NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements of Sonic Corp. (the “Company”). In the opinion of management, these financial statements reflect all adjustments of a normal recurring nature, including recurring accruals, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented in conformity with GAAP. In certain situations, recurring accruals, including franchise royalties, are based on more limited information at interim reporting dates than at the Company’s fiscal year end due to the abbreviated reporting period. Actual results may differ from these estimates. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended
August 31, 2017
, included in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of the results that may be expected for a full year or any other interim period. The second fiscal quarter is typically the most volatile for the Company due to seasonality and weather.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company, its wholly owned subsidiaries and a number of Company Drive-Ins in which a subsidiary has a controlling ownership interest. All intercompany accounts and transactions have been eliminated.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled for the transfer of promised goods or services to customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The ASU will replace most of the existing revenue recognition requirements in U.S. GAAP when it becomes effective. Further, the FASB has issued clarifying guidance with ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” and ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” ASU No. 2016-08 provides guidance for evaluating when another party, along with the entity, is involved in providing a good or service to a customer. ASU No. 2016-10 clarifies assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. ASU No. 2016-20 provides corrections or improvements to issues that affect narrow aspects of the guidance.
The Company plans to adopt the standards in the first quarter of fiscal year 2019 using the cumulative effect transition method. The Company does not believe the new revenue recognition standard will impact the recognition of sales from Company Drive-Ins or the recognition of royalty fees from franchisees, nor will it have a material impact to the recognition of gift card breakage. The Company expects the pronouncement will impact the recognition of the initial franchise fee, which is currently recognized upon the opening of a Franchise Drive-In. The impact on these fees is not expected to be material to total revenue. The Company continues to evaluate the effect this pronouncement will have on principal versus agent considerations, other transactions, the financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The new standard, which replaces existing lease guidance, requires lessees to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. Accounting guidance for lessors is largely unchanged. In January 2018, the FASB issued ASU No. 2018-01. ASU 2018-01 permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of 2016-02 and that were not accounted for as leases under previous lease guidance. The standard is effective for fiscal year 2020, with early application permitted. This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into after, the
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
beginning of the earliest comparative period presented in the financial statements, with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on the consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses.” The update was issued to provide more decision-useful information about the expected credit losses on financial instruments. The update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is effective for fiscal year 2021, with early adoption permitted for fiscal years beginning after December 15, 2018. The update should be adopted using a modified-retrospective approach. The Company is currently evaluating the effect this update will have on its financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.” The update is intended to reduce diversity in practice in how certain transactions are classified and will make eight targeted changes to how cash receipts and cash payments are presented in the statement of cash flows. The update is effective for fiscal year 2019. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the amendments will apply prospectively as of the earliest date practicable. The Company is currently evaluating the effect of this update but does not believe it will have a material impact on its financial statements and related disclosures.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory," as part of its simplification initiatives. The update requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than deferring the recognition until the asset has been sold to an outside party as is required under current GAAP. The update is effective for fiscal year 2019. The new standard will require adoption on a modified retrospective basis through a cumulative-effect adjustment to retained earnings, and early adoption is permitted. The Company is currently evaluating the effect that this update will have on its financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows - Restricted Cash." The update requires that restricted cash balances be included in the beginning and ending cash balance within the statement of cash flows. The update is effective for fiscal year 2019. The amendments should be adopted on a retrospective basis for each period presented, and early adoption is permitted. The adoption will increase the beginning and ending cash balance within the Company's statement of cash flows by its restricted cash balances and will require a new disclosure to reconcile the cash balances within the statement of cash flows to the balance sheets. The Company does not expect any other material impacts to its financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation: Scope of Modification Accounting," which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity will account for the effects of a modification unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified award are the same as the original award and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. The update is effective for fiscal year 2019. The update is to be adopted prospectively to an award modified on or after the adoption date. Early adoption is permitted. The Company is currently evaluating the effect of this update but does not believe it will have a material impact on its financial statements and related disclosures.
The Company has reviewed all other recently issued accounting pronouncements and concluded they are not applicable or not expected to be significant to our operations.
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
February 28,
|
|
Six months ended
February 28,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,607
|
|
|
$
|
10,963
|
|
|
$
|
31,037
|
|
|
$
|
24,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding– basic
|
|
38,284
|
|
|
43,794
|
|
|
38,806
|
|
|
44,757
|
|
Effect of dilutive employee stock options and unvested restricted stock units
|
|
413
|
|
|
756
|
|
|
485
|
|
|
790
|
|
Weighted average common shares outstanding – diluted
|
|
38,697
|
|
|
44,550
|
|
|
39,291
|
|
|
45,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share – basic
|
|
$
|
0.51
|
|
|
$
|
0.25
|
|
|
$
|
0.80
|
|
|
$
|
0.54
|
|
Net income per common share – diluted
|
|
$
|
0.51
|
|
|
$
|
0.25
|
|
|
$
|
0.79
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded
(1)
|
|
1,417
|
|
|
1,100
|
|
|
1,352
|
|
|
961
|
|
__________________
|
|
(1)
|
Anti-dilutive securities consist of stock options and unvested restricted stock units that were not included in the computation of diluted earnings per share because either the exercise price of the options was greater than the average market price of the common stock or the total assumed proceeds under the treasury stock method resulted in negative incremental shares and thus the inclusion would have been anti-dilutive.
|
|
|
3.
|
Share Repurchase Program
|
During fiscal year
2017
, approximately
6.7 million
shares were repurchased under the Company's share repurchase program for a total cost of
$172.9 million
, resulting in an average price per share of
$25.71
. In August 2017, the Board of Directors approved an incremental
$160.0 million
share repurchase authorization of the Company's outstanding shares of common stock through August 31, 2018.
During the first
six
months of fiscal year
2018
, approximately
2.8 million
shares were repurchased for a total cost of
$71.5 million
, resulting in an average price per share of
$25.20
. The total remaining authorized under the share repurchase program as of
February 28, 2018
was
$88.5 million
.
Share repurchases may be made from time to time in the open market or otherwise, including through an accelerated share repurchase program, under terms of a Rule 10b5-1 plan, in privately negotiated transactions or in round lot or block transactions. The share repurchase program may be extended, modified, suspended or discontinued at any time.
The following table presents the Company’s provision for income taxes and effective income tax rate for the periods below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
February 28,
|
|
Six months ended
February 28,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Provision for income taxes
|
|
$
|
(13,686
|
)
|
|
$
|
4,699
|
|
|
$
|
(9,961
|
)
|
|
$
|
11,938
|
|
Effective income tax rate
|
|
(231.1
|
)%
|
|
30.0
|
%
|
|
(47.3
|
)%
|
|
33.1
|
%
|
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
The lower effective income tax rate during the second quarter and first six months of fiscal year 2018 was due primarily to the recognition of the impacts of the Tax Cuts and Jobs Act (“TCJA”) discussed below.
On December 22, 2017, the TCJA was signed into law, significantly impacting several sections of the Internal Revenue Code. The most significant impacts on the Company for fiscal year 2018 include:
|
|
•
|
Effective January 1, 2018, the U.S. corporate federal statutory income tax rate was reduced from
35%
to
21%
. Because of our fiscal year end, the Company's statutory federal tax rate is
25.7%
for fiscal year 2018 and
21%
for fiscal year 2019 and thereafter.
|
|
|
•
|
The Company remeasured its existing deferred tax assets and liabilities at the rate the Company expects to be in effect when those deferred taxes will be realized (either
25.7%
if in 2018 or
21.0%
thereafter). The Company recognized a discrete benefit from the deferred tax remeasurement of approximately
$14.1
million in the second quarter of fiscal year 2018.
|
In December 2017, the SEC provided guidance allowing registrants to record provisional amounts, during a specified measurement period, when the necessary information is not available, prepared or analyzed in reasonable detail to account for the impact of the TCJA. Accordingly, we have reported the revaluation of our deferred tax assets and liabilities based on provisional amounts.
Among the factors that could affect the accuracy of our provisional amounts is uncertainty about the statutory tax rate applicable to our deferred income tax assets and liabilities, since the actual rate will be dependent on the timing of realization or settlement of such assets and liabilities. At February 28, 2018, we estimated the dates when such realization or settlement would occur. The actual dates when such realization or settlement occurs may be significantly different from our estimates, which could result in the ultimate revaluation of our deferred income taxes to be different from our provisional amounts. In addition, there is uncertainty about the impact of expected Internal Revenue Service guidance intended to interpret the most complex provisions of the TCJA.
The difference between our U.S. federal statutory income tax rate and our effective income tax rate for the six months ended February 28, 2018 and 2017 is summarized below:
|
|
|
|
|
|
|
|
Six months ended
February 28, 2018
|
|
Six months ended
February 28, 2017
|
U.S. federal statutory income tax rate
|
25.7
|
%
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
3.9
|
%
|
|
2.9
|
%
|
Federal tax benefit of statutory tax deduction
|
(1.5
|
)%
|
|
(1.4
|
)%
|
Employment related and other tax credits, net
|
(1.6
|
)%
|
|
(1.7
|
)%
|
Stock option excess tax benefit
|
(6.6
|
)%
|
|
(2.1
|
)%
|
Deferred tax revaluation
|
(67.0
|
)%
|
|
—
|
%
|
Other
|
(0.2
|
)%
|
|
0.4
|
%
|
Effective tax rate
|
(47.3
|
)%
|
|
33.1
|
%
|
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
|
|
5.
|
Accounts and Notes Receivable
|
Accounts and notes receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
2018
|
|
August 31,
2017
|
Current accounts and notes receivable:
|
|
|
|
|
Royalties and other trade receivables
|
|
$
|
15,591
|
|
|
$
|
19,571
|
|
Notes receivable from franchisees
|
|
1,966
|
|
|
1,441
|
|
Receivables from system funds
|
|
8,540
|
|
|
6,360
|
|
Other
|
|
6,934
|
|
|
7,475
|
|
Accounts and notes receivable, gross
|
|
33,031
|
|
|
34,847
|
|
Allowance for doubtful accounts and notes receivable
|
|
(958
|
)
|
|
(1,089
|
)
|
Current accounts and notes receivable, net
|
|
$
|
32,073
|
|
|
$
|
33,758
|
|
|
|
|
|
|
|
|
Noncurrent notes receivable:
|
|
|
|
|
|
|
Receivables from franchisees
|
|
$
|
8,541
|
|
|
$
|
6,810
|
|
Receivables from system funds
|
|
5,692
|
|
|
3,033
|
|
Allowance for doubtful notes receivable
|
|
(105
|
)
|
|
(42
|
)
|
Noncurrent notes receivable, net
|
|
$
|
14,128
|
|
|
$
|
9,801
|
|
The Company’s receivables are primarily due from franchisees, all of whom are in the restaurant business. Substantially all of the notes receivable from franchisees are collateralized by real estate or equipment. The receivables from system funds represent transactions in the normal course of business.
Litigation
As reported in the Annual Report on Form 10-K for the year ended August 31, 2017, the Company was named as a defendant in five purported class action complaints related to a payment card breach at certain Sonic Drive-Ins. The Company has since been named as a defendant in four additional purported class action complaints filed on October 9, 2017, in the United States District Court for the Northern District of Ohio, on November 3, 2017, in the United States District Court for the Northern District of Texas, on November 13, 2017, in the United States District Court for the District of Arizona, and on December 17, 2017, in the Northern District of Illinois. Each of these complaints asserted various claims related to the Company’s alleged failure to safeguard customer credit card information, and the plaintiffs sought monetary damages, injunctive and declaratory relief and attorneys’ fees and costs. The cases were centralized in the Northern District of Ohio for coordinated or consolidated pretrial proceedings, and a consolidated complaint was filed. The Company believes it has meritorious defenses to the litigation and intends to vigorously oppose the claims asserted in the complaint. We cannot reasonably estimate the range of potential losses that may be associated with the litigation because of the early stage of the lawsuit. We also cannot provide assurance we will not become subject to other inquiries or claims relating to the payment card breach in the future. Although we maintain cyber liability insurance, we currently believe it is possible the ultimate amount paid by us, if we are unsuccessful in defending the litigation, will be in excess of our cyber liability insurance coverage applicable to claims of this nature. We are unable to estimate the amount of any such excess.
The Company is involved in various other legal proceedings and has certain unresolved claims pending. Based on the information currently available, management believes all such other claims currently pending are either covered by insurance or would not have a material adverse effect on the Company’s business or financial condition.
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
Note Repurchase Agreement
On December 20, 2013, the Company extended a note purchase agreement to a bank that serves to guarantee the repayment of a franchisee loan, with a term through
2018
. In the event of default by the franchisee, the Company would purchase the franchisee loan from the bank, thereby becoming the note holder and providing an avenue of recourse with the franchisee. The Company recorded a liability for this guarantee which was based on the Company’s estimate of fair value. As of
February 28, 2018
, the balance of the franchisee’s loan was
$5.4 million
.
Lease Commitments
The Company has obligations under various operating lease agreements with third-party lessors related to the real estate for certain Company Drive-In operations that were sold to franchisees. Under these agreements, which expire through
2029
, the Company remains secondarily liable for the lease payments for which it was responsible as the original lessee. As of
February 28, 2018
, the amount remaining under these guaranteed lease obligations totaled
$15.3 million
. At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore,
zero
liability has been provided.
|
|
7.
|
Fair Value of Financial Instruments
|
The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company has no financial liabilities that are required to be measured at fair value on a recurring basis.
The Company categorizes its assets and liabilities recorded at fair value based on the following fair value hierarchy established by the FASB:
|
|
•
|
Level 1 valuations use quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
|
•
|
Level 2 valuations use inputs other than actively quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: (a) quoted prices for similar assets or liabilities in active markets, (b) quoted prices for identical or similar assets or liabilities in markets that are not active, (c) inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves observable at commonly quoted intervals and (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
•
|
Level 3 valuations use unobservable inputs for the asset or liability. Unobservable inputs are used to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
|
The Company’s cash equivalents, some of which are included in restricted cash, are carried at cost which approximates fair value and totaled
$69.4 million
at
February 28, 2018
and
$73.9 million
at
August 31, 2017
. This fair value is estimated using Level 1 inputs.
At
February 28, 2018
, the fair value of the Company’s Series 2018-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2018 Fixed Rate Notes”), the Series 2016-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2016 Fixed Rate Notes”) and the Series 2013-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2013 Fixed Rate Notes” and together with the 2018 Fixed Rate Notes and 2016 Fixed Rate Notes, the "Fixed Rate Notes") approximated the carrying value, including accrued interest, of
$720.7 million
. At
August 31, 2017
, the fair value of the Company's 2016 Fixed Rate Notes and 2013 Fixed Rate Notes approximated the carrying value, including accrued interest, of
$578.2 million
. At
February 28, 2018
, there was
no
balance on the Company's Series 2016-1 Senior Secured Variable Funding Notes, Class A-1 (the “2016 Variable Funding Notes” and, together with the Fixed Rate Notes, the “Notes”). At
August 31, 2017
the fair value of the 2016 Variable Funding Notes approximated the carrying value of
$60.1 million
, including accrued interest. The fair value of the Notes is estimated using Level 2 inputs from market information available for public debt transactions for companies with ratings that are similar to the Company’s ratings and from information gathered from brokers who trade in the Company’s notes.
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
During the second quarter of fiscal year 2018, the Company made a pro rata prepayment of
$28.0 million
on its 2013 and 2016 Fixed Rate Notes. The prepayment was made at par, as allowed under the terms of the 2013 Fixed Rate Notes and 2016 Fixed Rate Notes.
On
February 1, 2018
, various subsidiaries of the Company (the “Co-Issuers”) issued
$170.0 million
of 2018 Fixed Rate Notes in a private transaction which bears interest at
4.03%
per annum. The 2018 Fixed Rate Notes have an expected life of
seven years
with an anticipated repayment date in
February 2025
. At
February 28, 2018
, the balance outstanding under the 2018 Fixed Rate Notes including accrued interest totaled
$170.6 million
and carried a weighted-average interest cost of
4.40%
, including the effect of the loan origination costs described below.
Sonic used a portion of the net proceeds from the issuance of the 2018 Fixed Rate Notes to pay down the outstanding portion of the 2016 Variable Funding Notes and to pay the costs associated with the securitized financing transaction. In conjunction with the issuance of the 2018 Fixed Rate Notes, the commitments under the 2016 Variable Funding Notes were reduced to
$100.0 million
.
Loan origination costs associated with the Company’s 2018 Fixed Rate Notes totaled
$5.0 million
. Loan costs are amortized over each note’s expected life, and the unamortized balance related to the 2016 Variable Funding Notes and the Fixed Rate Notes is included in debt origination costs, net and long-term debt, net, respectively, on the condensed consolidated balance sheets.
In connection with the 2018 transactions described above, the Company recognized a
$1.3 million
loss during the
second
quarter of fiscal year
2018
. The loss consisted of a
$0.7 million
write-off of unamortized deferred debt origination costs related to the reduction of the 2016 Variable Funding Notes commitments, as well as a
$0.4 million
write-off of unamortized deferred debt origination costs related to the prepayment on its 2013 Fixed Rate Notes and 2016 Fixed Rate Notes. Additionally, as required by the terms of the 2016 Fixed Rate Notes, the Company paid a
$0.2 million
prepayment premium.
While the 2018 Fixed Rate Notes have an expected life of
seven
years, they have a legal final maturity date of
February 2048
. The Company intends to repay or refinance the 2018 Fixed Rate Notes on or before the end of their respective expected life. In the event the 2018 Fixed Rate Notes are not paid in full by the end of their expected life, the Notes are subject to an upward adjustment in the annual interest rate of at least
5%
. In addition, principal payments will accelerate by applying all of the royalties, lease revenues and other fees securing the debt, after deducting certain expenses, until the debt is paid in full. Also, any unfunded amount under the 2016 Variable Funding Notes will become unavailable.
The Co-Issuers and Sonic Franchising LLC (the “Guarantor”) are existing special purpose, bankruptcy remote, indirect subsidiaries of Sonic Corp. that hold substantially all of Sonic’s franchising assets and real estate. As of
February 28, 2018
, assets for these combined indirect subsidiaries totaled
$250.3 million
, including receivables for royalties, certain Company and Franchise Drive-In real estate, intangible assets and restricted cash balances of
$19.1 million
. The Notes are secured by franchise fees, royalty payments and lease payments, and the repayment of the Notes is expected to be made solely from the income derived from the Co-Issuer’s assets. In addition, the Guarantor, a Sonic Corp. subsidiary that acts as a franchisor, has guaranteed the obligations of the Co-Issuers under the Notes and pledged substantially all of its assets to secure those obligations.
Neither Sonic Corp., the ultimate parent of the Co-Issuers and the Guarantor, nor any other subsidiary of Sonic, guarantees or in any way is liable for the obligations of the Co-Issuers under the 2018 Fixed Rate Notes. The Company has, however, agreed to cause the performance of certain obligations of its subsidiaries, principally related to managing the assets included as collateral for the 2018 Fixed Rate Notes and certain indemnity obligations relating to the transfer of the collateral assets to the Co-Issuers.
The 2018 Fixed Rate Notes are subject to a series of covenants and restrictions similar to the Company’s 2016 Fixed Rate Notes and customary for transactions of this type. If certain covenants or restrictions are not met, the Notes are subject to
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
customary accelerated repayment events and events of default. Although management does not anticipate an event of default or any other event of noncompliance with the provisions of the debt, if such event occurred, the unpaid amounts outstanding could become immediately due and payable.
|
|
9.
|
Other Operating Income
|
During the first quarter of fiscal year 2017, the Company recorded a gain of
$3.8 million
on the sale of minority investments in franchise operations retained as part of a refranchising transaction that occurred in fiscal year 2009. The gain is reflected in other operating income, net, on the condensed consolidated statement of income.
|
|
10.
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Refranchising Initiative
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The Company completed a refranchising initiative in fiscal year 2017. During the first six months of fiscal year 2017,
110
Company Drive-Ins were refranchised, and the Company retained a non-controlling minority investment in most of the franchise operations. Income from minority investments is included in other revenue on the condensed consolidated statements of income. The gains and losses below are recorded in other operating income, net, on the condensed consolidated statement of income.
The following is a summary of the pretax activity recorded as a result of the refranchising initiative (in thousands, except number of refranchised Company Drive-Ins):
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Three months ended
February 28, 2017
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Six months ended
February 28, 2017
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Number of refranchised Company Drive-Ins
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54
|
|
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110
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|
|
|
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Proceeds from sales of Company Drive-Ins
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$
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11,086
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$
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20,036
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Assets sold, net of retained minority investment
(1)
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(3,277
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)
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(8,738
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)
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Initial and subsequent lease payments for real estate option
(2)
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414
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|
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(3,396
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)
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Goodwill related to sales of Company Drive-Ins
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(589
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)
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(966
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)
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Deferred gain for real estate option
(3)
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(1,040
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)
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(1,040
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)
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Gain (loss) on assets held for sale
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194
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(65
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)
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Refranchising initiative gains, net
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$
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6,788
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$
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5,831
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_______________
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(1)
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Net assets sold consisted primarily of equipment.
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(2)
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During the first quarter of fiscal year 2017, as part of a
53
drive-in refranchising transaction, the Company entered into a direct financing lease which included an option for the franchisee to purchase the real estate within the next 24 months. In accordance with lease accounting requirements, because the exercise of this option could occur at any time within 24 months, the portion of the proceeds from the refranchising attributable to the fair value of the option was applied as the initial minimum lease payment for the real estate. The franchisee exercised the option in the last six months of fiscal year 2017. Until the option was fully exercised, the franchisee made monthly lease payments which were included in other operating income, net of sub-lease expense.
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(3)
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The deferred gain of
$1.0 million
is recorded in other non-current liabilities as a result of a real estate purchase option extended to the franchisee in the second quarter of fiscal year 2017. The deferred gain will continue to be amortized into income through January 2020 when the option becomes exercisable.
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