<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 14(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended Commission File Number
February 28, 1998 0-18859
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SONIC CORP.
----------------------------------------------------
(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
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for the shorter period that the Registrant has
had to file the reports), and (2) has been subject to the filing requirement
for the past 90 days.
Yes X . No .
--- ---
As of February 28, 1998, the Registrant had 12,850,378 shares of common
stock issued and outstanding (excluding 807,080 shares of common stock held
as treasury stock).
<PAGE>
SONIC CORP.
INDEX
<TABLE>
Page
Number
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at February 28, 1998 and
August 31, 1997 3
Consolidated Statements of Income for the three months and six
months ended February 28, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the six
months ended February 28, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Independent Accountants' Review Report 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE>
SONIC CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
(UNAUDITED)
FEBRUARY 28, August 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,659 $ 7,334
Accounts and notes receivable, net 6,306 5,890
Other current assets 3,532 5,475
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Total current assets 12,497 18,699
Property, equipment and capital leases 188,863 164,336
Less accumulated depreciation and amortization (33,434) (27,814)
-------- --------
Property, equipment and capital leases, net 155,429 136,522
Trademarks, tradenames and other goodwill 21,198 21,124
Other intangibles and other assets 14,288 15,092
Less accumulated amortization (7,423) (6,596)
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Intangibles and other assets, net 28,063 29,620
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Total assets $195,989 $184,841
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,502 $ 4,635
Deposits from franchisees 845 780
Accrued liabilities 6,108 8,629
Obligations under capital leases and long-term debt
due within one year 1,127 1,146
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Total current liabilities 13,582 15,190
Obligations under capital leases due after one year 7,643 8,153
Long-term debt due after one year (Note 4) 40,459 37,517
Other noncurrent liabilities 5,276 5,807
Contingencies (Note 2)
Stockholders' equity:
Preferred stock, par value $.01; 1,000,000 shares
authorized; none outstanding - -
Common stock, par value $.01; 40,000,000 shares
authorized; 13,657,458 shares issued (13,531,593
shares issued at August 31, 1997) 137 135
Paid-in capital 62,182 59,891
Retained earnings 78,228 69,666
-------- --------
140,547 129,692
Treasury stock, at cost; 807,080 common shares at
February 28, 1998 and August 31, 1997 (11,518) (11,518)
-------- --------
Total stockholders'equity 129,029 118,174
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Total liabilities and stockholders' equity $195,989 $184,841
-------- --------
-------- --------
</TABLE>
See accompanying notes.
3
<PAGE>
SONIC CORP.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
(Unaudited) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
Company-owned restaurant sales $37,198 $30,664 $78,433 $64,250
Franchised restaurants:
Franchise fees 467 541 907 811
Franchise royalties 6,538 5,404 14,440 11,961
Other 623 1,524 918 2,084
--------------------- ---------------------
44,826 38,133 94,698 79,106
Cost and expenses:
Company-owned restaurants:
Food and packaging 10,378 8,796 21,907 18,564
Payroll and other employee benefits 10,657 9,039 22,437 18,843
Other operating expenses 6,911 5,625 14,394 11,728
--------------------- ---------------------
27,946 23,460 58,738 49,135
Selling, general and administrative 5,274 5,264 10,322 9,150
Depreciation and amortization 3,953 2,955 7,763 5,770
Minority interest in earnings of
restaurant partnerships 1,377 1,084 2,952 2,441
Provision for impairment of long-lived assets 14 15 29 38
--------------------- ---------------------
38,564 32,778 79,804 66,534
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Income from operations 6,262 5,355 14,894 12,572
Interest expense 810 471 1,582 808
Interest income (179) (149) (332) (295)
--------------------- ---------------------
Net interest expense 631 322 1,250 513
--------------------- ---------------------
Income before income taxes 5,631 5,033 13,644 12,059
Provision for income taxes 2,097 1,875 5,082 4,492
--------------------- ---------------------
Net income $ 3,534 $ 3,158 $ 8,562 $ 7,567
--------------------- ---------------------
--------------------- ---------------------
Net income per share - basic $ .28 $ .23 $ .67 $ .56
--------------------- ---------------------
--------------------- ---------------------
Net income per share - diluted $ .27 $ .23 $ .65 $ .55
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
See accompanying notes.
4
<PAGE>
SONIC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
(UNAUDITED)
SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,562 $ 7,567
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,763 5,770
Other (573) (1,778)
(Increase) decrease in operating assets 1,155 (73)
Decrease in operating liabilities (1,754) (1,809)
-----------------------
Total adjustments 6,591 2,110
-----------------------
Net cash provided by operating activities 15,153 9,677
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (25,104) (21,982)
Other 558 1,782
-----------------------
Net cash used in investing activities (24,546) (20,200)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (12,557) (11,070)
Proceeds from long-term borrowings 15,500 25,500
Proceeds from excercise of stock options 2,293 494
Other (518) (156)
-----------------------
Net cash provided by financing activities 4,718 14,768
Net increase (decrease) in cash and cash equivalents (4,675) 4,245
Cash and cash equivalents at beginning of period 7,334 7,706
-----------------------
Cash and cash equivalents at end of period $ 2,659 $ 11,951
-----------------------
-----------------------
</TABLE>
See accompanying notes.
5
<PAGE>
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 1
The unaudited Condensed Consolidated Financial Statements include all
adjustments, consisting of normal, recurring accruals, which Sonic Corp. (the
"Company") considers necessary for a fair presentation of the financial
position and the results of operations for the indicated periods. The notes
to the condensed consolidated financial statements should be read in
conjunction with the notes to the consolidated financial statements contained
in the Company's Form 10-K, for the fiscal year ended August 31, 1997. The
results of operations for the six months ended February 28, 1998, are not
necessarily indicative of the results to be expected for the full year ending
August 31, 1998.
NOTE 2
On March 13, 1998, the Texas Supreme Court denied the Company's application
for a writ of error regarding the Texas Court of Appeals reversal of the
district court's judgment notwithstanding the verdict which reinstated the
jury's verdict of $782 of actual damages, $1,000 of punitive damages, and
pre- and post-judgment interest in an action in which the plaintiffs claim a
subsidiary of the Company interfered with the contractual relations of the
plaintiffs. The court refused to exercise its discretionary jurisdiction to
consider the decision of the Texas Court of Appeals at Beaumont, Texas. The
Company filed a motion for rehearing on March 30, 1998 based upon two
favorable opinions rendered by the court since the time the Company filed its
original application for a writ of error in July, 1996. The Company
continues to believe that the findings of the jury and the court of appeals
have no merit and will defend its position vigorously during the appellate
process. However, the Company cannot predict the ultimate outcome of this
matter. If the Company is not successful in the appellate process, it is
likely that the Company will recognize a pre-tax charge to operations of
approximately $2 million.
The Company is a party to several lawsuits and claims arising in the ordinary
course of business. Management believes that the ultimate resolution of
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
NOTE 3
In February of 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings per Share." SFAS 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of stock options. Diluted earnings per share is very
similar to the previously reported earnings per share calculation. All
earnings per share amounts for all periods have been presented and, where
necessary, restated to conform to the SFAS 128 requirements.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data)
NOTE 3 (Continued)
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 3,534 $ 3,158 $ 8,562 $ 7,567
Denominator:
Weighted average shares outstanding - basic 12,786 13,498 12,764 13,486
Effect of dilutive employee stock options 430 223 411 257
--------------------- ---------------------
Weighted average shares - diluted 13,216 13,721 13,175 13,743
--------------------- ---------------------
--------------------- ---------------------
Net income per share - basic $ .28 $ .23 $ .67 $ .56
--------------------- ---------------------
--------------------- ---------------------
Net income per share - diluted $ .27 $ .23 $ .65 $ .55
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
NOTE 4
In April of 1998, the Company plans to issue $50 million of Senior Unsecured
Notes with $20 million of Series A notes maturing in 2003 and $30 million of
Series B notes maturing in 2005. Interest will be payable semi-annually in
arrears and will accrue at the rate of 6.65% for the Series A notes and 6.76%
for the Series B notes. The proceeds from the issuance will be used to repay
the balance outstanding under the existing line of credit ($40 million at
February 28, 1998), fund repurchases of common stock of the Company and for
general corporate purposes. The notes will be subject to various restrictive
financial covenants. In connection with the issuance of these notes, the
Company's existing line of credit was reduced on April 2, 1998 from $80
million to $60 million.
7
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
Sonic Corp.
We have reviewed the accompanying condensed consolidated balance sheet of
Sonic Corp. as of February 28, 1998, and the related consolidated statements
of income for the three-month and six-month periods ended February 28, 1998
and 1997, and the condensed consolidated statements of cash flows for the
six-month periods ended February 28, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial
statements referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Sonic Corp. as of August 31,
1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended (not presented herein) and in
our report dated October 17, 1997, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of August
31, 1997, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 23, 1998
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From time to time, the Company may publish forward-looking statements
relating to certain matters, including anticipated financial performance,
business prospects, the future opening of Company-owned and franchised
restaurants, anticipated capital expenditures, and other similar matters.
The Private Securities Litigation Reform Act of 1997 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 Company-owned restaurant
sales and royalty fees from franchisees. The Company also receives revenues
from initial franchise fees, area development fees, and the leasing of signs
and real estate. Costs of Company-owned restaurant sales and minority
interest in earnings of restaurant partnerships relate directly to
Company-owned restaurant sales. Other expenses, such as depreciation,
amortization, and general and administrative expenses, relate to both
Company-owned restaurant operations, as well as the Company's franchising
operations. The Company's revenues and expenses are directly affected by the
number and sales volumes of Company-owned restaurants. The Company's
revenues and, to a lesser extent, expenses also are affected by the number
and sales volumes of franchised restaurants. Initial franchise fees are
directly affected by the number of franchised restaurant openings.
The following table sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items included in the Company's
statements of income.
9
<PAGE>
PERCENTAGE RESULTS OF OPERATIONS
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
----------------------- ----------------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Company-owned restaurant sales 83.0% 80.4% 82.8% 81.2%
Franchised restaurants:
Franchise royalties 14.6 14.2 15.2 15.1
Franchise fees 1.0 1.4 1.0 1.1
Other 1.4 4.0 1.0 2.6
---------------------- ----------------------
100.0% 100.0% 100.0% 100.0%
---------------------- ----------------------
---------------------- ----------------------
Cost and expenses:
Company-owned restaurants (1)
Food and packaging 27.9% 28.7% 27.9% 28.9%
Payroll and other employee benefits 28.6 29.5 28.6 29.3
Other operating expenses 18.6 18.3 18.4 18.3
---------------------- ----------------------
75.1% 76.5% 74.9% 76.5%
Selling, general and administrative 11.8 13.8 10.9 11.6
Depreciation and amortization 8.8 7.7 8.2 7.3
Minority interest in earnings of
restaurant partnerships (1) 3.7 3.5 3.8 3.8
Other - - - -
Income from operations 14.0 14.0 15.7 15.9
Net interest expense 1.4 0.8 1.3 0.6
Net income 7.9% 8.3% 9.0% 9.6%
RESTAURANT OPERATING DATA:
RESTAURANT COUNT (2):
Company-owned restaurants
Core-markets 170 155 170 155
Developing markets 106 79 106 79
---------------------- ----------------------
All markets 276 234 276 234
Franchise restaurants 1,466 1,366 1,466 1,366
---------------------- ----------------------
System-wide restaurants 1,742 1,600 1,742 1,600
---------------------- ----------------------
---------------------- ----------------------
SALES DATA ($ in thousand):
System-wide sales $283,081 $236,058 $588,304 $492,880
Percentage increase (3) 20.0% 15.0% 18.6% 13.5%
Average sales per restaurant:
Company-owned $ 139 $ 133 $ 296 $ 280
Franchise 169 153 392 318
System-wide 164 150 343 312
Change in comparable restaurant sales (4):
Company-owned restaurants:
Core markets 8.3% 6.7% 8.3% 5.7%
Developing markets (0.4) (6.2) (2.3) (7.9)
---------------------- ----------------------
All markets 6.5% 3.8% 5.9% 2.5%
Franchise 8.7 10.2 9.1 7.5
System-wide 8.1 9.2 8.5 6.7
</TABLE>
- -------------------
(1) As a percentage of Company-owned restaurant sales.
(2) Number of restaurants open at end of period.
(3) Represents percentage increase from the comparable period in the prior
year.
(4) Represents percentage increase (decrease) for restaurants open both in
the current and prior year.
10
<PAGE>
COMPARISON OF THE SECOND FISCAL QUARTER OF 1998 TO THE SECOND FISCAL
QUARTER OF 1997.
Total revenues increased 17.6% to $44.8 million in the second fiscal quarter
of 1998 from $38.1 million in the second fiscal quarter of 1997.
Company-owned restaurant sales increased 21.3% to $37.2 million in the second
fiscal quarter of 1998 from $30.7 million in the second fiscal quarter of
1997. Of the $6.5 million increase, $4.7 million was due to the net addition
of 45 Company-owned restaurants since the beginning of fiscal 1997. Average
sales increases of approximately 6.5% by stores open the full reporting
periods of fiscal 1998 and 1997 accounted for $1.8 million of the increase.
Nineteen franchise drive-ins opened in the second fiscal quarter of 1998
compared to 16 in the comparable quarter of 1997; however, franchise fee
revenues decreased 13.7%. This decrease resulted primarily from fewer option
agreements (for which franchisees pay annual fees) in place for 1998 versus
the same period of 1997. Franchise royalties increased 21.0% to $6.5 million
in the second fiscal quarter of 1998, compared to $5.4 million in the second
fiscal quarter of 1997. Of the $1.1 million increase, increased sales by
comparable franchised restaurants resulted in an increase in royalties of
approximately $0.6 million and resulted from the franchise same-store sales
growth of 8.8% over the second fiscal quarter of 1997. The decrease 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 recognized in
the second fiscal quarter of 1997.
Restaurant cost of operations, as a percentage of Company-owned restaurant
sales, was 75.1% in the second fiscal quarter of 1998, compared to 76.5% in
the second fiscal quarter of 1997. Management believes the decrease in food
and packaging costs resulted from renegotiation of pricing, improved
operational controls and a reduction in promotional discounting from standard
menu prices The decrease in payroll and other employee benefits costs
resulted primarily from the leveraging of additional sales at existing stores
and from an increased focus on labor hours at the restaurant-level. This
improvement occurred despite a minimum wage increase effective September 1,
1997 and no material increase in pricing. Other operating expenses increased
slightly as a percentage of Company-owned restaurant sales. Operational cost
controls and leveraging of sales at existing stores were more than offset by
a 15% increase in marketing expenditures, as a percentage of Company-owned
restaurant sales, which reflects the Company's commitment to increased media
penetration through its system of advertising cooperatives. Minority
interest in earnings of restaurant partnerships increased, as a percentage of
Company-owned restaurant sales, to 3.7% in the second fiscal quarter of 1998,
compared to 3.5% in the second fiscal quarter of 1997. This increase
occurred primarily due to the improvements in operating margins discussed
above. The increase was offset by the minority partners' sharing of costs
associated with the roll-out of a point-of-sale system which is reflected in
depreciation expense in the Company's statement of income.
Selling, general and administrative expenses, as a percentage of total
revenues, decreased to 11.8% in the second fiscal quarter of 1998, compared
with 13.8% in the second fiscal quarter of 1997. This decrease resulted
primarily from a provision for contingent liabilities recorded during the
second fiscal quarter of 1997. Management expects selling, general and
administrative expenses, as a percentage of revenues, to decline in future
periods because the Company expects a significant portion of future revenue
growth to be attributable to Company-owned restaurants.
11
<PAGE>
Company-owned restaurants require a lower level of selling, general and
administrative expenses, as a percentage of revenues, than the Company's
franchising operations since most of these expenses are reflected in
restaurant cost of operations and minority interest in restaurant operations.
Many of the managers and supervisors of Company-owned restaurants own a
minority interest in the restaurants, and their compensation flows through
the minority interest in earnings of restaurant partnerships. Depreciation
and amortization expense increased approximately $1.0 million due to the
purchase of buildings and equipment for new and existing restaurants and
information systems upgrades. Management expects the rate of increase to
decline in future periods
Income from operations increased 16.9% to $6.3 million from $5.4 million in
the second fiscal quarter of 1997. Net interest expense in the second fiscal
quarter of 1998 increased $0.3 million over the second fiscal quarter of
1997. This increase was the result of additional borrowings to fund, in part,
capital additions and stock repurchases made during the latter part of fiscal
1997. 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 the second fiscal quarter of 1998, consistent with the same
period in fiscal 1997. Net income for the second fiscal quarter of 1998
increased 11.9% to $3.5 million, compared to $3.2 million in the comparable
period of fiscal 1997. Diluted earnings per share increased to $ .27 per
share in the second fiscal quarter of 1998, compared to $ .23 per share in
the second fiscal quarter of 1997, for an increase of 17.4%.
COMPARISON OF THE FIRST TWO FISCAL QUARTERS OF 1998 TO THE FIRST TWO FISCAL
QUARTERS OF 1997.
Total revenues increased 19.7% to $94.7 million in the first two fiscal
quarters of 1998 from $79.1 million in the first two fiscal quarters of 1997.
Company-owned restaurant sales increased 22.1% to $78.4 million in the first
two fiscal quarters of 1998 from $64.2 million in the first two fiscal
quarters of 1997. Of the $14.2 million increase, $10.6 million was due to
the net addition of 45 Company-owned restaurants since the beginning of
fiscal 1997. Average sales increases of approximately 5.9% by stores open the
full reporting periods of fiscal 1998 and 1997 accounted for $3.6 million of
the increase. Franchise fee revenues increased 11.8% in the first two fiscal
quarters of 1998 as compared to the first two fiscal quarters of 1997 due
primarily to the opening of 45 franchise stores in 1998 compared to 36 in the
comparable period of 1997. Franchise royalties increased 20.7% to $14.4
million in the first two fiscal quarters of 1998, compared to $12.0 million
in the first two fiscal quarters of 1997. Increased sales by comparable
franchised restaurants resulted in an increase in royalties of approximately
$1.5 million and resulted from the franchise same-store sales growth of 9.1%
over the first two fiscal quarters of 1997. Additional franchised
restaurants in operation resulted in an increase in royalties of $1.0
million. The decrease in other revenues of $1.2 million resulted primarily
from a $1.1 million gain recognized on the sale of the Company's minority
interest in 10 restaurants in the second fiscal quarter of 1997.
12
<PAGE>
Restaurant cost of operations, as a percentage of Company-owned restaurant
sales, was 74.9% in the first two fiscal quarters of 1998, compared to 76.5%
in the first two fiscal quarters of 1997. Management believes the decrease in
food and packaging costs resulted from renegotiation of pricing terms,
improved operational controls and a reduction in promotional discounting from
standard menu prices. The decrease in payroll and other employee benefits
costs resulted primarily from the leveraging of additional sales at existing
stores and from an increased focus on labor hours at the restaurant-level.
This improvement occurred despite a minimum wage increase which was effective
September 1, 1997 and no material increase in pricing. Other operating
expenses increased slightly as a percentage of Company-owned restaurant
sales. Operational cost controls and leveraging of sales at existing stores
were more than offset by a 15% increase in marketing expenditures, as a
percentage of Company-owned restaurant sales, which reflects the Company's
commitment to increased media penetration through its system of advertising
cooperatives. Minority interest in earnings of restaurant partnerships
remained unchanged, as a percentage of Company-owned restaurant sales, at
3.8% in the first two fiscal quarters of 1998. The minority partners share
of improvements in operating margins was offset by their sharing of costs
associated with the roll-out of a point-of-sale system which is reflected in
depreciation expense in the Company's statement of income.
Selling, general and administrative expenses, as a percentage of total
revenues, decreased to 10.9% in the first two fiscal quarters of 1998,
compared with 11.6% in the first two fiscal quarters of 1997. This decrease
resulted primarily from a provision for contingent liabilities recorded
during the second fiscal quarter of 1997. Management expects selling,
general and administrative expenses, as a percentage of revenues, to decline
in future periods because the Company expects a significant portion of future
revenue growth to be attributable to Company-owned restaurants.
Company-owned restaurants require a lower level of selling, general and
administrative expenses, as a percentage of revenues, than the Company's
franchising operations since most of these expenses are reflected in
restaurant cost of operations and minority interest in restaurant operations.
Many of the managers and supervisors of Company-owned restaurants own a
minority interest in the restaurants, and their compensation flows through
the minority interest in earnings of restaurant partnerships. Depreciation
and amortization expense increased approximately $2.0 million due to the
purchase of buildings and equipment for new and existing restaurants and
corporate furniture and information systems upgrades. Management expects the
rate of increase to decline in future periods.
Income from operations increased 18.5% to $14.9 million from $12.6 million in
the first two fiscal quarters of 1997. Net interest expense in the first two
fiscal quarters of 1998 increased $0.7 million compared to the comparable
fiscal quarters of 1997 due to increased borrowings to fund, in part,
capital additions and stock repurchases made during the latter part of fiscal
1997. The Company expects interest expense to continue to increase, as a
percentage of sales, due to the Company's restaurant expansion plans.
13
<PAGE>
Provision for income taxes reflects an effective federal and state tax rate of
37.25% for the first two fiscal quarters of 1998, consistent with for the
comparable period in fiscal 1997. Net income for the first two fiscal quarters
of 1998 increased 13.1% to $8.6 million, compared to $7.6 million in the
comparable period of fiscal 1997. Diluted earnings per share increased to $.65
per share in the first two fiscal quarters of 1998, compared to $ .55 per
share in the first two fiscal quarters of 1997, for an increase of 18.2%.
LIQUIDITY AND SOURCES OF CAPITAL
During the first six months of fiscal 1998, the Company opened 20
newly-constructed restaurants. The Company funded the total capital
additions for the first six months of 1998 of $25.1 million (which included
the cost of newly-opened restaurants, restaurants under construction, new
equipment for existing restaurants, and general corporate use) from cash
generated by operating activities and through borrowings under the Company's
line of credit. During the six months ended February 28, 1998, the Company
purchased the real estate on all 20 newly-constructed restaurants. The
Company expects to own the land and building for most of its future
newly-constructed restaurants. As of February 28, 1998, the Company's total
cash balance of $2.7 million reflected the impact of the cash generated from
operating activities, line of credit activity, and capital expenditures
mentioned above.
The Company has an agreement with a group of banks which provides the Company
with an $80 million line of credit expiring in July of 2000. In connection
with the $50 million note issuance discussed below, the line of credit was
reduced on April 2, 1998 to $60 million. The Company will use the line of
credit to finance the opening of newly-constructed restaurants, acquisitions
of existing restaurants, and other general corporate purposes. As of
February 28, 1998, the Company's outstanding borrowings under the line of
credit were $40.0 million, as well as $0.3 million in outstanding letters of
credit. The available line of credit as of February 28, 1998, was $39.7
million. The Company expects to complete a private placement of $50 million
in Senior Unsecured Notes around April 15, 1998. These notes will consist
of $20 million of Series A notes which mature in 2003, and $30 million of
Series B notes which mature in 2005. Interest on the notes will be payable
semi-annually in arrears. The Company expects to use the proceeds from the
notes to pay down the outstanding borrowings under the line of credit
(discussed above), to repurchase common stock of the Company and for general
corporate purposes. The Company's board of directors has authorized the
repurchase of up to $10 million of the Company's common stock.
The Company plans capital expenditures of approximately $50 to $55 million in
fiscal 1998, excluding potential acquisitions. Those capital expenditures
primarily relate to the development of additional Company-owned restaurants,
maintenance and remodeling of Company-owned restaurants, and enhancements to
existing financial and operating information systems, including refinement of
a point-of-sale system. The Company expects to fund those capital
expenditures through borrowings under its existing unsecured revolving credit
facility and cash flow from operations. The Company believes that existing
cash and funds generated from internal operations, as well as borrowings
under the line of credit, will meet the Company's needs for the foreseeable
future.
14
<PAGE>
YEAR 2000
The Company has completed a Year 2000 compliance assessment of its
information technology systems. The Year 2000 issue relates to the ability
of date-sensitive software to properly recognize the year 2000 in calculating
and processing computer system data. The Company has determined that some
existing software will need to be modified. Modifications to existing
software are expected to be completed well in advance of 2000. The Company
anticipates that timely completion of these modifications will mitigate the
Year 2000 issue internally.
The Company has not determined the potential impact of the Year 2000 issue on
its significant vendors, suppliers and franchisees at this time. Because
third party failures could have a material impact on the Company's ability to
conduct business, plans are being developed to address the Year 2000 issue
with these third parties. The Company anticipates completing this assessment
process during 1998. Based upon current expenditures and estimates, the
costs of addressing the Year 2000 issue are not expected to have a material
impact on future operating results or financial position.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." This statement requires the reporting
of comprehensive income and its components in a full set of general-purpose
financial statements. Additionally, in June 1997, the Financial Accounting
Standards Board issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement changes the way public
companies report segment information in annual financial statements and also
requires the reporting of selected segment information in interim financial
statements. Both statements are effective for the Company in fiscal 1999.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 would require
capitalization of certain costs incurred to develop or obtain internal-use
software. This SOP is effective for the Company in fiscal 2000. The Company
is in the process of evaluating the impact of these statements.
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, the Company increased prices at its Company-owned
restaurants primarily because of higher labor costs resulting from increases
in the federal minimum wage.
15
<PAGE>
SEASONALITY
The Company does not expect seasonality to affect its operations in a
materially adverse manner. The Company's results during its second fiscal
quarter (the months of December, January and February) generally are lower
than other quarters because of the climate of the locations of a number of
Company-owned and franchised restaurants.
16
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
During the fiscal quarter ended February 28, 1998, Sonic Corp. (the
"Company") did not have any new material legal proceedings brought against it,
its subsidiaries, or their properties. In addition, no material developments
occurred in connection with any previously reported legal proceedings against
the Company, its subsidiaries, or their properties during the last fiscal
quarter, except as set forth below.
In March of 1998, the Texas Supreme Court denied the Company's application
for a writ of certiorari in the previously-reported case involving L & G
Restaurants, Inc., Lucky Ott, and William Owen. That denial lets stand an
earlier court of appeals ruling reinstating a jury verdict against the Company
for actual and punitive damages of approximately $1.8 million, plus interest
and court costs. The Company has filed a motion for rehearing but cannot give
any assurances that the court will grant that motion. See Note 2 to the
Condensed Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 27, 1998, the Company held its annual meeting of stockholders,
at which the stockholders re-elected J. Clifford Hudson and Robert M.
Rosenberg for three-year terms ending in January of 2001. The following table
sets forth the voting results for those three directors.
<TABLE>
DIRECTOR VOTES FOR VOTES WITHHELD
-------- --------- --------------
<S> <C> <C>
J. Clifford Hudson 10,506,158 1,874,117
Robert M. Rosenberg 10,624,858 1,755,417
</TABLE>
Other directors of the Company whose terms continued after the meeting
consist of Dean Werries, Dennis H. Clark, Leonard Lieberman, H.E. Rainbolt, and
Frank E. Richardson.
In addition, the stockholders approved and ratified the selection of
Ernst & Young LLP, as the Company's independent auditors by a vote of 12,376,844
shares of common stock in favor, 313 shares opposed, and 3,118 shares
abstaining.
ITEM 5. OTHER INFORMATION
None.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS. The Company has filed the following exhibits with this report:
15.01. Letter re: Unaudited Interim Financial Information.
27.01. Financial Data Schedules
FORM 8-K REPORTS. The Company did not file any Form 8-K reports during
the fiscal quarter ended February 28, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Company
has caused the undersigned, duly authorized, to sign this report on behalf of
the Company.
SONIC CORP.
By: /s/ W. Scott McLain
-------------------------------------
W. Scott McLain, Vice President
and Chief Financial Officer
Date: April 8, 1998
<PAGE>
Exhibit 15.01
The Board of Directors
Sonic Corp.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 333-26359) pertaining to the Sonic Corp. Savings and Profit
Sharing Plan, the Registration Statement (Form S-8 No. 33-40987) pertaining
to the 1991 Sonic Corp. Directors' Stock Option Plan, the Registration
Statement (Form S-8 No. 33-40988) pertaining to the 1991 Sonic Corp. Stock
Purchase Plan, the Registration Statements (Forms S-8 No. 333-09373, No.
33-40989 and No. 33-78576) pertaining to the 1991 Sonic Corp. Stock Option
Plan and the Registration Statement (Form S-3 No. 33-95716) for the
registration of 1,420,000 shares of its common stock, and the related
Prospectuses of our report dated March 23, 1998 relating to the unaudited
condensed consolidated interim financial statements of Sonic Corp. which are
included in its Form 10-Q for the quarter ended February 28, 1998.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a
part of the registration statements prepared or certified by accountants
within the meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 2,659
<SECURITIES> 0
<RECEIVABLES> 6,306
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,497
<PP&E> 188,863
<DEPRECIATION> (33,434)
<TOTAL-ASSETS> 195,989
<CURRENT-LIABILITIES> 13,582
<BONDS> 48,102
0
0
<COMMON> 137
<OTHER-SE> 128,892
<TOTAL-LIABILITY-AND-EQUITY> 195,989
<SALES> 78,433
<TOTAL-REVENUES> 94,698
<CGS> 58,738
<TOTAL-COSTS> 79,804
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,250
<INCOME-PRETAX> 13,644
<INCOME-TAX> 5,082
<INCOME-CONTINUING> 8,562
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,562
<EPS-PRIMARY> .67
<EPS-DILUTED> .65
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FILED 01/14/1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 4,187
<SECURITIES> 0
<RECEIVABLES> 5,659
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,854
<PP&E> 177,267
<DEPRECIATION> (30,567)
<TOTAL-ASSETS> 188,786
<CURRENT-LIABILITIES> 14,270
<BONDS> 37,489
0
0
<COMMON> 136
<OTHER-SE> 123,652
<TOTAL-LIABILITY-AND-EQUITY> 188,786
<SALES> 41,235
<TOTAL-REVENUES> 49,872
<CGS> 30,792
<TOTAL-COSTS> 41,240
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 619
<INCOME-PRETAX> 8,013
<INCOME-TAX> 2,985
<INCOME-CONTINUING> 5,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,028
<EPS-PRIMARY> .39
<EPS-DILUTED> .38
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1997
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> AUG-31-1997 AUG-31-1997 AUG-31-1997 AUG-31-1997
<PERIOD-START> SEP-01-1996 SEP-01-1996 SEP-01-1996 SEP-01-1996
<PERIOD-END> NOV-30-1996 FEB-28-1997 MAY-31-1997 AUG-31-1997
<CASH> 8,778 11,951 10,761 7,334
<SECURITIES> 0 0 0 0
<RECEIVABLES> 4,764 5,106 6,070 5,989
<ALLOWANCES> 0 0 0 (99)
<INVENTORY> 0 0 0 1,239
<CURRENT-ASSETS> 17,212 20,136 19,813 18,699
<PP&E> 127,517 137,280 147,642 164,336
<DEPRECIATION> (20,443) (22,156) (24,284) (27,814)
<TOTAL-ASSETS> 154,841 166,878 175,461 184,841
<CURRENT-LIABILITIES> 14,710 11,191 15,482 15,190
<BONDS> 22,146 26,376 35,372 46,817
0 0 0 0
0 0 0 0
<COMMON> 135 135 135 135
<OTHER-SE> 114,438 117,609 111,737 118,039
<TOTAL-LIABILITY-AND-EQUITY> 154,841 166,878 175,461 184,841
<SALES> 33,586 64,250 105,661 152,739
<TOTAL-REVENUES> 40,973 79,106 127,924 184,018
<CGS> 25,675 49,135 78,744 112,588
<TOTAL-COSTS> 33,756 66,534 106,629 151,784
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 266
<INTEREST-EXPENSE> 191 513 964 1,558
<INCOME-PRETAX> 7,026 12,059 20,331 30,410
<INCOME-TAX> 2,617 4,492 7,573 11,328
<INCOME-CONTINUING> 4,409 7,567 12,758 19,082
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 4,409 7,567 12,758 19,082
<EPS-PRIMARY> .33 .56 .95 1.44
<EPS-DILUTED> .32 .55 .94 1.42
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1996
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> AUG-31-1996 AUG-31-1996
<PERIOD-START> SEP-01-1995 SEP-01-1995
<PERIOD-END> MAY-31-1996 AUG-31-1996
<CASH> 7,171 7,706
<SECURITIES> 0 0
<RECEIVABLES> 5,977 5,362
<ALLOWANCES> 0 (133)
<INVENTORY> 0 1,868
<CURRENT-ASSETS> 16,432 16,177
<PP&E> 114,917 118,914
<DEPRECIATION> (18,838) (18,409)
<TOTAL-ASSETS> 140,054 147,444
<CURRENT-LIABILITIES> 12,217 12,686
<BONDS> 16,389 22,209
0 0
0 0
<COMMON> 134 135
<OTHER-SE> 108,602 109,548
<TOTAL-LIABILITY-AND-EQUITY> 140,054 147,444
<SALES> 86,103 124,443
<TOTAL-REVENUES> 105,109 151,130
<CGS> 67,070 95,764
<TOTAL-COSTS> 87,299 132,467<F1>
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 124
<INTEREST-EXPENSE> 286 476
<INCOME-PRETAX> 17,523 18,063
<INCOME-TAX> 6,615 6,819
<INCOME-CONTINUING> 10,908 11,244
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,908 11,244
<EPS-PRIMARY> .83 .85
<EPS-DILUTED> .82 .84
<FN>
<F1>YEAR ENDED AUGUST 31, 1996 INCLUDES A $8.541 MILLION INITIAL CHARGE UPON
ADOPTION OF FAS 121.
</FN>
</TABLE>
