<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
November 30, 1997 0-18859
- ------------------------------ ----------------------
SONIC CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 73-1371046
------------------------ ----------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
101 Park Avenue
Oklahoma City, Oklahoma 73102
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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 November 30, 1997, the Registrant had 12,760,005 shares of common
stock issued and outstanding (excluding 807,080 shares of common stock held
as treasury stock).
<PAGE>
SONIC CORP.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets at November 30, 1997 and
August 31, 1997 3
Consolidated Statements of Income for the three months ended
November 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the three
months ended November 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Independent Accountants' Review Report 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Part II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
2
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SONIC CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(UNAUDITED)
NOVEMBER 30, August 31,
1997 1997
-------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,187 $ 7,334
Accounts and notes receivable, net 5,659 5,890
Other current assets 3,008 5,475
-------- ---------
Total current assets 12,854 18,699
Property, equipment and capital leases 177,267 164,336
Less accumulated depreciation and amortization (30,567) (27,814)
-------- ---------
Property, equipment and capital leases, net 146,700 136,522
Trademarks, tradenames and other goodwill 21,254 21,124
Other intangibles and other assets 15,019 15,092
Less accumulated amortization (7,041) (6,596)
-------- ---------
Intangibles and other assets, net 29,232 29,620
-------- ---------
Total assets $188,786 $ 184,841
-------- ---------
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,274 $ 4,635
Deposits from franchisees 700 780
Accrued liabilities 8,153 8,629
Obligations under capital leases and long-term
debt due within one year 1,143 1,146
-------- --------
Total current liabilities 14,270 15,190
Obligations under capital leases due after one year 7,900 8,153
Long-term debt due after one year 37,489 37,517
Other noncurrent liabilities 5,339 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; 13,567,085 shares issued (13,531,593
shares issued at August 31, 1997) 136 135
Paid-in capital 60,476 59,891
Retained earnings 74,694 69,666
-------- --------
135,306 129,692
Treasury stock, at cost; 807,080 common shares at
November 30 and August 31, 1997 (11,518) (11,518)
-------- --------
Total stockholders'equity 123,788 118,174
-------- --------
Total liabilities and stockholders' equity $188,786 $184,841
-------- ---------
-------- ---------
See accompanying notes.
3
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SONIC CORP.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
NOVEMBER 30, November 30,
1997 1996
----------------------------
<S> <C> <C>
Revenues:
Sales by Company-owned restaurants $41,235 $33,586
Franchised restaurants:
Franchise royalties 7,902 6,557
Franchise fees 440 270
Other 295 560
------- -------
49,872 40,973
Cost and expenses:
Company-owned restaurants:
Food and packaging 11,529 9,768
Payroll and other employee benefits 11,780 9,804
Other operating expenses 7,483 6,103
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30,792 25,675
Selling, general and administrative 5,048 3,886
Depreciation and amortization 3,810 2,815
Minority interest in earnings of
restaurant partnerships 1,575 1,357
Provision for impairment of long-lived assets 15 23
------- -------
41,240 33,756
------- -------
Income from operations 8,632 7,217
Interest expense 772 337
Interest income (153) (146)
------- -------
Net interest expense 619 191
------- -------
Income before income taxes 8,013 7,026
Provision for income taxes 2,985 2,617
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Net income $ 5,028 $ 4,409
------- -------
------- -------
Net income per share $ 0 .38 $ 0.32
------- -------
------- -------
Weighted average shares outstanding 13,134 13,766
------- -------
------- -------
</TABLE>
See accompanying notes.
4
<PAGE>
SONIC CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
(UNAUDITED)
THREE MONTHS ENDED
NOVEMBER 30, November 30,
1997 1996
-----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,028 $ 4,409
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,810 2,815
Other (723) (317)
Decrease in operating assets 1,936 44
Increase (decrease) in operating liabilities (831) 1,907
-------- -------
Total adjustments 4,192 4,449
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Net cash provided by operating activities 9,220 8,858
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (13,068) (9,781)
Other 399 (99)
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Net cash used in investing activities (12,669) (9,880)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (7,028) (6,069)
Proceeds from long-term borrowings 7,000 8,000
Other 330 163
-------- -------
Net cash provided by financing activities 302 2,094
Net increase (decrease) in cash and cash equivalents (3,147) 1,072
Cash and cash equivalents at beginning of period 7,334 7,706
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,187 $ 8,778
-------- -------
-------- -------
</TABLE>
See accompanying notes.
5
<PAGE>
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 1
The unaudited Condensed Consolidated Financial Statements include all
adjustments, consisting of normal, recurring accruals, which Sonic Corp. (the
"Company") considers necessary for a fair presentation of the financial position
and the results of operations for the indicated periods. The notes to the
condensed consolidated financial statements should be read in conjunction with
the notes to the consolidated financial statements contained in the Company's
Form 10-K for the fiscal year ended August 31, 1997. The results of operations
for the three months ended November 30, 1997, are not necessarily indicative of
the results to be expected for the full year ending August 31, 1998.
NOTE 2
On April 18, 1996, the Texas Court of Appeals reversed the district court's
judgment notwithstanding the verdict and reinstated the jury's verdict in the
amount of $781,600 of actual damages, $1,000,000 of punitive damages, and pre-
and post-judgment interest in an action in which the plaintiffs claim a
subsidiary of the Company interfered with contractual relations of the
plaintiffs. The Company has appealed the court of appeals' reversal to the
Supreme Court of Texas. The Company continues to believe that the findings of
the jury and the court of appeals have no merit and will defend its position
vigorously during the appellate process. A final resolution is not expected to
have a material adverse effect on the Company's financial position or future
results of operations.
The Company is a party to several additional legal actions arising in the
conduct of its business. Management of the Company believes that the ultimate
resolution of those actions will not have a material adverse effect on the
Company's financial position or results of operations.
6
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
Sonic Corp.
We have reviewed the accompanying condensed consolidated balance sheet of Sonic
Corp. as of November 30, 1997, and the related consolidated statements of income
for the three-month periods ended November 30, 1997 and 1996, and the condensed
consolidated statements of cash flows for the three-month periods ended November
30, 1997 and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying 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
January 7, 1998
7
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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 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. The table also sets forth certain restaurant data for
the periods indicated.
8
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PERCENTAGE RESULTS OF OPERATIONS AND RESTAURANT DATA
THREE MONTHS ENDED
NOVEMBER 30,
------------------------
1997 1996
------------------------
INCOME STATEMENT DATA:
Revenues:
Sales by Company-owned restaurants 82.7% 82.0%
Franchised restaurants:
Franchise royalties 15.8 16.0
Franchise fees 0.9 0.7
Other 0.6 1.3
------------------------
100.0% 100.0%
------------------------
------------------------
Costs and expenses:
Company-owned restaurants (1)
Food and packaging 28.0% 29.1%
Payroll and other employee benefits 28.6 29.2
Other operating expenses 18.1 18.1
------------------------
74.7 76.4
Selling, general and administrative 10.1 9.5
Depreciation and amortization 7.6 6.9
Minority interest in earnings of restaurant
partnerships (1) 3.8 4.0
Income from operations 17.3 17.6
Net interest expense 1.2 0.5
Net income 10.1% 10.8%
RESTAURANT OPERATING DATA ($ IN THOUSANDS):
Company-owned restaurants (2)
Core markets 172 154
Developing markets 95 76
------------------------
All markets 267 230
Franchised restaurants (2) 1,450 1,357
------------------------
Total 1,717 1,587
System-wide sales $ 305,972 $256,822
Percentage increase (3) 19.1% 12.2%
Average sales per restaurant:
Company-owned $ 158 $ 149
Franchise 184 165
System-wide 179 162
Change in comparable restaurant sales (4):
Company-owned restaurants:
Core markets 8.4% 4.7%
Developing markets (3.8) (9.3)
------------------------
All markets 5.4% 1.4%
Franchise 9.4 5.1
System-wide 8.9 4.4
- ------------------
(1) As a percentage of sales by Company-owned restaurants.
(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 for restaurants open in both the reported and
prior years.
9
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COMPARISON OF THE FIRST FISCAL QUARTER OF 1998 TO THE FIRST FISCAL QUARTER
OF 1997.
Total revenues increased 21.7% to $49.9 million in the first fiscal quarter
of 1998 from $41.0 million in the first fiscal quarter of 1997. Sales by
Company-owned restaurants increased 22.8% to $41.2 million in the first
fiscal quarter of 1998 from $33.6 million in the first fiscal quarter of
1997. Of the $7.6 million increase, $5.8 million was due to the net addition
of 36 Company-owned restaurants since the beginning of fiscal 1997. Average
sales increases of approximately 5.4% by stores open the full reporting
periods of fiscal 1997 and 1998 accounted for $1.8 million of the increase.
Franchise fee revenues increased $170,000 due to the opening of 26 franchise
restaurants in the first fiscal quarter of 1998, compared to the opening of
20 franchise restaurants in the first fiscal quarter of 1997. Franchise
royalties increased 20.5% to $7.9 million in the first fiscal quarter of
1998, compared to $6.6 million in the first fiscal quarter of 1997.
Increased sales by comparable franchised restaurants resulted in an increase
in royalties of approximately $0.8 million and resulted from the franchise
same-store sales growth of 9.4% over the first fiscal quarter of 1997. One
hundred and fourteen additional franchised restaurants in operation since the
beginning of fiscal 1997 resulted in an increase in royalties of
approximately $0.5 million. Approximately $0.1 million of the increase
resulted from the progressive nature of the company's franchise agreements
that require a higher royalty percentage as average monthly sales volumes
increase.
Restaurant cost of operations, as a percentage of sales by Company-owned
restaurants, was 74.7% in the first fiscal quarter of 1998, compared to 76.4%
in the first fiscal quarter of 1997. Management believes the improvement in
restaurant operating margins resulted from a 3.5% average price increase
implemented October 1, 1996, and reductions in food and packaging costs due
to consolidation of purchasing distribution functions and renegotiation of
pricing terms. The decrease in labor and benefits costs, as a percentage of
sales by Company-owned restaurants, resulted 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. Other operating
expenses remained unchanged as a percentage of sales by Company-owned
restaurants. Operational cost controls and leveraging of sales at existing
stores were offset by a 15% increase in marketing expenditures, as a
percentage of sales by Company-owned restaurants, which reflects the
Company's commitment to increased media penetration through its system of
advertising cooperatives. Minority interest in earnings of restaurant
partnerships decreased, as a percentage of sales by Company-owned
restaurants, to 3.8% in the first fiscal quarter of 1998, compared to 4.0% in
the first fiscal quarter of 1997. This decrease occurred primarily due to
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, increased to 10.1% in the first fiscal quarter of 1998, compared
with 9.5% in the first fiscal quarter of 1997. This increase resulted from
headcount additions and an accrual for performance bonuses in the first
fiscal quarter of 1998 for which there was no similar accrual in the first
fiscal quarter of 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
10
<PAGE>
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, equipment and point-of-sale systems 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 19.6% to $8.6 million from $7.2 million in
the first fiscal quarter of 1997. Net interest expense increased
approximately $0.4 million in the first fiscal quarter of 1998 compared to
the comparable quarter in 1997. This increase was the result of additional
borrowings to partially fund capital additions and stock repurchases. 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 first fiscal quarter of 1998. Net income for the first
fiscal quarter of 1998 increased 14.0% to $5.0 million, compared to $4.4
million in the comparable period of fiscal 1997. Earnings per share
increased to $ .38 per share in the first fiscal quarter of 1998, compared to
$ .32 per share in the first fiscal quarter of 1997, for an increase of
18.8%.
LIQUIDITY AND SOURCES OF CAPITAL
During the first fiscal quarter of 1998, the Company opened eleven
newly-constructed restaurants. The Company funded total capital additions
for the first fiscal quarter of 1998 of $13.1 million (which included the
cost of newly-opened restaurants, restaurants under construction, new
furniture and 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 first fiscal quarter of 1998, the
Company purchased the real estate on all eleven newly-constructed
restaurants. The Company expects to own the land and building for
approximately 80% of its future newly-constructed restaurants.
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. 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 November 30, 1997, the Company's outstanding
borrowings under the line of credit were $37.0 million, as well as $0.2
million in outstanding letters of credit. The available line of credit as of
November 30, 1997, was $42.8 million. As of November 30, 1997, the Company's
total cash and cash equivalents balance of $4.2 million reflected the impact
of the cash generated by operating activities, line of credit activity, and
capital expenditures mentioned above.
The Company plans capital expenditures of approximately $50 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.
11
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The Company expects to fund those capital expenditures through borrowings
under its existing unsecured revolving credit facility and cash flow from
operations. The Company believes that existing cash and funds generated from
internal operations, as well as borrowings under the line of credit, will
meet the Company's needs for the foreseeable future.
IMPACT OF INFLATION
Though increases in labor, food or other operating costs could adversely
affect the Company's operations, management does not believe that inflation
has had a material effect on income during the past several years. During
fiscal 1997, however, Company-owned restaurants increased prices for its
Company-owned restaurants primarily because of 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 fiscal
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.
12
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
During the fiscal quarter ended November 30, 1997, Sonic Corp. (the
"Company") did not have any new material legal proceedings brought against
it, its subsidiaries, or their properties. In addition, no material
developments occurred in connection with any previously reported legal
proceedings against the Company, its subsidiaries, or their properties during
the last fiscal quarter.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS. The Company has filed the following exhibits with this report:
15.01. Letter re: Unaudited Interim Financial Information.
27.01. Financial Data Schedules
FORM 8-K REPORTS. The Company did not file any Form 8-K reports during
the fiscal quarter ended November 30, 1997.
13
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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: January 13, 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 January 7, 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 November 30, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a
part of the registration statements prepared or certified by accountants
within the meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
January 7,1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<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
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<INCOME-TAX> 2,985
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