management and staffing for the Restaurant and shall have responsibility for the
day-to-day operations of the Restaurant, including (without limitation) the
hiring and firing of personnel, the required accounting for the operations of
the Restaurant, and the adherence to all applicable policies of Sonic Industries
Inc. The Supervising Partner shall comply with all obligations and duties of
the Managing Partner under the license agreement with Sonic Industries Inc. The
Partnership may pay the Supervising Partner a monthly guaranteed payment (in an
amount determined by the Managing Partner) from Partnership funds. The
Partnership shall treat any guaranteed payment to the Supervising Partner as an
expense of the Partnership and the Partnership may pay the amount whether or not
the Partnership operates at a profit. The Partnership shall not pay any other
compensation to the Supervising Partner except as provided by Section 14 of this
Agreement.
<PAGE>
12. WORKING PARTNER. If, at any time, no person is serving as the Working
Partner, the Managing Partner may make available for transfer to a Working
Partner up to 25% of the total percentage interests in the Partnership out of
the Managing Partner's percentage interest in the Partnership without the
consent of the Supervising Partner. The Managing Partner shall transfer the
amount to a Working Partner selected by the Managing Partner after receiving
input from the Supervising Partner. Any Working Partner who receives the
interest shall pay the Managing Partner a purchase price for the interest in an
amount determined by the Managing Partner, in its sole discretion.
13. DUTIES AND COMPENSATION OF THE WORKING PARTNER. The Working Partner
shall work as the manager of the Restaurant full time and shall have
responsibility for the day-to-day operation of the Restaurant, subject to the
supervision of the Supervising Partner. The Partnership may pay the Working
Partner a monthly guaranteed payment (in an amount determined by the Managing
Partner) from Partnership funds. The Partnership shall treat any guaranteed
payment to the Working Partner as an expense of the Partnership and the
Partnership may pay the amount whether or not the Partnership operates at a
profit. The Partnership shall not pay any other compensation to the Working
Partner except as provided by Section 14 of this Agreement.
14. CASH DISTRIBUTIONS AND PROFITS AND LOSSES. All partners shall share
in the cash distributions and profits and losses of the Partnership in
proportion to their percentage interests in the Partnership. The Partnership
shall have the right to require each of the partners to make additional capital
contributions to the Partnership from time to time in an amount sufficient to
offset all or part of any Partnership losses.
15. LIMITATIONS ON DISTRIBUTIONS OF FUNDS. The Partnership shall
distribute its funds to the partners only upon approval of a majority in
interest of the partners. In no event shall the capital accounts fall below the
original total contribution of all of the partners, except in the event of
partnership losses.
16. SUBSTITUTIONS, ASSIGNMENTS, WITHDRAWALS AND ADMISSIONS OF ADDITIONAL
PARTNERS. No partner shall substitute a partner in its place or sell, assign,
transfer or pledge all or any part of its interest in the Partnership without
the consent of the partners holding a majority in interest of the Partnership
interests.
17. DISSOLUTION OF PARTNERSHIP IN THE EVENT OF DEATH, RESIGNATION,
JUDICIAL DETERMINATION OF INCOMPETENCY OR BANKRUPTCY. In the event of the
death, resignation, judicial determination of incompetency, or bankruptcy of any
partner, the Partnership shall dissolve. However, the happening of any of those
events shall have no effect upon the continuance of the Partnership business as
a successor general partnership by the remaining partners in the Partnership.
The Managing Partner shall have the right either to purchase the interest of the
applicable partner or to terminate and liquidate the Partnership's assets.
18. MANAGING PARTNER'S OPTION TO PURCHASE SUPERVISING PARTNER'S INTEREST.
The Managing Partner shall have the right to purchase any or all of the
percentage interest of the Supervising Partner upon 30 days' written notice
pursuant to the terms and provisions of that certain Master Agreement, as
amended from time to time, between the Managing Partner and the Supervising
Partner. In the absence of a Master Agreement, the Managing Partner shall have
the right to purchase any or all of the Supervising Partner's percentage
interest upon 10 days' written notice for an amount equal to original purchase
price of the percentage interest. The Managing Partner shall pay the
Supervising Partner for the percentage interest purchased by corporate check
within 30 days after the end of the 10-day period, and the Managing Partner
shall have the right to offset any amounts due the Partnership or the Managing
Partner from the Supervising Partner.
<PAGE>
19. MANAGING PARTNER'S OPTION TO PURCHASE WORKING PARTNER'S INTEREST. The
Managing Partner shall have the right to purchase any or all of the Working
Partner's interest upon 10 days' written notice pursuant to the terms and
provisions of the Assignment and Assumption Agreement between the Managing
Partner and the Working Partner. The Managing Partner shall pay the Working
Partner for the percentage interest purchased by corporate check within 30 days
after the end of the 10-day period, and the Managing Partner shall have the
right to offset any amounts due the Partnership or the Managing Partner from the
Working Partner.
20. PARTNERSHIP LOANS AND FUNDS. All loans and equipment leases by the
Partnership shall require the approval of those partners having a majority in
interest of the Partnership interests. The Managing Partner and its affiliates
may loan money to the Partnership and shall have the right to charge interest on
those loans and to take security interests in any assets acquired with the
proceeds of those loans. The Partnership may arrange to have the Managing
Partner or its affiliates collect the Partnership's daily receipts, deposit
those receipts into a collective account, and pay the Partnership's expenses and
distributions from that account. The Supervising Partner and the Working
Partner waive any right to receive interest on any positive cash balances held
by the Managing Partner or its affiliates in the foregoing collective account
from time to time.
21. LIQUIDATION. Upon final dissolution, termination or liquidation of
the Partnership and after the payment of all liabilities, the Partnership shall
allocate and distribute the remaining assets to the partners in accordance with
their percentage interests. No partner, other than the Managing Partner, shall
have the right to purchase from the Partnership or receive in distribution any
Partnership property other than cash.
22. INDEMNIFICATION AND LIABILITY OF MANAGING PARTNER. The Partnership
shall indemnify and hold the Managing Partner harmless from and against any and
all liabilities, claims, causes of action, damages, losses, costs and expenses,
including (without limitation) legal and accounting fees, incurred by the
Managing Partner in connection with its services as the managing partner of the
Partnership as long as its conduct did not constitute gross negligence, willful
or wanton misconduct, or a breach of its fiduciary obligations to the
Partnership. In carrying out its duties under this Agreement, the Managing
Partner shall not bear liability to the Partnership or the other partners,
except for actions involving willful misconduct, fraud, gross negligence, or
breach of its fiduciary duties to the Partnership.
23. GENERAL RELEASE AND COVENANT NOT TO SUE. The Supervising Partner and
the Working Partner hereby release Sonic Corp., its subsidiaries, and the
officers, directors, employees and agents of Sonic Corp. and its subsidiaries
from any and all claims and causes of action, known or unknown, which may exist
in favor of the Supervising Partner or the Working Partner. In addition, the
Supervising Partner and the Working Partner covenant that the Supervising
Partner the Working Partner shall not file or pursue any legal action or
complaint against any of the foregoing entities or persons with regard to any of
the foregoing claims or causes of action released pursuant to this Section 23.
24. RESOLUTION OF DISPUTES. The following provisions shall apply to any
controversy between the other partners of the Partnership and the Managing
Partner (including any director, officer, employee, agent or affiliate of the
Managing Partner) and relating (a) to this Agreement (including any claim that
any part of this Agreement is invalid, illegal or otherwise void or voidable),
or (b) to the parties' business activities with the Managing Partner, whether or
not related to the Partnership.
(a) ARBITRATION. The parties shall resolve the controversy by
final and binding arbitration in accordance with the Rules for
Commercial Arbitration (the "Rules") of the
<PAGE>
American Arbitration Association in effect at the time of the execution of
this Agreement and pursuant to the following additional provisions:
(1) APPLICABLE LAW. The Federal Arbitration Act (the "Federal
Act"), as supplemented by the Oklahoma Arbitration Act (to the extent
not inconsistent with the Federal Act), shall apply to the arbitration
and all procedural matters relating to the arbitration.
(2) SELECTION OF ARBITRATORS. The parties shall select one
arbitrator within 10 days after the filing of a demand and submission
in accordance with the Rules. If the parties fail to agree on an
arbitrator within that 10-day period or fail to agree to an extension
of that period, the arbitration shall take place before an arbitrator
selected in accordance the Rules.
(3) LOCATION OF ARBITRATION. The arbitration shall take place
in Oklahoma City, Oklahoma, and the arbitrator shall issue any award
at the place of arbitration. The arbitrator may conduct hearings and
meetings at any other place agreeable to the parties or, upon the
motion of a party, determined by the arbitrator as necessary to obtain
significant testimony or evidence.
(4) DISCOVERY. The arbitrator shall have the power to authorize
all forms of discovery (including depositions, interrogatories and
document production) upon the showing of (a) a specific need for the
discovery, (b) that the discovery likely will lead to material
evidence needed to resolve the controversy, and (c) that the scope,
timing and cost of the discovery is not excessive.
(5) AUTHORITY OF ARBITRATOR. The arbitrator shall not have the
power (a) to alter, modify, amend, add to, or subtract from any term
or provision of this Agreement; (b) to rule upon or grant any
extension, renewal or continuance of this Agreement; or (c) to grant
interim injunctive relief prior to the award.
(6) ENFORCEMENT OF AWARD. The prevailing party shall have the
right to enter the award of the arbitrator in any court having
jurisdiction over one or more of the parties or their assets. The
parties specifically waive any right they may have to apply to any
court for relief from the provisions of this Agreement or from any
decision of the arbitrator made prior to the award.
(b) ATTORNEYS' FEES AND COSTS. The prevailing party to the
arbitration shall have the right to an award of its reasonable attorneys'
fees and costs incurred after the filing of the demand and submission. If
Sonic prevails, the award shall include an amount for that portion of
Sonic's administrative overhead reasonably allocable to the time devoted by
Sonic's in-house legal staff.
<PAGE>
25. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties with regard to the subject matter of this Agreement and replaces and
supersedes all other written and oral agreements and statements of the parties
relating to the subject matter of this Agreement.
26. WAIVER. The failure of a party to insist in any one or more instances
on the performance of any term or condition of this Agreement shall not operate
as a waiver of any future performance of that term or condition.
27. INTERPRETATION. The use of the masculine, feminine, or neuter genders
in this Agreement, when appropriate, shall include the masculine, feminine or
neuter gender, and the use of the singular, when appropriate, shall include the
plural, and vice versa.
28. ASSIGNMENT. No party may assign any of the party's rights or delegate
any of the party's obligations under this Agreement.
29. HEADINGS. The headings used in this Agreement appear strictly for the
parties' convenience in identifying the provisions of this Agreement and shall
not affect the construction or interpretation of the provisions of this
Agreement.
30. BINDING EFFECT. This Agreement binds and inures to the benefit of the
parties and their respective successors, legal representatives, heirs and
permitted assigns.
31. AMENDMENTS. The partners holding a majority in interest of the
interests in the Partnership may amend this Agreement. No amendment to this
Agreement shall become effective or binding on the parties, unless made in
writing.
32. TIME. Time constitutes an essential part of each and every part of
this Agreement.
33. NOTICE. Except as otherwise provided in this Agreement, when this
Agreement makes provision for notice or concurrence of any kind, the sending
party shall deliver or address the notice to the other party by certified mail,
telecopy, or nationally-recognized overnight delivery service to the following
address or telecopy number:
The Managing Partner: 101 Park Avenue
Oklahoma City, Oklahoma 73102
(405) 280-7627
The Supervising Partner: 101 Park Avenue
Oklahoma City, Oklahoma 73102
(405) 280-7516
34. GOVERNING LAW. Notwithstanding the place where the parties execute
this Agreement, the internal laws of Oklahoma shall govern the construction of
the terms and the application of the provisions of this Agreement. The federal
and state courts in Oklahoma County, Oklahoma, shall constitute the proper venue
and forum for any action arising out of or in any way related to this Agreement.
Each party to this Agreement hereby consents to any those court's exercise of
personal jurisdiction over the party in that type of action and expressly waives
all objections that the party otherwise might have to that exercise of personal
jurisdiction.
<PAGE>
35. SEVERABILITY. If a court of competent jurisdiction holds any
provision of this Agreement invalid or ineffective with respect to any person or
circumstance, the holding shall not affect the remainder of this Agreement or
the application of this Agreement to any other person or circumstance. If a
court of competent jurisdiction holds any provision of this Agreement too broad
to allow enforcement of the provision to its full extent, the court shall have
the power and authority to enforce the provision to the maximum extent permitted
by law and may modify the scope of the provision accordingly pursuant to an
order of the court.
In witness of their agreement, the parties have executed this Agreement on
the day and year first set forth above.
Managing Partner: Sonic Restaurants, Inc.
By:
---------------------------------
(Vice) President
Date: , 199
---------- --- --
Attest:
- ------------------------------------
(Assistant) Secretary
Supervising Partner: Sonic Industries Inc.
By:
---------------------------------
(Vice) President
Date: , 199
---------- --- --
Attest:
- ------------------------------------
(Assistant) Secretary
<PAGE>
OPERATING AGREEMENT
OF
SDI OF __________________, __________________, L.C.
Sonic Restaurants, Inc. (the "Manager"), an Oklahoma corporation having its
principal place of business in Oklahoma; and Sonic Industries Inc. (the
"Supervisor"), an Oklahoma corporation having its principal place of business in
Oklahoma, hereby enter into this Operating Agreement (this "Agreement") as of
the ____ day of __________, 199_.
ARTICLE I: FORMATION OF LIMITED LIABILITY COMPANY
1.01. FORMATION AND NAME. The Manager and the Supervisor hereby form a
limited liability company, designated SDI of __________, __________, L.C. (the
"Company"), pursuant to the Oklahoma Limited Liability Company Act (the "Act"),
to develop, own, operate and maintain the Sonic drive-in restaurant (the
"Restaurant") located at __________, __________, _________; generally, to have
the authority to engage in any and all general business activities related to
the foregoing purpose or in any way incidental to the foregoing purpose; and to
do all things necessary or appropriate for the operation of the Company's
business, including (without limitation) the acts specified in Section 2003 of
the Act.
1.02. TERM. The term of the Company shall commence on the filing of
its articles of organization with the Oklahoma Secretary of State and shall
terminate on the date on which the Company has sold its last assets and
concluded its affairs, unless sooner terminated as provided in Article X of this
Agreement.
1.03. PRINCIPAL PLACE OF BUSINESS. The Company shall have its principal
place of business at __________, __________, __________ _______, or at any
other location the Manager may determine, effective upon notice to the other
Members of the Company.
1.04. REGISTERED AGENT. The Manager shall serve as the registered agent
of the Company.
ARTICLE II: DEFINITIONS
Unless the context of their use in this Agreement requires otherwise, the
following words and phrases shall have the following meanings when used in
initially-capitalized form in this Agreement:
2.01. AFFILIATE. The word "Affiliate" shall mean any person or entity
that directly or indirectly controls, is controlled by, or is under common
control with another entity. The word "control" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of an entity, whether through the ownership of voting
securities, by contract, or otherwise.
2.02. CAPITAL ACCOUNT. The phrase "Capital Account" shall mean the
account established for each party to this Agreement to which the Company shall
credit the party's contributions and share of profits and to which the Company
shall charge the party's distributions and share of losses. If the Company makes
any distribution of property other than cash, it shall make the distribution at
the property's fair market value, as reasonably determined by the Manager. The
Company also shall credit or charge the accounts with any non-taxable income and
any costs or losses which the parties cannot capitalize or deduct for federal
income tax purposes.
2.03. CODE. The word "Code" shall mean the Internal Revenue Code of 1986,
as amended.
<PAGE>
2.04. FISCAL YEAR. The phrase "Fiscal Year" shall mean the annual
period ending on August 31 of each year.
2.05. MANAGER. The word "Manager" shall mean Sonic Restaurants, Inc., an
Oklahoma corporation, and its successors.
2.06. MEMBER. The word "Member" shall mean each party to this Agreement.
2.07. MEMBER INTERESTS. The phrase "Member Interests" shall mean the
percentage interests of the Members in the Company.
2.08. NET CASH FLOW. The phrase "Net Cash Flow" shall mean, with respect
to any accounting period, the amount (if any) by which the Proceeds
(including any proceeds received from fire and casualty insurance to the
extent not used to rebuild or replace the property involved) exceed the sum
of the following items: (a) all principal and interest payments on mortgages
and other indebtedness of the Company and all other sums the Company paid to
lenders; (b) all cash expenditures (including expenditures for capital
improvements) incurred by the Company; and (c) any cash reserves which the
Manager deems reasonably necessary for the proper operation of the Company,
including (without limitation) the payment of worker's compensation
insurance, multi-peril insurance, and property taxes.
2.09. PROCEEDS. The word "Proceeds" shall mean all cash receipts and funds
the Company receives from any source and, also, shall include any cash reserves
which the Company previously set aside and which the Manager no longer deems
reasonably necessary for the proper operation of the Company.
2.10. REGULATIONS. The word "Regulations" shall mean any temporary or
final Treasury Regulation promulgated with regard to the Code.
ARTICLE III: CAPITAL CONTRIBUTIONS
3.01. MEMBER CONTRIBUTIONS. Each party to this Agreement shall make the
following contributions to the capital of the Company and shall have the
following percentage interest in the Company:
MEMBER AMOUNT PERCENTAGE
------ ------ ----------
Manager $49,500.00 99%
Supervisor $ 500.00 1%
The Company shall have the right to require each of the members to make
additional capital contributions to the Company from time to time in an amount
sufficient to offset all or part of any Company losses.
3.02. SPECIAL PROVISIONS. The following special provisions shall apply
to the Capital Accounts of the Members:
(a) Upon the transfer of all or part of an interest in the
Company, the Company shall carry over the Capital Account of the
transferring Member in accordance with Regulation Section
1.704(b)(2)(iv). However, if the transfer of an interest in the
Company
<PAGE>
causes a termination of the Company under Code Section 708(b)(1)(B),
the Company shall adjust the Capital Account that carries over to
the transferee Member in accordance with Regulation Section 1.704(b)
in connection with the constructive liquidation of the Company under
Regulation 1.708-1. In addition, the Company shall treat the
constructive reformation of the Company, for purposes of Section
1.704(b), as the formation of a new entity, and the Company shall
determine and maintain the Capital Accounts of the Members of the new
entity accordingly.
(b) The Members intend for the provisions of this Agreement
relating to the maintenance of Capital Accounts to comply with Code
Section 704(b) and all applicable Regulations as interpreted and
applied in a manner consistent with Code Section 704(b) and the
Regulations.
(c) If the Manager determines it as prudent to modify the manner
in which the Company computes the Capital Accounts, or any debits or
credits to the Capital Accounts, in order to comply with the
Regulations, the Manager may make the modification as long as it
likely will not have a material effect on the amounts distributable to
any Member upon the dissolution of the Company. The Manager also may
make any adjustments necessary or appropriate to maintain equality
between the Capital Accounts of the Members and the amount of capital
reflected on the Company's balance sheet, as computed for book
purposes, in accordance with Regulation Section 1.704(b)(2)(iv)(q),
and the Manager may make any appropriate modifications if
unanticipated events might otherwise cause this Agreement not to
comply with Regulation Section 1.704(b).
3.03. INTEREST AND RETURN OF CAPITAL CONTRIBUTIONS. The Company shall
not pay interest on the capital contributions or Capital Account of any Member.
Prior to the termination of the Company, no Member shall have the right to
demand the return of the Member's capital contribution unless the Company has
paid all of its liabilities (except liabilities to the Members as a result of
their contributions) or the Company will have after the return sufficient assets
with which to pay those liabilities. In addition, all of the Members must have
consented to the return. No Member shall have the right to demand and receive
property other than cash in return for the Member's capital contribution.
3.04. LOANS. The Manager and its Affiliates may loan money to the
Company and shall have the right to charge interest on those loans and to take
security interests in any assets acquired with the proceeds of those loans.
Loans by a Member to the Company shall not constitute capital contributions.
ARTICLE IV: DISTRIBUTIONS
From time to time, not less than monthly, the Company shall distribute the
Company's Net Cash Flow to the Members in accordance with their percentage
interests in the Company.
ARTICLE V: TAX ALLOCATIONS
5.01. ALLOCATIONS. The Company shall allocate each item of Company
income, gain, loss, deduction and credit for each Fiscal Year to the Members
according to their percentage interests in the Company. If a Member's
percentage interest varies during a taxable year because of the contribution of
additional capital to the Company or because of the transfer of a Member's
interest, the Company shall allocate the profits and losses among the applicable
Members for each taxable year in proportion to the
<PAGE>
interest in the Company each Member held during the taxable year in
accordance with Code Section 706, using any convention permitted by law and
selected by the Manager. The Company shall allocate each item of income,
gain, loss, deduction or credit with regard to property contributed to the
Company by a Member in a manner which takes into account any difference
between the basis of the property to the Company and its fair market value at
the time of the contribution in accordance with Code Section 704(c) and the
Regulations solely for income tax purposes and not for purposes of
maintaining the Capital Accounts of the Members. The Manager shall have the
sole discretion to choose among alternatives, if any, set forth in the
Regulations for handling the foregoing difference. The Manager also shall
have the authority to make special allocations of tax items required under
Subchapter K of the Code and the Regulations.
5.02. METHOD OF ACCOUNTING, ELECTIONS, AND TAX AUDITS. The Company
shall adopt the accrual method of accounting and may make other income tax
elections as determined by the Manager. The Company shall not make any election
excluding it from the application of the provisions of Subchapter K of the
Internal Revenue Code of 1986, as amended. The Company shall bear all costs of
responding to audits by the Internal Revenue Service and of protesting or
contesting adjustments by or on behalf of the Company.
ARTICLE VI: CONDUCT OF ACTIVITIES
6.01. AUTHORITY AND COMPENSATION OF THE MANAGER. The Manager shall have
full and final control over all of the activities of the Company and shall
have the authority to do all things deemed necessary or desirable by it in
the conduct of the business of the Company, including (without limitation)
the actions specified in Section 2003 of the Act. If the Manager serves as
the licensee under the license agreement for the Restaurant, the Company
shall reimburse the Manager for all royalty payments, advertising fees, and
other payments the Manager has the obligation to pay to Sonic Industries Inc.
as the licensee for the Restaurant. The Company shall treat that reimbursement
as an expense of the Company and shall pay the amounts to the Manager whether
or not the Company operates at a profit. The Company shall not pay any other
compensation to the Manager except as provided by Article IV of this Agreement.
6.02. DESIGNATION, DUTIES AND COMPENSATION OF THE SUPERVISOR. If, at
any time, no person is serving as the Supervisor, the Manager may make available
for transfer to a Supervisor up to 20% of the total Member Interests in the
Company out of the Manager's Member Interest in the Company without the consent
of any other Member. Any Supervisor who receives the interest shall pay the
Manager a purchase price for the interest in an amount determined by the
Manager, in its sole discretion. The Supervisor shall manage the Restaurant,
subject to the advice and recommendations of the Manager. The Supervisor shall
provide complete management and staffing for the Restaurant and shall have
responsibility for the day-to-day operations of the Restaurant, including
(without limitation) the hiring and firing of personnel, the required accounting
for the operations of the Restaurant, and the adherence to all applicable
policies of Sonic Industries Inc. The Supervisor shall comply with all
obligations and duties of the Manager under the license agreement with Sonic
Industries Inc. The Company may pay the Supervisor a monthly guaranteed payment
(in an amount determined by the Manager) from Company funds. The Company shall
treat any guaranteed payment to the Supervisor as an expense of the Company and
the Company may pay the amount whether or not the Company operates at a profit.
The Company shall not pay any other compensation to the Supervisor except as
provided by Article IV of this Agreement.
6.03. DESIGNATION, DUTIES AND COMPENSATION OF WORKING MANAGER. If, at
any time, no person is serving as the Working Manager, the Manager may make
available for transfer to a Working Manager up to 25% of the total Member
Interests in the Company out of the Manager's Member Interest in the Company
<PAGE>
without the consent of any other Member. The Manager shall transfer the Member
Interest to a Working Manager selected by the Manager after receiving input from
the Supervisor. Any Working Manager who receives a Member Interest shall pay
the Manager a purchase price for the interest in an amount determined by the
Manager, in its sole discretion. The Working Manager shall work as the manager
of the Restaurant full time and shall have the authority and responsibility for
the day-to-day operation of the Restaurant, subject to the supervision of the
Supervisor. The Working Manager shall have the right to a monthly salary (in an
amount determined by the Manager) from Company funds. The Company shall treat
the salary of the Working Manager as an expense of the Company and the Company
shall pay the amount whether or not the Company operates at a profit. The
Company shall not pay any other compensation to the Working Manager except as
provided by Article IV of this Agreement. The Working Manager shall constitute
a Member of the Company but shall not constitute a "manager" of the Company as
defined by the Act.
6.04. DESIGNATION, AUTHORITY AND COMPENSATION OF TAX MATTERS PARTNER.
The parties hereby designate the Manager as the tax matters partner pursuant to
Section 6231 of the Internal Revenue Code of 1986, as amended. The Company
shall reimburse the tax matters partner for its expenses incurred in
representing the Company in any administrative or judicial proceeding relating
to the tax treatment of Company items. Additionally, if the tax matters partner
institutes a proceeding in any United States District Court or Court of Claims
and, therefore, has to deposit an amount equal to the proposed increase in tax
liability if the Company were to treat the items on its return consistent with
the asserted adjustment, the Company shall advance that amount to the tax
matters partner. If the court finds the tax matters partner liable as a member
of the Company for any additional tax as a result of the adjustment to Company
items, the tax matters partner shall repay the Company an amount equal to its
liability, without interest, for any funds advanced for the payment of the tax
finally determined as due.
6.05. LIMITATIONS ON AUTHORITY OF SUPERVISOR AND WORKING MANAGER. Without
the prior, written consent of the Manager, neither the Supervisor nor the
Working Manager shall (a) borrow any money on behalf of the Company, (b) enter
into any contract which would commit the Company to pay more that $5,000 during
any period of time, or (c) compromise any claim on behalf of the Company in
excess of $5,000.
6.06. COMPLIANCE AND AGREEMENT WITH TERMS OF LICENSE AGREEMENT. The
Supervisor and the Working Manager shall take all necessary and appropriate
actions to have the Company comply with the terms and conditions of the license
agreement with Sonic Industries Inc. ("Sonic") for the Restaurant now in
existence and as later amended, renewed, converted or substituted (the "License
Agreement"). In addition, the Supervisor and the Working Manager agree to
become personally bound by and hereby agree to the terms and provisions of the
License Agreement relating to the safeguarding of confidential information.
6.07 COMPANY FUNDS. The Company may arrange to have the Manager or its
Affiliates collect the Company's daily receipts, deposit those receipts into a
collective account, and pay the Company's expenses and distributions from that
account. The Supervisor and the Working Manager waive any right to receive
interest on any positive cash balances held by the Manager or its Affiliates in
the foregoing collective account from time to time.
6.08 RESTRICTIONS ON POWERS. Except as otherwise provided in this
Agreement or by the Act, a Member shall not have the authority or power to bind
or act on behalf of the Company or any other Member. A Member shall not have
the right or power to take any action which would change the Company to a
general Company, change the limited liability of a Member, or affect the status
of the Company for federal income tax purposes. Unless authorized by this
Agreement, no Member, agent or employee of the
<PAGE>
Company shall have any power or authority to bind the Company in any way, to
pledge its credit, or to render it liable pecuniarily for any purpose.
ARTICLE VII: OTHER RIGHTS OF THE PARTIES
7.01. OUTSIDE ACTIVITIES. Each Member and its Affiliates may have
business interests and engage in business activities in addition to those
relating to the Company, as long as the business interests or activities do not
violate the provisions of Section 6.06 of this Agreement. Each of the parties
may engage in whatever other activities the party chooses. Nothing in this
Agreement shall prevent the parties to this Agreement or their Affiliates from
engaging in any other activities, individually, jointly with others, or as a
part of any other limited liability company, limited or general partnership,
joint venture, or entity. Nothing in this Agreement shall prevent parties to
this Agreement or their Affiliates from dealing with the Company or any of
Member of the Company as independent parties or through any business entity,
including the performance of services and the sale or leasing of equipment,
materials and supplies to the Company or any Member of the Company.
Furthermore, nothing in this Agreement shall require the parties to this
Agreement or their Affiliates to permit the Company or any Member of the Company
to participate in their outside activities or to present to the Company or any
Member of the Company any particular investment opportunity which comes to their
attention even if the opportunity meets the investment objectives of the Company
or any Member of the Company.
7.02. INDEMNIFICATION. The Company shall indemnify and hold the Manager
harmless from and against any and all liabilities, claims, causes of action,
damages, losses, costs and expenses, including (without limitation) legal and
accounting fees, incurred by the Manager in connection with its services as
the manager of the Company as long as its conduct did not constitute (a) a
breach of the Manager's duty of loyalty to the Company or its Members, (2)
acts or omissions not in good faith or which involved intentional misconduct
or a knowing violation of the law, or (3) a transaction from which the
Manager derived an improper personal benefit.
7.03 LIABILITY. In carrying out its duties under this Agreement, the
Manager shall not bear liability to the Company or any Member for monetary
damages for its breach of any duty to the Company or its Members except for acts
or omissions not in good faith or which involved intentional misconduct or a
knowing violation of the law.
7.04 GENERAL RELEASE AND COVENANT NOT TO SUE. The Supervisor and the
Working Manager hereby release Sonic Corp., its subsidiaries, and the officers,
directors, employees and agents of Sonic Corp. and its subsidiaries from any and
all claims and causes of action, known or unknown, which may exist in favor of
the Supervisor or the Working Manager. In addition, the Supervisor and the
Working Manager covenant that the Supervisor and the Working Manager shall not
file or pursue any legal action or complaint against any of the foregoing
entities or persons with regard to any of the foregoing claims or causes of
action released pursuant to this Section 7.04.
7.05. RESOLUTION OF DISPUTES. The following provisions shall apply to
any controversy between the other Members of the Company and the Manager
(including any director, officer, employee, agent or Affiliate of the Manager)
and relating (a) to this Agreement (including any claim that any part of this
Agreement is invalid, illegal or otherwise void or voidable), or (b) to the
parties' business activities with the Manager, whether or not related to the
Company.
<PAGE>
(a) ARBITRATION. The parties shall resolve the controversy by
final and binding arbitration in accordance with the Rules for Commercial
Arbitration (the "Rules") of the American Arbitration Association in effect
at the time of the execution of this Agreement and pursuant to the
following additional provisions:
(1) The Federal Arbitration Act (the "Federal Act"), as
supplemented by the Oklahoma Arbitration Act (the "Oklahoma Act") to
the extent not inconsistent with the Federal Act, shall apply to the
arbitration.
(2) The parties shall select a sole arbitrator within 10 days
after the filing of a demand and submission in accordance with the
Rules. If the parties fail to agree on a sole arbitrator within that
10-day period or fail to agree to an extension of that period, the
arbitration shall take place before a sole arbitrator selected in
accordance with the Rules.
(3) The arbitration shall take place in Oklahoma City, Oklahoma,
and the arbitrator shall issue any award at the place of arbitration.
The arbitrator may conduct hearings and meetings at any other place
agreeable to the parties or, upon the motion of a party, determined by
the arbitrator as necessary to obtain significant testimony or
evidence.
(4) The arbitrator shall have the power to authorize all forms
of discovery (including depositions, interrogatories and document
production) upon the showing of (a) a specific need for the discovery,
(b) that the discovery likely will lead to material evidence needed to
resolve the controversy, and (c) that the scope, timing and cost of
the discovery is not excessive.
(5) The arbitrator shall not have the power to alter, modify,
amend, add to, or subtract from any term or provision of this
Agreement; nor rule upon or grant any extension, renewal or
continuance of this Agreement; nor award damages or other remedies
expressly prohibited by this Agreement; nor grant interim injunctive
relief prior to the award.
(6) The prevailing party shall have the right to enter the
award of the arbitrator in any court having jurisdiction over one or
more of the parties or their assets. The parties specifically waive
any right they may have to apply to any court for relief from the
provisions of this Agreement or from any decision of the arbitrator
made prior to the award.
(b) ATTORNEYS' FEES AND COSTS. The prevailing party to the
arbitration shall have the right to an award of its reasonable
attorneys' fees and costs incurred after the filing of the demand and
submission. If the Manager prevails, the award shall include an
amount for that portion of the Manager's administrative overhead
reasonably allocable to the time devoted by the Manager's in-house
legal staff.
<PAGE>
ARTICLE VIII: TRANSFER OF MEMBER INTERESTS
No Member shall have the authority to sell, transfer or pledge a Member
Interest, except to or with the consent of the Manager. Furthermore, no
transferee of a Member Interest in the Company shall become a substituted member
until the transferee first agrees in writing to the terms of this Agreement.
Each Member hereby consents to the admission to the Company of any transferee
complying with the provisions of this Article VIII as a substituted member. No
transfer of a Member Interest, including the transfer of less than all of the
transferor's rights under this Agreement, or the transfer of Member Interests to
more than one party, shall relieve the transferor of any responsibility for the
transferor's proportionate share of any expenses, obligations and liabilities
under this Agreement with regard to the Member Interest transferred, whether
arising prior or subsequent to the transfer, nor shall any transfer require an
accounting by the Company between the transferor and transferee (or
transferees). Until the transferee has become a substituted member, the Company
shall continue to account only to the person to whom it was furnishing notices
prior to that time pursuant to Section 11.01 of this Agreement, and that party
shall continue to exercise all of the rights applicable to the entire Member
Interest owned by the transferor.
ARTICLE IX: OPTION TO PURCHASE MEMBER INTERESTS
The Manager shall have the right to purchase any or all of the Member
Interest of the Supervisor upon 30 days' written notice pursuant to the terms
and provisions of the Master Agreement, if any, between the Manager and the
Supervisor. In the absence of a Master Agreement, the Manager shall have the
right to purchase any or all of the Supervisor's Member Interest upon 10 days'
written notice for an amount equal to original purchase price of the interest.
The Manager shall pay the Supervisor for the interest purchased by corporate
check within 30 days after the end of the 10-day period, and the Manager shall
have the right to offset any amounts due the Company or the Manager from the
Supervisor. The Manager shall have the right to purchase any or all of the
Member Interest of the Working Manager upon 10 days' written notice pursuant to
the terms and provisions of the Assignment and Assumption Agreement between the
Manager and the Working Manager. The Manager shall pay the Working Manager for
the Member Interest purchased by corporate check within 30 days after the end of
the 10-day period, and the Manager shall have the right to offset any amounts
due the Company or the Manager from the Working Manager.
ARTICLE X: DURATION, DISSOLUTION AND WINDING UP
10.01. DURATION. The Company shall continue in existence until the
expiration of its term as provided in Section 1.02 of this Agreement, unless
terminated pursuant to the provisions of this Article X. The Company shall
dissolve upon the occurrence of a Final Terminating Event, upon the adjudication
of insolvency of the Manager, upon the institution of proceedings for the
liquidation of the Manager by arrangement or composition with its creditors,
upon the dissolution of the Manager (except as a part of a corporate merger or
reorganization), or upon the occurrence of any event which under the Act causes
the dissolution of a limited liability company. Except upon the occurrence of a
Final Terminating Event, the Company or any successor limited liability company
shall not terminate, but shall continue as a successor limited liability company
under all of the terms of this Agreement. The successor limited liability
company shall succeed to all of the assets and liabilities of the Company. As
used throughout this Agreement, the word "Company" shall include any successor
limited liability company.
10.02. DISSOLUTION AND WINDING UP. Upon the occurrence of a Final
Terminating Event, the Manager shall wind up the affairs of the Company and
shall make a final accounting. As used in this Agreement, the phrase "Final
Terminating Event" shall mean (a) the expiration of the fixed term of the
Company or (b) the giving of notice to the Members by the Manager of its
election to terminate and wind up
<PAGE>
the affairs of the Company. Promptly upon the occurrence of a Final
Terminating Event, the Company shall sell or convert to cash or
cash-equivalent assets (which may include negotiable promissory notes,
installment sales contracts, or similar instruments) all non-cash assets of
the Company. The Company shall apply the assets first to the payment of all
Company liabilities or to the setting up of reserves or escrow accounts for
existing liabilities. The Company shall allocate all items of income, gain,
loss, deduction and credit among the parties in accordance with this
Agreement and shall distribute all assets available for distribution to all
parties in the ratio of the positive balances in their Capital Accounts.
10.03. ARTICLES OF DISSOLUTION. Upon the completion of the distribution
of the Company's assets, the Company shall file articles of dissolution as
required by the Act or any other state law. Each Member shall take any
advisable or proper action necessary to carry out the provisions of this
section.
ARTICLE XI: MISCELLANEOUS PROVISIONS
11.01. NOTICE. Except as otherwise provided in this Agreement, when
this Agreement makes provision for notice or concurrence of any kind, the
sending party shall deliver or address the notice to the other party by
certified mail, telecopy or nationally-recognized overnight delivery service to
the following address or telephone number:
Company: 101 Park Avenue
Oklahoma City, Oklahoma
Manager: 101 Park Avenue
Oklahoma City, Oklahoma 73102
Supervisor: 101 Park Avenue
Oklahoma City, Oklahoma 73102
All notices pursuant to the provisions of this Agreement shall run from the
date the party delivers the notice to the other party or three business days
after the party places the notice in the United States mail. Each party may
change the party's address by giving written notice to the other parties.
11.02. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties with regard to the subject matter of this Agreement and
replaces and supersedes all other written and oral agreements and statements of
the parties relating to the subject matter of this Agreement.
11.03. GOVERNING LAW. Notwithstanding the place where the parties
execute this Agreement, the internal laws of Oklahoma shall govern the
construction of the terms and the application of the provisions of this
Agreement.
11.04. HEADINGS. The headings used in this Agreement appear strictly
for the parties' convenience in identifying the provisions of this Agreement and
shall not affect the construction or interpretation of the provisions of this
Agreement.
11.05. BINDING EFFECT. This Agreement binds and inures to the benefit
of the parties and their respective successors, legal representatives, heirs and
permitted assigns.
<PAGE>
11.06. AMENDMENTS. No amendments to this Agreement shall become
effective unless agreed to in writing by the Members whose Member Interests
equal a majority of the outstanding Member Interests. However, any amendment
which changes the amount of a Member's Member Interest in the Company shall
require the written consent of that Member.
11.08. COUNTERPARTS. The parties may execute this Agreement in
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one and the same instrument.
In witness of their agreement, the parties have executed this Agreement as
of the day and year first set forth above.
Manager: Sonic Restaurants, Inc.
By:
-----------------------------------
(Vice) President
Supervisor: Sonic Industries Inc.
By:
-----------------------------------
(Vice) President
<PAGE>
MASTER AGREEMENT
Sonic Restaurants, Inc. ("SRI"), an Oklahoma corporation; and ___
("Partner"), a ____ resident, enter into this Master Agreement (this
"Agreement") as of the ____ day of _____, 1997.
W I T N E S S E T H:
Whereas, SRI owns and operates Sonic drive-in restaurants in a number of
states, including ______; and
Whereas, SRI and Partner intend to enter into certain general partnership
agreements for the purpose of operating certain Sonic drive-in restaurants in
__________ and other locations; and
Whereas, SRI and Partner wish to set forth the terms and conditions of
the proposed partnership agreements and the contemplated manner in which the
respective partnerships will operate.
Now, therefore, in consideration of the mutual covenants contained in
this Agreement, the parties agree as follows:
1. COVERED PARTNERSHIPS. Simultaneously with the execution of this
Agreement, SRI and Partner shall execute an assignment and assumption
agreement in the form attached as Exhibit A to this Agreement for each of the
Sonic drive-in restaurants listed on Exhibit B to this Agreement. Thereafter,
SRI and Partner may execute additional assignment and assumption agreements
in substantially the same form as Exhibit A to this Agreement for the
operation of future Sonic drive-in restaurants in __________ as designated by
amendment to this Agreement from time to time. The addition of future
partnerships to this Agreement shall take place on the basis of the mutual
agreement of SRI and Partner. Either party may elect not to enter into a
partnership agreement with the other party in his or its sole and absolute
discretion.
2. CAPITAL CONTRIBUTIONS. Upon the execution of each partnership
agreement, SRI and Partner shall contribute to the capital of the respective
partnership amounts determined by SRI.
3. OPTION TO PURCHASE ADDITIONAL PARTNERSHIP INTERESTS. After Partner
has served as the supervising partner of a partnership covered by this
Agreement for two complete fiscal years ending August 31, Partner shall have
the right to acquire additional supervising partner interests in that
partnership out of SRI's partnership interests pursuant to the following
provisions:
(a) Partner may purchase an additional interest only if the
partnership's net royalty sales and net income (as defined below)
increased during the preceding fiscal year ending August 31.
(b) If eligible, Partner shall have the right to purchase up to
an additional 2% interest at the end of each consecutive two-year
period.
(c) To purchase an additional interest, Partner must give SRI
written notice of Partner's election to purchase the interest and
specify the amount of the additional percentage interest being
purchased not later than November 30 of each eligible year.
<PAGE>
(d) Partner's purchase of any additional interest shall become
effective the following January 1, subject to SRI's receipt of the
purchase price for the interest.
(e) The purchase price for Partner's additional interest shall
equal, on a percentage point basis, the same amount as the original
purchase price for Partner's original interest in the partnership.
(f) Partner shall pay the purchase price for the additional
interest by delivering a cashier's check payable to SRI with Partner's
written notice of election to purchase the interest.
(g) Partner may not purchase more than a cumulative total of an
additional 5% supervising partner interest in each partnership.
(h) Partner may not purchase an additional interest if it would
result in SRI owning less than 51% of a partnership.
4. SRI'S OPTION TO PURCHASE PARTNER'S INTERESTS. SRI shall have the
right to purchase any or all of Partner's partnership interest in each
partnership covered by this Agreement pursuant to the following provisions:
(a) SRI shall have the right to purchase any or all of Partner's
interest effective immediately upon 30 days' written notice to
Partner.
(b) The purchase price for Partner's interest shall equal an
amount determined by multiplying Partner's percentage interest being
purchased times 10% of the partnership's net royalty sales for the
last 12 full months of operations during the period ending with the
second month preceding the date of SRI's election to purchase
Partner's interest.
(c) If the partnership has not had 12 full months of operations
during the period ending with the second month preceding the date of
SRI's election to purchase Partner's interest, the purchase price for
Partner's interest shall equal Partner's original purchase price for
the interest being purchased.
(d) On Partner's fifth anniversary as the supervising partner of
a partnership and on each subsequent anniversary of that date, the
purchase price for Partner's partnership interest shall increase
through an increase of one percentage point in the applicable percent
of the partnership's net royalty sales used in the foregoing
calculation.
(e) SRI shall pay Partner for the percentage interest purchased
by corporate check within 30 days after the end of the 30-day period,
and SRI shall have the right to offset any amounts due the partnership
or SRI from Partner.
5. NET ROYALTY SALES AND NET INCOME. The phrase "net royalty sales"
shall mean the amount reported as net royalty sales to Sonic Industries Inc.
on the profit and loss statements of the partnership prepared in the format
then being required by Sonic Industries Inc. The phrase "net income" shall
mean the
<PAGE>
amount reported as net income to Sonic Industries Inc. on the profit and loss
statements of the partnership prepared in the format then being required by
Sonic Industries Inc.
6. TRANSFER OF PERCENTAGE INTEREST BY PARTNER. Partner shall not have
the right to transfer, assign or pledge any partnership interest or any other
interest in any partnership formed with SRI pursuant to the terms of this
Agreement without the prior, written consent of SRI.
7. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with regard to the subject matter of this Agreement and
replaces and supersedes all other written and oral agreements and statements
of the parties relating to the subject matter of this Agreement.
8. WAIVER. The failure of a party to insist in any one or more
instances on the performance of any term or condition of this Agreement shall
not operate as a waiver of any future performance of that term or condition.
9. INTERPRETATION. The use of the masculine, feminine, or neuter
genders in this Agreement, when appropriate, shall include the masculine,
feminine or neuter gender, and the use of the singular, when appropriate,
shall include the plural, and vice versa.
10. ASSIGNMENT. No party may assign any of the party's rights or
delegate any of the party's obligations under this Agreement.
11. HEADINGS. The headings used in this Agreement appear strictly for
the parties' convenience in identifying the provisions of this Agreement and
shall not affect the construction or interpretation of the provisions of this
Agreement.
12. BINDING EFFECT. This Agreement binds and inures to the benefit of
the parties and their respective successors, legal representatives, heirs and
permitted assigns.
13. AMENDMENTS. No amendment to this Agreement shall become binding
unless in writing and signed by all of the parties to this Agreement.
14. TIME. Time constitutes an essential part of each and every part of
this Agreement.
15. NOTICE. Except as otherwise provided in this Agreement, when this
Agreement makes provision for notice or concurrence of any kind, the sending
party shall deliver or address the notice to the other party by certified
mail, telecopy, or nationally-recognized overnight delivery service to the
following address or telecopy number:
SRI: 101 Park Avenue
Oklahoma City, Oklahoma 73102
(405) 280-7627
Partner:
---------------------------------
---------------------------------
( ) -
---- ---- ------
<PAGE>
16. GOVERNING LAW. Notwithstanding the place where the parties execute
this Agreement, the internal laws of Oklahoma shall govern the construction
of the terms and the application of the provisions of this Agreement. The
federal and state courts in Oklahoma County, Oklahoma, shall constitute the
proper venue and forum for any action arising out of or in any way related to
this Agreement. Each party to this Agreement hereby consents to any those
court's exercise of personal jurisdiction over the party in that type of
action and expressly waives all objections that the party otherwise might
have to that exercise of personal jurisdiction.
17. SEVERABILITY. If a court of competent jurisdiction holds any
provision of this Agreement invalid or ineffective with respect to any person
or circumstance, the holding shall not affect the remainder of this Agreement
or the application of this Agreement to any other person or circumstance. If
a court of competent jurisdiction holds any provision of this Agreement too
broad to allow enforcement of the provision to its full extent, the court
shall have the power and authority to enforce the provision to the maximum
extent permitted by law and may modify the scope of the provision accordingly
pursuant to an order of the court.
In witness of their agreement, the parties have executed this Agreement
on the day and year first above written.
SRI: Sonic Restaurants, Inc.
By:
------------------------------------
(Vice) President
Date: , 1997
------------------- -------
Attest:
- --------------------------------
(Assistant) Secretary
Partner:
----------------------------------------
----------------------------------------
SSN: ###-##-####
Date: , 1997
------------------- -------
<PAGE>
MASTER AGREEMENT
Sonic Restaurants, Inc. ("SRI"), an Oklahoma __________; and __ ("__"), a
__ resident, enter into this Master Agreement (this "Agreement") as of the __
day of __, 199_.
W I T N E S S E T H:
Whereas, SRI owns and operates Sonic drive-in restaurants in a number of
states, including __; and
Whereas, SRI and __ intend to form certain limited liability companies
for the purpose of operating certain Sonic drive-in restaurants in __ and
other locations; and
Whereas, SRI and __ wish to set forth the terms and conditions of the
operating agreements of the proposed limited liability companies and the
contemplated manner in which the respective limited liability companies will
operate.
Now, therefore, in consideration of the mutual covenants contained in
this Agreement, the parties agree as follows:
1. COVERED LIMITED LIABILITY COMPANIES. Simultaneously with the
execution of this Agreement, SRI and __ shall execute an assignment and
assumption agreement in the form attached as Exhibit A to this Agreement for
each of the Sonic drive-in restaurants listed on Exhibit B to this Agreement.
Thereafter, SRI and ___ may execute additional assignment and assumption
agreements in substantially the same form as Exhibit A to this Agreement for
the operation of future Sonic drive-in restaurants in __________ as
designated by amendment to this Agreement from time to time. The addition of
future limited liability companies to this Agreement shall take place on the
basis of the mutual agreement of SRI and ___. Either party may elect not to
enter into an operating agreement with the other party in his or its sole and
absolute discretion.
2. CAPITAL CONTRIBUTIONS. Upon the execution of each operating
agreement, SRI and __ shall contribute to the capital of the respective
limited liability company amounts determined by SRI.
3. OPTION TO PURCHASE ADDITIONAL MEMBER INTERESTS. After __ has served
as the supervisor of a company covered by this Agreement for two complete
fiscal years ending August 31, ___ shall have the right to acquire additional
supervisor member interests in that company out of SRI's member interests
pursuant to the following provisions:
(a) ___ may purchase an additional interest only if the
company's net royalty sales and net income (as defined below)
increased during the preceding fiscal year ending August 31.
(b) If eligible, ___ shall have the right to purchase up to an
additional 2% interest at the end of each consecutive two-year period.
(c) To purchase an additional interest, ___ must give SRI
written notice of ___'s election to purchase the interest and specify
the amount of the additional percentage interest being purchased not
later than November 30 of each eligible year.
<PAGE>
(d) ___'s purchase of any additional interest shall become
effective the following January 1, subject to SRI's receipt of the
purchase price for the interest.
(e) The purchase price for ___'s additional interest shall
equal, on a percentage point basis, the same amount as the original
purchase price for Partner's original interest in the company.
(f) ___ shall pay the purchase price for the additional interest
by delivering a cashier's check payable to SRI with ___'s written
notice of election to purchase the interest.
(g) ___ may not purchase more than a cumulative total of an
additional 5% supervisor member interest in each company.
(h) ___ may not purchase an additional interest if it would
result in SRI owning less than 51% of a company.
4. SRI'S OPTION TO PURCHASE ___'S INTERESTS. SRI shall have the right
to purchase any or all of ___'s member interest in each company covered by
this Agreement pursuant to the following provisions:
(a) SRI shall have the right to purchase any or all of ___'s
interest effective immediately upon 30 days' written notice to ___.
(b) The purchase price for ___'s interest shall equal an amount
determined by multiplying ___'s percentage interest being purchased
times 10% of the company's net royalty sales for the last 12 full
months of operations during the period ending with the second month
preceding the date of SRI's election to purchase ___'s interest.
(c) If the company has not had 12 full months of operations
during the period ending with the second month preceding the date of
SRI's election to purchase ___'s interest, the purchase price for
___'s interest shall equal ___'s original purchase price for the
interest being purchased.
(d) On ___'s fifth anniversary as the supervisor of a company
and on each subsequent anniversary of that date, the purchase price
for ___'s member interest shall increase through an increase of one
percentage point in the applicable percent of the company's net
royalty sales used in the foregoing calculation.
(e) SRI shall pay ___ for the percentage interest purchased by
corporate check within 30 days after the end of the 30-day period, and
SRI shall have the right to offset any amounts due the company or SRI
from ___.
5. NET ROYALTY SALES AND NET INCOME. The phrase "net royalty sales"
shall mean the amount reported as net royalty sales to Sonic Industries Inc.
on the profit and loss statements of the company prepared in the format then
being required by Sonic Industries Inc. The phrase "net income" shall mean
the amount reported as net income to Sonic Industries Inc. on the profit and
loss statements of the company prepared in the format then being required by
Sonic Industries Inc.
<PAGE>
6. TRANSFER OF MEMBER INTEREST BY __________. __________ shall not
have the right to transfer, assign or pledge any member interest or any other
interest in any limited liability company formed with SRI pursuant to the
terms of this Agreement without the prior, written consent of SRI.
7. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with regard to the subject matter of this Agreement and
replaces and supersedes all other written and oral agreements and statements
of the parties relating to the subject matter of this Agreement.
8. WAIVER. The failure of a party to insist in any one or more
instance on the performance of any term or condition of this Agreement shall
not operate as a waiver of any future performance of that term or condition.
9. INTERPRETATION. The use of the masculine, feminine, or neuter
genders in this Agreement, when appropriate, shall include the masculine,
feminine or neuter gender, and the use of the singular, when appropriate,
shall include the plural, and vice versa.
10. ASSIGNMENT. No party may assign any of the party's rights or
delegate any of the party's obligations under this Agreement.
11. HEADINGS. The headings used in this Agreement appear strictly for
the parties' convenience in identifying the provisions of this Agreement and
shall not affect the construction or interpretation of the provisions of this
Agreement.
12. BINDING EFFECT. This Agreement binds and inures to the benefit of
the parties and their respective successors, legal representatives, heirs and
permitted assigns.
13. AMENDMENTS. No amendment to this Agreement shall become binding
unless in writing and signed by all of the parties to this Agreement.
14. TIME. Time constitutes an essential part of each and every part of
this Agreement.
15. NOTICE. Except as otherwise provided in this Agreement, when this
Agreement makes provision for notice or concurrence of any kind, the sending
party shall deliver or address the notice to the other party by certified
mail, telecopy, or nationally-recognized overnight delivery service to the
following address or telecopy number:
SRI: 101 Park Avenue
Oklahoma City, Oklahoma 73102
(405) 280-7654
:
---------- ------------------------------------
------------------------------------
( ) -
--- ----
16. GOVERNING LAW. Notwithstanding the place where the parties execute
this Agreement, the internal laws of Oklahoma shall govern the construction
of the terms and the application of the provisions of this Agreement. The
federal and state courts in Oklahoma County, Oklahoma, shall constitute the
sole
<PAGE>
proper venue and forum for any action arising out of or in any way related to
this Agreement. Each party to this Agreement hereby consents to any of those
court's exercise of personal jurisdiction over the party in that type of
action and expressly waives all objections that the party otherwise might
have to that exercise of personal jurisdiction.
17. SEVERABILITY. If a court of competent jurisdiction holds any
provision of this Agreement invalid or ineffective with respect to any person
or circumstance, the holding shall not affect the remainder of this Agreement
or the application of this Agreement to any other person or circumstance. If
a court of competent jurisdiction holds any provision of this Agreement too
broad to allow enforcement of the provision to its full extent, the court
shall have the power and authority to enforce the provision to the maximum
extent permitted by law and may modify the scope of the provision accordingly
pursuant to an order of the court.
In witness of their agreement, the parties have executed this Agreement
on the day and year first above written.
SRI: Sonic Restaurants, Inc.
By:
----------------------------------
(Vice) President
Date: , 199
-------------------- -
:
- ---------- --------------------------------------
Date: , 199
-------------------------- -
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is entered into effective as of the ______ day of
__________, 1996, by and between Sonic Corp. (the "Corporation"), a Delaware
corporation, and __________________ (the "Employee").
RECITALS
Whereas, the Employee is currently serving as the ______________________
of the Corporation and is an integral part of its management; and
Whereas, the Corporation's Board of Directors (the "Board") has
determined that it is appropriate to reinforce and encourage the continued
attention and dedication of certain key members of the Corporation's
management, including Employee, to their assigned duties without distraction
and potentially disturbing circumstances arising from the possibility of a
Change in Control (herein defined) of the Corporation; and
Whereas, the Corporation desires to continue the services of Employee,
whose experience, knowledge and abilities with respect to the business and
affairs of the Corporation are extremely valuable to the Corporation; and
Whereas, the Board on the _____ day of ______________, 19__, ratified
and approved this Agreement; and
Whereas, the parties hereto desire to enter into this Agreement setting
forth the terms and conditions of the continued employment relationship of
the Corporation and Employee.
Now, therefore, it is agreed as follows:
ARTICLE I
TERM OF EMPLOYMENT
1.1 TERM OF EMPLOYMENT. The Corporation shall employ Employee for a
period of one year from the date hereof (the "Initial Term").
1.2 EXTENSION OF INITIAL TERM. Upon each annual anniversary date of
this Agreement, this Agreement shall be extended automatically for successive
terms of one year each, unless either the Corporation or the Employee gives
contrary written notice to the other not later than the annual anniversary
date.
1.3 TERMINATION OF AGREEMENT AND EMPLOYMENT. The Corporation may
terminate this Agreement and the Employee's employment at any time effective
upon written notice to the Employee. The Corporation, in its sole discretion,
may terminate this Agreement without terminating the employment of the
Employee. The Employee may terminate this Agreement and
<PAGE>
the Employee's employment only after at least 30 days' written notice to the
Corporation, unless otherwise agreed by the Corporation.
ARTICLE II
DUTIES OF THE EMPLOYEE
Employee shall serve as the ______________________ of the Corporation.
Employee shall do and perform all services, acts, or things necessary or
advisable to manage and conduct the business of the Corporation consistent
with such position subject to such policies and procedures as may be
established by the Board.
ARTICLE III
COMPENSATION
3.1 SALARY. For Employee's services to the Corporation as the
______________________, Employee shall be paid a salary at the annual rate of
$____________ (herein referred to as "Salary"), payable in twenty-four equal
installments on the first and fifteenth day of each month. On the first day
of each calendar year during the term of this Agreement with the Corporation,
Employee shall be eligible for an increase in Salary based on an evaluation
of Employee's performance during the past year with the Corporation. During
the term of this Agreement, the Salary of the Employee shall not be decreased
at any time from the Salary then in effect unless agreed to in writing by the
Employee.
3.2 BONUS. The Employee shall be entitled to participate in an
equitable manner with other officers of the Corporation in discretionary cash
bonuses as authorized by the Board.
ARTICLE IV
EMPLOYEE BENEFITS
4.1 USE OF AUTOMOBILE. The Corporation shall provide Employee, at the
option of Employee, with either the use of an Oldsmobile 88 automobile for
business and personal use (or a different make automobile with a comparable
initial retail value) or a cash car allowance of $850.00 per month. The
Corporation shall pay all expenses of operating, maintaining and repairing
the automobile and shall procure and maintain automobile liability insurance
in respect thereof, with such coverage insuring each Employee for bodily
injury and property damage.
4.2 MEDICAL, LIFE AND DISABILITY INSURANCE BENEFITS. The Corporation
shall provide Employee with medical, life and disability insurance benefits
in accordance with the established benefit policies of the Corporation.
4.3 WORKING FACILITIES. Employee shall be provided adequate office
space, secretarial assistance, and such other facilities and services
suitable to Employee's position and adequate for the performance of
Employee's duties.
2
<PAGE>
4.4 BUSINESS EXPENSES. Employee shall be authorized to incur
reasonable expenses for promoting the business of the Corporation, including
expenses for entertainment, travel, and similar items. The Corporation shall
reimburse Employee for all such expenses upon the presentation by Employee,
from time to time, of an itemized account of such expenditures.
4.5 VACATIONS. Employee shall be entitled to an annual paid vacation
commensurate with the Corporation's established vacation policy for officers.
The timing of paid vacations shall be scheduled in a reasonable manner by the
Employee.
4.6 DISABILITY. Upon disability (as defined herein) of the Employee,
the Employee shall be entitled to receive an amount equal to 50% of
Employee's Salary (in addition to any disability insurance benefits received
pursuant to Section 4.2 herein), such amount being paid semi-monthly in
twelve equal installments.
4.7 TERM LIFE INSURANCE. The Corporation shall purchase term life
insurance on the life of the Employee having a face value of four times the
Employee's Salary (to be changed as salary adjustments are made) or the face
value of life insurance that can be purchased based upon the Employee's
health history with the Corporation paying the standard premium rate for term
insurance under its then current insurance program at the Employee's age and
assuming good health, whichever amount is lesser; provided further that, such
insurance can be obtained by the Corporation in a manner which meets the
requirements for deductibility by the Corporation under Section 79 of the
Internal Revenue Code of 1986, or as hereafter amended.
4.8 COMPENSATION DEFINED. Compensation shall be defined as all
monetary compensation and all benefits described in Articles III and IV
hereunder (as adjusted during the term hereof).
ARTICLE V
TERMINATION
5.1 DEATH. Employee's employment hereunder shall be terminated upon
the Employee's death.
5.2 DISABILITY. The Corporation may terminate Employee's employment
hereunder in the event Employee is disabled and such disability continues for
more than 180 days. Disability shall be defined as the inability of Employee
to render the services required of him, with or without a reasonable
accommodation, under this Agreement as a result of physical or mental
incapacity.
5.3 CAUSE.
(a) The Corporation may terminate Employee's employment hereunder for
cause. For the purpose of this Agreement, "Cause" shall mean (i) the willful
and intentional failure by Employee to substantially perform Employee's
duties hereunder, other than any failure resulting from Employee's incapacity
due to physical or mental incapacity, or (ii) commission by Employee, in
connection with Employee's employment by the Corporation, of an illegal act
or any act (though
3
<PAGE>
not illegal) which is not in the ordinary course of the Employee's
responsibilities and exposes the Corporation to a significant level of undue
liability. For purposes of this paragraph, no act or failure to act on
Employee's part shall be considered to have met either of the preceding tests
unless done or omitted to be done by Employee not in good faith without a
reasonable belief that Employee's action or omission was in the best interest
of the Corporation.
(b) Notwithstanding the foregoing, Employee shall not be deemed to have
been terminated for cause unless and until there shall have been delivered to
Employee a copy of a resolution, duly adopted by the affirmative vote of not
less than two-thirds of the entire membership of the Board at a meeting held
within 30 days of such termination (after reasonable notice to Employee and
an opportunity for Employee to be heard by members of the Board) confirming
that Employee was guilty of the conduct set forth in this Section 5.3.
5.4 COMPENSATION UPON TERMINATION FOR CAUSE OR UPON RESIGNATION BY
EMPLOYEE. Except as otherwise set forth in Section 5.7 hereof, if Employee's
employment shall be terminated for Cause or if Employee shall resign
Employee's position with the Corporation, the Corporation shall pay
Employee's Compensation only through the last day of Employee's employment by
the Corporation. The Corporation shall then have no further obligation to
Employee under this Agreement.
5.5 COMPENSATION UPON TERMINATION OTHER THAN FOR CAUSE OR DISABILITY.
Except as otherwise set forth in Section 5.7 hereof, if the Company shall
terminate Employee's employment other than for Cause or Disability, the
Company shall continue to be obligated to pay Employee's Salary for a period
of one year, beginning on the date of termination, but shall not be obligated
to provide any other benefits described in Articles III and IV hereof, except
to the extent required by law.
5.6 COMPENSATION UPON NON-RENEWAL OF AGREEMENT. Except as otherwise
set forth in Section 5.7 hereof, if the Company shall give notice to Employee
in accordance with Section 1.2 hereof that this Agreement will not be renewed
but Employee's employment is not terminated, the Company shall continue to be
obligated to pay Employee's Compensation for a period of one year beginning
on the date notice of non-renewal is given.
5.7 TERMINATION OF EMPLOYEE OR RESIGNATION BY EMPLOYEE FOR GOOD REASON.
If at any time within the first twelve months subsequent to a Change in
Control, the Employee's employment with the Corporation is terminated other
than as provided for in Section 5.1, 5.2 or 5.3 hereof, or the Corporation
violates any provision of this Agreement or Employee shall resign Employee's
employment for Good Reason (as defined herein), the Corporation shall be
obligated to pay to Employee a lump sum payment upon the effective date of
such termination or resignation or breach (as determined in Employee's sole
discretion), in an amount equal to two times the Employee's compensation
payable under paragraph 5.5 above, but in no event to exceed an amount equal
to $1.00 less than three (3) times the mean average annual compensation paid
to Employee by the Corporation and any of its subsidiaries during the five
calendar years ending before the date on which the Change in Control occurred
(or if Employee was not employed for that entire five year period, then the
mean average annual compensation paid to employee during such shorter period,
4
<PAGE>
with the Employee's compensation annualized for any calendar year during
which the employee was not employed for the entire calendar year); provided,
however, that if the lump-sum severance payment under this Section 5.7,
either alone or together with any other payments or compensation which
Employee has a right to receive from the Corporation, would constitute a
"parachute payment" (as defined in Section 280G (or any equivalent term
defined in any successor or equivalent provision) of the Internal Revenue
Code of 1986, as amended (the "Code")), then such lump-sum severance payment
shall be reduced to the largest amount as will result in no portion of the
lump-sum severance payment under this Section 5.7 being subject to the excise
tax imposed by Section 4999 (or any successor or equivalent provision) of the
Code. For the purpose of this Section 5.7, the Employee's annual
compensation from the Corporation and its subsidiaries for a given year shall
equal Employee's compensation as reflected on Employee's Form W-2 for that
year (unless the Employee was not employed for the entire calendar year, in
which case Employee's Form W-2 compensation for such year shall be
annualized). The determination of any reduction in lump-sum severance payment
under this Section 5.7 pursuant to the foregoing provision shall be
conclusive and binding on the Corporation. Notwithstanding any other
provision of this Section 5.7, Employee may elect to have the lump sum
severance payment hereunder paid in equal monthly installments over a period
not to exceed 12 consecutive months.
"Good Reason" shall mean any of the following which occur during the
term of this Agreement without Employee's express written consent:
In the Event of a Change in Control:
(a) the assignment to Employee of duties inconsistent with Employee's
position, office, duties, responsibilities and status with the Corporation
immediately prior to a Change in Control; or, a change in Employee's titles
or offices as in effect immediately prior to a Change in Control; or, any
removal of Employee from or any failure to reelect Employee to any such
position or office, except in connection with the termination of Employee's
employment by the Corporation for Disability or Cause or as a result of
Employee's death or by Employee other than for Good Reason as set forth in
this Section 5.7(a); OR
(b) a reduction by the Corporation in Employee's Salary as in effect
as of the date of this Agreement or as the same may be increased from
time-to-time during the term of this Agreement or the Corporation's failure
to increase (within twelve months of the Employee's last increase in
Salary) Employee's Salary after a Change in Control in an amount which at
least equals, on a percentage basis, the highest percentage increase in
salary for all officers of the Corporation or any parent or affiliated
company effected in the preceding twelve months; OR
(c) the failure of the Corporation to provide Employee with the same
fringe benefits (including, without limitation, life insurance plans,
medical or disability plans, retirement plans, incentive plans, stock
option plans, stock purchase plans, stock ownership plans, or bonus plans)
that were provided to Employee immediately prior to the Change in Control,
or with a package of fringe benefits
5
<PAGE>
that, if one or more of such benefits varies from those in effect
immediately prior to such Change in Control, is in Employee's sole
judgment substantially comparable in all material respects to such fringe
benefits taken as a whole; OR
(d) relocation of the Corporation's principal executive offices to a
location outside of Oklahoma City, Oklahoma, or Employee's relocation to
any place other than the location at which Employee performed Employee's
duties prior to a Change in Control, except for required travel by Employee
on the Corporation's business to an extent substantially consistent with
Employee's business travel obligations at the time of the Change in
Control; OR
(e) any failure by the Corporation to provide Employee with the same
number of paid vacation days to which Employee is entitled at the time of
the Change in Control; OR
(f) the failure of a successor to the Corporation to assume the
obligation of this Agreement as set forth in Section 7.1 herein.
5.8. CHANGE IN CONTROL. For the purposes of this Agreement, the phrase
"change in control" shall mean any of the following events:
(a) Any consolidation or merger of the Corporation in which the
Corporation is not the continuing or surviving corporation or pursuant to
which shares of the Corporation's capital stock would convert into cash,
securities or other property, other than a merger of the Corporation in
which the holders of the Corporation's capital stock immediately prior to
the merger have the same proportionate ownership of capital stock of the
surviving corporation immediately after the merger;
(b) Any sale, lease, exchange or other transfer (whether in one
transaction or a series of related transactions) of all or substantially
all of the assets of the Corporation;
(c) The stockholders of the Corporation approve any plan or proposal
for the liquidation or dissolution of the Corporation;
(d) Any person (as used in Section 13(d) and 14(d)(2) of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"))
becomes the beneficial owner (within the meaning of Rule 13D-3 under the
Exchange Act) of 50% or more of the Corporation's outstanding capital
stock;
(e) During any period of two consecutive years, individuals who at
the beginning of that period constitute the entire Board of Directors of
the Corporation, cease for any reason to constitute a majority of the
Board of Directors unless the election or the nomination for election by
the Corporation's stockholders of each
6
<PAGE>
new director received the approval of the Board of Directors by a vote of
at least two-thirds of the directors then and still in office and who
served as directors at the beginning of the period; or
(f) The Corporation becomes a subsidiary of any other corporation.
ARTICLE VI
OBLIGATION TO MITIGATE DAMAGES; NO EFFECT
ON OTHER CONTRACTUAL RIGHTS
6.1 MITIGATION. The Employee shall not have any obligation to mitigate
damages or the amount of any payment provided for under this Agreement by
seeking other employment or otherwise. However, all payments required under
the terms of this Agreement shall cease 30 days after the acceptance by the
Employee of employment by another employer; provided that, this limitation
shall not apply to payments due under paragraph 5.7, above.
6.2 OTHER CONTRACTUAL RIGHTS. The provisions of this Agreement, and
any payment provided for hereunder shall not reduce any amount otherwise
payable, or in any way diminish Employee's existing rights, or rights which
would accrue solely as a result of passage of time under any employee benefit
plan or other contract, plan or arrangement of which Employee is a
beneficiary or in which Employee participates.
ARTICLE VII
SUCCESSORS TO THE CORPORATION
7.1 ASSUMPTION. The Corporation will require any successor or assignee
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
of all or substantially all of the business and/or assets of the Corporation,
by agreement in form and substance reasonably satisfactory to Employee, to
expressly, absolutely and unconditionally assume and agree to perform this
Agreement in the same manner and to the same extent that the Corporation
would be required to perform it if no such succession or assignment had taken
place. Any failure by the Corporation to obtain such agreement prior to the
effectiveness of any such succession or assignment shall be a material breach
of this Agreement.
7.2 EMPLOYEE'S SUCCESSORS AND ASSIGNS. This Agreement shall inure to
the benefit of and be enforceable by Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee should die while any amounts are still
payable to Employee hereunder, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to
Employee's devisee, legatee or other designee or, if there is no such
designee, to Employee's estate.
7
<PAGE>
ARTICLE VIII
RESTRICTIONS ON EMPLOYEE
8.1 CONFIDENTIAL INFORMATION. During the term of the Employee's
employment and for a period of twelve months thereafter, the Employee shall
not divulge or make accessible to any party any Confidential Information, as
defined below, of the Corporation or any of its subsidiaries, except to the
extent authorized in writing by the Corporation or otherwise required by law.
The phrase "Confidential Information" shall mean the unique, proprietary and
confidential information of the Corporation and its subsidiaries, consisting
of: (1) confidential financial information regarding the Corporation or its
subsidiaries, (2) confidential recipes for food products; (3) confidential
and copyrighted plans and specifications for interior and exterior signs,
designs, layouts and color schemes; (4) confidential methods, techniques,
formats, systems, specifications, procedures, information, trade secrets,
sales and marketing programs; (5) knowledge and experience regarding the
operation and franchising of Sonic drive-in restaurants; (6) the identities
and locations of Sonic's franchisees, Sonic drive-in restaurants, and
suppliers to Sonic's franchisees and drive-in restaurants; (7) knowledge,
financial information, and other information regarding the development of
franchised and company-store restaurants; (8) knowledge, financial
information, and other information regarding potential acquisitions and
dispositions; and (9) any other confidential business information of the
Corporation or any of its subsidiaries. The Employee shall give the
Corporation written notice of any circumstances in which Employee has actual
notice of any access, possession or use of the Confidential Information not
authorized by this Agreement.
8.2 RESTRICTIVE COVENANT. During the term of Employee's employment,
the Employee shall not engage in or have any interest, directly or
indirectly, in any business competing with the business being conducted by
the Corporation or any of its subsidiaries, without the Corporation's prior
written consent. For the six month period immediately following the
termination of Employee's employment, the Employee shall not engage in or
have any interest, directly or indirectly, in any fast food restaurant
business that has a menu similar to that of a Sonic drive-in restaurant (such
as hamburgers, hot dogs, onion rings and similar items customarily sold by
Sonic drive-in restaurants), or which has an appearance similar to that of a
Sonic drive-in restaurant (such as color pattern, use of canopies, use of
speakers and menu housings for ordering food, or other items that are
customarily used by a Sonic drive-in restaurant), and which operates such
restaurants within a three mile radius of any Sonic drive-in restaurant.
ARTICLE IX
MISCELLANEOUS
9.1 INDEMNIFICATION. To the full extent permitted by law, the Board
shall authorize the payment of expenses incurred by or shall satisfy
judgments or fines rendered or levied against Employee in any action brought
by a third-party against Employee (whether or not the Corporation is joined
as a party defendant) to impose any liability or penalty on Employee for any
act alleged to have been committed by Employee while employed by the
Corporation unless Employee was acting with gross negligence or willful
misconduct. Payments authorized hereunder shall include amounts paid and
expenses incurred in settling any such action or threatened action.
8
<PAGE>
9.2 RESOLUTION OF DISPUTES. The following provisions shall apply to
any controversy between the Employee and the Corporation and its subsidiaries
and the Employee (including any director, officer, employee, agent or
affiliate of the Corporation and its subsidiaries) whether or not relating to
this Agreement.
(a) ARBITRATION. The parties shall resolve all controversies by
final and binding arbitration in accordance with the Rules for Commercial
Arbitration (the "Rules") of the American Arbitration Association in effect
at the time of the execution of this Agreement and pursuant to the
following additional provisions:
(1) APPLICABLE LAW. The Federal Arbitration Act (the "Federal
Act"), as supplemented by the Oklahoma Arbitration Act (to the extent
not inconsistent with the Federal Act), shall apply to the arbitration
and all procedural matters relating to the arbitration.
(2) SELECTION OF ARBITRATORS. The parties shall select one
arbitrator within 10 days after the filing of a demand and submission
in accordance with the Rules. If the parties fail to agree on an
arbitrator within that 10-day period or fail to agree to an extension
of that period, the arbitration shall take place before an arbitrator
selected in accordance with the Rules.
(3) LOCATION OF ARBITRATION. The arbitration shall take place
in Oklahoma City, Oklahoma, and the arbitrator shall issue any award
at the place of arbitration. The arbitrator may conduct hearings and
meetings at any other place agreeable to the parties or, upon the
motion of a party, determined by the arbitrator as necessary to obtain
significant testimony or evidence.
(4) DISCOVERY. The arbitrator shall have the power to authorize
all forms of discovery (including depositions, interrogatories and
document production) upon the showing of (a) a specific need for the
discovery, (b) that the discovery likely will lead to material
evidence needed to resolve the controversy, and (c) that the scope,
timing and cost of the discovery is not excessive.
(5) AUTHORITY OF ARBITRATOR. The arbitrator shall not have the
power (a) to alter, modify, amend, add to, or subtract from any term
or provision of this Agreement; (b) to rule upon or grant any
extension, renewal or continuance of this Agreement; or (c) to grant
interim injunctive relief prior to the award.
(6) ENFORCEMENT OF AWARD. The prevailing party shall have the
right to enter the award of the arbitrator in any court having
9
<PAGE>
jurisdiction over one or more of the parties or their assets. The
parties specifically waive any right they may have to apply to any
court for relief from the provisions of this Agreement or from any
decision of the arbitrator made prior to the award.
(b) ATTORNEYS' FEES AND COSTS. The prevailing party to the
arbitration shall have the right to an award of its reasonable attorneys'
fees and costs (including the cost of the arbitrator) incurred after the
filing of the demand and submission. If the Corporation or any of its
subsidiaries prevails, the award shall include an amount for that portion
of the administrative overhead reasonably allocable to the time devoted by
the in-house legal staff of the Corporation or any subsidiary.
(c) EXCLUDED CONTROVERSIES. At the election of the Corporation or
its subsidiaries, the provisions of this Section 9.2 shall not apply to
any controversies relating to the enforcement of the covenant not to
compete or the use and protection of the trademarks, service marks,
tradenames, copyrights, patents, confidential information and trade secrets
of the Corporation or its subsidiaries, including (without limitation) the
right of the Corporation or its subsidiaries to apply to any court of
competent jurisdiction for appropriate injunctive relief for the
infringement of the rights of the Corporation or its subsidiaries.
(d) OTHER RIGHTS. The provisions of this Section 9.2 shall not
prevent the Corporation, its subsidiaries, or the Employee from exercising
any of their rights under this agreement, any other agreement, or under the
common law, including (without limitation) the right to terminate any
agreement between the parties or to end or change the party's legal
relationship.
9.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties with regard to the subject matter of this Agreement and
replaces and supersedes all other written and oral agreements and statements
of the parties relating to the subject matter of this Agreement.
9.4 NOTICES. Any notices required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by mail to Employee's
residence, in the case of Employee, or to its principal office, in the case
of the Corporation.
9.5 WAIVER OF BREACH. The waiver by any party hereto of a breach of
any provision of this Agreement shall not operate or be construed as a waiver
of any subsequent breach by any party.
9.6 AMENDMENT. No amendment or modification of this Agreement shall be
deemed effective unless or until executed in writing by the parties hereto.
9.7 VALIDITY. This Agreement, having been executed and delivered in
the State of Oklahoma, its validity, interpretation, performance and
enforcement will be governed by the laws of that state.
10
<PAGE>
9.8 SECTION HEADINGS. Section and other headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.9 COUNTERPART EXECUTION. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one and the same instrument.
9.10 EXCLUSIVITY. Specific arrangements referred to in this Agreement
are not intended to exclude Employee's participation in any other benefits
available to executive personnel generally or to preclude other compensation
or benefits as may be authorized by the Board from time to time.
9.11 PARTIAL INVALIDITY. If any provision in this Agreement is held by
a court of competent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions shall nevertheless continue in full force without being
impaired or invalidated in any way.
In witness whereof, the Corporation has caused this Agreement to be
executed and its seal affixed hereto by its officers thereunto duly
authorized; and the Employee has executed this Agreement, as of the day and
year first above written.
The Corporation: Sonic Corp.
By:
---------------------------------
J. Clifford Hudson, President
Attest:
- ------------------------------
Ronald L. Matlock, Secretary
The Employee:
--------------------------------------
--------------------
11
<PAGE>
SCHEDULE OF MATERIAL DIFFERENCES FOR THE EXECUTIVE OFFICERS OF THE COMPANY
PART I
<TABLE>
CONTRACTING TERM OF
OFFICER TITLE CORPORATION AGREEMENT
- ------- ----- ----------- ---------
<S> <C> <C> <C>
J. C. Hudson President and Chief Executive Officer Sonic Corp. Two Years
K. Keymer President Sonic Industries Inc. One Year
M. Shumsky President Sonic Restaurants, Inc. One Year
P. Moore Senior Vice President of Marketing and Brand Development Sonic Corp. One Year
R. Matlock Vice President, General Counsel and Secretary Sonic Corp. One Year
W. S. McLain Vice President of Finance, Chief Financial Officer and Treasurer Sonic Corp. One Year
D. Dolan Vice President of Administration and Corporate Human Resources Sonic Corp. One Year
D. Foringer Vice President of Information Technology Sonic Corp. One Year
S. Jeska Vice President of Franchise Development Sonic Industries Inc. One Year
D. Ritger Vice President of Purchasing Sonic Industries Inc. One Year
W. Van Sciver Vice President of Franchise Services Sonic Industries Inc. One Year
S. Vaughan Vice President and Controller Sonic Corp. One Year
F. Young Vice President of Operations Sonic Restaurants, Inc. One Year
</TABLE>
<PAGE>
SCHEDULE OF MATERIAL DIFFERENCES FOR THE EXECUTIVE OFFICERS OF THE COMPANY
PART II
<TABLE>
AUTOMOBILE
OFFICER SALARY AUTOMOBILE ALLOWANCE SECTION 5.5 SECTION 5.6 SECTION 5.7
- ------- ------ ---------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
J.C. Hudson $275,000 Full-size Luxury $1,000 Two Years Two Years One and
One-half
K. Keymer $190,000 Full-size Luxury $1,000 One Year One Year Two
M. Shumsky $190,000 Full-size Luxury $1,000 One Year One Year Two
P. Moore $150,000 Full-size $850 One Year One Year Two
R. Matlock $145,000 Full-size $850 One Year One Year Two
W. S. McLain $125,000 Full-size $850 Six Months Six Months Two
D. Dolan $75,000 Full-size $850 Six Months Six Months Two
D. Foringer $120,000 Full-size $850 Six Months Six Months Two
S. Jeska $100,000 Full-size $850 Six Months Six Months Two
D. Ritger $110,000 Full-size $850 Six Months Six Months Two
W. Van Sciver $111,456 Full-size $850 Six Months Six Months Two
S. Vaughan $60,000 Full-size $850 Six Months Six Months Two
F. Young $101,760 Full-size $850 Six Months Six Months Two
</TABLE>
<PAGE>
Exhibit 23.01
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 333-09373, No. 33-40989 and No. 33-78576) pertaining to the
1991 Sonic Corp. Stock Option Plan, the Registration Statement (Form S-8 No.
33-40988) pertaining to the 1991 Sonic Corp. Stock Purchase Plan, the
Registration Statement (Form S-8 No. 33-40987) pertaining to the 1991 Sonic
Corp. Directors' 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 October 17, 1997, with
respect to the consolidated financial statements and schedule of Sonic Corp.
included in the Annual Report (Form 10-K) for the year ended August 31, 1997.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
November 24, 1997
<PAGE>
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below hereby constitutes and appoints Ronald L. Matlock and W. Scott McLain,
and each of them, his true and lawful attorney-in-fact, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to the Form 10-K Annual Report of
Sonic Corp. for the fiscal year ended August 31, 1997, and to file the
amendments, with exhibits, with the Securities and Exchange Commission,
granting to the foregoing attorney-in-fact, and his substitutes, the full
power and authority to do and perform each and every act and thing necessary
or appropriate to file the amendments as fully to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that the
attorney-in-fact, or his substitutes, lawfully may do by virtue of this
instrument.
Executed as of the 26th day of November, 1997.
/s/ Dennis H. Clark
----------------------------------------
Dennis H. Clark
/s/ Leonard Lieberman
----------------------------------------
Leonard Lieberman
/s/ H. E. Rainbolt
----------------------------------------
H. E. Rainbolt
/s/ Frank E. Richardson
----------------------------------------
Frank E. Richardson
/s/ Robert M. Rosenberg
----------------------------------------
Robert M. Rosenberg
/s/ E. Dean Werries
----------------------------------------
E. Dean Werries
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY INCLUDED ELSEWHERE IN THIS
REPORT. THE COMPANY HEREBY QUALIFIES THE FOLLOWING INFORMATION IN ITS ENTIRETY
BY REFERENCE TO THOSE FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 7,334
<SECURITIES> 0
<RECEIVABLES> 5,989
<ALLOWANCES> (99)
<INVENTORY> 1,239
<CURRENT-ASSETS> 18,699
<PP&E> 164,336
<DEPRECIATION> (27,814)
<TOTAL-ASSETS> 184,841
<CURRENT-LIABILITIES> 15,190
<BONDS> 46,817
0
0
<COMMON> 135
<OTHER-SE> 118,039
<TOTAL-LIABILITY-AND-EQUITY> 184,841
<SALES> 152,739
<TOTAL-REVENUES> 184,018
<CGS> 112,588
<TOTAL-COSTS> 151,784
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 266
<INTEREST-EXPENSE> 1,558
<INCOME-PRETAX> 30,410
<INCOME-TAX> 11,328
<INCOME-CONTINUING> 19,082
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,082
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.42
</TABLE>
