UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 
OF 1934
For the fiscal year ended:                                           August 31, 2007
   
OR
   
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
For the transition period from _______________ to _________________
   
Commission File Number 0-18859
   
 
SONIC CORP.
 
(Exact name of registrant as specified in its charter)
     
    Delaware    
 
          73-1371046
(State of
 
(I.R.S. Employer
incorporation)
 
Identification No.)
300 Johnny Bench Drive
 
Oklahoma City, Oklahoma
 
     73104
   
(Address of principal executive offices)
 
Zip Code
     
Registrant’s telephone number, including area code:   (405) 225-5000

Securities registered pursuant to section 12(b) of the Act:

None

Securities registered pursuant to section 12(g) of the Act:

Common Stock, Par Value $.01 (Title of class)
Rights to Purchase Series A Junior Preferred Stock, Par Value $.01 (Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes   X   .  No      

(Facing Sheet Continued)



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes       .  No X   .

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file the reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes   X   .  No      

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [ X ] .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.   (Check one):

Large accelerated filer   X   .                               Accelerated filer ___.                                Non-accelerated filer __.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes           .  No    X   .

As of February 28, 2007, the aggregate market value of the 62,780,894   shares of common stock of the Company held by non-affiliates of the Company equaled $1,360,461,973 based on the closing sales price for the common stock as reported for that date.  

As of October 16 , 2007, the Registrant had 60,780,414 shares of common stock issued and outstanding.


Documents Incorporated by Reference

Part III of this report incorporates by reference certain portions of the definitive proxy statement which the Registrant will file with the Securities and Exchange Commission no later than 120 days after August 31, 2007.

FORM 10-K OF SONIC CORP.
 
TABLE OF CONTENTS

PART I
 
 
 
Business
1  
 
 
 
Risk Factors
9
     
Unresolved Staff Comments
14
     
Properties
14
 
 
 
Legal Proceedings
14
 
 
 
Submission of Matters to a Vote of Security Holders
14
 
 
 
Executive Officers of the Company
15
 
 
 
PART II
 
 
 
Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
16
 
 
 
Selected Financial Data
18
 
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
 
 
 
Quantitative and Qualitative Disclosures About Market Risk
31
 
 
Financial Statements and Supplementary Data
32
 
 
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
32
 
 
 
Controls and Procedures
32
 
 
 
Other Information
34
 
 
 
PART III
 
 
 
Directors and Executive Officers of the Company and Corporate Governance
34
 
 
 
Executive Compensation
34
 
 
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
34
 
 
 
Certain Relationships and Related Transactions, and Director Independence
34
 
 
 
Principal Accounting Fees and Services
34
 
 
 
PART IV
 
 
 
Exhibits and Financial Statement Schedules
35


FORM 10-K

SONIC CORP.

PART I

Item 1.  Business

General

Sonic Corp. (the “Company”) operates and franchises the largest chain of drive-in restaurants (“Sonic Drive-Ins”) in the United States.  As of August 31, 2007, the Company had 3,343 Sonic Drive-Ins in operation from coast to coast, consisting of 654 Partner Drive-Ins and 2,689 Franchise Drive-Ins.  We own a majority interest, typically at least 60%, and the supervisor and manager of the drive-in own a minority interest in each Partner Drive-In.  Franchise Drive-Ins are owned and operated by our franchisees.  At a typical Sonic Drive-In, a customer drives into one of 24 to 36 covered drive-in spaces, orders through an intercom speaker system, and has the food delivered by a carhop within an average of four minutes.  Many Sonic Drive-Ins also include a drive-through lane and patio seating.

Our objective is to maintain our position as, or to become, a leading operator within each of our core and developing markets.  We have developed and are implementing a strategy designed to build the Sonic brand and to maintain high levels of customer satisfaction and repeat business.  The key elements of that strategy are:  (1) a unique drive-in concept focusing on a distinctive menu of quality made-to-order food products including several signature items; (2) a commitment to customer service featuring the quick delivery of food by carhops; (3) the expansion of Partner Drive-Ins and Franchise Drive-Ins within the continental United States; (4) an owner/operator philosophy, in which managers have an equity interest in their restaurants, thereby providing an incentive for managers to operate restaurants profitably and efficiently; and (5) a commitment to strong franchisee relationships.

The Sonic Drive-In restaurant chain was begun in the early 1950’s.  Sonic Corp. was incorporated in the State of Delaware in 1990 in connection with its 1991 public offering of common stock.  Our principal executive offices are located at 300 Johnny Bench Drive, Oklahoma City, Oklahoma 73104.  Our telephone number is (405) 225-5000.

Menu

Sonic Drive-Ins feature Sonic signature items, such as specialty soft drinks including cherry limeades and slushes, frozen desserts, made-to-order sandwiches and hamburgers, extra-long cheese coneys, hand-battered onion rings, tater tots, salads, and wraps.  Sonic Drive-Ins also offer breakfast items that include sausage, ham, or bacon with egg and cheese Breakfast Toaster ® or Bistro sandwiches, sausage and egg burritos, and specialty breakfast drinks.  Sonic Drive-Ins serve the full menu all day.

Restaurant Locations

We identify markets based on television viewing areas and further classify markets as either core or developing.  We define our core television markets as those markets where the penetration of Sonic Drive-Ins (as measured by population per restaurant, advertising levels, and share of restaurant spending) has reached a certain level of market maturity established by management.  All other television markets where Sonic Drive-Ins are located are referred to as developing markets.  Our core markets contain approximately 75% of all Sonic Drive-Ins as of August 31, 2007.  The following table sets forth the number of Partner Drive-Ins and Franchise Drive-Ins by core and developing markets as of August 31, 2007:

 

 
 
 
Core Markets
Developing Markets
Total
States
Partner
Franchise
Total
Partner
Franchise
Total
 
Alabama
33
72
105
 
6
6
111
Arizona
       
97
97
97
Arkansas
29
161
190
     
190
California
       
36
36
36
Colorado
14
8
22
21
38
59
81
Delaware
       
2
2
2
Florida
16
10
26
20
76
96
122
Georgia
5
16
21
4
100
104
125
Idaho
       
18
18
18
Illinois
       
29
29
29
Indiana
       
17
17
17
Iowa
     
1
16
17
17
Kansas
41
95
136
     
136
Kentucky
4
31
35
 
39
39
74
Louisiana
23
139
162
     
162
Mississippi
 
123
123
     
123
Missouri
44
164
208
     
208
Nebraska
     
8
17
25
25
Nevada
       
20
20
20
New Mexico
 
73
73
     
73
North Carolina
       
93
93
93
Ohio
     
4
11
15
15
Oklahoma
94
175
269
     
269
Oregon
       
3
3
3
Pennsylvania
       
3
3
3
South Carolina
 
19
19
 
53
53
72
South Dakota
       
2
2
2
Tennessee
42
168
210
10
 
10
220
Texas
216
685
901
 
12
12
913
Utah
       
28
28
28
Virginia
     
25
25
50
50
Washington
       
1
1
1
West Virginia
       
2
2
2
Wyoming
       
5
5
5
 
             
Mexico
       
1
1
1
Total
561
1,939
2,500
93
750
843
3,343
 

Expansion

During fiscal year 2007 , we opened 175 Sonic Drive-Ins, which consisted of 29 Partner Drive-Ins and 146 Franchise Drive-Ins.  During fiscal year 2008, we anticipate approximately 180 to 200 new Sonic Drive-In openings, including 155 to 165 openings by our franchisees.  That expansion plan involves the opening of new Sonic Drive-Ins predominantly by franchisees under existing area development agreements, single-store development by existing franchisees, and development by new franchisees. We believe that our existing core and developing markets, as well as newly-opened markets, offer significant growth opportunities for both Partner Drive-In and Franchise Drive-In expansion.  The ability of Sonic and its franchisees to open the anticipated number of Sonic Drive-Ins during fiscal year 2008 necessarily will depend on various factors, including those discussed under Item 1A.  Risk Factors – Failure to successfully implement our growth strategy could reduce, or reduce the growth of, our revenue and net income, of this Form 10-K.
2

 
Our expansion strategy for Sonic Drive-Ins involves three principal components:  (1) the building-out of existing core markets, (2) the further penetration of developing markets, and (3) the expansion into new markets.  In addition, we may consider the acquisition of other similar local or regional brands for conversion to Sonic Drive-Ins.

Restaurant Design and Construction

General.   The typical Sonic Drive-In consists of a kitchen housed in a one-story building flanked by canopy-covered rows of 24 to 36 parking spaces, with each space having its own intercom speaker system and menu board.  In addition, since 1995, most new Sonic Drive-Ins have incorporated a drive-through service and patio seating area.  We have 191 Sonic Drive-Ins that provide an indoor seating area, 49 of which are located in non-traditional areas such as shopping mall food courts, airports, and universities, and 21 of which are located adjacent to convenience stores.

Retrofit .   In fiscal 2006, we began implementing a program to retrofit all Sonic Drive-Ins over the next several years. The retrofit is a remodeling program which includes significant trade dress modifications to the drive-ins.  We completed the retrofit of over 100 Partner Drive-Ins in fiscal 2006.  In fiscal 2007, we completed the retrofit of an additional 173 Partner Drive-Ins and 326 Franchise Drive-Ins.  In fiscal 2008, we expect to retrofit approximately 150 additional Partner Drive-Ins and 600 to 700 Franchise Drive-Ins.  Franchisees pay the costs of the retrofit for their drive-ins.  We currently estimate the cost to complete a standard retrofit at approximately $125,000 to $150,000 per drive-in, which may be higher or lower depending on the configuration of the drive-in.  All new Sonic Drive-Ins being built now feature the new retrofit changes.  

Marketing

We have designed our marketing program to differentiate Sonic Drive-Ins from our competitors by emphasizing five key areas of customer satisfaction:  (1) wide variety of distinctive made-to-order menu items, (2) personal delivery of service by carhops, (3) speed of service, (4) quality, and (5) value.  The marketing plan includes promotions for use throughout the Sonic chain.  We support those promotions with television, radio, interactive media, point-of-sale materials, and other media as appropriate.  Those promotions generally center on products which highlight limited time new product introductions or signature menu items of Sonic Drive-Ins.

Each year Sonic develops a marketing plan with the involvement of the Sonic Franchise Advisory Council.  (Information concerning the Sonic Franchise Advisory Council is set forth on page 7 under Franchise Program - Franchise Advisory Council .)  Funding for our marketing plan has three components:  (1) the System Marketing Fund (2) local advertising expenditures, and (3) the Sonic Brand Fund (formerly known as the Sonic Advertising Fund).

Depending on the type of license agreement, each Sonic Drive-In must spend 1.125% to 5.0% of the drive-in’s gross revenues on local advertising, either directly or through participation in the local advertising cooperative. Advertising cooperatives among drive-in owners are formed to pool and direct advertising expenditures in local markets. The members of each local advertising cooperative may elect and frequently do elect by majority vote to require the cooperative’s member drive-ins to contribute more than the minimum percentage of gross revenues to the advertising cooperative’s funds.  For fiscal year 2007, drive-ins participating in cooperatives contributed an average of 4.15% of their Sonic Drive-Ins’ gross revenues to Sonic advertising cooperatives.  As of August 31, 2007, 3,236 Sonic Drive-Ins (97% of the chain) participated in advertising cooperatives.

The System Marketing Fund is funded out of the required local advertising funds by either redistributing 2.0% of each Sonic Drive-In’s gross revenues from the local advertising cooperatives to the System Marketing Fund or, if no advertising cooperative has been formed, requiring the Sonic Drive-In to pay directly 2.0% of its gross revenues to the System Marketing Fund with a corresponding deduction in the amount the drive-in is required to spend on local advertising. The System Marketing Fund complements local advertising efforts in attracting customers to Sonic Drive-Ins by promoting the Sonic brand and restaurant to an expanded audience.  The primary focus of the System Marketing Fund is to purchase advertising on national cable and broadcast networks and other national media and sponsorship opportunities.

The Sonic Brand Fund is Sonic’s national media production fund.  Each Sonic Drive-In must contribute 0.375% to 0.90% of their gross revenues, depending on the type of license agreement,  to the Sonic Brand Fund.    

The total amount spent on media (principally television) was approximately $175 million for fiscal year 2007 and we expect media expenditures of approximately $190 million for fiscal year 2008.
3


Purchasing

We negotiate with suppliers for our primary food products (hamburger patties, dairy products, chicken products, hot dogs, french fries, tater tots, cooking oil, fountain syrup, produce, and other items) and packaging supplies to ensure adequate quantities of food and supplies and to obtain competitive prices.  We seek competitive bids from suppliers on many of our food products.  We approve suppliers of those products and require them to adhere to our established product and food safety specifications. Suppliers manufacture several key products for Sonic under private label and sell them to authorized distributors for resale to Partner Drive-Ins and Franchise Drive-Ins.

We require our Partner Drive-Ins and Franchise Drive-Ins to purchase from approved distribution centers.  By purchasing as a group, we have achieved cost savings, improved food quality and consistency, and helped decrease the volatility of food and supply costs for Sonic Drive-Ins.  For fiscal year 2007, the average cost of food and packaging for a Sonic Drive-In, as reported to us by our Partner Drive-Ins and Franchise Drive-Ins, equaled approximately 27 % of revenues.

Food Safety and Quality Assurance

To ensure the consistent delivery of safe, high-quality food, we created a food safety and quality assurance program.  Sonic’s food safety program promotes the quality and safety of all products and procedures utilized by all Sonic Drive-Ins, and provides certain requirements that must be adhered to by all suppliers, distributors, and Sonic Drive-Ins.  We also have a comprehensive, restaurant-based food safety program called Sonic Safe.  Sonic Safe is a risk-based system that utilizes Hazard Analysis & Critical Control Points (HACCP) principles for managing food safety and quality.  Our food safety system includes employee training, supplier product testing, unannounced drive-in food safety auditing by independent third-parties, and other detailed components that monitor the safety and quality of Sonic’s products and procedures at every stage of the food preparation and production cycle.  Employee food safety training is covered under our Sonic Drive-In training program, referred to as the STAR Training Program.  This program includes specific training information and requirements for every station in the drive-in.  We also require our drive-in managers and assistant managers to pass the ServSafe training program.  ServSafe is the most recognized food safety training certification in the restaurant industry.

General Operations

Management Information Systems .  We utilize point-of-sale equipment in each of our Partner Drive-Ins and Franchise Drive-Ins.  Certain financial and other information is polled on a daily basis from most drive-ins.  We are continuing to develop software and hardware enhancements to our management information systems to facilitate improved communication and the exchange of information among the corporate office and Partner Drive-Ins and Franchise Drive-Ins.  These enhancements primarily utilize an intranet designed for that purpose, which we refer to as PartnerNet.

Reporting .  The new form of license agreement (Number 7) requires all Sonic Drive-Ins to submit a profit and loss statement on or before the 10 th of each month, while all prior forms of license agreements require submission on or before the 20 th of each month.  All Partner Drive-Ins and 66 % of Franchise Drive-Ins submit their data electronically.  We expect to add more Franchise Drive-Ins to electronic reporting which will reduce resources needed for manual processing of restaurant level data.

Hours of Operation .  Sonic Drive-Ins typically operate seven days a week and are open from at least 6:00 a.m. to 11:00 p.m.   Some Sonic Drive-Ins are open 24 hours a day.

  Company Operations

Restaurant Personnel .  A typical Partner Drive-In is operated by a manager, two to four assistant managers, and approximately 25 hourly employees, many of whom work part-time.  The manager has responsibility for the day-to-day operations of the Partner Drive-In.  Each supervisor has the responsibility of overseeing an average of four to seven Partner Drive-Ins.  Sonic Restaurants, Inc. (“SRI”), Sonic’s operating subsidiary, oversees the operations and development of and provides administrative services to all Partner Drive-Ins.  SRI employs directors of operations who oversee an average of four to seven supervisors within their respective regions and report to either a regional vice president or a vice president of SRI.
4

 
                Ownership Program.   The Sonic Drive-In philosophy stresses an ownership relationship with supervisors and managers.  As part of the ownership program, either a limited liability company or a general partnership is formed to own and operate each individual Partner Drive-In.  SRI owns a majority interest, typically at least 60%, in each of these limited liability companies and partnerships.  Generally, the supervisors and managers own a minority interest in the limited liability company or partnership. The amount of ownership percentage is separately negotiated for each Partner Drive-In.  Supervisors and managers are not employees of Sonic or of the limited liability companies or partnerships in which they have an ownership interest.  As owners, they share in the cash flow and are responsible for their share of any losses incurred by their Partner Drive-Ins.  We believe that our ownership structure provides a substantial incentive for Partner Drive-In supervisors and managers to operate their restaurants profitably and efficiently.  Additional information regarding our ownership program can be found under Ownership Program, in Part II, Item 7, at page 30 of this Form 10-K.
 
Sonic records the interests of supervisors and managers as “minority interest in earnings of Partner Drive-Ins” under costs and expenses on its financial statements.  We estimate that the average percentage interest of a supervisor was 16% and the average percentage interest of a manager in a Partner Drive-In was 19% in fiscal year 2007.  Each Partner Drive-In distributes its available cash flow to its supervisors and managers and to Sonic on a monthly basis pursuant to the terms of the operating agreement or partnership agreement for that restaurant.  Sonic has the right, but not the obligation, to purchase the minority interest of the supervisor or manager in the restaurant.  The amounts of the buy-in and the buy-out are generally based on the Partner Drive-In’s sales during the preceding 12 months and approximate the fair market value of a minority interest in that restaurant.  Most supervisors and managers finance the buy-in with a loan from a third-party financial institution. 
 
Each Partner Drive-In usually purchases equipment with funds borrowed from Sonic at competitive rates.  In most cases, Sonic also owns or leases the land and building and guarantees any third-party lease entered into for the site.
 
  Partner Drive-In Data.   The following table provides certain financial information relating to Partner Drive-Ins and the number of Partner Drive-Ins opened and closed during the past five fiscal years.
 
 
2007
 
2006
 
2005
 
2004
 
2003
 
Average Sales Per Partner Drive In
                   
  ( in thousands )
$
1,017
 
$
980
 
$
957
 
$
886
 
$
799
 
Number of Franchise Drive-Ins:
                             
Total Open at Beginning of Year
 
623
   
574
   
539
   
497
   
452
 
Newly Opened and Re-opened
 
29
   
35
   
37
   
21
   
35
 
Purchased from Franchisees*
 
(15
)
 
(15
)
 
(4
)
 
24
 
 
52
 
Sold to Franchisees*
 
10
   
--
   
5
   
(3
 
(41
Closed
 
(3
)  
 (1
)  
 (1
 
 0
   
 (1
)
Total Open at Year End
 
654
   
623
   
574
   
539
   
497
 
                               
*The relatively large number of drive-ins sold to franchisees in fiscal year 2003 and purchased from franchisees in fiscal years 2003 and 2004 represent transactions where a majority of Sonic Drive-Ins in a certain market were sold to or purchased from a multi-unit franchisee group.  In most instances where we purchased Sonic Drive-Ins, the selling multi-unit franchisee groups continued to own and operate multiple Franchise Drive-Ins.
 
Franchise Program
 
                General.  As of August 31, 2007, we had 2,689 Franchise Drive-Ins in operation.  A large number of successful multi-unit franchisee groups have developed during the Sonic system’s 54 years of operation. Those franchisees continue to develop new Franchise Drive-Ins in their franchise territories either through area development agreements or single site development.  Our franchisees opened 146 Franchise Drive-Ins during fiscal year 2007 and we expect our franchisees to open approximately 155 to 165 Franchise Drive-Ins in fiscal 2008.  We consider our franchisees a vital part of our continued growth and believe our relationship with our franchisees is good.
5


Franchise Agreements .  Each Sonic Drive-In, including each Partner Drive-In, operates under a franchise agreement that provides for payments to Sonic of an initial franchise fee and a royalty fee based on a graduated percentage of the gross revenues of the drive-in.  We began offering a new form of  license agreement (Number 7) in July 2007 which provides for an initial franchise fee of $45,000 and an ascending royalty rate beginning at 2% of gross revenues and increasing to 5% as the level of gross revenues increases.  For non-traditional drive-ins, which are those Sonic Drive-Ins located in venues such as shopping mall food courts, airports, and universities, the new form of license agreement (Number 7NT) provides for a franchise fee of $22,500 and a graduated royalty rate from 2% to 5% of gross revenues.  The most recent prior form of license agreement (Number 6A) has a $30,000 initial license fee and a graduated royalty rate of 1% to 5% of gross revenues.  Also in fiscal 2007, existing franchisees of approximately 790 drive-ins with older forms of license agreement opted to convert to a newer form of license agreement (Number 5.5) which contains a 20-year term and provides for the payment of a higher royalty rate than under the franchisee’s previous agreement.

All Sonic Drive-Ins opening in fiscal year 2008 are expected to open under the Number 6A license agreement. These drive-ins will be opening under previously entered area development agreements which provide for the use of a Number 6A license agreement.   We have the right to terminate any franchise agreement for a variety of reasons, including a franchisee’s failure to make payments when due or failure to adhere to our policies and standards.  Many state franchise laws affect our ability to terminate or refuse to renew a franchise.

As of August 31, 2007, 51 % of all Sonic Drive-Ins were subject to the 1% to 5% graduated royalty rate.  For fiscal year 2007, Sonic’s average royalty rate equaled 3.75 %.

Area Development Agreements .  We use area development agreements to facilitate the planned expansion of the Sonic Drive-In restaurant chain through multiple unit development.  While many existing franchisees continue to expand on a single drive-in basis, approximately 73 % of the new Franchise Drive-Ins opened during fiscal year 2007 occurred as a result of then-existing area development agreements.  Each area development agreement gives a developer the exclusive right to construct, own, and operate Sonic Drive-Ins within a defined area.  In exchange, each developer agrees to open a minimum number of Sonic Drive-Ins in the area within a prescribed time period.  If the developer does not meet the minimum opening requirements, we have the right to terminate the area development agreement and grant a new area development agreement to other franchisees for the area previously covered by the terminated area development agreement.

During fiscal year 2007, we entered into 71 new area development agreements calling for the opening of 441 Franchise Drive-Ins and amended 19 existing area development agreements calling for the opening of an additional 68 Franchise Drive-Ins, all during the next seven years.  As of August 31, 2007, we had a total of 173 area development agreements in effect and in compliance, calling for the development of 908 Sonic Drive-Ins during the next seven years. We cannot give any assurance that our franchisees will achieve that number of new Franchise Drive-Ins during the next seven years.  Of the 167 Franchise Drive-Ins scheduled to open during fiscal year 2007 under area development agreements in place at the beginning of that fiscal year, 107 or 64% opened during the period.  During fiscal year 2007, we terminated 25 of the 152 area development agreements existing at the beginning of the fiscal year.  The terminated area development agreements called for the opening of 35 Franchise Drive-Ins in fiscal year 2007 and an additional ten Franchise Drive-Ins in the next three fiscal years.  All of these terminations were as a result of the franchisee failing to meet the development schedule under the area development agreement.

In addition to the area development agreement commitments, during fiscal 2007, existing franchisees purchased options to develop approximately 400 drive-ins, which allow them to open new drive-ins under the more favorable Number 6A license agreement, rather than the new Number 7 license agreement.  The development options and area development agreements together reflect a development pipeline of over 1,300 drive-ins. 

Franchise Drive-In Development .  We assist each franchisee in selecting sites and developing Sonic Drive-Ins. Each franchisee has responsibility for selecting the franchisee’s drive-in location, but must obtain our approval of each Sonic Drive-In design and each location based on accessibility and visibility of the site and targeted demographic factors, including population density, income, age, and traffic.  We provide our franchisees with the physical specifications for the typical Sonic Drive-In.

Franchisee Financing .  Other than the agreements described below, we do not generally provide financing to franchisees or guarantee loans to franchisees made by third-parties.
6


We had an agreement with GE Capital Franchise Finance Corporation (“GEC”), pursuant to which GEC made loans to existing Sonic franchisees who met certain underwriting criteria set by GEC.  Under the terms of the agreement with GEC, Sonic provided a guaranty of 10% of the outstanding balance of a loan from GEC to the Sonic franchisee.  The portions of loans made by GEC to Sonic franchisees that are guaranteed by the Company total $2.2 million as of August 31, 2007. We ceased guaranteeing new loans made under the program during fiscal year 2003 and have not been required to make any payments under our agreement with GEC.

We have an agreement with Irwin Franchise Capital Corporation (“IFCC”) pursuant to which IFCC has agreed to make loans to existing Sonic franchisees who meet certain underwriting criteria set by IFCC to finance the equipment and improvements for our retrofit program as described under Restaurant Design and Construction – Retrofit of Item 1 of this Form 10-K.  Under the terms of the agreement with IFCC, we will provide a guaranty to IFCC of the greater of (i) 5% of the outstanding balance of a loan from IFCC to the Sonic franchisee or (ii) $250,000, provided that in no event will our maximum liability to IFCC exceed $2,500,000 in the aggregate.  As of August 31, 2007, the total amount guaranteed under the IFCC agreement was $ 250,000.

Franchisee Training .  Each franchisee must have at least one full-time employee at the Sonic Drive-In who has completed the Sonic Management Development Program before opening or operating the Sonic Drive-In.  The program consists of a minimum of 12 weeks of on-the-job training and one week of classroom development.  The program emphasizes food safety, quality food preparation, speed of service, cleanliness of Sonic Drive-Ins, management techniques and consistency of service.  We also require our management teams to pass the ServSafe training program. ServSafe is the most recognized food safety training certification in the restaurant industry.

Franchisee Support .  In addition to training, advertising and food purchasing as a system, and marketing programs, we provide various other services to our franchisees.  Those services include assistance with quality control through area field representatives, to ensure that each franchisee consistently delivers high quality food and service. Our field service consultants provide operational services and support for our franchisees, and our field marketing representatives assist the franchisees with the development of advertising cooperative and local market promotional activities.  We also provide new franchise consultants and new franchisee trainers to franchisees to support the successful integration of new franchisees into the Sonic system from training through the first months following the opening of each of the franchisee’s first three Sonic Drive-Ins.  We provide training to franchisees in such areas as shift management, customer service, time management, supervisory skills, and financial controls.  We additionally assist franchisees with the identification of trade areas for new Franchise Drive-Ins and the franchisees’ selection of sites for their Franchise Drive-Ins using demographic data and studies of traffic patterns.  Our architect and engineering personnel design, plan, and permit new stores.  Our construction personnel also assist in the construction of new drive-ins.

Franchise Operations .  Sonic’s franchisees operate all Franchise Drive-Ins in accordance with uniform operating standards and specifications.  These standards pertain to the quality and preparation of menu items, selection of menu items, maintenance and cleanliness of premises, and employee responsibilities.  We develop all standards and specifications with input from franchisees, and they are applied on a system-wide basis.  Each franchisee has certain discretion to determine the prices charged to its customers.

Franchise Advisory Council .  Our Franchise Advisory Council provides advice, counsel, and input to Sonic on important issues impacting the business, such as marketing and promotions, operations, purchasing, building design, human resources, technology, and new products.  The Franchise Advisory Council currently consists of 19 members selected by Sonic.   Currently, we have six executive committee members who are selected at large, 12 regional members representing four defined regions of the country, and one at large member representing new franchisees and smaller operators.   We have five Franchise Advisory Council task groups comprised of 48   total members who serve two-year terms and lend support on individual key priorities.

7

 
Franchise Drive-In Data .  The following table provides certain financial information relating to Franchise Drive-Ins and the number of Franchise Drive-Ins opened, purchased from or sold to Sonic, and closed during Sonic’s last five fiscal years.

 
2007
 
2006
 
2005
 
2004
 
2003
 
Average Sales Per Franchise
                   
Drive-In   ( in thousands )
$
1,132
  $
1,092
  $
1,039
  $
983
  $
929
 
Number of Franchise Drive-Ins:
                             
Total Open at Beginning of Year
 
2,565
   
2,465
   
2,346
   
2,209
   
2,081
 
New Franchise Drive-Ins
 
146
   
138
   
138
   
167
   
159
 
Sold to the Company*
  (15 )   (15 )   (4 )   (24 )   (52
Purchased from the Company*
 
10
   
--
   
5
   
3
   
41
 
Closed and Terminated,
                             
  Net of Re-openings
  (17 )   (23 )   (20 )   (9 )   (20
Total Open at Year End
 
2,689
   
2,565
   
2,465
   
2,346
   
2,209
 
 
* The relatively large number of drive-ins purchased from Sonic in fiscal year 2003 and sold to Sonic in fiscal years 2003 and 2004 represent transactions where a majority of Sonic Drive-Ins in a certain market were sold to or purchased from a multi-unit franchisee group.  In most instances where Sonic purchased Sonic Drive-Ins, the selling multi-unit franchisee groups continued to own and operate multiple Franchise Drive-Ins.

Competition

We compete in the restaurant industry, a highly competitive industry in terms of price, service, restaurant location, and food quality.  The restaurant industry is often affected by changes in consumer trends, economic conditions, demographics, traffic patterns, and concerns about the nutritional content of quick-service foods.  We compete on the basis of speed and quality of service, method of food preparation (made-to-order), food quality and variety, signature food items, and monthly promotions.  The quality of service, featuring Sonic carhops, constitutes one of our primary marketable points of difference from the competition.  There are many well-established competitors with substantially greater financial and other resources.  These competitors include a large number of national, regional, and local food services, including quick-service restaurants and casual dining restaurants.  A significant change in pricing or other marketing strategies by one or more of those competitors could have an adverse impact on Sonic’s sales, earnings, and growth.  In selling franchises, we also compete with many franchisors of quick-service and other restaurants and other business opportunities.

Seasonality

Our results during Sonic’s second fiscal quarter (the months of December, January and February) generally are lower than other quarters because of the lower temperatures in the locations of a number of Partner Drive-Ins and Franchise Drive-Ins, which tends to reduce customer visits to our drive-ins.

Employees

As of August 31, 2007, we had 357 full-time corporate employees.  This number does not include the approximately 19,000 full-time and part-time employees employed by separate partnerships and limited liability companies that operate our Partner Drive-Ins or the supervisors or managers of the Partner Drive-Ins who own a minority interest in the separate partnerships or limited liability companies.

None of our employees is subject to a collective bargaining agreement.  We believe that we have good labor relations with our employees.

Trademarks and Service Marks

Sonic owns numerous trademarks and service marks.  We have registered many of those marks, including the “Sonic” logo and trademark, with the United States Patent and Trademark Office.  Trademarks and service marks generally are valid as long as they are used or registered.  We believe that our trademarks and service marks have significant value and play an important role in our marketing efforts.
8


Government Regulations

We must comply with regulations adopted by the Federal Trade Commission (the “FTC”) and with several state laws that regulate the offer and sale of franchises.  We also must comply with a number of state laws that regulate certain substantive aspects of the franchisor-franchisee relationship.  The FTC’s Trade Regulation Rule on Franchising (the “FTC Rule”) requires that we furnish prospective franchisees with a franchise disclosure document containing information prescribed by the FTC Rule.

State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states. Those laws regulate the franchise relationship, for example, by requiring the franchisor to deal with its franchisees in good faith, by prohibiting interference with the right of free association among franchisees, by regulating discrimination among franchisees with regard to charges, royalties, or fees, and by restricting the development of other restaurants within certain prescribed distances from existing franchised restaurants.  Those laws also restrict a franchisor’s rights with regard to the termination of a franchise agreement (for example, by requiring “good cause” to exist as a basis for the termination), by requiring the franchisor to give advance notice and the opportunity to cure the default to the franchisee, and by requiring the franchisor to repurchase the franchisee’s inventory or provide other compensation upon termination.  To date, those laws have not precluded us from seeking franchisees in any given area and have not had a significant effect on our operations.

Each Sonic Drive-In must comply with regulations adopted by federal agencies and with licensing and other regulations enforced by state and local health, sanitation, safety, fire, and other departments.  Difficulties or failures in obtaining the required licenses or approvals can delay and sometimes prevent the opening of a new Sonic Drive-In.

Sonic Drive-Ins must comply with federal and state environmental regulations, but those regulations have not had a material effect on their operations.  More stringent and varied requirements of local governmental bodies with respect to zoning, land use, and environmental factors can delay and sometimes prevent development of new Sonic Drive-Ins in particular locations.

Sonic and its franchisees must comply with laws and regulations governing immigration, labor, employment and wage and hour issues, such as employment eligibility verification, minimum wage, overtime, family and medical leave, discrimination, and other working conditions.  Many of the food service personnel in Sonic Drive-Ins receive compensation at rates related to federal, state, and local minimum wage laws and, accordingly, increases in applicable minimum wage laws will increase labor costs at those locations.

Available Information

We maintain an internet website with the address of http://www.sonicdrivein.com .  Copies of the Company’s reports filed with, or furnished to, the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K and any amendments to such reports are available for viewing and copying at such internet website, free of charge, as soon as reasonably practicable after filing such material with, or furnishing it to, the Securities and Exchange Commission.  In addition, copies of Sonic’s corporate governance materials, including the Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee Charter, Nominating and Corporate Governance Committee Charter, Code of Ethics for Financial Officers, and Code of Business Conduct and Ethics are available for viewing and copying at the website, free of charge.

Item 1A.  Risk Factors
 
This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur.  Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this report.  These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties.  Our actual future results and trends may differ materially depending on a variety of factors including, but not limited to, the risks and uncertainties discussed below.  Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized.  For these reasons, you should not place undue reliance on forward-looking statements.  We undertake no obligation to publicly update or revise them, except as may be required by law.
9

 
Events reported in the media, such as incidents involving food-borne illnesses or food tampering, whether or not accurate, can cause damage to our reputation and rapidly affect sales and profitability.
 
Reports, whether true or not, of food-borne illnesses, such as e-coli, avian flu, bovine spongiform encephalopathy (commonly known as mad cow disease), hepatitis A or salmonella, and injuries caused by food tampering have in the past severely injured the reputations of participants in the restaurant industry and could in the future affect us.  The potential for terrorism of our nation’s food supply also exists and, if such an event occurs, it could have a negative impact on our brand’s reputation and could severely hurt sales, revenues, and profits.
 
 Our brand’s reputation is an important asset to the business; as a result, anything that damages our brand’s reputation could immediately and severely hurt sales, revenues, and profits.  If customers become ill from food-borne illnesses or food tampering, we could also be forced to temporarily close some, or all, Sonic Drive-Ins.  In addition, instances of food-borne illnesses or food tampering occurring at the restaurants of competitors, could, by resulting in negative publicity about the restaurant industry, adversely affect our sales on a local, regional, or national basis.  A decrease in customer traffic as a result of these health concerns or negative publicity, or as a result of a temporary closure of any Sonic Drive-Ins, could materially harm our brand, sales, and profitability.
 
The restaurant industry is highly competitive, and that competition could lower our revenues, margins, and market share.
 
The restaurant industry is intensely competitive as to price, service, location, personnel, dietary trends, and quality of food, and is often affected by changes in consumer tastes, economic conditions, population, and traffic patterns. We compete with international, regional and local restaurants, some of which operate more restaurants and have greater financial resources.  We compete primarily through the quality, price, variety, and value of food products offered. Other key competitive factors include the number and location of restaurants, quality and speed of service, attractiveness of facilities, effectiveness of advertising and marketing programs, and new product development by us and our competitors.  Some of our competitors have substantially larger marketing budgets, which may provide them with a competitive advantage.  In addition, our system competes within the quick-service restaurant industry not only for customers but also for management and hourly employees, suitable real estate sites, and qualified franchisees.

Changing dietary preferences may cause consumers to avoid our products in favor of alternative foods.
 
The restaurant industry is affected by consumer preferences and perceptions.  Although we will monitor these changing preferences and strive to adapt to meet changing consumer needs, growth of our brand, and ultimately system-wide sales, depend on the sustained demand for our products.  If dietary preferences and perceptions cause consumers to avoid certain products offered by Sonic Drive-Ins in favor of alternative foods, demand for our products may be reduced, and our business could be harmed.
 
Our earnings and business growth strategy depends in large part on the success of our franchisees, who exercise independent control of their businesses.
 
A portion of our earnings comes from royalties, rents and other amounts paid by our franchisees. Franchisees are independent contractors, and their employees are not our employees.  We provide training and support to, and monitor the operations of, our franchisees, but the quality of their drive-in operations may be diminished by any number of factors beyond our control.  Franchisees may not successfully operate drive-ins in a manner consistent with our high standards and requirements, and franchisees may not hire and train qualified managers and other restaurant personnel.  Any operational shortcoming of a Franchise Drive-In is likely to be attributed by consumers to the entire Sonic brand, thus damaging our reputation and potentially affecting revenues and profitability.

10

 
Changes in economic, market and other conditions could adversely affect Sonic and its franchisees, and thereby Sonic’s operating results.
 
The quick-service restaurant industry is affected by changes in economic conditions, consumer preferences and spending patterns, demographic trends, consumer perceptions of food safety, weather, traffic patterns, the type, number and location of competing restaurants, and the effects of war or terrorist activities and any governmental responses thereto.  Factors such as interest rates, inflation, gasoline prices, food costs, labor and benefit costs, legal claims, and the availability of management and hourly employees also affect restaurant operations and administrative expenses.  Economic conditions, including interest rates and other government policies impacting land and construction costs and the cost and availability of borrowed funds, affect our ability and our franchisees’ ability to finance new restaurant development, improvements and additions to existing restaurants, and the acquisition of restaurants from, and sale of restaurants to, franchisees.  Inflation can cause increased food, labor and benefits costs and can increase our operating expenses.  As operating expenses increase, we recover increased costs by increasing menu prices, to the extent permitted by competition, or by implementing alternative products or cost reduction procedures.  We cannot ensure, however, that we will be able to recover increases in operating expenses due to inflation in this manner.
 
Our financial results may fluctuate depending on various factors, many of which are beyond our control.

Our sales and operating results can vary from quarter to quarter and year to year depending on various factors, many of which are beyond our control.  Certain events and factors may directly and immediately decrease demand for our products.  If customer demand decreases rapidly, our results of operations would also decline precipitously.  These events and factors include:
 
 
 
variations in the timing and volume of Sonic Drive-Ins’ sales;
 
 
sales promotions by Sonic and its competitors;
 
 
changes in average same-store sales and customer visits;
 
 
variations in the price, availability and shipping costs of supplies;
 
 
seasonal effects on demand for Sonic’s products;
 
 
unexpected slowdowns in new drive-in development efforts;
 
 
changes in competitive and economic conditions generally;
 
 
changes in the cost or availability of ingredients or labor;
 
 
weather and other acts of God; and
 
 
changes in the number of franchise agreement renewals. 

Our profitability may be adversely affected by increases in energy costs.

Our success depends in part on our ability to absorb increases in energy costs.  Various regions of the United States in which we operate multiple drive-ins have experienced significant increases in energy prices.  If these increases continue to occur, it would have an adverse effect on our profitability.

Shortages or interruptions in the supply or delivery of perishable food products or rapid price increases could adversely affect our operating results.

We are dependent on frequent deliveries of perishable food products that meet certain specifications.  Shortages or interruptions in the supply of perishable food products may be caused by unanticipated demand, problems in production or distribution, financial or other difficulties of suppliers, disease or food-borne illnesses, inclement weather or other conditions.  We purchase large quantities of food and supplies, which can be subject to significant price fluctuations due to seasonal shifts, climate conditions, industry demand, energy costs, changes in international commodity markets and other factors.  These shortages or rapid price increases could adversely affect the availability, quality and cost of ingredients, which would likely lower revenues and reduce our profitability.
11

Failure to successfully implement our growth strategy could reduce, or reduce the growth of, our revenue and net income.

We plan to increase the number of Sonic Drive-Ins, but may not be able to achieve our growth objectives, and any new drive-ins may not be profitable.  The opening and success of drive-ins depends on various factors, including:

 
 
competition from other restaurants in current and future markets;
 
 
the degree of saturation in existing markets;
 
 
consumer interest in the Sonic Brand in new and developing markets;
 
 
the identification and availability of suitable and economically viable locations;
 
 
sales levels at existing drive-ins;
 
 
the negotiation of acceptable lease or purchase terms for new locations;
 
 
permitting and regulatory compliance;
 
 
the cost and availability of construction resources;
 
 
the ability to meet construction schedules;
 
 
the availability of qualified franchisees and their financial and other development capabilities;
 
 
the ability to hire and train qualified management personnel; 
 
 
weather; and
 
 
general economic and business conditions.
 
If we are unable to open as many new drive-ins as planned, if the drive-ins are less profitable than anticipated or if we are otherwise unable to successfully implement our growth strategy, revenue and profitability may grow more slowly or even decrease.

Our outstanding and future leverage could have an effect on our operations.

On December 20, 2006, the Company closed on a securitized financing facility, comprised of a $600 million fixed rate term loan and a $200 million variable rate revolving credit facility.   As of August 31, 2007, we had $593.4 million in outstanding debt under the fixed rate note at an interest rate of 5.7% and $116 million outstanding under the variable rate note at an interest rate of 6.4%.

Our increased leverage could have the following consequences:
 
 
 
We may be more vulnerable in the event of deterioration in our business, in the restaurant industry or in the economy generally.  In addition, we may be limited in our flexibility in planning for or reacting to changes in our business and the industry in which we operate.
 
 
 
We may be required to dedicate a substantial portion of our cash flow to the payment of interest on our indebtedness, which could reduce the amount of funds available for operations or development of new Partner Drive-Ins and thus place us at a competitive disadvantage as compared with competitors that are less highly leveraged.
 
 
 
From time to time, we may engage in various capital markets, bank credit and other financing activities to meet our cash requirements.  We may have difficulty obtaining additional financing at economically acceptable interest rates.
 
 
 
Our existing and future debt obligations may contain certain negative covenants including limitations on liens, consolidations and mergers, indebtedness, capital expenditures, asset dispositions, sale-leaseback transactions, stock repurchases and transactions with affiliates, which may reduce our flexibility in responding to changing business and economic conditions.
 
 
 
Our debt obligations are subject to customary rapid amortization 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 Notes, if such an event occurred, the unpaid amounts outstanding could become immediately due and payable.
 
 
12

 
Sonic Drive-Ins are subject to health, employment, environmental and other government regulations, and failure to comply with existing or future government regulations could expose us to litigation, damage to our reputation and lower profits.
 
Sonic and its franchisees are subject to various federal, state and local laws affecting their businesses.  The successful development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use (including the placement of drive-thru windows), environmental (including litter), traffic and other regulations.  Restaurant operations are also subject to licensing and regulation by state and local departments relating to health, food preparation, sanitation and safety standards, federal and state labor and immigration laws, (including applicable minimum wage requirements, overtime, working and safety conditions and citizenship requirements), federal and state laws prohibiting discrimination and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990.  If we fail to comply with any of these laws, we may be subject to governmental action or litigation, and our reputation could be accordingly harmed.  Injury to our reputation would, in turn, likely reduce revenues and profits.
 
In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry, particularly among restaurants.  As a result, we may become subject to regulatory initiatives in the area of nutrition disclosure or advertising, such as requirements to provide information about the nutritional content of our food products, which could increase expenses.  The operation of our franchise system is also subject to franchise laws and regulations enacted by a number of states and rules promulgated by the U.S. Federal Trade Commission.  Any future legislation regulating franchise relationships may negatively affect our operations, particularly our relationship with our franchisees.  Failure to comply with new or existing franchise laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales.  Changes in applicable accounting rules imposed by governmental regulators or private governing bodies could also affect our reported results of operations.
 
We are subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions, along with the Americans with Disabilities Act, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated, by federal, state and local governmental authorities that govern these and other employment matters.  We have experienced and expect further increases in payroll expenses as a result of federal and state mandated increases in the minimum wage, and although such increases are not expected to be material, there may be material increases in the future. In addition, our vendors may be affected by higher minimum wage standards, which may increase the price of goods and services they supply to us.
 
Litigation from customers, franchisees, employees and others could harm our reputation and impact operating results.
 
Claims of illness or injury relating to food quality or food handling are common in the quick-service restaurant industry.  In addition, class action lawsuits have been filed, and may continue to be filed, against various quick-service restaurants alleging, among other things, that quick-service restaurants have failed to disclose the health risks associated with high-fat foods and that quick-service restaurants’ marketing practices have encouraged obesity.  In addition to decreasing our sales and profitability and diverting management resources, adverse publicity or a substantial judgment against us could negatively impact our reputation, hindering the ability to attract and retain qualified franchisees, and grow the business.
 
Further, we may be subject to employee, franchisee and other claims in the future based on, among other things, discrimination, harassment, wrongful termination and wage, rest break and meal break issues, including those relating to overtime compensation.
 
We may not be able to adequately protect our intellectual property, which could decrease the value of our brand and products.
 
The success of our business depends on the continued ability to use existing trademarks, service marks and other components of our brand in order to increase brand awareness and further develop branded products.  All of the steps we have taken to protect our intellectual property may not be adequate.
13

Ownership and leasing of significant amounts of real estate exposes us to possible liabilities and losses.
 
We own or lease the land and building for all Partner Drive-Ins.  Accordingly, we are subject to all of the risks associated with owning and leasing real estate.  In particular, the value of our assets could decrease and our costs could increase because of changes in the investment climate for real estate, demographic trends and supply or demand for the use of our drive-ins, which may result from competition from similar restaurants in the area, as well as liability for environmental conditions.  We generally cannot cancel the leases, so if an existing or future Sonic Drive-In is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term.  In addition, as each of the leases expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close drive-ins in desirable locations.

Catastrophic events may disrupt our business.
 
Unforeseen events, including war, terrorism and other international conflicts, public health issues, and natural disasters such as hurricanes, earthquakes, or other adverse weather and climate conditions, whether occurring in the United States or abroad, could disrupt our operations, disrupt the operations of franchisees, suppliers or customers, or result in political or economic instability.  These events could reduce demand for our products or make it difficult or impossible to receive products from suppliers.

Item 1B.  Unresolved Staff Comments.

None.

Item 2.  Properties

Of the 654 Partner Drive-Ins operating as of August 31, 2007, we operated 273 of them on property leased from third-parties and 381 of them on property we own.  The leases expire on dates ranging from 2007 to 2027, with the majority of the leases providing for renewal options.  All leases provide for specified monthly rental payments, and some of the leases call for additional rentals based on sales volume.  All leases require Sonic to maintain the property and pay the cost of insurance and taxes.

Our corporate headquarters are located in the Bricktown district of downtown Oklahoma City.  We have a 15-year lease to occupy approximately 78,000 square feet.  The lease expires in November 2018 and has two five-year renewal options.  Sonic believes its properties are suitable for the purposes for which they are being used.

Item 3.  Legal Proceedings

The Company is involved in various legal proceedings and has certain unresolved claims pending.  Based on the information currently available, management believes that all claims currently pending are either covered by insurance or would not have a material adverse effect on the Company’s business or financial condition.

Item 4.  Submission of Matters to a Vote of Security Holders

Sonic did not submit any matter during the fourth quarter of the Company’s last fiscal year to a vote of Sonic’s stockholders, through the solicitation of proxies or otherwise.
14


Item 4A.  Executive Officers of the Company

Identification of Executive Officers

The following table identifies the executive officers of the Company:

Name
Age
Position
Executive
Officer Since
       
J. Clifford Hudson
52
Chairman of the Board of Directors, Chief Executive Officer and President
June 1985
       
W. Scott McLain
45
Executive Vice President of Sonic Corp. and President of Sonic Industries Services Inc.
April 1996
       
Michael A. Perry
49
President of Sonic Restaurants, Inc.
August 2003
       
Stephen C. Vaughan
41
Vice President and Chief Financial Officer
January 1996
       
V. Todd Townsend
43
Vice President and Chief Marketing Officer
August 2005
       
Paige S. Bass
38
Vice President and General Counsel
January 2007
       
Carolyn C. Cummins
49
Vice President of Compliance and Corporate Secretary
April 2004
       
Claudia San Pedro
38
Vice President of Investor Relations and Treasurer
January 2007
       
Terry D. Harryman
42
Controller
January 1999

Business Experience

The following sets forth the business experience of the executive officers of the Company for at least the past five years:

J. Clifford Hudson has served as the Company’s Chairman of the Board since January 2000 and Chief Executive Officer since April 1995.  Mr. Hudson served as President of the Company from April 1995 to January 2000 and reassumed that position in November 2004.  He has served in various other offices with the Company since 1984.  Mr. Hudson has served as a Director of the Company since 1993. Mr. Hudson has served on the Board of Trustees of the Ford Foundation since January 2006 and on the Board of Trustees of the National Trust for Historic Preservation since January 2001, where he now serves as Chairman of the Board.  He served as Chairman of the Board of Securities Investor Protection Corporation, the federally-chartered organization which serves as the insurer of customer accounts with brokerage firms, from 1994 to 2001.

W. Scott McLain has served as Executive Vice President of the Company and President and Director of Sonic Industries Services Inc. since September 2004.  He served as the Company’s Executive Vice President and Chief Financial Officer from January 2004 until November 2004 and as the Company’s Senior Vice President and Chief Financial Officer from January 2000 until January 2004.  Mr. McLain served as the Company’s Vice President of Finance and Chief Financial Officer from August 1997 until January 2000.

Michael A. Perry has served as President and Director of Sonic Restaurants, Inc. since September 2004.  He served as Senior Vice President of Operations and Director of Sonic Restaurants, Inc. from August 2003 until September 2004.  Mr. Perry served as Vice President of Franchise Services of Sonic Industries Services Inc. from September 1998 until August 2003.

Stephen C. Vaughan has served as Vice President and Chief Financial Officer of the Company since November 2004.  Mr. Vaughan also served as Treasurer of the Company from November 2004 until April 2005.  Mr. Vaughan served as Vice President of Planning and Analysis and Treasurer from November 2001 until November 2004 and served as Vice President of Planning and Analysis from January 1999 until November 2001.  He joined the Company in 1992.

V. Todd Townsend has served as Vice President and Chief Marketing Officer of the Company since joining the Company in August 2005. Mr. Townsend served as Vice President of Marketing for Yahoo! Inc. from 2004 until joining the Company in 2005.  Mr. Townsend served as Assistant Vice President of Marketing for Sprint Corp. from 2001 until 2003 and as  Senior Director of Marketing for Sprint Corp.  from 2000 until 2001.

Paige S. Bass has served as Vice President and General Counsel of the Company since January 2007.  Ms. Bass joined the Company as Associate General Counsel in April 2004.  Prior to joining the Company, Ms. Bass was employed seven years as an associate with the law firm of Crowe & Dunlevy in Oklahoma City, Oklahoma.

Carolyn C. Cummins has served as the Company’s Corporate Secretary since January 2007 and as the Company’s Vice President of Compliance since April 2004.  Ms. Cummins has also served as Assistant General Counsel since joining the Company in January 1999.

Claudia San Pedro has served as Vice President of Investor Relations and Treasurer of the Company since January 2007 and as Treasurer of Sonic Industries Services Inc. since November 2006.  She served as the Director of the Oklahoma Office of State Finance from June 2005 through November 2006.  From July 2003 to May 2005, Ms. San Pedro served as the Budget Division Director for the Office of State Finance.  From September 2000 until June 2003, Ms. San Pedro served as the Assistant Fiscal Staff Director and Education Fiscal Analyst for the Oklahoma State Senate.

Terry D. Harryman has served as the Company’s Controller since January 1999.  Mr. Harryman has also served as the Controller of Sonic Restaurants, Inc. and Sonic Industries Services Inc. since January 2002.  He served as Assistant Treasurer of Sonic Restaurants, Inc. and Sonic Industries Services Inc. from October 1996 until January 2002.  Mr. Harryman joined the Company in 1996.
15


PART II

Item 5.  Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company’s common stock trades on the Nasdaq National Market (“Nasdaq”) under the symbol “SONC.” The following table sets forth the high and low closing bids for the Company’s common stock during each fiscal quarter within the two most recent fiscal years as reported on Nasdaq.  Share amounts set forth below and elsewhere in this report have been adjusted to reflect the results of the April 2006 three-for-two stock split.

Fiscal Year Ended August 31, 2007
 
High
 
Low
Fiscal Year Ended August 31, 2006
 
High
 
Low
First Quarter
$24.02
$21.63
First Quarter
$19.94
$17.99
Second Quarter
$ 24.35
$21.50
Second Quarter
$ 21.73
$18.33
Third Quarter
$24.96
$20.60
Third Quarter
$23.48
$20.83
Fourth Quarter
$24.71
$20.29
Fourth Quarter
$22.40
$19.07

Stockholders

As of October 16, 2007, the Company had 629 record holders of its common stock.
 
Dividends

The Company did not pay any cash dividends on its common stock during its two most recent fiscal years and does not intend to pay any dividends in the foreseeable future as profits are reinvested in the Company to fund expansion of its business, acquisition of Franchise Drive-Ins, repurchases of the Company’s common stock, and payments under the Company’s financing arrangements.  As in the past, future payment of dividends will be considered after reviewing, among other factors, returns to stockholders, profitability expectations and financing needs.
16

 
  Issuer Purchases of Equity Securities
 
Shares repurchased during the fourth quarter of fiscal 2007 are as follows (in thousands, except per share amounts):
 
 Period
Total Number of Shares
Purchased
 
(a)
Average Price Paid per
Share
 
(b)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
(c)
Maximum Dollar Value that May Yet Be Purchased Under the Program
 
(d)
         
June 1, 2007 through June 30, 2007
890
$21.36
890
$20,425
         
July 1, 2007 through July 31, 2007
942
$21.68
942
$2
         
August 1, 2007 through August 31, 2007
1,481
$21.90
1,481
$42,571
         
      Total
3,313
$21.89
3,313
 

(1)  All of the shares purchased during the fourth quarter of fiscal 2007 were purchased as part of the Company’s share repurchase program which was first publicly announced on April 14, 1997.  In August 2007, the Company’s Board of Directors approved an additional $75 million under the Company’s stock repurchase authorization and extended the program to August 31, 2008.

17

Item 6.  Selected Financial Data

The following table sets forth selected financial data regarding the Company’s financial condition and operating results.  One should read the following information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” below, and the Company’s Consolidated Financial Statements included elsewhere in this report.

[The Remainder of this Page Intentionally Left Blank]
18


 
Selected Financial Data
(In thousands, except per share data)

 
   
Year ended August 31,
 
   
2007
   
2006
   
2005 (1)
   
2004 (1)
   
2003 (1)
 
                               
Income Statement Data:
                             
Partner Drive-In sales
  $
646,915
    $
585,832
    $
525,988
    $
449,585
    $
371,518
 
Franchise Drive-Ins:
                                       
Franchise royalties
   
111,052
     
98,163
     
88,027
     
77,518
     
66,431
 
Franchise fees
   
4,574
     
4,747
     
4,311
     
4,958
     
4,674
 
Other
   
7,928
     
4,520
     
4,740
     
4,385
     
4,017
 
Total revenues
   
770,469
     
693,262
     
623,066
     
536,446
     
446,640
 
Cost of Partner Drive-In sales
   
520,176
     
468,627
     
421,906
     
358,859
     
291,764
 
Selling, general and administrative
   
58,736
     
52,048
     
47,503
     
44,765
     
41,061
 
Depreciation and amortization
   
45,103
     
40,696
     
35,821
     
32,528
     
29,223
 
Provision for impairment of long-lived
                                       
assets
   
1,165
     
264
     
387
     
675
     
727
 
Total expenses
   
625,180
     
561,635
     
505,617
     
436,827
     
362,775
 
Income from operations
   
145,289
     
131,627
     
117,449
     
99,619
     
83,865
 
Debt extinguishment and other costs
   
6,076
   
   
   
   
 
Interest expense, net
   
38,330
     
7,578
     
5,785
     
6,378
     
6,216
 
Income before income taxes
  $
100,883
    $
124,049
    $
111,664
    $
93,241
    $
77,649
 
Net income
  $
64,192
    $
78,705
    $
70,443
    $
58,031
    $
47,801
 
                                         
Income per share (2) :
                                       
Basic
  $
0.94
    $
0.91
    $
0.78
    $
0.65
    $
0.55
 
Diluted
  $
0.91
    $
0.88
    $
0.75
    $
0.63
    $
0.52
 
Weighted average shares used in calculation (2) :
                                       
Basic
   
68,019
     
86,260
     
89,992
     
88,970
     
87,698
 
Diluted
   
70,592
     
89,239
     
93,647
     
92,481
     
91,365
 

Balance Sheet Data:
                             
Working capital (deficit)
  $ (40,784 )   $ (35,585 )   $ (30,093 )   $ (14,537 )   $ (2,875 )
Property, equipment and capital leases, net
   
529,993
     
477,054
     
422,825
     
376,315
     
345,551
 
Total assets
   
758,520
     
638,018
     
563,316
     
518,633
     
486,119
 
Obligations under capital leases (including current portion)
   
39,318
     
36,625
     
38,525
     
40,531
     
27,929
 
Long-term debt (including current portion)
   
710,743
     
122,399
     
60,195
     
82,169
     
139,587
 
Stockholders’ equity (deficit)
    (106,802 )    
391,693
     
387,917
     
337,900
     
267,733
 
Cash dividends declared per common share
 
   
   
   
   
 
 
(1)   Previously reported prior-year results have been adjusted to implement SFAS 123R on a modified retrospective basis.
(2)   Adjusted for three-for-two stock splits in 2006 and 2004.
19

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Description of the Business .   Sonic operates and franchises the largest chain of drive-ins in the United States.  As of August 31, 2007, the Sonic system was comprised of 3,343 drive-ins, of which 20% or 654 were Partner Drive-Ins and 80% or 2,689 were Franchise Drive-Ins.  Sonic Drive-Ins feature signature menu items such as specialty soft drinks and frozen desserts, made-to-order sandwiches and a unique breakfast menu.  We derive our revenues primarily from Partner Drive-In sales and royalties from franchisees.  We also receive revenues from initial franchise fees.  To a lesser extent, we also receive income from the selling and leasing of signs and real estate, as well as from minority ownership interests in a few Franchise Drive-Ins.

Costs of Partner Drive-In sales, including minority interest in earnings of drive-ins, relate directly to Partner Drive-In sales.  Other expenses, such as depreciation, amortization, and general and administrative expenses, relate to the Company’s franchising operations, as well as Partner Drive-In operations.  Our revenues and expenses are directly affected by the number and sales volumes of Partner Drive-Ins.  Our revenues and, to a lesser extent, expenses also are affected by the number and sales volumes of Franchise Drive-Ins.  Initial franchise fees and franchise royalties are directly affected by the number of Franchise Drive-In openings.

Overview of Business Performance . Business fundamentals at the drive-in level continued to be strong during fiscal year 2007.  Cumulative results for the year, however, were impacted by costs associated with the financing of the Company’s tender offer and other share repurchase activities which have collectively resulted in the repurchase of approximately 30% of the Company’s outstanding stock during the year ended August 31, 2007.  While the tender offer was dilutive to earnings per share in the first two quarters of fiscal 2007, it was accretive to third and fourth quarter earnings per share and is expected to continue to be accretive in the future. Net income for the year decreased 18.4%, while earnings per share increased 3.4% to $0.91 per diluted share from $0.88 in the previous year.  The Company’s earnings were reduced by debt extinguishment charges related primarily to Sonic’s tender offer and financing activities during fiscal year 2007, which totaled $0.05 per diluted share for the year.  Excluding these special charges, net income per diluted share was $0.96 for fiscal year 2007, reflecting a 9.1% increase versus the prior year.  The Company believes this non-GAAP measure of net income per diluted share before special items provides for comparability to prior year net income per diluted share, and is useful in assessing ongoing operations performance.

We continue to experience considerable momentum in our business fueled by solid growth in same-store sales that led to an increase in system-wide drive-in level average profits.  In turn, the rise in store-level profits, which have grown handsomely over the last four years, helped produce an increase in the number of new drive-in openings by franchisees.  We believe these results reflect our multi-layered growth strategy that features the following components:

·  
Solid same-store sales growth;
·  
Expansion of the Sonic brand through new unit growth, particularly by franchisees;
·  
Increased franchising income stemming from franchisee new unit growth, solid same-store sales growth and our unique ascending royalty rate;
·  
Operating leverage at both the drive-in level and the corporate level; and
·  
The use of excess operating cash flow and issuance of new debt for share repurchases and franchise acquisitions.

The following table provides information regarding the number of Partner Drive-Ins and Franchise Drive-Ins in operation as of the end of the periods indicated as well as the system-wide growth in sales and average unit volume. System-wide information includes both Partner Drive-In and Franchise Drive-In information, which we believe is useful in analyzing the growth of the brand as well as the Company’s revenues since franchisees pay royalties based on a percentage of sales.
20

System-Wide Performance
($ in thousands)
 
   
   
Year Ended August 31,
 
   
2007
   
2006
   
2005
 
Percentage increase in sales
    8.6 %     10.7 %     12.4 %
                         
System-wide drive-ins in operation   (1) :
                       
Total at beginning of period
   
3,188
     
3,039
     
2,885
 
Opened
   
175
     
173
     
175
 
Closed (net of re-openings)
    (20 )     (24 )     (21 )
Total at end of period
   
3,343
     
3,188
     
3,039
 
                         
Core markets   (2)
   
2,500
     
2,435
     
2,165
 
Developing markets   (2)
   
843
     
753
     
874
 
      All markets
   
3,343
     
3,188
     
3,039
 

Average sales per drive-in:
                 
Core markets
  $
1,145
    $
1,105
    $
1,059
 
Developing markets
   
998
     
954
     
934
 
    All markets
   
1,109
     
1,070
     
1,023
 
                         
Change in same-store sales   (3) :
                       
Core markets
    3.6 %     5.3 %     5.6 %
Developing markets
   
1.2
     
1.5
     
7.4
 
    All markets
   
3.1
     
4.5
     
6.0
 
                         
(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(2) Markets are identified based on television viewing areas and further classified as core or developing markets based upon number of drive-ins in a market and the level of advertising support. Market classifications are updated periodically.
(3) Represents percentage change for drive-ins open for a minimum of 15 months.
 

System-wide same-store sales increased 3.1% during fiscal year 2007 as a result of growth in average check, offset somewhat by a slight decrease in traffic (number of transactions per drive-in). The increase in average check was the result of price increases, as well as the success of the pay-at-your-stall (PAYS) program, which has increased credit and debit card transactions that, on average, exceed the average cash transaction.  We believe our strong sales performance is a direct result of our specific sales-driving initiatives including, but not limited to:

·  
Continued growth of our business in non-traditional day parts including the morning, afternoon, and evening day parts;
·  
Use of technology to reach customers and improve the customer experience;
·  
Monthly promotions and new product news focused on quality and expanded choice for our customers;
·  
Growth in brand awareness through increased media spending and greater use of network cable advertising; and
·  
The ongoing physical retrofit of drive-ins with a new look.

Looking forward, these strategies are expected to continue to positively impact our business.  We expect revenue growth of between 10% and 12% for fiscal year 2008, based upon targeted same-store sales growth in the range of 2% to 4%, with Partner Drive-In sales growth expected to be slightly ahead of this range.

We continue to use our monthly promotions to highlight our distinctive food offerings and to feature new products.   We also use our promotions and new product news to create a strong emotional link with consumers and to align closely with consumer trends for fresh ingredients, customization, menu variety and choice.  During the past year, our new product offerings showcased the breadth of our menu and emphasized the opportunity for choice at Sonic.  We will continue to have new product news in the coming months, all designed to meet customers’ evolving taste preferences including the growing desire for fresh, quality product offerings and healthier alternatives.
21

During fiscal year 2007, our system-wide media expenditures were approximately $175 million as compared to $145 million in fiscal year 2006, which we believe continues to increase overall brand awareness.  We also continued to spend approximately one-half of our marketing dollars on system-wide marketing fund efforts, which are largely used for network cable television advertising, growing this area of our advertising from approximately $72 million in fiscal year 2006 to approximately $90 million in fiscal year 2007.  We believe increased network cable advertising provides several benefits including the ability to more effectively target and better reach the cable audience, which has now surpassed broadcast networks in terms of viewership.  In addition, national cable advertising also allows us to bring additional depth to our media and expand our message beyond our traditional emphasis on a single monthly promotion.  Looking forward, we expect system-wide media expenditures to be approximately $190 million in fiscal 2008, with the system-wide marketing fund representing approximately one-half of total media expenditures.

We continue to make investments to upgrade the exterior look of our drive-ins including a retrofit and the use of new electronic signage.  The new retrofit features several new elements including an upgraded building exterior, new more energy-efficient lighting, a significantly enhanced patio area, and improved menu housings.  We completed the retrofit of over 100 Partner Drive-Ins before fiscal year 2007.  During fiscal year 2007, the retrofit was completed at 326 Franchise Drive-Ins and 173 Partner Drive-Ins.  The retrofit of the entire Sonic system is expected to occur over the next three to four years, with an additional 600 to 700 Franchise Drive-Ins and 150 Partner Drive-Ins expected to be retrofitted during fiscal year 2008.

Sonic opened 175 new drive-ins during fiscal year 2007, consisting of 29 Partner Drive-Ins and 146 Franchise Drive-Ins, a slight increase overall from 173 drive-in openings during fiscal year 2006 (35 Partner Drive-Ins and 138 Franchise Drive-Ins).  Looking forward, the Company expects to open 180 to 200 new drive-ins during fiscal year 2008, including 155 to 165 by franchisees.

Results of Operations

Revenues .   Total revenues increased 11.1% to $770.5 million in fiscal year 2007 from $693.3 million during fiscal year 2006.  The increase in revenues primarily relates to solid sales growth for Partner Drive-Ins and a rise in franchise royalties.
 
Revenues
 
($ in thousands)
 
               
Percent
 
               
Increase/
   
Increase/
 
Year Ended August 31,
 
2007
   
2006
   
(Decrease)
   
(Decrease)
 
Revenues:
   Partner Drive-In sales
  $
646,915
    $
585,832
    $
61,083
      10.4 %
Franchise revenues:
     Franchise royalties
   
111,052
     
98,163
     
12,889
     
13.1
 
     Franchise fees
   
4,574
     
4,747
      (173 )     (3.6 )
Other
   
7,928
     
4,520
     
3,408
     
75.4
 
   Total revenues
  $
770,469
    $
693,262
    $
77,207
     
11.1
 
                                 
                           
Percent
 
                   
Increase/
   
Increase/
 
Year Ended August 31,
 
2006
   
2005
   
(Decrease)
   
(Decrease)
 
Revenues:
  Partner Drive-In sales
  $
585,832
    $
525,988
    $
59,844
      11.4 %
Franchise revenues:
    Franchise royalties
   
98,163
     
88,027
     
10,136
     
11.5
 
    Franchise fees
   
4,747
     
4,311
     
436
     
10.1
 
  Other
   
4,520
     
4,740
      (220 )     (4.6 )
  Total revenues
  $
693,262
    $
623,066
    $
70,196
     
11.3
 

The following table reflects the growth in Partner Drive-In sales and changes in comparable drive-in sales for Partner Drive-Ins.  It also presents information about average unit volumes and the number of Partner Drive-Ins, which is useful in analyzing the growth of Partner Drive-In sales.
22

Partner Drive-In Sales
($ in thousands)
 
   
   
Year Ended August 31,
 
   
2007
   
2006
   
2005
 
Partner Drive-In sales
  $
646,915
    $
585,832
    $
525,988
 
Percentage increase
    10.4 %     11.4 %     17.0 %
                         
Partner Drive-Ins in operation   (1) :
                       
   Total at beginning of period
   
623
     
574
     
539
 
   Opened
   
29
     
35
     
37
 
   Acquired from (sold to) franchisees, net
   
5
     
15
      (1 )
   Closed
    (3 )     (1 )     (1 )
   Total at end of period
   
654
     
623
     
574
 
                         
Average sales per Partner Drive-In
  $
1,017
    $
980
    $
957
 
Percentage increase
    3.8 %     2.4 %     8.0 %
                         
Change in same-store sales   (2)
    2.5 %     1.9 %     7.4 %
                         
(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(2) Represents percentage change for drive-ins open for a minimum of 15 months.
 

The following table reflects the increase in Partner Drive-In sales by type of activity for fiscal year 2007 and 2006:
 
Change in Partner Drive-In Sales
($ in thousands)
 
   
   
Year Ended August 31,
 
   
2007
   
2006
 
Increase from addition of newly constructed drive-ins (1)
  $
42,593
    $
33,332
 
Net increase from drive-ins acquired and sold (2)
   
4,409
     
17,197
 
Increase from same-store sales
   
15,439
     
9,754
 
Decrease from drive-ins closed (3)
    (1,358 )     (439 )
Net increase in Partner Drive-In sales
  $
61,083
    $
59,844
 
                 
(1) Represents the increase for 64 and 72 drive-ins opened since the beginning of the prior fiscal year as of August 31, 2007 and 2006, respectively.
 
(2) Represents the net increase for 15 drive-ins acquired and 10 drive-ins sold since the beginning of the prior fiscal year as of August 31, 2007 and 19 drive-ins acquired and 5 drive-ins sold since the beginning of the prior fiscal year as of August 31, 2006.
 
(3) Represents the decrease for 4 and 2 drive-ins closed since the beginning of the prior fiscal year as of August 31, 2007 and 2006, respectively.
 

The increase in Partner Drive-In sales for both fiscal year 2007 and 2006 was primarily driven by the opening of newly constructed drive-ins.  Looking forward, we anticipate opening approximately 25 to 35 Partner Drive-Ins during fiscal year 2008.  Same-store sales at Partner Drive-Ins increased 2.5% in fiscal year 2007 and 1.9% in fiscal year 2006, which also contributed to the increase in total Partner Drive-In sales.  These increases also reflect the positive impact of increasing average sales per drive-in of 3.8% for 2007 and 2.4% for 2006.

The following table reflects the growth in franchise income (franchise royalties and franchise fees) as well as franchise sales, average unit volumes and the number of Franchise Drive-Ins.  While we do not record Franchise Drive-In sales as revenues, we believe this information is important in understanding our financial performance since these sales are the basis on which we calculate and record franchise royalties.  This information is also indicative of the financial health of our franchisees.
23


Franchise Information
($ in thousands)
 
   
Year Ended August 31,
 
   
2007
   
2006
   
2005
 
Franchise fees and royalties   (1)
  $
115,626
    $
102,910
    $
92,338
 
Percentage increase
    12.4 %     11.4 %     12.0 %
                         
Franchise Drive-Ins in operation   (2) :
                       
Total at beginning of period
   
2,565
     
2,465
     
2,346
 
Opened
   
146
     
138
     
138
 
Acquired from (sold to) Company, net
    (5 )     (15 )    
1
 
Closed
    (17 )     (23 )     (20 )
Total at end of period
   
2,689
     
2,565
     
2,465
 
                         
Franchise Drive-In sales
  $
2,961,168
    $
2,735,802
    $
2,474,133
 
Percentage increase
    8.2 %     10.6 %     11.5 %
                         
Effective royalty rate
    3.75 %     3.59 %     3.56 %
                         
Average sales per Franchise Drive-In
  $
1,132
    $
1,092
    $
1,039
 
                         
Change in same-store sales   (3)
    3.3 %     5.1 %     5.8 %
   
(1) See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of MD&A.
 
(2) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(3) Represents percentage change for drive-ins open for a minimum of 15 months.
 

Franchise royalties increased 13.1% to $111.1 million in fiscal year 2007, compared to $98.2 million in fiscal year 2006.  Of the $12.9 million increase, approximately $8.0 million resulted from Franchise Drive-Ins’ same-store sales growth of 3.3% in fiscal year 2007, combined with an increase in the effective royalty rate to 3.75% during fiscal year 2007 compared to 3.59% during fiscal year 2006.  Each of our license agreements contains an ascending royalty rate whereby royalties, as a percentage of sales, increase as sales increase.  The balance of the increase was attributable to growth in the number of Franchise Drive-Ins over the prior period.

Franchise royalties were positively impacted during the latter half of fiscal year 2007 when franchisees opted to convert approximately 790 older license agreements to a newer form of license agreement.  The conversion license provides a 20 year term and for payment of a higher royalty rate than in the previous agreement.  The rate for the converted licenses was effective April 1, 2007, and we estimate the total benefit for the last half of the fiscal year was between $1.5 to $2.0 million.  Looking forward, franchise royalties will continue to be impacted positively by this conversion.  The benefit to the first half of fiscal year 2008 is expected to be approximately $1.5 million in additional royalties.

Franchise royalties increased 11.5% to $98.1 million in fiscal year 2006, compared to $88.0 million in fiscal year 2005.  Of the $10.1 million increase, approximately $6.1 million resulted from Franchise Drive-Ins’ same-store sales growth of 5.1% in fiscal year 2006, combined with an increase in the effective royalty rate to 3.59% during fiscal year 2006 compared to 3.56% during fiscal year 2005.  The balance of the increase was attributable to growth in the number of Franchise Drive-Ins over the prior period.

Franchisees opened 146 new drive-ins in fiscal year 2007, up from 138 new drive-ins in fiscal year 2006.  Despite the increase in new drive-in openings, franchise fees decreased 3.6% to $4.6 million as a result of approximately $0.3 million more in fees recognized in fiscal year 2006 from terminations of area development agreements.  These terminations were due to an initiative to strengthen the franchise development pipeline by terminating non-performing agreements and were the primary reason for the 10.1% increase in franchise fees to $4.7 million in fiscal year 2006, when franchisees opened 138 new drive-ins in both fiscal years 2006 and 2005.
24


As of August 31, 2007, we had 173 area development agreements representing 908 planned Franchise Drive-In openings over the next few years, compared to 152 such agreements at August 31, 2006 which represented approximately 576 planned Franchise Drive-In openings.  We anticipate 155 to 165 store openings by franchisees during fiscal year 2008.  As a result of these new Franchise Drive-In openings, the impact of the conversion of older license agreements, and the continued benefit of the ascending royalty rate contained in all license agreements, we expect approximately $13 to $15 million in incremental franchise fees and royalties in fiscal year 2008.

Other income increased 75.4% to $7.9 million in fiscal year 2007 from $4.5 million in fiscal year 2006.  The increase relates primarily to the net favorable impact of non-income tax matters and an approximately $2.0 million gain on the sale of real estate to a franchisee.  Looking forward, other income is anticipated in the range of $0.8 million to $1.0 million per quarter during fiscal year 2008.

Operating Expenses .   Overall, drive-in cost of operations, as a percentage of Partner Drive-In sales, increased to 80.3% in fiscal year 2007 from 80.0% in fiscal year 2006.   Minority interest in earnings of drive-ins is included as a part of cost of sales in the table below since it is directly related to Partner Drive-In operations.

Operating Margins
 
   
   
Year Ended August 31,
 
   
2007
   
2006
   
2005
 
Costs and Expenses (1) :
                 
Partner Drive-Ins:
                 
Food and packaging
    25.7 %     25.9 %     26.2 %
Payroll and other employee benefits
   
30.4
     
30.0
     
30.3
 
Minority interest in earnings of
Partner Drive-Ins
   
4.1
     
4.3
     
4.1
 
Other operating expenses
   
20.1
     
19.8
     
19.6
 
Total Partner Drive-In cost of operations
    80.3 %     80.0 %     80.2 %
                         
(1) As a percentage of Partner Drive-In sales.
 

Food and packaging costs decreased by 0.2 percentage points during fiscal year 2007 compared to fiscal year 2006 following a decrease of 0.3 percentage points during fiscal year 2006 compared to fiscal year 2005.   The decrease for fiscal year 2007 relates primarily to price increases that more than offset generally higher commodity pricing, particularly for dairy, soybean oil and packaging.  The improvement for fiscal year 2006 relates primarily to lower dairy costs and a favorable shift in product mix to drinks and ice cream, which have more favorable margins than other menu items.  Looking forward, commodity pressures are expected to ease in the second half of fiscal year 2008.

Labor costs increased by 0.4 percentage points during fiscal year 2007 compared to fiscal year 2006 after a decrease of 0.3 percentage points during fiscal year 2006 compared to fiscal year 2005.  The increase for fiscal year 2007 was a result of federal and state minimum wage increases, which was partially offset by price increases.  The improvement for fiscal year 2006 was primarily a result of leverage from higher sales volumes.  Looking forward, wage rates are expected to continue to increase as a result of federal and state minimum wage legislation.  While the Company expects to mitigate some of the increase with menu price increases, it is likely that labor costs, as a percentage of sales, will rise during fiscal year 2008.

Minority interest, which reflects our store-level partners’ pro-rata share of earnings through our partnership program, increased by $1.4 million during fiscal year 2007.  While these costs increased in real terms during fiscal year 2007, they declined as a percentage of Partner Drive-In sales reflecting our partners’ share of the increased operating costs experienced during the period.  During fiscal year 2006, minority interest increased $3.7 million, reflecting the increase in average profit per store.  We continue to view the partnership program as an integral part of our culture at Sonic and a large factor in the success of our business, and we are pleased that profit distributions to our partners increased during fiscal year 2007.  Since we expect our average store level profits to continue to grow in fiscal year 2008, we expect minority interest to continue to increase in dollar terms.
25

Other operating expenses increased by 0.3 percentage points during fiscal year 2007 after an increase of 0.2 percentage points during fiscal year 2006.  The increase in fiscal year 2007 relates to a number of items, including higher credit card fees due to increasing credit card sales and higher repair and maintenance costs.  Leverage from higher sales partially offset increased utility costs resulting from higher energy prices in fiscal year 2006.  Looking forward, we expect increases in credit card fees to continue, which is expected to be offset by leverage from higher sales to result in flat to slightly favorable other operating expenses, as a percentage of sales, on a year-over-year basis, in fiscal year 2008.

To summarize, we are expecting leverage from higher sales and operations initiatives to result in slightly favorable overall restaurant-level margins during fiscal year 2008 on a year-over-year basis, primarily in the second half of the year.

Selling, General and Administrative (“SG&A”) .   SG&A expenses increased 12.8% to $58.7 million during fiscal year 2007 and 9.6% to $52.0 million during fiscal year 2006.  The increases in these fiscal years relate to the addition of headcount and other infrastructure to support the continued growth of our business.  As a percentage of total revenues, SG&A expenses increased to 7.6% in fiscal year 2007, compared with 7.5% in fiscal year 2006 and 7.6% in fiscal year 2005.  Stock-based compensation is included in SG&A, and, as of August 31, 2007, total remaining unrecognized compensation cost related to unvested stock-based arrangements was $12.9 million and is expected to be recognized over a weighted average period of 1.6 years.  See Note 1 and Note 12 of the Notes to the Consolidated Financial Statements included in this Form 10-K for additional information regarding our stock-based compensation.  We anticipate that SG&A costs will increase approximately 10% to 12% in fiscal year 2008 and decline slightly, as a percentage of sales.

Depreciation and Amortization .   Depreciation and amortization expense increased 10.8% to $45.1 million in fiscal year 2007 as a result of additional capital expenditures.  Depreciation and amortization expense increased 13.6% to $40.7 million in fiscal year 2006 due, in part, to additional depreciation stemming from the Tennessee and Kentucky acquisitions, as well as the reduction in remaining useful life for certain assets related to the retrofit of Partner Drive-Ins in the late 1990s. Capital expenditures during fiscal year 2007 for new drive-in construction and continued investment in existing drive-ins, including retrofit and, in some cases, upgraded signage were $110.9 million.  An additional $10.8 million was spent for the acquisition of drive-ins from franchisees.  Looking forward, with approximately $75 to $85 million in capital expenditures planned for the year, normal depreciation and amortization is expected to increase by approximately 11% to 13% for the year.

Provision for Impairment of Long-Lived Assets .   We assess drive-in assets for impairment on a quarterly basis under the guidelines of FAS 144 – “Accounting for the Impairment or Disposal of Long-Lived Assets.”  During fiscal year 2007, three surplus or leased properties were impaired which resulted in a charge of $0.8 million to reduce the carrying cost of the properties to estimated fair value.  In addition, during fiscal year 2007, two operating Partner Drive-Ins were impaired resulting in a $0.4 million charge for carrying cost in excess of estimated fair value for the related assets.   The total of these provisions for fiscal year 2007 was $1.2 million.  During fiscal year 2006, three surplus properties became impaired which resulted in a provision for impairment of $0.3 million for carrying cost in excess of estimated fair value for the assets.  During fiscal year 2005, one operating Partner Drive-In and one surplus property became impaired which resulted in provision for impairment of $0.4 million for carrying cost in excess of estimated fair value for the assets.  We continue to perform quarterly analyses of certain underperforming drive-ins. It is reasonably possible that the estimate of future cash flows associated with these drive-ins may change in the near future resulting in the need to write-down assets associated with one or more of these drive-ins to fair value.  While it is impossible to predict if future write-downs will occur, we do not believe that future write-downs will impede our ability to continue growing earnings at a solid rate.

Interest Expense .   Net interest expense increased $36.8 million to $44.4 million in fiscal year 2007 and increased $1.8 million to $7.6 million in fiscal year 2006.  The increase in fiscal year 2007 is the result of interest on increased borrowings used to fund the purchase of shares in the Company’s tender offer and subsequent repurchases, as well as $6.1 million in debt extinguishment charges related to financing the Company’s tender offer and other share repurchase activities.  The smaller increase in net interest expense in fiscal year 2006 resulted from increased borrowings that were used largely to fund share repurchases and capital expenditures.  During fiscal year 2008, we expect net interest expense of approximately $45 to $50 million, but may vary based upon the level of share repurchases and acquisitions of Franchise Drive-Ins during the year.
26

Income taxes .  The provision for income taxes remained relatively constant for fiscal year 2007 with an effective federal and state tax rate of 36.4% compared with 36.6% in fiscal year 2006 and 36.9% in fiscal year 2005. The decrease in rate in fiscal year 2007 related to the favorable resolution of state tax matters and the retroactive extension of the Work Opportunity Tax Credit.  We expect our tax rate to be in the range of 36.5% to 37.5% in fiscal year 2008.  However, our tax rate may continue to vary significantly from quarter-to-quarter depending on the timing of option exercises and dispositions by option-holders and as circumstances on individual tax matters change.

Financial Position

During fiscal year 2007, current assets increased 73.4% to $73.7 million compared to $42.5 million as of the end of fiscal year 2006.  Cash balances increased by $29.3 million primarily due to changes in cash processing for the securitized cash flows, including consideration of the current portion of restricted cash of $13.5 million.  In addition, the noncurrent portion of restricted cash of $11.4 million was an increase associated with the securitized cash flows.  Net property, equipment and capital leases increased by $52.9 million primarily as a result of capital expenditures of $112.0 million, capital lease additions of $5.2 million and $10.8 million for the acquisition of drive-ins from franchisees.  Goodwill increased by $5.7 million primarily as a result of the acquisition of drive-ins from franchisees.  Debt origination costs increased by $19.8 million as a result of the costs associated with the securitized debt transaction.  These increases combined with the increase in current assets resulted in an 18.9% increase in total assets to $758.5 million as of the end of fiscal year 2007.

Total current liabilities increased $36.4 million or 46.6% during fiscal year 2007 primarily as a result of a $15.3 million increase in the current obligations for capital leases and debt related to the securitized debt transaction, a $14.4 million accrual for share repurchase obligations that settled in September and a $1.6 million increase in gift program liabilities.  The noncurrent portion of long-term debt increased $573.3 million as a result of the debt used to fund the repurchase of stock.  Overall, total liabilities increased $619.0 million or 251.3% as a result of the items discussed above.

Stockholders’ equity decreased $498.5 million during fiscal year 2007 primarily resulting from the stock repurchase activity during the year.  The Company completed a “modified Dutch auction” tender offer in October 2006, repurchasing 15.9 million shares at a purchase price of $23.00 per share for a total of $366.1 million, and incurred costs related to the transaction totaling $1.2 million that are included in stockholders’ equity.  Subsequent to the tender offer, additional share repurchases totaling approximately $211.1 million were completed under Board-authorized share repurchase initiatives.  The stock repurchase activity was partially offset by earnings during the year of $64.2 million and proceeds and the related tax benefits from the exercise of stock options.

The Company considers the non-GAAP measure of debt-to-EBITDA to be a significant indication of the Company’s financial performance and available capital resources.  This is not a measure of financial performance or liquidity under generally accepted accounting principles (“GAAP”).  EBITDA is a non-GAAP measure of income and does not include the effects of interest and taxes, and excludes the “non-cash” effects of all depreciation and amortization.  While management considers EBITDA useful in analyzing our results, it is not intended to replace any presentation included in our consolidated financial statements.  As of August 31, 2007, our debt-to-EBITDA ratio was 3.9.  The following table reconciles EBITDA to net income as of August 31, 2007 and provides the components to calculate this ratio:

Net Income
  $
64,192
 
Provision for income taxes
   
36,691
 
Depreciation and amortization
   
45,103
 
Net interest expense
   
44,406
 
EBITDA
  $
190,392
 
Obligations under capital leases (including current portion)
  $
39,318
 
Long-term debt (including current portion)
   
710,743
 
Total debt
  $
750,061
 
Debt-to-EBITDA
   
3.9
 
 
27

Liquidity and Sources of Capital

Operating Cash Flows .   Net cash provided by operating activities decreased $6.5 million or 5.1% to $121.0 million in fiscal year 2007 as compared to $127.5 million in fiscal year 2006.  This decrease results from lower net income excluding non-cash items as a result of increased interest expense associated with the Company’s increased debt, the segregation of $9.0 million of operating cash flows at year-end as restricted cash as a result of debt requirements, and $5.6 million from termination of a hedge instrument.  These decreases were offset by a significant increase in operating liabilities related to the amount and timing of tax and other liability payments, including the effect of an increase in franchise deposits from franchise development activities.

Investing Cash Flows.   During fiscal year 2007, we opened 29 newly constructed Partner Drive-Ins, acquired 15 drive-ins from franchisees and sold ten drive-ins to franchisees.  For the same period, we used cash generated from operating activities and borrowings to fund capital additions of $110.9 million, which included the cost of newly opened drive-ins, retrofits of existing drive-ins, new equipment for existing drive-ins, drive-ins under construction and other capital expenditures, from cash generated by operating activities and borrowings.  We purchased the real estate for 21 of the 29 newly constructed drive-ins.  In addition, the acquisition of 15 drive-ins during fiscal year 2007 resulted in cash outlays of $10.8 million.  We also entered into a sale-leaseback agreement during the first fiscal quarter and disposed of the real estate underlying drive-ins that were acquired in the fourth quarter of fiscal year 2006 for proceeds of approximately $12.6 million. Proceeds from dispositions of assets for the year of $13.7 million primarily resulted from sales of other real estate relating to drive-ins previously sold to franchisees.

Financing Cash Flows.   In December 2006, the Company closed on a securitized financing facility of Variable Rate Series 2006-1 Senior Variable Funding Notes, Class A-1, which provides for the issuance of up to $200 million of Variable Funding Notes and certain other credit instruments, including letters of credit. As of August 31, 2007, our outstanding Variable Funding Notes totaled $116.0 million at an effective borrowing rate of 6.4%, as well as $0.3 million in outstanding letters of credit. The amount available under the Variable Funding Notes as of August 31, 2007, was $83.7 million. In addition to the Class A-1 notes, the Company issued $600 million of Fixed Rate Series 2006-1 Senior Notes, Class A-2, in a private transaction in December 2006. This new debt has an effective borrowing rate of 6.8%, including debt issuance costs totaling $24.3 million which were incurred in conjunction with the securitized debt transactions closed in December 2006. We believe that cash flows from operations will be adequate for repayment of any long-term debt that does not get refinanced or extended.  We plan to use our Class A-1 notes to finance the opening of newly constructed drive-ins, acquisitions of existing drive-ins, purchases of the Company’s common stock and for other general corporate purposes, as needed. See Note 9 of the Notes to Consolidated Financial Statements for additional information regarding our long-term debt.

The Class A-1 and Class A-2 notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) required actions to better secure collateral upon the occurrence of certain performance-related events, (ii) application of certain disposition proceeds as note prepayments after a set time is allowed for reinvestment, (iii) maintenance of specified reserve accounts, (iv) maintenance of certain debt service coverage ratios, (v) optional and mandatory prepayments upon change in control, (vi) indemnification payments for defective or ineffective collateral, and (vii) covenants relating to recordkeeping, access to information and similar matters.  The Notes are also subject to customary rapid amortization 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 an event occurred, the unpaid amounts outstanding could become immediately due and payable.  See Note 1 – Restricted Cash of the Notes to Consolidated Financial Statements for additional information regarding restrictions on cash.

The Company’s tender offer in October 2006 resulted in total cash outflow of $366.1 million, along with related costs totaling $1.2 million. In addition to the shares purchased through the tender offer, the Company has acquired 9.6 million shares for a total cost of $211.1 million under the share repurchase program authorized by our Board of Directors.  In August 2007, the Board of Directors authorized an additional $75.0 million under the Company’s share repurchase program and extended the program through August 31, 2008.  As of August 31, 2007, $42.6 million remained available under the program.
28

We plan capital expenditures of approximately $75 to $85 million in fiscal year 2008, excluding potential acquisitions and share repurchases.  These capital expenditures primarily relate to the development of additional Partner Drive-Ins, retrofit of existing Partner Drive-Ins and other drive-in level expenditures.  We expect to fund these capital expenditures through cash flow from operations and borrowings under the Variable Funding Notes.

As of August 31, 2007, our total cash balance of $50.3 million reflected the impact of the cash generated from operating activities, borrowing activity, and capital expenditures mentioned above.  We believe that existing cash and funds generated from operations, as well as borrowings under the Variable Funding Notes, will meet our needs for the foreseeable future.

Off-Balance Sheet Arrangements

The Company has obligations for guarantees on certain franchisee loans and lease agreements. See Note 15 of the Notes to Consolidated Financial Statements for additional information about these guarantees. The Company has no other material off-balance sheet arrangements.

Contractual Obligations and Commitments

In the normal course of business, Sonic enters into purchase contracts, lease agreements and borrowing arrangements.  Our commitments and obligations as of August 31, 2007 are summarized in the following table:

Payments Due by Period
 
(In Thousands)
 
                             
   
Total
   
Less than
             1 – 3             3 – 5    
More than
 
         
1 Year
   
Years
 
Years
   
5 Years
 
Contractual Obligations
                               
Long-term debt (1)
  $
857,836
    $
54,079
    $
155,041
  $
213,579
    $
435,137
 
Capital leases
   
57,332
     
4,385
     
10,774
   
10,143
     
32,030
 
Operating leases
   
190,174
     
11,948
     
23,606
   
22,661
     
131,959
 
Total
  $
1,105,342
    $
70,412
    $
189,421
  $
246,383
    $
599,126
 

(1) The fixed-rate interest payments included in the table above assume that all the Class A-2 notes will be outstanding for the expected six-year term, and all other fixed-rate notes will be held to maturity.  Interest payments
associated with variable-rate debt have not been included in the table.  Assuming that the amounts outstanding under the Class A-1 notes as of August 31, 2007 are held to maturity, and utilizing interest rates in effect at August 31, 2007, the interest payments will be in the range of $7 to $8 million for at least the next five years.

Impact of Inflation

Though increases in labor, food or other operating costs could adversely affect our operations, we do not believe that inflation has had a material effect on income during the past several years.

Seasonality

We do not expect seasonality to affect our operations in a materially adverse manner.  Our results during the 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 Partner and Franchise Drive-Ins.

Critical Accounting Policies and Estimates

The Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this document contain information that is pertinent to management's discussion and analysis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to use its judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. These assumptions and estimates could have a material effect on our financial statements.  We evaluate our assumptions and estimates on an ongoing basis using historical experience and various other factors that are believed to be relevant under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.
29

  We annually review our financial reporting and disclosure practices and accounting policies to ensure that our financial reporting and disclosures provide accurate and transparent information relative to the current economic and business environment.  We believe that of our significant accounting policies (see Note 1 of Notes to Consolidated Financial Statements), the following policies involve a higher degree of risk, judgment and/or complexity.

Impairment of Long-Lived Assets .   We review Partner Drive-In and other long-lived assets for impairment when events or circumstances indicate they might be impaired. We test for impairment using historical cash flows and other relevant facts and circumstances as the primary basis for our estimates of future cash flows.  This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. In addition, at least annually, we assess the recoverability of goodwill and other intangible assets related to our brand and drive-ins. These impairment tests require us to estimate fair values of our brand and our drive-ins by making assumptions regarding future cash flows and other factors.  During fiscal year 2007, we reviewed Partner Drive-ins and other long-lived assets with combined carrying amounts of $12.5 million in property, equipment and capital leases for possible impairment, and, our cash flow assumptions resulted in impairment charges totaling $1.2 million to write-down certain assets to their estimated fair value.  During the fourth quarter of fiscal year 2007, we performed our annual assessment of recoverability of goodwill and other intangible assets and determined that no impairment was indicated.  As of August 31, 2007, goodwill and intangible assets totaled $114.0 million.  If these assumptions change in the future, we may be required to record impairment charges for these assets.

Ownership Program .   Our drive-in philosophy stresses an ownership relationship with supervisors and drive-in managers.  Most supervisors and managers of Partner Drive-Ins own an equity interest in the drive-in, which is financed by third parties.  Supervisors and managers are neither employees of Sonic nor of the drive-in in which they have an ownership interest.

The minority ownership interests in Partner Drive-Ins of the managers and supervisors are recorded as a minority interest liability on the Consolidated Balance Sheets, and their share of the drive-in earnings is reflected as Minority interest in earnings of Partner Drive-Ins in the Costs and expenses section of the Consolidated Statements of Income.  The ownership agreements contain provisions, which give Sonic the right, but not the obligation, to purchase the minority interest of the supervisor or manager in a drive-in.  The amount of the investment made by a partner and the amount of the buy-out are based on a number of factors, primarily upon the drive-in’s financial performance for the preceding 12 months, and are intended to approximate the fair value of a minority interest in the drive-in.

The Company acquires and sells minority interests in Partner Drive-Ins from time to time as managers and supervisors buy-out and buy-in to the partnerships or limited liability companies.  If the purchase price of a minority interest that we acquire exceeds the net book value of the assets underlying the partnership interest, the excess is recorded as goodwill.  The acquisition of a minority interest for less than book value is recorded as a reduction in purchased goodwill.  Any subsequent sale of the minority interest to another minority partner is recorded as a pro-rata reduction of goodwill, and no gain or loss is recognized on the sale of the minority ownership interest.  Goodwill created as a result of the acquisition of minority interests in Partner Drive-Ins is not amortized but is tested annually for impairment under the provisions of FAS 142, “Goodwill and Other Intangible Assets.”

Revenue Recognition Related to Franchise Fees and Royalties .  Initial franchise fees are recognized in income when we have substantially performed or satisfied all material services or conditions relating to the sale of the franchise and the fees are nonrefundable.  Area development fees are nonrefundable and are recognized in income on a pro-rata basis when the conditions for revenue recognition under the individual development agreements are met. Both initial franchise fees and area development fees are generally recognized upon the opening of a Franchise Drive-In or upon termination of the agreement between Sonic and the franchisee.

Our franchisees are required under the provisions of the license agreements to pay royalties to Sonic each month based on a percentage of actual net sales.  However, the royalty payments and supporting financial statements are not due until the 10 th of the following month for the new form of license agreement (Number 7) and the 20 th of the following month for all prior forms of license agreement.  As a result, we accrue royalty revenue in the month earned based on estimates of Franchise Drive-Ins sales.  These estimates are based on projections of average unit volume growth at Franchise Drive-Ins collected from a majority of Franchise Drive-Ins.
30


Accounting for Stock-Based Compensation .   We account for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”).  We estimate the fair value of options granted using the Black-Scholes option pricing model along with the assumptions shown in Note 12 of Notes to the Consolidated Financial Statements in this Form 10-K.  The assumptions used in computing the fair value of share-based payments reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control.  We estimate expected volatility based on historical daily price changes of the Company’s stock for a period equal to the current expected term of the options.  The expected option term is the number of years the Company estimates that options will be outstanding prior to exercise considering vesting schedules and our historical exercise patterns.  If other assumptions or estimates had been used, the stock-based compensation expense that was recorded during fiscal year 2007 could have been materially different.  Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted in the future.

Income Taxes .  We estimate certain components of our provision for income taxes.  These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as wages paid to certain employees, effective rates for state and local income taxes and the tax deductibility of certain other items.

Our estimates are based on the best available information at the time that we prepare the provision, including legislative and judicial developments.  We generally file our annual income tax returns several months after our fiscal year end.  Income tax returns are subject to audit by federal, state and local governments, typically several years after the returns are filed.  These returns could be subject to material adjustments or differing interpretations of the tax laws.  Adjustments to these estimates or returns can result in significant variability in the tax rate from period to period.

Leases .   Certain Partner Drive-Ins lease land and buildings from third parties.  Rent expense for operating leases is recognized on a straight-line basis over the expected lease term, including cancelable option periods when it is deemed to be reasonably assured that we would incur an economic penalty for not exercising the options.  Judgment is required to determine options expected to be exercised.  Within the provisions of certain of our leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods.  The effects of the rent holidays and escalations are reflected in rent expense on a straight-line basis over the expected lease term, including cancelable option periods when appropriate.  The lease term commences on the date when we have the right to control the use of lease property, which can occur before rent payments are due under the terms of the lease.  Contingent rent is generally based on sales levels and is accrued at the point in time we determine that it is probable that such sales levels will be achieved.


Sonic’s use of debt directly exposes the Company to interest rate risk.  Floating rate debt, where the interest rate fluctuates periodically, exposes the Company to short-term changes in market interest rates.  Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes the Company to changes in market interest rates reflected in the fair value of the debt and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate.  Sonic is also exposed to market risk from changes in commodity prices.  Sonic does not utilize financial instruments for trading purposes.  Sonic manages its debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps as a tool to achieve that goal in the future.

Interest Rate Risk.   At the time the Company filed its Form 10-K for the year ended August 31, 2006, the Company had refinanced the debt outstanding as of year-end with variable rate debt and had borrowed additional amounts for the tender offer.  The market risk disclosure for the prior year therefore addressed interest rate risk based upon $486 million of variable rate debt.  Our exposure to interest rate risk at August 31, 2007 is primarily based on the fixed rate Class A-2 notes with an effective rate of 5.7%, before amortization of debt-related costs.  At August 31, 2007, the fair value of the Class A-2 notes was estimated at $591.7 million versus carrying value of $594.4 million (including accrued interest).  Differences between fair value versus carrying value are attributable to interest rate increases subsequent to when the debt was originally issued.  Should interest rates increase or decrease by one percentage point, the estimated fair value of the Class A-2 notes would decrease by approximately $21.9 million or increase by approximately $22.9 million, respectively.  The Class A-1 notes outstanding at August 31, 2007 totaled $116.0 million, with a variable rate of 6.4%.  The annual impact on our results of operations of a one-point interest rate change for the balance outstanding at year-end would be approximately $1.2 million before tax.  We have made certain loans to our franchisees totaling $6.2 million as of August 31, 2007.  The interest rates on these notes are generally between 5.0% and 10.5%.  We believe the fair market value of these notes approximates their carrying amount.
31

 
Commodity Price Risk .   The Company and its franchisees purchase certain commodities such as beef, potatoes, chicken and dairy products.  These commodities are generally purchased based upon market prices established with vendors. These purchase arrangements may contain contractual features that limit the price paid by establishing price floors or caps; however, we have not made any long-term commitments to purchase any minimum quantities under these arrangements. We do not use financial instruments to hedge commodity prices because these purchase agreements help control the ultimate cost.

This market risk discussion contains forward-looking statements.  Actual results may differ materially from this discussion based upon general market conditions and changes in financial markets.


The Company has included the financial statements and supplementary financial information required by this item immediately following Part IV of this report and hereby incorporates by reference the relevant portions of those statements and information into this Item 8.


None.


As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14 under the Securities Exchange Act of 1934).  Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.  There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Management's Report on Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
        
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of August 31, 2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework.  Based on our assessment, we believe that, as of August 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting. This report appears on the following page.
32

Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of
Sonic Corp.
 
        We have audited Sonic Corp.’s internal control over financial reporting as of August 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).  Sonic Corp.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
 
        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting,  assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
        A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
        In our opinion, Sonic Corp. maintained, in all material respects, effective internal control over financial reporting as of August 31, 2007, based on the COSO criteria.
 
        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sonic Corp. as of August 31, 2007 and 2006, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended August 31, 2007 of Sonic Corp. and our report dated October 17, 2007 expressed an unqualified opinion thereon.
 
 
 
ERNST & YOUNG LLP
 
 
 
Oklahoma City, Oklahoma
October 17, 2007
 
33


No information was required to be disclosed in a Form 8-K during the Company’s fourth quarter of its 2007 fiscal year which was not reported.

PART III


Sonic has adopted a Code of Ethics for Financial Officers and a Code of Business Conduct and Ethics that applies to all directors, officers and employees.  Sonic has posted copies of these codes on the investor section of its internet website at the internet address: http://www.sonicdrivein.com. 

Information regarding Sonic’s executive officers is set forth under Item 4A of Part I of this report.  The other information required by this item is incorporated by reference from the definitive proxy statement which Sonic will file with the Securities and Exchange Commission no later than 120 days after August 31, 2007 (the “Proxy Statement”), under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”


The information required by this item is incorporated by reference from the Proxy Statement under the caption “Executive Compensation – Compensation Discussion and Analysis.”


The information required by this item is incorporated by reference from the Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and “Equity Compensation Plan Information


The information required by this item is incorporated by reference from the Proxy Statement under the captions “Certain Relationships and Related Transactions,” “Director Independence,” “Committees, Compensation, and Meetings of the Board of Directors,” and “Compensation Committee Interlock and Insider Participation.”


The information required by this item is incorporated by reference from the Proxy Statement under the caption “Ratification of Independent Registered Public Accounting Firm.”
34

 
PART IV
 

Financial Statements

The following consolidated financial statements of the Company appear immediately following this Item 15:
 
   
Page s
     
 
Report of Independent Registered Public Accounting Firm
F-1
 
Consolidated Balance Sheets at August 31, 2007 and 2006
F-2
 
Consolidated Statements of Income for each of the three years
 
 
   in the period ended August 31, 2007
F-4
 
Consolidated Statements of Stockholders’ Equity (Deficit) for each
 
 
   of the three years in the period ended August 31, 2007
F-5
 
Consolidated Statements of Cash Flows for each of the three years
 
 
   in the period ended August 31, 2007
F-6
 
Notes to Consolidated Financial Statements
F-8
 
Financial Statement Schedules

The Company has included the following schedule immediately following this Item 15:
                Page
 
Schedule II
-
Valuation and Qualifying Accounts
        F-30
 
The Company has omitted all other schedules because the conditions requiring their filing do not exist or because the required information appears in Sonic’s Consolidated Financial Statements, including the notes to those statements.

35


Exhibits

The Company has filed the exhibits listed below with this report.  The Company has marked all management contracts and compensatory plans or arrangements with an asterisk (*).
 
3.01.                        Certificate of Incorporation of the Company, which the Company hereby incorporates by reference from Exhibit 3.1 to the Company’s Form S-1 Registration Statement No. 33-37158 filed on October 3, 1990.
 
3.02.                        Certificate of Amendment of Certificate of Incorporation of the Company, March 4, 1996, which the Company hereby incorporates by reference from Exhibit 3.05 to the Company’s Form 10-K for the fiscal year ended August 31, 2000.

3.03.                        Certificate of Amendment of Certificate of Incorporation of the Company, January 22, 2002, which the Company hereby incorporates by reference from Exhibit 3.06 to the Company’s Form 10-K for the fiscal year ended August 31, 2002.

3.04.                        Certificate of Amendment of Certificate of Incorporation of the Company, January 31, 2006 , which the Company hereby incorporates by reference from Exhibit 3.04 to the Company’s Form 10-K for the fiscal year ended August 31, 2006 .

3.05.                       Bylaws of the Company, which the Company hereby incorporates by reference from Exhibit 3.2 to the Company’s Form S-1 Registration Statement No. 33-37158 filed on October 3, 1990.

3.06.                       Certificate of Designations of Series A Junior Preferred Stock, which the Company hereby incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K filed on June 17, 1997.

4.01.                       Specimen Certificate for Common Stock, which the Company hereby incorporates by reference from Exhibit 4.01 to the Company’s Form 10-K for the fiscal year ended August 31, 1999.

10.01.                      Form of Sonic Industries Franchising LLC, successor to Sonic Industries Inc., License Agreement (the Number 4 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.1 to the Company’s Form S-1 Registration Statement No. 33-37158 filed on October 3, 1990.

10.02.                      Form of Sonic Industries Franchising LLC, successor to Sonic Industries Inc., License Agreement (the Number 5 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.2 to the Company’s Form S-1 Registration Statement No. 33-37158 filed on October 3, 1990.

10.03.                      Form of Sonic Industries Franchising LLC, successor to Sonic Industries Inc., License Agreement (the Number 4.2 License Agreement and Number 5.1 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.03 to the Company’s Form 10-K for the fiscal year ended August 31, 1994.
 
10.04.                      Form of Sonic Industries Franchising LLC, successor to Sonic Industries Inc., License Agreement (the Number 6 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.04 to the Company’s Form 10-K for the fiscal year ended August 31, 1994.

10.05.                      Form of Sonic Industries LLC, successor to Sonic Industries Inc., License Agreement (the Number 6A License Agreement), which the Company hereby incorporates by reference from Exhibit 10.05 to the Company’s Form 10-K for the fiscal year ended August 31, 1998.

10.06.                      Form of Sonic Industries Franchising LLC, successor to Sonic Industries Inc., License Agreement (the Number 5.2 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.06 to the Company’s Form 10-K for the fiscal year ended August 31, 1998.

10.07.                      Form of Sonic Industries Franchising LLC, successor to Sonic Industries Inc., License Agreement (the Number 6NT License Agreement), which the Company hereby incorporates by reference from Exhibit 10.07 to the Company’s Form 10-K for the fiscal year ended August 31, 2004.
36


10.08.                      Form of Sonic Industries LLC License Agreement (the Number 4.4/5.4 License Agreement).

10.09.                      Form of Sonic Industries LLC License Agreement (the Number 5.5 License Agreement).

10.10.                      Form of Sonic Industries LLC License Agreement (the Number 7 License Agreement).

10.11.                      Form of Sonic Industries LLC License Agreement (the Number 7NT License Agreement).

10.12.                      Form of Sonic Industries Franchising LLC, successor to Sonic Industries Inc., Area Development Agreement (the Number 6A Area Development Agreement), which the Company hereby incorporates by reference from Exhibit 10.05 to the Company’s Form 10-K for the fiscal year ended August 31, 1995.

10.13.                      Form of Sonic Industries LLC Area Development Agreement (the Number 7 Area Development Agreement).

10.14.                      Form of Sonic Industries Services Inc. Sign Lease Agreement, which the Company hereby incorporates by reference from Exhibit 10.4 to the Company’s Form S-1 Registration Statement No. 33-37158.

10.15.                      Form of General Partnership Agreement, Limited Liability Company Operating Agreement and Master Agreement, which the Company hereby incorporates by reference from Exhibit 10.09 to the Company’s Form 10-K for fiscal year ended August 31, 2003.

10.16.                      1991 Sonic Corp. Stock Option Plan, which the Company hereby incorporates by reference from Exhibit 10.5 to the Company’s Form S-1 Registration Statement No. 33-37158. *

10.17.                      1991 Sonic Corp. Stock Purchase Plan, which the Company hereby incorporates by reference from Exhibit 10.6 to the Company’s Form S-1 Registration Statement No. 33-37158. *

10.18.                      1991 Sonic Corp. Directors’ Stock Option Plan, which the Company hereby incorporates by reference from Exhibit 10.08 to the Company’s Form 10-K for the fiscal year ended August 31, 1991. *

10.19.                      Sonic Corp. Savings and Profit Sharing Plan, which the Company hereby incorporates by reference from Exhibit 10.8 to the Company’s Form S-1 Registration Statement No. 33-37158. *

10.20.                      Net Revenue Incentive Plan, which the Company hereby incorporates by reference from Exhibit 10.19 to the Company’s Form S-1 Registration Statement No. 33-37158. *

10.21.                      Form of Indemnification Agreement for Directors, which the Company hereby incorporates by reference from Exhibit 10.7 to the Company’s Form S-1 Registration Statement No. 33-37158. *

10.22.                      Form of Indemnification Agreement for Officers, which the Company hereby incorporates by reference from Exhibit 10.14 to the Company’s Form 10-K for the fiscal year ended August 31, 1995. *

10.23.                      Employment Agreement with J. Clifford Hudson dated August 20, 1996, which the Company hereby incorporates by reference from Exhibit 10.18 to the Company’s Form 10-K for the fiscal year ended August 31, 2002. *

10.24.                     Employment Agreement with W. Scott McLain dated January 27, 1998, which the Company hereby incorporates by reference from Exhibit 10.21 to the Company’s Form 10-K for the fiscal year ended August 31, 2002. *

10.25.                      Employment Agreement with Michael A. Perry dated August 20, 2003, which the Company hereby incorporates by reference from Exhibit 10.22 to the Company’s Form 10-K for the fiscal year ended August 31, 2003. *

10.26.                      Employment Agreement with Stephen C. Vaughan dated August 20, 1996, which the Company hereby incorporates by reference from Exhibit 10.23 to the Company’s Form 10-K for the fiscal year ended August 31, 2002. *
37

 
10.27.                     Employment Agreement with Terry D. Harryman dated January 19, 2000, which the Company hereby incorporates by reference from Exhibit 10.24 to the Company’s Form 10-K for the fiscal year ended August 31, 2002. *

10.28.                      Employment Agreement with Carolyn C. Cummins dated April 29, 2004, which the Company hereby incorporates by reference from Exhibit 10.25 to the Company’s Form 10-K for the fiscal year ended August 31, 2004. *

10.29.                      Employment Agreement with V. Todd Townsend dated August 18, 2005 which the Company hereby incorporates by reference from Exhibit 10.26 to the Company’s Form 10-K for the fiscal year ended August 31, 2005. *

10.30.                      Employment Agreement with Paige S. Bass dated January 31, 2007 ,which the Company hereby incorporates by reference from Exhibit 10.01 to the Company’s Form 10-Q for the quarterly period ended February 28, 2007. *

10.31.                      Employment Agreement with Claudia San Pedro dated January 31, 2007 ,which the Company hereby incorporates by reference from Exhibit 10.02 to the Company’s Form 10-Q for the quarterly period ended February 28, 2007. *

10.32.                      2001 Sonic Corp. Stock Option Plan, which the Company hereby incorporates by reference from Exhibit No. 10.32 to the Company’s Form 10-K for the fiscal year ended August 31, 2001. *

10.33.                      2001 Sonic Corp. Directors’ Stock Option Plan, which the Company hereby incorporates by reference from Exhibit No. 10.33 to the Company’s Form 10-K for the fiscal year ended August 31, 2001. *

10.34.                      Sonic Corp. 2006 Long Term Incentive Plan which the Company hereby incorporates by reference from Exhibit No. 10.31 to the Company’s Form 10-K for the fiscal year ended August 31, 2006. *

21.01.                      Subsidiaries of the Company.

23.01.                      Consent of Independent Registered Public Accounting Firm.

31.01.                      Certification of Chief Executive Officer pursuant to S.E.C. Rule 13a-14.

31.02.                      Certification of Chief Financial Officer pursuant to S.E.C. Rule 13a-14.

32.01.                      Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.02.                      Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

99.01                       Base Indenture dated December 20, 2006 among Sonic Capital LLC and certain other indirect subsidiaries of the Company, and Citibank, N.A. as Trustee and Securities Intermediary, which the Company hereby incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K filed on December 27, 2006.

99.02                       Supplemental Indenture dated December 20, 2006 among Sonic Capital LLC and certain other indirect subsidiaries of the Company, and Citibank, N.A. as Trustee and the Series 2006-1 Securities Intermediary, which the Company hereby incorporates by reference from Exhibit 99.2 to the Company’s Form 8-K filed on December 27, 2006.

99.03                       Class A-1 Note Purchase Agreement dated December 20, 2006 among Sonic Capital LLC and certain other indirect subsidiaries of the Company, certain private conduit investors, financial institutions and funding agents, Bank of America, N.A. as provider of letters of credit, and Lehman Commercial Paper Inc., as a swing line lender and as Administrative Agent, which the Company hereby incorporates by reference from Exhibit 99.3 to the Company’s Form 8-K filed on December 27, 2006.
38


99.04                       Guarantee and Collateral Support Agreement dated December 20, 2006 made by Sonic Industries LLC, as Guarantor in favor of Citibank N.A. as Trustee, which the Company hereby incorporates by reference from Exhibit 99.4 to the Company’s Form 8-K filed on December 27, 2006.

99.05                       Parent Company Support Agreement dated December 20, 2006 made by Sonic Corp. in favor of Citibank N.A., as Trustee, which the Company hereby incorporates by reference from Exhibit 99.5 to the Company’s Form 8-K filed on December 27, 2006.

39

The Board of Directors and Stockholders of
Sonic Corp.

We have audited the accompanying consolidated balance sheets of Sonic Corp. as of August 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended August 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sonic Corp. at August 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Sonic Corp.’s internal control over financial reporting as of August 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 17, 2007, expressed an unqualified opinion thereon.


ERNST & YOUNG LLP

Oklahoma City, Oklahoma
October 17, 2007

F-1


Sonic Corp.

Consolidated Balance Sheets

   
August 31,
 
   
2007
   
2006
 
   
(In Thousands)
 
             
Assets
           
Current assets:
           
Cash and cash equivalents
  $
25,425
    $
9,597
 
Restricted cash
   
13,521
   
 
Accounts and notes receivable, net
   
23,084
     
21,271
 
Net investment in direct financing leases
   
1,267
     
1,287
 
Inventories
   
4,444
     
4,200
 
Deferred income taxes
   
517
     
307
 
Prepaid expenses and other
   
5,445
     
5,848
 
Total current assets
   
73,703
     
42,510
 
                 
                 
Noncurrent restricted cash
   
11,354
   
 
                 
Notes receivable, net
   
5,532
     
5,182
 
                 
Net investment in direct financing leases
   
2,593
     
3,815
 
                 
Property, equipment and capital leases, net
   
529,993
     
477,054
 
                 
Goodwill, net
   
102,628
     
96,949
 
                 
Trademarks, trade names and other intangibles, net
   
11,361
     
10,746
 
                 
Debt origination costs, net
   
20,914
     
1,083
 
                 
Other assets, net
   
442
     
679
 
Total assets
  $
758,520
    $
638,018
 

F-2


Sonic Corp.

Consolidated Balance Sheets (continued)

   
August 31,
 
   
2007
   
2006
 
   
(In Thousands)
 
             
Liabilities and stockholders’ equity (deficit)
           
Current liabilities:
           
Accounts payable
  $
25,283
    $
23,438
 
Deposits from franchisees
   
2,783
     
2,553
 
Accrued liabilities
   
55,707
     
33,874
 
Income taxes payable
   
7,863
     
10,673
 
Obligations under capital leases and long-term debt due within one year
   
22,851
     
7,557
 
Total current liabilities
   
114,487
     
78,095
 
                 
Obligations under capital leases due after one year
   
36,773
     
34,295
 
Long-term debt due after one year
   
690,437
     
117,172
 
Other noncurrent liabilities
   
17,212
     
12,504
 
Deferred income taxes
   
6,413
     
4,259
 
Commitments and contingencies (Notes 6, 7, 14, and 15)
               
                 
Stockholders’ equity (deficit):
               
Preferred stock, par value $.01; 1,000,000 shares authorized; none outstanding
 
   
 
Common stock, par value $.01; 245,000,000 shares authorized; shares issued 116,222,839 in 2007 and 114,988,369 in 2006
   
1,162
     
1,150
 
Paid-in capital
   
193,682
     
173,802
 
Retained earnings
   
540,886
     
476,694
 
Accumulated other comprehensive income
    (2,848 )     (484 )
     
732,882
     
651,162
 
Treasury stock, at cost; 55,078,107 shares in 2007 and 29,506,003 shares in 2006
    (839,684 )     (259,469 )
Total stockholders’ equity (deficit)
    (106,802 )    
391,693
 
Total liabilities and stockholders’ equity (deficit)
  $
758,520
    $
638,018
 

See accompanying notes.
F-3


Sonic Corp.

Consolidated Statements of Income

   
Year ended August 31,
 
   
2007
   
2006
   
2005
 
   
(In Thousands, Except Per Share Data)
 
Revenues:
                 
Partner Drive-In sales
  $
646,915
    $
585,832
    $
525,988
 
Franchise Drive-Ins:
                       
Franchise royalties
   
111,052
     
98,163
     
88,027
 
Franchise fees
   
4,574
     
4,747
     
4,311
 
Other
   
7,928
     
4,520
     
4,740
 
     
770,469
     
693,262
     
623,066
 
Costs and expenses:
                       
Partner Drive-Ins:
                       
Food and packaging
   
166,531
     
151,724
     
137,845
 
Payroll and other employee benefits
   
196,785
     
175,610
     
159,478
 
Minority interest in earnings of Partner Drive-Ins
   
26,656
     
25,234
     
21,574
 
Other operating expenses, exclusive of depreciation and amortization included below
   
130,204
     
116,059
     
103,009
 
     
520,176
     
468,627
     
421,906
 
                         
Selling, general and administrative
   
58,736
     
52,048
     
47,503
 
Depreciation and amortization
   
45,103
     
40,696
     
35,821
 
Provision for impairment of long-lived assets
   
1,165
     
264
     
387
 
     
625,180
     
561,635
     
505,617
 
Income from operations
   
145,289
     
131,627
     
117,449
 
                         
Interest expense
   
41,227
     
8,853
     
6,418
 
Debt extinguishment and other costs
   
6,076
     
     
 
Interest income
    (2,897 )     (1,275 )     (633 )
Net interest expense
   
44,406
     
7,578
     
5,785
 
Income before income taxes
   
100,883
     
124,049
     
111,664
 
Provision for income taxes
   
36,691
     
45,344
     
41,221
 
Net income
  $
64,192
    $
78,705
    $
70,443
 
                         
Basic income per share
  $
0.94
    $
0.91
    $
0.78
 
                         
Diluted income per share
  $
0.91
    $
0.88
    $
0.75
 
                         

See accompanying notes.
F-4


Sonic Corp.

Consolidated Statements of Stockholders’ Equity (Deficit)

                     
  Accumulated Other
       
   
Common Stock  
               
  Comprehensive
   
  Treasury Stock
 
   
Shares 
Amount
   
Paid-in Capital
   
Retained Earnings
   
 Income
   
Shares 
Amount
 
   
(In Thousands)
 
                                           
Balance at August 31, 2004
   
74,618
    $
746
    $
132,006
    $
327,546
    $
     
15,099
    $ (122,398 )
Exercise of common stock options
   
1,148
     
12
     
10,796
     
     
     
     
 
Stock-based compensation expense
   
     
     
6,757
     
     
     
     
 
Tax benefit related to exercise of employee stock options
   
     
     
4,595
     
     
     
     
 
Purchase of treasury stock
   
     
     
     
     
     
1,352
      (42,586 )
Net income
   
     
     
     
70,443
     
     
     
 
Balance at August 31, 2005
   
75,766
     
758
     
154,154
     
397,989
     
     
16,451
      (164,984 )
                                                         
Exercise of common stock options
   
1,003
     
10
     
7,981
     
     
     
     
 
Stock-based compensation expense, including capitalized compensation of $216
   
     
     
7,404
     
     
     
     
 
Tax benefit related to exercise of employee stock options
   
     
     
4,645
     
     
     
     
 
Purchase of treasury stock
   
     
     
     
     
     
3,538
      (94,485 )
Three-for-two stock split
   
38,219
     
382
      (382 )    
     
     
9,517
     
 
Deferred hedging losses, net of tax of $300
   
     
     
     
      (484 )    
     
 
Net income
   
     
     
     
78,705
     
     
     
 
Balance at August 31, 2006
   
114,988
     
1,150
     
173,802
     
476,694
      (484 )    
29,506
      (259,469 )
                                                         
Exercise of common stock options
   
1,235
     
12
     
8,524
     
     
     
     
 
Stock-based compensation expense, including capitalized compensation of $232
   
     
     
7,290
     
     
     
     
 
Tax benefit related to exercise of employee stock options
   
     
     
4,066
     
     
     
     
 
Purchase of treasury stock
   
     
     
     
     
     
25,572
      (580,215 )
Net change in deferred hedging losses, net of tax of $1,464
   
     
     
     
      (2,364 )    
     
 
Net income
   
     
     
     
64,192
     
     
     
 
Balance at August 31, 2007
   
116,223
    $
1,162
    $
193,682
    $
540,886
    $ (2,848 )    
55,078
    $ (839,684 )


See accompanying notes.
F-5


Sonic Corp.

Consolidated Statements of Cash Flows

 
   
Year ended August 31,
 
   
2007
   
2006
   
2005
 
   
(In Thousands)
 
Cash flows from operating activities
                 
Net income
  $
64,192
    $
78,705
    $
70,443
 
Adjustments to reconcile net income to net
cash provided by operating activities:
                       
Depreciation
   
41,078
     
37,074
     
32,418
 
Amortization of assets under capital leases and other
   
4,025
     
3,622
     
3,403
 
Gain on dispositions of assets, net
    (3,267 )     (422 )     (1,115 )
Stock-based compensation expense
   
7,058
     
7,188
     
6,757
 
(Credit) provision for deferred income taxes
    (1,592 )     (2,713 )    
1,075
 
Provision for impairment of long-lived assets
   
1,165
     
264
     
387
 
Excess tax benefit from exercise of employee stock options
    (4,117 )     (4,645 )     (4,595 )
Debt extinguishment and other costs
   
5,283
     
--
     
--
 
Payment for hedge termination
    (5,640 )    
--
     
--
 
Amortization of debt costs to interest expense
   
4,256
     
--
     
--
 
Other
   
185
     
398
     
500
 
Decrease (increase) in operating assets:
                       
Restricted cash
    (8,965 )    
--
     
--
 
Accounts and notes receivable
    (709 )     (2,275 )     (2,481 )
Inventories and prepaid expenses
   
159
      (2,267 )     (1,371 )
Increase (decrease) in operating liabilities:
                       
Accounts payable
   
106
     
2,821
     
4,334
 
Deposits from franchisees
   
3,556
     
227
     
1,513
 
Accrued and other liabilities
   
14,242
     
9,496
     
16,417
 
Total adjustments
   
56,823
     
48,768
     
57,242
 
Net cash provided by operating activities
   
121,015
     
127,473
     
127,685
 
                         
Cash flows from investing activities
                       
Purchases of property and equipment
    (110,912 )     (86,863 )     (85,905 )
Acquisition of businesses, net of cash received
    (10,760 )     (14,601 )     (820 )
Acquisition of real estate, net of cash received
   
--
      (12,125 )    
--
 
Proceeds from sale of real estate
   
12,619
     
--
     
--
 
Investments in direct financing leases
    (302 )     (237 )     (320 )
Collections on direct financing leases
   
1,544
     
1,342
     
1,266
 
Proceeds from dispositions of assets
   
13,668
     
5,271
     
8,882
 
Increase in intangibles and other assets
    (456 )     (757 )     (1,053 )
Net cash used in investing activities
    (94,599 )     (107,970 )     (77,950 )
 

(Continued on following page)
F-6


Sonic Corp.

Consolidated Statements of Cash Flows (continued)
   
Year ended August 31,
 
   
2007
   
2006
   
2005
 
   
(In Thousands)
 
                   
Cash flows from financing activities
                 
Proceeds from borrowings
  $
1,404,490
    $
274,763
    $
127,415
 
Payments on long-term debt
    (815,396 )     (206,806 )     (149,390 )
Purchases of treasury stock
    (564,984 )     (93,689 )     (42,324 )
Debt issuance costs
    (28,166 )    
--
     
--
 
Restricted cash for debt obligations
    (15,910 )    
--
     
--
 
Payments on capital lease obligations
    (2,471 )     (2,444 )     (2,139 )
Exercises of stock options
   
7,732
     
7,194
     
10,546
 
Excess tax benefit from exercise of employee stock options
   
4,117
     
4,645
     
4,595
 
Net cash used in financing activities
    (10,588 )     (16,337 )     (51,297 )
 
Net increase (decrease) in cash and cash equivalents
   
15,828
     
3,166
      (1,562 )
                         
Cash and cash equivalents at beginning of the year
   
9,597
     
6,431
     
7,993
 
Cash and cash equivalents at end of the year
  $
25,425
    $
9,597
    $
6,431
 
                         
Supplemental cash flow information
                       
Cash paid during the year for:
                       
Interest (net of amounts capitalized of $576, $733 and $604, respectively)
  $
36,501
    $
8,769
    $
7,144
 
Income taxes (net of refunds)
   
32,651
     
48,225
     
27,377
 
Obligation to acquire treasury stock
   
14,432
     
--
     
--
 
Additions to capital lease obligations
   
5,164
     
4,958
     
877
 
Accounts and notes receivable and decrease in capital lease
                       
obligations from property and equipment sales
   
1,500
     
6,514
     
1,063
 
Stock options exercised by stock swap
   
799
     
787
     
250
 
Obligations for purchases of property and equipment
   
1,134
     
--
     
--
 

 

See accompanying notes.
F-7

      
         Sonic Corp.       
      
         Notes to Consolidated Financial Statements       
      
         August 31, 2007, 2006 and 2005       
      
         (In Thousands, Except Per Share Data)       
        
1. Summary of Significant Accounting Policies
 
Operations
 
Sonic Corp. (the “Company”) operates and franchises a chain of quick-service drive-ins in the United States.  It derives its revenues primarily from Partner Drive-In sales and royalty fees from franchisees.  The Company also leases signs and real estate, and owns a minority interest in several Franchise Drive-Ins.

From time to time, the Company purchases existing Franchise Drive-Ins with proven track records in core markets from franchisees and other minority investors as a means to deploy excess cash generated from operating activities and provide a foundation for future earnings growth.

Principles of Consolidation

The accompanying financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned Partner Drive-Ins, organized as general partnerships and limited liability companies.  All significant intercompany accounts and transactions have been eliminated.

Certain amounts have been reclassified in the Consolidated Financial Statements to conform to the fiscal year 2007 presentation.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported and contingent assets and liabilities disclosed in the financial statements and accompanying notes.  Actual results may differ from those estimates, and such differences may be material to the financial statements.

Cash Equivalents

Cash equivalents consist of highly liquid investments that mature in three months or less from date of purchase.

Restricted Cash

As of August 31, 2007, the Company had restricted cash balances totaling $24,875 for funds required to be held in trust for the benefit of senior note holders under the Company’s debt arrangements.  The current portion of restricted cash of $13,521 represents amounts to be returned to Sonic or paid to service current debt obligations.  The noncurrent portion of $11,354 represents interest reserves required to be set aside for the duration of the debt.

Accounts and Notes Receivable

The Company charges interest on past due accounts receivable at a rate of 18% per annum.   Interest accrues on notes receivable based on contractual terms. The Company monitors all accounts for delinquency and provides for estimated losses for specific receivables that are not likely to be collected.  In addition, a general provision for bad debt is estimated based on historical trends.
 
F-8

 
Inventories

Inventories consist principally of food and supplies that are carried at the lower of cost (first-in, first-out basis) or market.

Property, Equipment and Capital Leases

Property and equipment are recorded at cost, and leased assets under capital leases are recorded at the present value of future minimum lease payments. Depreciation of property and equipment and capital leases is computed by the straight-line method over the estimated useful lives or the lease term, including cancelable option periods when appropriate, and are combined for presentation in the financial statements.

Accounting for Long-Lived Assets

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable.  Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which generally represents the individual drive-in.  The Company’s primary test for an indicator of potential impairment is operating losses.  If an indication of impairment is determined to be present, the Company estimates the future cash flows expected to be generated from the use of the asset and its eventual disposal.  If the sum of undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized.  The impairment loss is measured by comparing the fair value of the asset to its carrying amount.   Fair value is typically determined to be the value of the land, since drive-in buildings and improvements are single-purpose assets and have little value to market participants.  The equipment associated with a store can be easily relocated to another store, and therefore is not adjusted.

Surplus property assets are carried at the lower of depreciated cost or fair value less cost to sell.  The majority of the value in surplus property is land.  Fair values are estimated based upon appraisals or independent assessments of the assets’ estimated sales values.

Goodwill and Other Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”.  Goodwill is determined based on acquisition purchase price in excess of the fair value of identified assets.  Intangible assets with lives restricted by contractual, legal, or other means are amortized over their useful lives.  Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.  SFAS No. 142 requires a two-step process for testing impairment.  First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists.  If impairment is indicated, then the fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination.  The amount of impairment for goodwill and other intangible assets is measured as the excess of its carrying value over its fair value.

F-9

The Company’s intangible assets subject to amortization under SFAS No. 142 consist primarily of acquired franchise agreements, franchise fees, and other intangibles.  Amortization expense is calculated using the straight-line method over the expected period of benefit, not exceeding 20 years.  The Company’s trademarks and trade names were deemed to have indefinite useful lives and are not subject to amortization.  See Note 5 for additional disclosures related to goodwill and other intangibles.

Ownership Program

The Company’s drive-in philosophy stresses an ownership relationship with drive-in supervisors and managers.  Most supervisors and managers of Partner Drive-Ins own an equity interest in the drive-in, which is financed by third parties.  Supervisors and managers are neither employees of the Company nor of the drive-in in which they have an ownership interest.

The minority ownership interests in Partner Drive-Ins of the managers and supervisors are recorded as a minority interest liability on the Consolidated Balance Sheets, and their share of the drive-in earnings is reflected as Minority interest in earnings of Partner Drive-Ins in the Costs and expenses section of the Consolidated Statements of Income. The ownership agreements contain provisions, which give the Company the right, but not the obligation, to purchase the minority interest of the supervisor or manager in a drive-in.   The amount of the investment made by a partner and the amount of the buy-out are based on a number of factors, primarily upon the drive-in’s financial performance for the preceding 12 months, and is intended to approximate the fair value of a minority interest in the drive-in.

The Company acquires and sells minority interests in Partner Drive-Ins from time to time as managers and supervisors buy-out and buy-in to the partnerships or limited liability companies.   If the purchase price of a minority interest that we acquire exceeds the net book value of the assets underlying the partnership interest, the excess is recorded as goodwill.  The acquisition of a minority interest for less than book value is recorded as a reduction in purchased goodwill.  Any subsequent sale of the minority interest to another minority partner is recorded as a pro-rata reduction of goodwill, and no gain or loss is recognized on the sale of the minority ownership interest.   Goodwill created as a result of the acquisition of minority interests in Partner Drive-Ins is not amortized but is tested annually for impairment under the provisions of SFAS No. 142.

Revenue Recognition, Franchise Fees and Royalties

Revenue from Partner Drive-In sales is recognized when food and beverage products are sold.

Initial franchise fees are recognized in income when all material services or conditions relating to the sale of the franchise have been substantially performed or satisfied by the Company and the fees are nonrefundable.  Area development fees are nonrefundable and are recognized in income on a pro rata basis when the conditions for revenue recognition under the individual development agreements are met.  Both initial franchise fees and area development fees are generally recognized upon the opening of a franchise drive-in or upon termination of the agreement between the Company and the franchisee.
 
F-10

The Company’s franchisees are required under the provisions of the license agreements to pay the Company royalties each month based on a percentage of actual net royalty sales.  However, the royalty payments and supporting financial statements are not due until the 10 th of the following month for the new form of license agreement (Number 7) and the 20 th of the following month for all prior forms.  As a result, the Company accrues royalty revenue in the month earned based on estimates of Franchise Drive-In sales.  These estimates are based on actual sales at Partner Drive-Ins and projections of average unit volume growth at Franchise Drive-Ins.
 
Operating Leases

Rent expense is recognized on a straight-line basis over the expected lease term, including cancelable option periods when it is deemed to be reasonably assured that we would incur an economic penalty for not exercising the options.  Within the provisions of certain of our leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods.  The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes cancelable option periods when appropriate.  The lease term commences on the date when we have the right to control the use of the leased property, which can occur before rent payments are due under the terms of the lease.  Percentage rent expense is generally based on sales levels and is accrued at the point in time we determine that it is probable that such sales levels will be achieved.

Advertising Costs

Costs incurred in connection with the advertising and promoting of the Company’s products are included in other operating expenses and are expensed as incurred.  Such costs amounted to $35,241, $30,948, and $28,216 for fiscal years 2007, 2006 and 2005, respectively.

Under the Company’s license agreements, both Partner-Drive-Ins and Franchise Drive-Ins must contribute a minimum percentage of revenues to a national media production fund (Sonic Brand Fund, formerly known as the Sonic Advertising Fund) and spend an additional minimum percentage of gross revenues on local advertising, either directly or through Company-required participation in advertising cooperatives. A portion of the local advertising contributions is redistributed to a System Marketing Fund, which purchases advertising on national cable and broadcast networks and other national media and sponsorship opportunities.  As stated in the terms of existing license agreements, these funds do not constitute assets of the Company, and the Company acts with limited agency in the administration of these funds. Accordingly, neither the revenues   and expenses nor the assets and liabilities of the advertising cooperatives, the Sonic Brand Fund, or the System Marketing Fund are included in the Company’s consolidated financial statements.  However, all advertising contributions by Partner Drive-Ins are recorded as expense on the Company’s financial statements.

Stock-Based Compensation

In accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant).  The Company adopted SFAS 123R effective September 1, 2005, using the modified retrospective application method and, as a result, financial statement amounts for all periods presented in this Form 10-K reflect the fair value method of expensing prescribed by SFAS 123R.
F-11

 
The following table shows total stock-based compensation expense and the tax benefit included in the Consolidated Statements of Income and the effect on basic and diluted earnings per share for the years ended August 31:

   
2007
   
2006
   
2005
 
                   
Selling, general and administrative
  $
7,059
    $
7,187
    $
6,757
 
Income tax benefit
    (2,254 )     (2,266 )     (1,819 )
Net stock-based compensation expense
  $
4,805
    $
4,921
    $
4,938
 
Impact on net income per share:
                       
Basic
  $
.07
    $
.06
    $
.05
 
Diluted
  $
.07
    $
.06
    $
.05
 

Many of the options granted by Sonic are incentive stock options, for which a tax benefit only results if the option holder has a disqualifying disposition.  For grants of non-qualified stock options, the Company expects to recognize a tax benefit on exercise of the option, so the full tax benefit is recognized on the related stock-based compensation expense.  As a result of the limitation on the tax benefit for incentive stock options, the tax benefit for stock-based compensation will generally be less than the Company’s overall tax rate, and will vary depending on the timing of employees’ exercises and sales of stock.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax purposes but do not affect earnings. These benefits are principally generated from employee exercises of non-qualified stock options and disqualifying dispositions of incentive stock options.

New Accounting Pronouncements

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109,” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109, “Accounting for Income Taxes.”  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is adopting the provisions of FIN 48 effective September 1, 2007.  The cumulative effect of implementation of FIN 48 is approximately a $1 to 1.5 million increase in the liability for unrecognized tax benefits, which will be accounted for as a decrease in the September 1, 2007 balance of retained earnings.
F-12

 
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.  This statement applies under other accounting pronouncements that currently require or permit fair value measurements and is effective for fiscal year beginning after November 15, 2007, which will be our fiscal year beginning September 1, 2008.  In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value.  If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date.  SFAS 159 has the same effective date as SFAS 157.  We are currently in the process of assessing the impact that SFAS 157 and 159 may have on the Company’s consolidated financial statements.

2.  Net Income Per Share

The following table sets forth the computation of basic and diluted earnings per share for the years ended August 31:

   
2007
   
2006
   
2005
 
Numerator:
                 
Net income
  $
64,192
    $
78,705
    $
70,443
 
                         
Denominator:
                       
Weighted average shares outstanding – basic
   
68,019
     
86,260
     
89,992
 
Effect of dilutive employee stock options
   
2,573
     
2,979
     
3,655
 
Weighted average shares – diluted
   
70,592
     
89,239
     
93,647
 
                         
Net income per share – basic
  $
0.94
    $
0.91
    $
0.78
 
Net income per share – diluted
  $
0.91
    $
0.88
    $
0.75
 
                         
Anti-dilutive employee stock options excluded
   
1,858
     
1,378
     
249
 

3.  Impairment of Long-Lived Assets

During the fiscal years ended August 31, 2007, 2006 and 2005, the Company identified impairments for certain drive-in assets and surplus property through regular quarterly reviews of long-lived assets. During fiscal year 2007, these analyses resulted in provisions for impairment totaling $1,165, including $412 to reduce the carrying amount of assets in excess of fair value for two drive-ins, and $753 to reduce to fair value the carrying amount of assets for three properties leased to franchisees.  During fiscal year 2006, these analyses resulted in provisions for impairment totaling $264 to reduce the carrying amount of three surplus properties down to fair value.  During fiscal year 2005, these analyses resulted in provisions for impairment totaling $387, including $286 to writedown the carrying amount of building and leasehold improvements on an underperforming drive-in, and $101 to reduce the carrying amount of a surplus property down to fair value.

F-13

4. Accounts and Notes Receivable

Accounts and notes receivable consist of the following at August 31, 2007 and 2006:

   
2007
   
2006
 
Current Accounts and Notes Receivable:
           
Royalties and other trade receivables
  $
12,792
    $
12,863
 
Notes receivable from franchisees
   
528
     
353
 
Notes receivable from advertising funds
   
4,083
     
3,681
 
Other
   
6,275
     
4,682
 
     
23,678
     
21,579
 
Less allowance for doubtful accounts and notes receivable
   
594
     
308
 
    $
23,084
    $
21,271
 
Noncurrent Notes Receivable:
               
Notes receivable from franchisees
  $
5,649
    $
5,509
 
Less allowance for doubtful notes receivable
   
117
     
327
 
    $
5,532
    $
5,182
 

The Company’s receivables are primarily due from franchisees, all of whom are in the restaurant business.  The notes receivable from advertising funds represent transactions in the normal course of business.  Substantially all of the notes receivable from franchisees are collateralized by real estate or equipment.

5. Goodwill, Trademarks, Trade Names and Other Intangibles

The gross carrying amount of franchise agreements, franchise fees and other intangibles subject to amortization was $6,529 and $5,245 at August 31, 2007 and 2006, respectively.  The estimated amortization expense for each of the five years after August 31, 2007 is approximately $400. Accumulated amortization related to these intangible assets was $1,212 and $543 at August 31, 2007 and 2006, respectively.  The carrying amount of trademarks and trade names not subject to amortization was $6,044 at August 31, 2007 and 2006.

The changes in the carrying amount of goodwill for fiscal years ending August 31, 2007 and 2006 were as follows:


   
2007
   
2006
 
Balance as of September 1,
 
$
96,949
   
$
88,471
 
Goodwill acquired during the year
   
5,464
     
8,504
 
Goodwill acquired (disposed of) related to the acquisitions and
               
   dispositions of minority interests in Partner Drive-Ins, net
   
316
     
(26
)
Goodwill disposed of related to the sale of Partner Drive-Ins
   
(101
)
 
 
Balance as of August 31,
 
$
102,628
   
$
96,949
 
 

 
F-14


6. Leases

Description of Leasing Arrangements

The Company’s leasing operations consist principally of leasing certain land, buildings and equipment (including signs) and subleasing certain buildings to franchise operators. The land and building portions of these leases are classified as operating leases and expire over the next 16 years.   The equipment portions of these leases are classified principally as direct financing leases and expire principally over the next 10 years. These leases include provisions for contingent rentals that may be received on the basis of a percentage of sales in excess of stipulated amounts. Income is not recognized on contingent rentals until sales exceed the stipulated amounts.  Some leases contain escalation clauses over the lives of the leases.  Most of the leases contain one to four renewal options at the end of the initial term for periods of five years.  The Company classifies income from leasing operations as other revenue in the Consolidated Statements of Income.

Certain Partner Drive-Ins lease land and buildings from third parties. These leases, which expire over the next 18 years, include provisions for contingent rentals that may be paid on the basis of a percentage of sales in excess of stipulated amounts. For the majority of leases, the land portions are classified as operating leases and the building portions are classified as capital leases.

Direct Financing Leases

Components of net investment in direct financing leases are as follows at August 31, 2007 and 2006:

   
2007
   
2006
 
Minimum lease payments receivable
  $
5,098
    $
6,827
 
Less unearned income
   
1,238
     
1,725
 
Net investment in direct financing leases
   
3,860
     
5,102
 
Less amount due within one year
   
1,267
     
1,287
 
Amount due after one year
  $
2,593
    $
3,815
 

Initial direct costs incurred in the negotiations and consummations of direct financing lease transactions have not been material.  Accordingly, no portion of unearned income has been recognized to offset those costs.

F-15

 
Future minimum rental payments receivable as of August 31, 2007 are as follows:

   
Operating
   
Direct Financing
 
Year ending August 31:
           
2008
  $
478
    $
1,725
 
2009
   
483
     
1,277
 
2010
   
464
     
703
 
2011
   
452
     
477
 
2012
   
433
     
336
 
Thereafter
   
2,380
     
580
 
     
4,690
     
5,098
 
Less unearned income
 
     
1,238
 
    $
4,690
    $
3,860
 

Capital Leases

Components of obligations under capital leases are as follows at August 31, 2007 and 2006:

   
2007
   
2006
 
Total minimum lease payments
  $
57,332
    $
54,437
 
Less amount representing interest averaging 7.1% in 2007 and 8.0% in 2006
   
18,014
     
17,812
 
Present value of net minimum lease payments
   
39,318
     
36,625
 
Less amount due within one year
   
2,545
     
2,330
 
Amount due after one year
  $
36,773
    $
34,295
 

F-16

Maturities of these obligations under capital leases and future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of August 31, 2007 are as follows:

   
Operating
   
Capital
 
Year ending August 31:
           
   2008
  $
11,948
    $
4,385
 
   2009
   
11,893
     
5,376
 
   2010
   
11,713
     
5,398
 
   2011
   
11,454
     
5,199
 
   2012
   
11,207
     
4,944
 
   Thereafter
   
131,959
     
32,030
 
     
190,174
     
57,332
 
Less amount representing interest
   
     
18,014
 
    $
190,174
    $
39,318
 

Total rent expense for all operating leases and capital leases consists of the following for the years ended August 31:

   
2007
   
2006
   
2005
 
Operating leases:
                 
   Minimum rentals
  $
13,644
    $
12,731
    $
11,355
 
   Contingent rentals
   
229
     
199
     
289
 
   Sublease rentals
    (553 )     (542 )     (536 )
Capital leases:
                       
   Contingent rentals
   
1,300
     
1,123
     
1,109
 
    $
14,620
    $
13,511
    $
12,217
 

The aggregate future minimum rentals receivable under noncancelable subleases of operating leases as of August 31, 2007 was $2,405.

F-17


7.  Property, Equipment and Capital Leases

Property, equipment and capital leases consist of the following at August 31, 2007 and 2006:

 
Estimated Useful Life
 
2007
   
2006
 
Property and equipment:
             
   Home office:
             
   Leasehold improvements
Life of lease
  $
3,082
    $
3,066
 
   Computer and other equipment
2 – 5 yrs
   
33,134
     
28,842
 
   Drive-ins, including those leased to others:
                 
   Land
     
158,968
     
154,092
 
   Buildings
8 – 25 yrs
   
331,901
     
275,924
 
   Equipment
5 – 7 yrs
   
179,863
     
168,019
 
Property and equipment, at cost
     
706,948
     
629,943
 
Less accumulated depreciation
     
211,327
     
185,275
 
Property and equipment, net
     
495,621
     
444,668
 

Capital Leases:
             
   Leased home office building
Life of lease
   
9,321
     
9,321
 
   Leased drive-in buildings, equipment and other assets under
                 
capital leases, including those held for sublease
Life of lease
   
40,125
     
35,844
 
Less accumulated amortization
     
15,074
     
12,779
 
Capital leases, net
     
34,372
     
32,386
 
Property, equipment and capital leases, net
    $
529,993
    $
477,054
 

Land, buildings and equipment with a carrying amount of $29,245 at August 31, 2007 were leased under operating leases to franchisees or other parties.  The accumulated depreciation related to these buildings and equipment was $6,085 at August 31, 2007.  As of August 31, 2007, the Company had drive-ins under construction with costs to complete which aggregated $12,793.
F-18


8.  Accrued Liabilities

Accrued liabilities consist of the following at August 31, 2007 and 2006:

   
2007
   
2006
 
Wages and other employee benefits
  $
8,178
    $
9,707
 
Taxes, other than income taxes
   
15,296
     
13,476
 
Accrued interest
   
1,122
     
389
 
Minority interest in consolidated drive-ins
   
3,690
     
2,610
 
Obligation to acquire treasury stock
   
14,432
     
 
Unredeemed gift cards and gift certificates
   
5,997
     
4,400
 
Other
   
6,992
     
3,292
 
    $
55,707
    $
33,874
 

9.  Long-Term Debt

Long-term debt consists of the following at August 31, 2007 and 2006:

   
2007
   
2006
 
5.7% Class A-2 senior notes, due December 2031
  $
593,440
    $
 
6.58% Series A senior unsecured notes, due August 2008
   
     
2,000
 
6.87% Series B senior unsecured notes, due August 2011
   
     
17,857
 
Class A-1 senior variable funding notes
   
116,000
     
 
Line of credit
   
     
101,150
 
Other
   
1,303
     
1,392
 
     
710,743
     
122,399
 
Less long-term debt due within one year
   
20,306
     
5,227
 
Long-term debt due after one year
  $
690,437
    $
117,172
 

Maturities of long-term debt for each of the five years after August 31, 2007 are $20,306 in 2008, $38,472 in 2009, $55,143 in 2010, $73,437 in 2011, $93,416 in 2012, and $429,969 thereafter.

In October 2006, the Company refinanced its senior unsecured notes and line of credit and funded a tender offer to repurchase shares of its common stock with proceeds from a senior secured credit facility until the Class A-2 senior notes were financed in December 2006.  Loan origination costs associated with this debt totaled $4,631 and the unamortized loan origination costs of $4,544 were expensed as debt extinguishment costs when the financing was closed in December 2006.
F-19


In December 2006, various subsidiaries of the Company issued $600,000 of Class A-2 senior notes in a private transaction.  The proceeds were used to refinance the outstanding balance under the senior secured credit facility, along with costs associated with the transaction.  The Class A-2 notes are the first issuance under a facility that will allow Sonic to issue additional series of notes in the future subject to certain conditions.  These notes have a fixed interest rate of 5.7%, subject to upward adjustment after the expected six-year repayment term.  Loan origination costs associated with this debt totaled $24,329, and the unamortized balance is categorized as debt origination costs, net, on the Consolidated Balance Sheet as of August 31, 2007.  Amortization of these loan costs and the hedge loss discussed below produces an overall weighted average interest cost of 6.8%.  The Class A-2 notes have an expected life of six years, with a legal final repayment date in December 2031. If the debt extends beyond the expected life, rapid amortization and cash trapping provisions of the debt agreements will be triggered which will cause the remaining  principle balance to be given higher priority of payment from the secured sources. The Company anticipates paying the debt in full based on the expected life.

In connection with issuance of the Class A-2 notes, various subsidiaries of the Company also completed a securitized financing facility of Class A-1 senior variable funding notes.  This facility allows for the issuance of up to $200,000 of notes and certain other credit instruments, including letters of credit.  Considering the $116,000 outstanding at August 31, 2007 and $325 in outstanding letters of credit, $83,675 was unused and available under the Class A-2 notes.  The effective interest rate on the $116,000 outstanding at August 31, 2007 was 6.44%, and there is a commitment fee on the unused portion of the Class A-1 notes of 0.5%.

The Class A-1 and Class A-2 senior notes were issued by special purpose, bankruptcy remote, indirect subsidiaries of the Company that hold substantially all of Sonic’s franchising assets and Partner Drive-In real estate used in operation of the Company’s existing business.  As of August 31, 2007, total assets for these combined indirect subsidiaries were approximately $410,000, including receivables for royalties, Partner Drive-In real estate, intangible assets, loan origination costs and restricted cash balances of $24,875.  The Class A-1 and Class A-2 notes are secured by Sonic’s franchise royalty payments, certain lease and other payments and fees and, as a result, the repayment of these notes is expected to be made solely from the income derived from these indirect subsidiaries’ assets.  Sonic Industries LLC, which is the subsidiary that acts as franchisor, has guaranteed the obligations of the co-issuers and pledged substantially all of its assets to secure such obligations.

Although the Company does not guarantee the Class A-1 and Class A-2 notes, the Company has agreed to cause the performance of certain obligations of its subsidiaries, principally related to the servicing of the assets included as collateral for the notes and certain indemnity obligations.

In August 2006, the Company entered into a forward starting swap agreement with a financial institution to hedge part of the exposure to changing interest rates until new financing was closed in December 2006.  The forward starting swap was designated as a cash flow hedge, and was subsequently settled in conjunction with the closing of the Class A-2 notes, as planned.  The loss resulting from settlement of $5,640 ($3,483, net of tax) was recorded in accumulated other comprehensive income and is being amortized to interest expense over the expected term of the Class A-2 notes.  Amortization of this loss during fiscal year 2007 totaled $753 ($465, net of tax) in interest expense, and over the next 12 months, the Company expects to amortize $1,063 ($656, net of tax) to interest expense for this loss.  The ineffective portion of the hedge was $275 ($170, net of tax) and is reflected in debt extinguishment and other costs on the Consolidated Income Statement.  The cash flows resulting from these hedge transactions are included in cash flows from operating activities on the Consolidated Statement of Cash Flows.
F-20


The following table presents the components of comprehensive income for the years ended August 31, 2007 and 2006:
 
   
2007
   
2006
 
Net Income
  $
64,192
    $
78,705
 
Increase in deferred hedging loss, net of tax
    (2,364 )     (484 )
Total comprehensive income
  $
61,828
    $
78,221
 

10.  Other Noncurrent Liabilities

Other noncurrent liabilities consist of the following at August 31, 2007 and 2006:

   
2007
   
2006
 
Minority interests in consolidated drive-ins
  $
3,789
    $
4,566
 
Deferred area development fees
   
6,227
     
2,385
 
Other
   
7,196
     
5,553
 
    $
17,212
    $
12,504
 

F-21

11.  Income Taxes

The Company’s income before the provision for income taxes is classified by source as domestic income.

The components of the provision for income taxes consist of the following for the years ended August 31:

   
2007
   
2006
   
2005
 
Current:
                 
Federal
  $
31,369
    $
42,629
    $
37,572
 
State
   
3,859
     
4,163
     
3,269
 
     
35,228
     
46,792
     
40,841
 
                         
Deferred:
                       
Federal
   
1,272
      (1,127 )    
284
 
State
   
191
      (321 )    
96
 
     
1,463
      (1,448 )    
380
 
Provision for income taxes
  $
36,691
    $
45,344
    $
41,221
 

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate due to the following for the years ended August 31:

   
2007
   
2006
   
2005
 
Amount computed by applying a tax rate of 35%
  $
35,309
    $
43,417
    $
39,083
 
State income taxes (net of federal income tax benefit)
   
2,726
     
2,767
     
2,481
 
Employment related and other tax credits, net
    (1,443 )     (1,014 )     (1,092 )
Other
   
99
     
174
     
749
 
Provision for income taxes
  $
36,691
    $
45,344
    $
41,221
 


F-22


11.  Income Taxes (continued)

Deferred tax assets and liabilities consist of the following at August 31, 2007 and 2006:

   
2007
   
2006
 
Current deferred tax assets (liabilities):
           
Allowance for doubtful accounts and notes receivable
  $
176
    $
83
 
Property, equipment and capital leases
   
197
     
272
 
Accrued litigation costs
   
371
     
76
 
Prepaid expenses
    (424 )  
 
Deferred income from franchisees
   
79
      (327 )
Deferred income from affiliated technology fund
   
118
     
203
 
Current deferred tax assets, net
  $
517
    $
307
 
                 
Noncurrent deferred tax assets (liabilities):
               
Net investment in direct financing leases including differences related to capitalization and amortization
  $ (2,458 )   $ (2,390 )
Investment in partnerships, including differences in capitalization and
               
depreciation related to direct financing leases and different year ends for
               
financial and tax reporting purposes
    (13,466 )     (8,764 )
Capital loss carryover
   
1,695
   
 
State net operating losses
   
3,319
     
4,247
 
Property, equipment and capital leases
    (2,720 )     (1,150 )
Allowance for doubtful accounts and notes receivable
   
97
     
160
 
Deferred income from affiliated franchise fees
   
1,976
     
1,830
 
Accrued liabilities
   
241
     
296
 
Intangibles and other assets
   
117
     
107
 
Deferred income from franchisees
   
798
     
877
 
Stock compensation
   
5,544
     
4,420
 
Loss on cash flow hedge
   
1,765
     
300
 
Other
    (2 )    
55
 
      (3,094 )     (12 )
Valuation allowance
    (3,319 )     (4,247 )
Noncurrent deferred tax liabilities, net
  $ (6,413 )   $ (4,259 )
                 
Deferred tax assets and (liabilities):
               
Deferred tax assets (net of valuation allowance)
  $
13,174
    $
8,679
 
Deferred tax liabilities
    (19,070 )     (12,631 )
Net deferred tax liabilities
  $ (5,896 )   $ (3,952 )
 
F-23


State net operating loss carryforwards expire generally beginning in 2010.  Management does not believe the Company will be able to realize the state net operating loss carryforwards and therefore has provided a valuation allowance as of August 31, 2007 and 2006.

The Company has capital loss carryovers of approximately $4.4 million which expire beginning in fiscal year 2011.  Management believes the Company will realize these carryovers before they expire.

12.  Stockholders’ Equity

On April 6, 2006, the Company’s board of directors authorized a three-for-two stock split in the form of a stock dividend.  A total of 38,219 shares of common stock were issued in connection with the split, and an aggregate amount equal to the par value of the common stock issued of $382 was reclassified from paid-in capital to common stock.

Stock Purchase Plan

The Company has an employee stock purchase plan for all full-time regular employees.  Employees are eligible to purchase shares of common stock each year through a payroll deduction not in excess of the lesser of 10% of compensation or $25. The aggregate amount of stock that employees may purchase under this plan is limited to 759,375 shares. The purchase price will be between 85% and 100% of the stock’s fair market value and will be determined by the Company’s board of directors.

Stock-Based Compensation

The Sonic Corp. 2006 Long-Term Incentive Plan (the “2006 Plan”) provides flexibility to award various forms of equity compensation, such as stock options, stock appreciation rights, performance shares, restricted stock and other stock-based awards.  At August 31, 2007, 4,871 shares were available for grant under the 2006 Plan.  The Company has historically granted only stock options with an exercise price equal to the market price of the Company’s stock at the date of grant, a contractual term of seven to ten years, and a vesting period of three years.  The Company’s policy is to recognize compensation cost for these options on a straight-line basis over the requisite service period for the entire award.  Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option exercises.

The Company measures the compensation cost associated with share-based payments by estimating the fair value of stock options as of the grant date using the Black-Scholes option pricing model.  The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted during 2007, 2006 and 2005.  Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards.

F-24

 
The per share weighted average fair value of stock options granted during 2007, 2006 and 2005 was $7.10, $7.90 and $8.94, respectively.  In addition to the exercise and grant date prices of the awards, certain weighted average assumptions that were used to estimate the fair value of stock option grants in the respective periods are listed in the table below:

 
2007
2006
2005
Expected term (years)
4.5
4.5 
5.1 
Expected volatility
28%
34%
41%
Risk-free interest rate
4.6%
4.7%
4.0%
Expected dividend yield
0%
0%
0%

The Company estimates expected volatility based on historical daily price changes of the Company’s common stock for a period equal to the current expected term of the options.  The risk-free interest rate is based on the United States treasury yields in effect at the time of grant corresponding with the expected term of the options.  The expected option term is the number of years the Company estimates that options will be outstanding prior to exercise considering vesting schedules and our historical exercise patterns.

SFAS 123R requires the cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense recorded for those options (excess tax benefits) to be classified as financing cash flows.  These excess tax benefits were $­­­­­­­­4,117, $4,645 and $4,595 for the years ended August 31, 2007, 2006 and 2005, respectively, and are classified as a financing cash inflow in the Company’s Consolidated Statements of Cash Flows.  The proceeds from exercises of stock options are also classified as cash flows from financing activities and totaled $7,732, $7,194 and $10,546 for each of the years ended August 31, 2007, 2006 and 2005, respectively.

A summary of stock option activity under the Company’s share-based compensation plans for the year ended August 31, 2007 is presented in the following table:
   
Options
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Life (Yrs.)
   
Aggregate Intrinsic Value
 
Outstanding-beginning of year
   
7,230
    $
11.98
             
Granted
   
1,259
     
22.36
             
Exercised
    (1,234 )    
6.91
             
Forfeited or expired
    (132 )    
21.18
             
Outstanding August 31, 2007
   
7,123
    $
14.53
     
5.08
    $
53,436
 
Exercisable August 31, 2007
   
5,054
    $
11.40
     
4.45
    $
52,895
 

The total intrinsic value of options exercised during the years ended August 31, 2007, 2006 and 2005 was $19,408, $19,567 and $20,923, respectively.  At August 31, 2007, total remaining unrecognized compensation cost related to unvested stock-based arrangements was $12,893 and is expected to be recognized over a weighted average period of 1.6 years.

F-25


Stockholder Rights Plan

The Company had a stockholder rights plan designed to deter coercive takeover tactics and to prevent a potential acquirer from gaining control of the Company without offering a fair price to all of the Company’s stockholders.  This plan expired by its terms on June 16, 2007.

Stock Repurchase Program

The Company has a stock repurchase program that is authorized by the Board of Directors.  In addition to the ongoing stock repurchase program, the Board authorized a “modified Dutch auction” tender offer that resulted in the repurchase of 15,918 shares of common stock at a purchase price of $23.00 per share for a total purchase price of $366,117 in October 2006.  Costs incurred in relation to the tender offer totaled $1,205 and are included in treasury stock, resulting in an average cost of $23.08 per share for the tender offer shares.  Subsequent to the tender offer, the Board authorized the continuation of the stock repurchase program.  On January 31, 2007, the Board of Directors approved an increase in the stock repurchase program from $10,705 to $100,000, followed by an additional authorization on August 2, 2007 of $75,000 and extension of the program through August 31, 2008.  Pursuant to this program, the Company acquired 9,574 shares for a total cost of $211,135 during fiscal year 2007.  The total remaining amount authorized for repurchase as of August 31, 2007 was $42,571 and is scheduled to expire August 31, 2008.

Accumulated Other Comprehensive Income

In August 2006, the Company entered into a forward starting swap agreement with a financial institution to hedge part of the interest rate risk associated with the pending securitized debt transaction.  The forward starting swap was designated as a cash flow hedge, and was subsequently settled in conjunction with the closing of the Class A-2 notes, as planned.  The loss resulting from settlement was recorded net of tax in accumulated other comprehensive income and is being amortized to interest expense over the expected term of the debt.  See Note 9 for additional information.

13.  Net Revenue Incentive Plan

The Company has a Net Revenue Incentive Plan (the “Incentive Plan”), as amended, which applies to certain members of management and is at all times discretionary with the Company’s board of directors.  If certain predetermined earnings goals are met, the Incentive Plan provides that a predetermined percentage of the employee’s salary may be paid in the form of a bonus.  The Company recognized as expense incentive bonuses of $2,943, $3,247, and $2,997 during fiscal years 2007, 2006 and 2005, respectively.

14.  Employment Agreements

The Company has employment contracts with its Chairman and Chief Executive Officer and several members of its senior management. These contracts provide for use of Company automobiles or related allowances, medical, life and disability insurance, annual base salaries, as well as an incentive bonus.  These contracts also contain provisions for payments in the event of the termination of employment and provide for payments aggregating $8,710 at August 31, 2007 due to loss of employment in the event of a change in control (as defined in the contracts).

F-26

15.  Contingencies

The Company is involved in various legal proceedings and has certain unresolved claims pending.  Based on the information currently available, management believes that all claims currently pending are either covered by insurance or would not have a material adverse effect on the Company’s business or financial condition.

The Company initiated a new agreement with Irwin Franchise Capital Corporation (“Irwin”) in September 2006, pursuant to which existing Sonic franchisees may qualify with Irwin to finance drive-in retrofit projects.  The agreement provides that Sonic will guarantee at least $250 of such financing, limited to 5% of the aggregate amount of loans, not to exceed $2,500.  As of August 31, 2007, the total amount guaranteed under the Irwin agreement was $250.  The agreement provides for release of Sonic’s guarantee on individual loans under the program that meet certain payment history criteria at the mid-point of each loans’ term.  Existing loans under the program have terms through 2014.  In the event of default by a franchisee, the Company is obligated to pay Irwin the outstanding balances, plus limited interest and charges up to Sonic’s guarantee limitation.  Irwin is obligated to pursue collections as if Sonic’s guarantee were not in place, therefore, providing recourse with the franchisee under the notes.

The Company has an agreement with GE Capital Franchise Finance Corporation (“GEC”), pursuant to which GEC made loans to existing Sonic franchisees who met certain underwriting criteria set by GEC.  Under the terms of the agreement with GEC, the Company provided a guarantee of 10% of the outstanding balance of loans from GEC to the Sonic franchisees, limited to a maximum amount of $5,000.  As of August 31, 2007, the total amount guaranteed under the GEC agreement was $2,201.  The Company ceased guaranteeing new loans under the program during fiscal year 2002 and has not been required to make any payments under its agreement with GEC.   Existing loans under guarantee will expire through 2012.  In the event of default by a franchisee, the Company has the option to fulfill the franchisee’s obligations under the note or to become the note holder, which would provide an avenue of recourse with the franchisee under the notes.

The Company has obligations under various lease agreements with third-party lessors related to the real estate for Partner Drive-Ins that were sold to franchisees.  Under these agreements, the Company remains secondarily liable for the lease payments for which it was responsible as the original lessee.  As of August 31, 2007, the amount remaining under the guaranteed lease obligations totaled $3,653.

Effective November 30, 2005, the Company extended a note purchase agreement to a bank that serves to guarantee the repayment of a franchisee loan and also benefits the franchisee with a lower financing rate.  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.  As of August 31, 2007, the balance of the loan was $1,880.

The Company has not recorded a liability for its obligations under the guarantees, other than immaterial amounts related to the fair value of the Irwin guarantee and the guarantee associated with the note purchase agreement, and has not been required to make any payments under any of these guarantees.
F-27


16.  Selected Quarterly Financial Data (Unaudited)

   
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
   
Full Year
 
   
2007
   
2006
   
2007
   
2006
   
2007
   
2006
   
2007
   
2006
   
2007
   
2006
 
Income statement data:
                                                           
Partner Drive-In sales
  $
146,419
    $
135,422
    $
137,007
    $
126,376
    $
175,027
    $
156,921
    $
188, 462
    $
167,113
    $
646,915
    $
585,832
 
Other
   
28,371
     
24,378
     
24,445
     
22,572
     
34,894
     
29,548
     
35,844
     
30,932
     
123,554
     
107,430
 
Total revenues
   
174,790
     
159,800
     
161,452
     
148,948
     
209,921
     
186,469
     
224,306
     
198,045
     
770,469
     
693,262
 
                                                                                 
Partner Drive-In operating expenses
   
119,480
     
110,125
     
112,050
     
102,615
     
139,402
     
123,755
     
149,244
     
132,132
     
520,176
     
468,627
 
Selling, general and administrative
   
14,033
     
12,196
     
14,401
     
13,214
     
15,236
     
13,293
     
15,066
     
13,345
     
58,736
     
52,048
 
Other
   
10,758
     
9,897
     
11,099
     
9,997
     
11,967
     
10,361
     
12,444
     
10,705
     
46,268
     
40,960
 
Total expenses
   
144,271
     
132,218
     
137,550
     
125,826
     
166,605
     
147,409
     
176,754
     
156,182
     
625,180
     
561,635
 
Income from operations
   
30,519
     
27,582
     
23,902
     
23,122
     
43,316
     
39,060
     
47,552
     
41,863
     
145,289
     
131,627
 
                                                                                 
Debt extinguishment and other costs
   
1,258
   
     
4,818
   
   
   
   
   
     
6,076
   
 
Interest expense, net
   
5,759
     
1,307
     
10,304
     
2,096
     
10,921
     
2,215
     
11,346
     
1,960
     
38,330
     
7,578
 
Income before income taxes
   
23,502
     
26,275
     
8,780
     
21,026
     
32,395
     
36,845
     
36,206
     
39,903
     
100,883
     
124,049
 
Provision for income taxes
   
8,216
     
9,845
     
2,555
     
8,122
     
11,747
     
13,011
     
14,173
     
14,366
     
36,691
     
45,344
 
Net income
  $
15,286
    $
16,430
    $
6,225
    $
12,904
    $
20,648
    $
23,834
    $
22,033
    $
25,537
    $
64,192
    $
78,705
 
Net income per share:
                                                                               
Basic
  $
0.20
    $
0.19
    $
0.09
    $
0.15
    $
0.32
    $
0.28
    $
0.35
    $
0.30
    $
0.94
    $
0.91
 
Diluted
  $
0.19
    $
0.18
    $
0.09
    $
0.14
    $
0.31
    $
0.27
    $
0.34
    $
0.29
    $
0.91
    $
0.88
 
Weighted average shares outstanding:
                                                                               
Basic
   
76,606
     
87,415
     
67,325
     
86,227
     
64,985
     
85,993
     
63,162
     
85,405
     
68,019
     
86,260
 
Diluted
   
79,489
     
90,521
     
70,026
     
89,261
     
67,408
     
89,007
     
65,445
     
88,168
     
70,592
     
89,239
 
                                                                                 


F-28


17.  Fair Values of Financial Instruments

The following discussion of fair values is not indicative of the overall fair value of the Company’s consolidated balance sheet since the provisions of SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” do not apply to all assets, including intangibles.

The following methods and assumptions were used by the Company in estimating its fair values of financial instruments:

Cash and cash equivalents —Carrying value approximates fair value due to the short duration to maturity.

Notes receivable —For variable rate loans with no significant change in credit risk since the loan origination, fair values approximate carrying amounts.  Fair values for fixed-rate loans are esti­mated using discounted cash flow analysis, using interest rates that would currently be offered for loans with similar terms to borrowers of similar credit quality and/or the same remaining maturities.

As of August 31, 2007 and 2006, carrying values approximate their estimated fair values.

Borrowed funds —Fair values for fixed rate borrowings are estimated using a discounted cash flow analysis that applies interest rates currently being offered on borrowings of similar amounts and terms to those currently outstanding.  Carrying values for variable-rate borrowings approxi­mate their fair values.

The carrying amounts, including accrued interest, and estimated fair values of the Company’s fixed-rate borrowings at August 31, 2007 were $594,364 and $591,668, respectively, and at August 31, 2006 were $19,857 and $19,925, respectively.

F-29



Sonic Corp .

Schedule II – Valuation and Qualifying Accounts

 
 
 
Description
 
Balance at Beginning of Year
Additions Charged to Costs and Expenses
Amounts Written Off Against the Allowance
 
 
(Transfer)
Recoveries
 
Balance
at End
of Year
 
(In Thousands)
           
Allowance for doubtful accounts and notes receivable
         
Year ended:
         
August 31, 2007
635
269
235
42
711
August 31, 2006
507
(5)
86
219
635
August 31, 2005
526
414
542
109
507
           
Accrued carrying costs
for drive-in closings and disposals
         
Year ended:
 
       
August 31, 2007
113
22
91
August 31, 2006
162
49
113
August 31, 2005
198
36
162

F-30


 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has caused the undersigned, duly-authorized, to sign this report on its behalf on this 26th day of October, 2007.

Sonic Corp.

By:            /s/  J. Clifford Hudson
               J. Clifford Hudson
Chairman, Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the undersigned have signed this report on behalf of the registrant, in the capacities and as of the dates indicated.
     
Signature
Title
Date
     
/s/  J. Clifford Hudson Chairman of the Board of Directors, Chief Executive Officer and President October 26, 2007
J. Clifford Hudson,
Principal Executive Officer
 
     
/s/ Stephen C. Vaughan Vice President and Chief Financial Officer October 26, 2007
Stephen C. Vaughan,
Principal Financial Officer
 
 
     
/s/ Terry D. Harryman Controller October 26, 2007
Terry D. Harryman,
Principal Accounting Officer
 
 
     
/s/ Leonard Lieberman Director October 26, 2007
Leonard Lieberman
 
 
     
/s/ Michael J. Maples Director October 26, 2007
Michael J. Maples
 
 
     
/s/ Federico F. Pena Director October 26, 2007
Federico F. Peña
 
 
     
/s/ J. Larry Nichols Director October 26, 2007
J. Larry Nichols
 
 
     
/s/ H. E. Rainbolt Director October 26, 2007
H.E. Rainbolt
 
 
     
/s/ Frank E. Richardson Director October 26, 2007
Frank E. Richardson
 
 
     
/s/ Robert M. Rosenberg Director October 26, 2007
Robert M. Rosenberg
 
 
     



EXHIBIT INDEX
 
 
 
                Exhibit Number and Description      
 
                21.01.      Subsidiaries of the Company
 




 
 
SONIC INDUSTRIES LLC

NUMBER 4.4/5.4 LICENSE AGREEMENT






BY AND BETWEEN SONIC INDUSTRIES LLC, Licensor and


________________________, Licensee



Sonic Drive-In of ____________________, ______________________

located at _____________________________

_________________________, ______________________.





 





Dated:  ___________, _______.







Store No. _________
CIF No. __________


 
TABLE OF CONTENTS
 
1.DEFINITIONS.
 
2
 
1.01.
Affiliate.
2
 
1.02.
Control.
2
 
1.03.
DMA.
2
 
1.04.
Gross Sales.
2
 
1.05.
License.
3
 
1.06.
MSA.
3
 
1.07.
Person.
3
 
1.08.
Proprietary Marks.
3
 
1.09.
Protected Area.
4
 
1.10.
Sonic Restaurant.
4
 
1.11.
Sonic System.
4
 
1.12.
Non-traditional Locations.
4
2.  LICENSE GRANT.  
4
 
2.01.
Location.
5
 
2.02.
Trade Radius.
5
 
2.03.
Efficient Market Development and Sales Dilution.
6
 
2.04.
Licensee.
7
 
2.05.
Use of Sonic’s Marks.
7
 
2.06.
Site Selection.
7
 
2.07.
Relocation.
7
3.  TERM.  
8
 
3.01.
Initial Term.
8
 
3.02.
Opening of Restaurant.
8
 
3.03.
Option.
8
4.  DUTIES OF LICENSOR.  
9
 
4.01.
Plans.
9
 
4.02.
Operations Manual.
9
 
4.03.
Marketing Assistance.
9
 
4.04.
Communication.
10
 
4.05.
Evaluation Program.
10
5.  FEES.
 
 
10
 
5.01.
License Fee.
10
 

 
 
5.02.
Royalty Fees.
10
 
5.03.
Brand Fee.
14
 
5.04.
Transfer Fee.
14
 
5.05.
Late Charges.
14
6.  DUTIES OF LICENSEE.  
15
 
6.01.
Sonic Restaurant Site.
15
 
6.02.
Construction.
15
 
6.03.
Equipment and Sign.
16
 
6.04.
Training.
17
 
6.05.
Compliance with Entire System.
17
 
6.06.
Approved Suppliers and Advertising Agencies.
19
 
6.07.
Best Efforts.
20
 
6.08.
Interference with Employment Relations of Others.
20
 
6.09.
SONIC’s Standards.
21
 
6.10.
Majority Interest Owner.
21
7.  PROPRIETARY MARKS.  
21
 
7.01.
SONIC’s Representations.
21
 
7.02.
Use of Marks.
21
 
7.03.
Licensee’s Understanding.
22
8.  MANUAL.
 
 
23
9.  CONFIDENTIAL INFORMATION.  
23
 
9.01.
SONIC Proprietary and Confidential Information.
23
 
9.02.
Licensee’s Use of Proprietary and Confidential Information.
24
 
9.03.
Licensee’s Use of Sonic Operations Manual.
24
10.  ACCOUNTING AND RECORDS.  
25
 
10.01.
Due Date.
25
 
10.02.
Record Retention.
25
 
10.03.
Charitable Contributions and Discounts.
25
 
10.04.
Annual Reports.
25
 
10.05.
Audit by SONIC.
26
 
10.06.
Third –Party Audit.
26
 
10.07.
Licensee’s Failure to Timely Deliver Financial Records.
26
 
10.08.
Financial Disclosure.
27
11.  ADVERTISING AND BRAND EXPENDITURES.  
27


 
 
11.01.
Standard Program.
27
 
11.02.
Publicity.
30
1 2.  INSURANCE.
 
 
30
 
12.01.
Insurance Amounts.
30
 
12.02.
SONIC as Additional Insured.
30
 
12.03.
General Conditions.
31
13.  TRANSFER OF INTEREST.  
31
 
13.01.
Assignment.
31
 
13.02.
Death or Permanent Incapacity of Licensee.
31
 
13.03.
Assignment to Licensee’s Corporation.
32
 
13.04.
Other Assignment.
33
 
13.05.
SONIC’s Right of First Refusal.
34
 
13.06.
Consent to Assignments.
35
14.  DEFAULT AND TERMINATION.  
35
 
14.01.
Automatic Termination.
35
 
14.02.
Optional Termination.
36
 
14.03.
Period to Cure.
36
 
14.04.
Resolution of Disputes.
38
 
(a)
Negotiation.
38
 
(b)
Mediation.
38
 
(c)
Arbitration.
38
 
(d)
Excluded Controversies.
39
 
(e)
Attorneys’ Fees and Costs.
40
15.  OBLIGATIONS UPON TERMINATION.  
40
 
15.01.
Effect of Termination, Cancellation or Expiration of this Agreement.
40
 
15.02.
SONIC’s Option to Purchase.
41
 
15.03.
SONIC’s Obligation to Purchase.
42
 
15.04.
Fair Market Value Determination.
42
 
16.  COVENANTS.
 
 
42
 
16.01.
Restrictions on Licensee.
42
 
16.02.
Covenants by Others.
44
17.  INDEPENDENT CONTRACTOR & INDEMNIFICATION.  
45
 
17.01.
Licensee not an Agent of SONIC.
45


 
 
17.02.
Cost of Enforcement.
45
 
17.03.
Indemnification.
45
1 8.  EFFECT OF WAIVERS.  
46
19.  NOTICES.  
46
 
19.01.
Address.
46
 
19.02.
Failure to Accept.
46
 
19.03.
Licensee’s Principal.
46
20.  ENTIRE AGREEMENT.  
46
 
20.01.
No Oral Agreements.
46
 
20.02.
Scope and Modification of License.
47
21.  CONSTRUCTION AND SEVERABILITY.  
47
 
21.01.
Interpretation.
47
 
21.02.
Scope of Protected Area.
47
 
21.03.
Invalidity.
47
 
21.04.
Binding Effect.
47
 
21.05.
Survival.
47
 
21.06.
Liability of Multiple Licensees.
48
22.  BUSINESS ENTITY LICENSEES  
48
 
22.01.
Corporate Licensee.
48
 
22.02.
Partnership Licensee.
48
 
22.03.
Limited Liability Company Licensee.
49
 
22.04.
Other Entity Licensee.
50
 
22.05.
Employee Stock Purchase Plans.
50
23.  APPLICABLE LAWS.  
50
24.  ACKNOWLEDGEMENT.  
50
 
24.01.
Initial Term.
51
 
24.02.
Consultation with Counsel.
51
 
24.03.
Profitability.
51
 
24.04.
Licensee’s Investigation.
51
 
24.05.
Contrary Representations.
51
 
24.06.
Variances to Other Licensees.
52
 
24.07.
Complete Agreement.
52


 
25.   INPUT AND ADVICE FROM LICENSEES.  
52
26.   INJUNCTIVE RELIEF.  
52
27.   GENERAL RELEASE AND COVENANT NOT TO SUE.  
52
 
SCHEDULE I – GUARANTY AND RESTRICTION AGREEMENT


           Store No._________
CIF No. _______

LICENSE AGREEMENT

THIS AGREEMENT made this ___day of ______, 200_, by and between SONIC INDUSTRIES LLC, a Delaware limited liability company (“SONIC”), and

                                                                                                                                                                           _________________________ (“Principal”)
                                                                                                                                                                           _________________________


  (all of whom shall be jointly referred to herein as the “Licensee”).

RECITALS

SONIC is the developer and the sole and exclusive owner of the right to license the distinctive and proprietary drive-in, food service system under which food is sold to the public from drive-in restaurants operated under the trade name and federally registered trademark and service mark “Sonic”.  The Sonic System so developed now includes, among other things, the following elements, all or some of which may be deleted, changed, improved or further developed by SONIC from time to time:

A.  Methods and procedures for the preparation and serving of food and beverage products.

B.  Confidential recipes for food products and distinctive service accessories (including, but not limited to, uniforms, menus, packages, containers and additional paper or plastic items). 

C.  Plans and specifications for distinctive standardized premises featuring characteristic exterior style, colors, and design (including angled parking stalls equipped with menu housings, speakers and tray supports), interior furnishings, equipment layout, exterior signage, and marketing techniques and materials.

D.  A uniform method of operating which is described in the Sonic Operations Manual .

E.  Distinctive and characteristic trade names, trade dress, trademarks and service marks, including, but not limited to: “Sonic”, “Sonic Happy Eating,” “America’s Favorite Drive-In Sonic,” signs, menu housings, designs, color schemes, standardized premises featuring characteristic exterior style, canopies, colors, and design (including angled parking stalls equipped with menu housings, speakers and tray supports), interior furnishings and equipment layout, and emblems as SONIC designates in the Sonic Operations Manual or otherwise in writing or through usage as prescribed for use with the Sonic System and as may from time to time be developed.
1


F.  Such exclusive and trade secrets as have been and may from time to time be developed, which are owned by SONIC and which are disclosed to its licensees in confidence in connection with the construction and operation of a Sonic drive-in restaurant.

Licensee wishes to obtain a license from SONIC to operate a Sonic drive-in restaurant pursuant to the Sonic System and to be afforded the assistance provided by SONIC in connection therewith, and understands and accepts the terms, conditions and covenants set forth herein as those which are reasonably necessary to maintain SONIC’s high and uniform standards of quality and service designed to protect the goodwill and enhance the public image of the Proprietary Marks and the Sonic System, and recognizes the necessity of operating the licensed Sonic drive-in restaurant in faithful compliance therewith, and with SONIC’s standards and specifications.

1.   DEFINITIONS .

Unless the context of their use in this Agreement requires otherwise, the following words and phrases shall have the following meanings when used in initially-capitalized form in this Agreement.

1.01.       Affiliate .

The word “Affiliate” shall mean (a) any stockholder, director or officer of a specified Person (if the specified Person is a corporation), (b) any partner of a specified Person (if the specified Person is a partnership), (c) any member of a specified Person (if the specified Person is a limited liability company), (d) any employee of a specified Person, and (e) any Person which directly or indirectly through one or more intermediaries Controls the specified Person, the specified Person Controls, or shares a common Control with the specified Person.

1.02.            Control .

The word “Control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person or entity, whether through the ownership of voting securities, by contract, or otherwise.

1.03.             DMA .

The term “DMA” shall mean a Designated Market Area as defined by A.C. Nielsen Company from time to time.

1.04.            Gross Sales .

The phrase “Gross Sales” shall mean all revenues from sales resulting from all business conducted upon or from the Sonic Restaurant, whether evidenced by check, cash, credit, charge account, exchange or otherwise, and shall include (without limitation) the amounts received from the sale of goods, wares and merchandise, including sales of food, beverages and tangible property of every kind and nature, promotional or otherwise (excluding restaurant
 
2

equipment) and for services performed from or at the Sonic Restaurant, whether the Licensee fills the orders from the Sonic Restaurant or elsewhere.  Each charge or sale upon credit shall constitute a sale for the full price in the month during which the charge or sale occurs, regardless of the time when the Licensee receives payment (in whole or in part) for the charge or sale.  The phrase “Gross Sales” shall not include (a) sales of merchandise for which the Licensee makes a cash refund, if previously included in Gross Sales; (b) the price of merchandise returned by customers for exchange, if the Licensee previously included the sales price of the merchandise returned by the customer in Gross Sales and includes the sales price of merchandise delivered to the customer in exchange in Gross Sales; (c) amounts received from the sale of tobacco products; (d) the amount of any sales tax imposed by any governmental authority directly on sales and collected from customers, if the Licensee adds the amount of the tax to the sales price or absorbs the amount of the sales tax in the sales price and the Licensee actually pays the tax to the governmental authority; and (e) amounts not received for menu items because of discounts or coupons, if properly documented.  The phrase “Gross Sales” also shall not include any proceeds received by the Licensee pursuant to an assignment made in accordance with the provisions of Section 13.

1.05.             License .

The word “License” shall mean the rights granted the Licensee pursuant to Section 2 of this Agreement.

1.06.             MSA .

The term “MSA” shall mean a Metropolitan Statistical Area as defined by the United States Census Bureau from time to time.  An MSA shall not include any city or town otherwise falling within the MSA which has at least 10 miles of continuous undeveloped and sparsely populated rural land between every portion of its boundary and the boundary of the city which serves as the primary metropolitan area for the MSA.

1.07.             Person .

The word “Person” shall mean any individual or business entity, including (without limitation) corporation, joint venture, general partnership, limited partnership, limited liability company, or trust.

1.08.             Proprietary Marks .

The phrase “Proprietary Marks” shall mean the distinctive and characteristic trade names, trademarks, service marks, and trade dress which SONIC designates in writing or through usage from time to time as prescribed for use with the Sonic System, including (without limitation) the terms “Sonic,” “Happy Eating,” and “America’s Favorite Drive-In”; signs; emblems; menu housings; designs; color schemes; standardized premises featuring characteristic
3

 
exterior style, canopies, colors and design (including angled parking stalls equipped with menu housings, speakers and tray supports); interior furnishings; and equipment layout.

1.09.             Protected Area .

The phrase “Protected Area” shall mean the area defined by Sections 2.02 and 2.03 of this Agreement.

1.10.             Sonic Restaurant .

The phrase “Sonic Restaurant” shall mean the Sonic drive-in restaurant licensed by this Agreement.

1.11.             Sonic System .

The phrase “Sonic System” shall mean the unique, proprietary and confidential information of SONIC, including (without limitation) the Sonic Operations Manual and consisting of (a) methods and procedures for the preparation of food and beverage products; (b) confidential recipes for food products; (c) distinctive service and accessories; (d) plans and specifications for interior and exterior signs, designs, layouts and color schemes (whether copyrighted or not); (e) methods, techniques, formats, systems, specifications, procedures, information, trade secrets, sales and marketing programs; (f) methods of business operations and management; and (g) knowledge and experience regarding the operation and franchising of Sonic drive-in restaurants.

1.12.             Non-traditional Locations .

The phrase “Non-traditional Locations” shall mean permanent or temporary food service facilities operating under one or more of the Proprietary Marks at locations featuring facilities other than free-standing buildings with canopies devoted solely to the operation of a Sonic drive-in restaurant and accessible to the general public by automobile from public thoroughfares.  Non-traditional Locations shall include (without limitation) (a) military bases and other governmental facilities; (b) universities and schools; (c) airports and other transportation facilities; (d) stadiums, arenas and other sports and entertainment venues; (e) amusement and theme parks; (f) cafeterias and food courts in shopping centers, shopping malls, office buildings, and industrial buildings; (g) hotels and convention centers; (h) hospitals and nursing facilities; (i) museums, zoos and other public facilities; and (j) highway travel plazas, convenience stores, and gasoline filling stations.

2.   LICENSE GRANT .

SONIC grants to Licensee for the following stated term the right, license and privilege:

4


2.01.            Location .

(a)           To adopt and use the Sonic System at the Sonic Restaurant located at __________________________, ______________, _______________.

(b)           To have the exclusive rights to adopt and use the Sonic System for a Sonic Restaurant to be constructed within the current boundaries of the town or city of __________________, ________________, for a period of six months from the date hereof, with the obligation of selecting and having such site approved within such six month period and completing Section 2.01(a), above, within such six month period.

2.02.             Trade Radius .

Subject to the provisions of paragraphs (c) and (d), below, SONIC shall not own or operate a Sonic Restaurant and shall not franchise any other Person to own or operate a Sonic Restaurant (other than a Sonic drive-in restaurant licensed prior to the date of this Agreement) within the area determined by the following provisions:

 
(a)
(i)
An area defined by a radius extending one and one-half miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of 75,000 or more.

 
(ii)
An area defined by a radius extending two miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of less than 75,000 but more than 25,000.

 
(iii)
An area defined by a radius extending three miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of 25,000 or less.

 
(iv)
An area defined by a radius extending three miles from the front door of the Sonic Restaurant if located outside a city, town or MSA.

(b)           The foregoing radius shall not extend into the contractually-granted protected radius of any Sonic drive-in restaurant in existence as of the date of this Agreement and shall not extend into the franchised area of any developer under an existing area development agreement with SONIC.  SONIC shall determine the population of an MSA from time to time after the date of this Agreement according to the latest published federal census.

(c)           SONIC shall not own, operate or license any other Person to own or operate a Non-traditional Location (other than a Non-traditional Location owned, operated or licensed prior to the date of this Agreement) within the Protected Area without the Licensee’s prior written consent.  Simultaneously with the request for that written consent, SONIC shall offer the Licensee a right of first refusal to develop the Non-traditional Location.  The Licensee must notify SONIC in writing of its decision regarding the right of first refusal to license and operate the Non-traditional Location within 30 days after SONIC notifies the Licensee of SONIC’s request for the Licensee’s written consent to own, operate and/or license the Non-traditional Location.  If the Licensee chooses to exercise its right of first refusal, the Licensee must sign SONIC’s then current form of license agreement for a Non-traditional Location for the applicable jurisdiction within 30 days after the Licensee notifies SONIC of its decision.  The Licensee then must open the Non-traditional Location within the time period specified in the license agreement (if specified) or within 12 months after the date of the license agreement (if not specified).  If the Licensee does not execute that agreement within the foregoing 30-day period or does not exercise its right of first refusal within the foregoing 30-day period, SONIC shall have the right to proceed with the ownership, operation and/or licensing of the Non-traditional Location as disclosed to the Licensee only if the Licensee has given its written consent to SONIC.  If the Licensee elects, in its sole and absolute discretion, not to give its written consent, SONIC shall not own, operate or license any other Person to own or operate the Non-traditional Location.
5


(d)           SONIC has and hereby further reserves the right, in its sole discretion, to acquire the assets or controlling ownership of an existing restaurant within the Protected Area. However, prior to converting an acquired restaurant to a Sonic drive-in restaurant or a Non-traditional Location within the Protected Area, SONIC shall offer the Licensee a right of first refusal to acquire the restaurant at a price equal to SONIC’s cost of acquiring the restaurant.  If the restaurant represents a part of an acquisition of multiple restaurants, SONIC shall make a reasonable allocation of its cost to acquire the restaurant.  The Licensee must notify SONIC of its decision regarding the right of first refusal within 30 days after SONIC gives the Licensee written notice of its intention to convert the restaurant to a Sonic drive-in restaurant or Non-traditional Location.  If the Licensee chooses to exercise its right of first refusal, the Licensee must sign SONIC’s then current form of license agreement for a Sonic drive-in restaurant or Non-traditional Location, and pay the required license fee, as applicable, within 20 days after the Licensee notifies SONIC of its decision.  In the event the Licensee fails to convert the restaurant to a Sonic drive-in restaurant or Non-traditional Location pursuant to the terms of the applicable license agreement, SONIC shall have the right to repurchase the restaurant from the Licensee at the same purchase price.  If the Licensee does not exercise its right of first refusal, SONIC shall have the right to own, operate and/or license other Persons to operate the restaurant in any manner which does not violate the provisions of this Agreement or SONIC may sell or otherwise dispose of the restaurant to any person or entity under any terms or conditions SONIC deems appropriate.  SONIC shall not own, operate or license any Person to operate the restaurant if the ownership or operation of the restaurant otherwise would violate the non-compete provisions of 16.01 of this Agreement if owned or operated by a Sonic licensee.

2.03.             Efficient Market Development and Sales Dilution .

The following additional provisions shall apply to the Sonic Restaurant:

(a)           In utilizing its best efforts to reduce the dilution of sales and profitability, in the event SONIC develops or licenses another Person to develop a Sonic drive-in restaurant on the same street as the Sonic Restaurant (according to the Sonic Restaurant’s designated street address) and no traffic barrier or break (such as a river or other waterway, interceding roadway, unpaved landmass, or other similar structure blocking through traffic) exists between the Sonic Restaurant and the proposed new site, notwithstanding the provisions of Section 2.02, above, the Protected Area provided by Section 2.02 shall equal two and one-half miles (each way) on that street and an additional 500 feet (each way from the center of the intersection) on any street crossing that street within the foregoing 2 1/2-mile distance.
6


(b)           In order to achieve efficient market development and in utilizing its best efforts to reduce the dilution of sales and profitability, in the event SONIC develops or licenses another Person to develop a Sonic drive-in restaurant within two miles of the Sonic Restaurant (if permitted under Section 2.02, above), SONIC shall apply at least the level of demographic analysis, market impact analysis, and site and market review used by SONIC as of the date of this Agreement in considering the additional site for the development of a Sonic drive-in restaurant.

2.04.             Licensee .

Licensee shall advertise to the public as a Licensee of SONIC.

2.05.             Use of Sonic’s Marks .

Licensee shall adopt and use, but only in connection with the sale of those food and beverage products which have been designated in the Sonic menu as specified in the Sonic Operations Manual , the trade names, trademarks and service marks which SONIC shall designate from time to time to be part of the Sonic System.

2.06.             Site Selection .

In the event the Licensee receives this license pursuant to Section 2.01(b), above, the selection of a site by Licensee shall be subject to the approval of SONIC in accordance with the standard site approval procedures required by this Agreement and the standard practices of SONIC.  In the event a site for the Sonic Restaurant has not been approved by SONIC before the expiration of the six month period provided for by Section 2.01(b), above, then this Agreement shall expire and be of no further force or effect.

2.07.             Relocation .

If the Licensee relocates the Sonic Restaurant during the term of this Agreement with the written consent of SONIC (which consent SONIC shall not withhold unreasonably), this Agreement shall continue to apply to the Sonic Restaurant in accordance with the terms contained in this Agreement, except that SONIC and the Licensee shall enter into an amendment to this Agreement to change the address of the Sonic Restaurant accordingly.

7

 
3.   TERM .

3.01.             Initial Term .

Unless sooner terminated as hereafter provided, the term of this License shall end 20 years from the effective date of this Agreement as set forth on the cover page to this Agreement.

3.02.             Opening of Restaurant .

Licensee expressly acknowledges and agrees that a pre-condition to opening the Sonic Restaurant shall be SONIC’s written authorization to open, which authorization shall be given only upon Licensee’s completing, to SONIC’s satisfaction, (i) construction of the Sonic Restaurant, (ii) preparation of the Sonic Restaurant for commencement of operations, and (iii) training as required by Section 6.04 of this Agreement.

3.03.            Option .

At the end of the term, if Licensee desires, Licensee may renew the License to adopt and use the Sonic System at the Sonic Restaurant for an additional 10-year term, provided that prior to the expiration of the initial term:

(a)           Licensee gives SONIC written notice of Licensee’s election to renew not less than six months nor more than 12 months prior to the end of the initial term.

(b)           Licensee is not, when notice is given, in material default of any provision of this Agreement or any amendment hereof or successor agreement hereto or in material default of any other agreement between Licensee and SONIC or SONIC’s Affiliates involving any other License Agreement and has substantially complied with the terms and conditions of this Agreement and all other such agreements, during the term thereof.

(c)           All monetary obligations owed by Licensee to SONIC or SONIC’s Affiliates from any source whatsoever (whether under this Agreement or otherwise) have been satisfied prior to renewal.

(d)           The Licensee executes a license agreement containing the same terms and conditions as this Agreement, except that the license agreement shall provide for a term of 10 years and shall contain the then current royalty rate and the then current national and local advertising and brand expenditure requirements; provided, however, that in lieu of an initial license fee, a renewal fee shall be paid to SONIC in the amount of:  (i) $3,000.00, or (ii) 20% of the then current initial license fee, whichever is greater.  However, the renewal fee shall not exceed $6,000 as adjusted for inflation on September 1 of each year in accordance with the consumer price index and using August of 1994 as the base amount.
8


(e)           Licensee performs such remodeling, repairs, replacements and redecorations as SONIC may reasonably require to cause the restaurant equipment and fixtures to conform to the plans and specifications being used for new or remodeled Sonic drive-in restaurants on the renewal date, provided SONIC notifies Licensee of such requirements within 30 days after receipt of Licensee’s notice of renewal.

(f)           SONIC and the Licensee execute a general release of each other, in a form satisfactory to SONIC, of any and all claims the Licensee may have against SONIC and its Affiliates, including (without limitation) all claims arising under any federal, state or local law, rule or ordinance, but excluding (as to SONIC) any claims against the Licensee for (a) unpaid moneys due SONIC or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of SONIC’s legal rights regarding the Proprietary Marks.  SONIC may waive the requirements of this paragraph (f) at SONIC’s election.

(g)           Licensee principal and/or manager at their expense attend and satisfactorily complete such retraining program as SONIC may require at its sole discretion. 

(h)           Licensee meets the remodeling requirements set forth in Section 6.02(d) herein.
 
4.   DUTIES OF LICENSOR .

SONIC agrees to regularly advise and consult with Licensee in connection with the operation of the Sonic Restaurant and to provide to Licensee:

4.01.             Plans .

Standard Sonic Plans and Specifications for a free standing building, equipment layout and signs (See Subsection 6.03), together with advice and consultation.  Any modifications for non­standard buildings, whether required by local zoning or building laws or otherwise, must be approved in writing by SONIC and are to be paid by Licensee.

4.02.             Operations Manual

The Sonic Operations Manual containing the standards, specifications, procedures and methods for operating a Sonic drive-in restaurant, a copy of which will be loaned to Licensee for the term of this Agreement.

4.03.            Marketing Assistance .

Certain marketing materials and such merchandising, marketing and advertising research data and advice as may be developed from time to time by SONIC and deemed to be helpful in the operation of a Sonic drive-in restaurant.
9


4.04.             Communication .

Certain management development and motivational seminars and periodic newsletters which communicate to Licensee available advertising materials and new developments, techniques and improvements in areas of restaurant equipment, management, food preparation and service which are pertinent to the operation of a restaurant using the Sonic System.
 
4.05.             Evaluation Program .

A field evaluation of the Restaurant will be conducted for the mutual benefit of both SONIC and Licensee to promote uniform standards of operation and quality control.
 
5.   FEES .

5.01.             License Fee

The Licensee shall not pay any conversion fee or initial license fee for this Agreement.

5.02.             Royalty Fees .

On or before the 20th day of each calendar month, the Licensee shall pay a royalty fee determined by the following provisions:

(a)
Number 4.4 License Agreement .

(i)            Converting from Number 4.0 License Agreements and Number 4.1 License Agreements .  For all Number 4.0 license agreements and Number 4.1 license agreements converting to this Agreement, the following provisions shall apply:

(A)            Through Original Expiration Date .  Through the original expiration date of the license agreement converted to this Agreement, the Licensee shall pay a royalty fee determined by the following scale based on Gross Sales:
 
 
Gross Sales
But Not
Royalty
 
Greater Than
More Than
Rate
 
$0.00
$10,000.00
1.00%
 
$10,000.00
$20,000.00
1.50%
 
$20,000.00
$30,000.00
2.00%
 
$30,000.00
$40,000.00
2.50%
 
$40,000.00
N/A
3.00%
 

10

The calculation of Gross Sales and the corresponding royalty fees shall take place on a cumulative basis.  For example, the formula for determining the royalty amount for monthly Gross Sales of $50,000 is: ($10,000 x .01) + ($10,000 x .015) + ($10,000 x .02) + ($10,000 x .025) + ($10,000 x .03).

(B)            Conversion of Rate .   After the original expiration date of the license agreement converted to this Agreement, the Licensee shall pay a monthly amount equal to the royalty fee determined pursuant to the Conversion Royalty Table, below.

CONVERSION ROYALTY TABLE
 
 
Gross Sales
But Not
Royalty
 
Greater Than
More Than
Rate
 
$         0.00
$  5,000.00
1.00%
 
$  5,000.00
$10,000.00
2.00%
 
$10,000.00
$15,000.00
3.00%
 
$15,000.00
$30,000.00
4.00%
 
$30,000.00
$40,000.00
4.25%
 
$40,000.00
$50,000.00
4.50%
 
$50,000.00
$60,000.00
4.75%
 
$60,000.00
N/A
5.00%

The calculation of Gross Sales and the corresponding royalty fees shall take place on a cumulative basis.  For example, the following formula results in the calculation of the royalty fee on $50,000 of gross sales:  Royalty Fee = ($5,000 x .01) + ($5,000 x .02) + ($5,000 x .03) + ($15,000 x .04) + ($10,000 x .0425) + ($10,000 x .0450).
 
                                                (ii)            Converting from Number 4.2 License Agreements .  For all Number 4.2 license agreements converting to this Agreement, the following provisions shall apply:

 
(A)           For conversions from Number 4.2 license agreements operating under the Table I royalty rate, as elected in the Number 4.2 license agreement from which Licensee is converting:

(1)            Through First Original Expiration Date .  Through the original expiration date of the license agreement converted to the Number 4.2 license agreement or through the date elected for the royalty rate conversion pursuant to Section 5.02(a)(3) of the Number 4.2 license agreement, whichever date is earlier (the “First Original Expiration   Date”), the Licensee shall pay a monthly amount equal to the sum of (a) the royalty fee determined pursuant to Table I, below, plus (b) either (i) $625.00 if Option A was elected by Licensee in the Number 4.2 license agreement from which Licensee is converting or (ii) $416.67 if Option B was elected by Licensee in the Number 4.2 license agreement from which Licensee is converting.
11


TABLE I

   
Gross Sales
 
But Not
 
Royalty
 
Greater Than
More Than
Rate
 
$         0.00
$10,000.00
1.00%
 
$10,000.00
$20,000.00
1.50%
 
$20,000.00
$30,000.00
2.00%
 
$30,000.00
$40,000.00
2.50%
 
$40,000.00
N/A
3.00%
 
The calculation of Gross Sales and the corresponding royalty fees shall take place on a cumulative basis.  For example, the formula for determining the royalty amount for monthly Gross Sales of $50,000 is: ($10,000 x .01) + ($10,000 x .015) + ($10,000 x .02) + ($10,000 x .025) + ($10,000 x .03).

(2)            Through Second Original Expiration Date .  After the First Original Expiration Date and through the original expiration date of the Number 4.2 license agreement converted to this Agreement (the “Second Original Expiration Date”), the Licensee shall pay a monthly amount equal to the royalty fee determined pursuant to Table II, below.

TABLE II

   
Gross Sales
 
But Not
 
Royalty
 
Greater Than
More Than
Rate
 
$         0.00
$  5,000.00
1.00%
 
$  5,000.00
$10,000.00
1.50%
 
$10,000.00
$15,000.00
2.00%
 
$15,000.00
$20,000.00
2.50%
 
$20,000.00
$30,000.00
3.00%
 
$30,000.00
$40,000.00
3.50%
 
$40,000.00
N/A
4.00%
 
12

The calculation of Gross Sales and the corresponding royalty fees shall take place on a cumulative basis.  For example, the following formula results in the calculation of the royalty fee on $50,000 of Gross Sales: ($5,000 x .01) + ($5,000 x .015) + ($5,000 x .02) + ($5,000 x .025) + ($10,000 x .03) + ($10,000 x .035) + ($10,000 x .04).

(3)            Conversion of Rate .  After the Second Original Expiration Date, the Licensee shall pay a monthly amount equal to the royalty fee determined pursuant to the Conversion Royalty Table, above.

(B)           For conversions from Number 4.2 license agreements operating under the Table II royalty rate, as elected in the Number 4.2 license agreement from which Licensee is converting:

(1)            Through Original Expiration Date .  Through the original expiration date of the Number 4.2 license agreement converted to this Agreement, the Licensee shall pay a monthly amount equal to the royalty fee determined pursuant to Table II, above.

(2)            Conversion of Rate .  After the original expiration date of the Number 4.2 license agreement converted to this Agreement, the Licensee shall pay a monthly amount equal to the royalty fee determined pursuant to the Conversion Royalty Table, above.

(b)            Number 5.4 License Agreement .  For all Number 5.0 license agreements and Number 5.1 license agreements converting to this Agreement, the following provisions shall apply:

(i)            Through Original Expiration Date .  Through the original expiration date of the license agreement converted to this Agreement, the licensee shall pay a royalty fee determined pursuant to Table II, above.

(ii)           Conversion of Rate .  After the original expiration date of the license agreement converted to this Agreement, the Licensee shall pay a monthly amount equal to the royalty fee determined pursuant to the Conversion Royalty Table, above.
13

 
                5.03.             Brand Fee .

(a)           On or before the 20th day of each calendar month throughout the term of this Agreement, Licensee shall pay to Sonic Brand Fund, which is administered by SONIC, a brand contribution fee in an amount equal to .75% of the Gross Sales received by Licensee from the operation of the Sonic Restaurant during the calendar month next preceding the date of such payment.  Such payment shall be forwarded with the profit and loss statement required to be provided pursuant to Section 10.01 herein.

(b)           The amount due to SONIC by Licensee pursuant to Section 5.03, above, shall be in addition to and separate from that which Licensee is obligated to spend pursuant to Section 11.01(a) of this Agreement.

5.04.             Transfer Fee

(a)           A transfer fee in the amount of $500 shall be paid by Licensee in the event of a transfer or assignment of this Agreement (resulting in a change in Control of the License) to a licensee then-currently qualified as a licensee, excluding assignments under Subsections 13.02 and 13.03. 

(b)           A transfer fee in the amount of $1,500 shall be paid by Licensee in the event of a transfer or assignment of this Agreement (resulting in a change in Control of this license) to a new licensee not then-currently qualified as a licensee, excluding assignments under Subsections 13.02 and 13.03.

5.05.             Late Charges .

In the event any payments required by Sections 5.02, 5.03 or 5.04, above, are not paid on or before the date on which they are due, a late charge in an amount equal to 1.75% per month shall be levied against such amounts due and shall be owing to SONIC by the Licensee from the date on which such obligations were due until any such obligations are paid in full.  In the event the interest rate set out in this Section 5.05 exceeds that amount permitted by Oklahoma law, then the maximum interest rate permitted by Oklahoma law shall be charged.

14

6.   DUTIES OF LICENSEE .

6.01.            Sonic Restaurant Site

(a)           The site at which Licensee shall operate the Sonic Restaurant is more fully described in paragraph (a) of Section 2.01.  During the term of this Agreement, the site shall be used exclusively for the purpose of operating a franchised Sonic drive-in restaurant.

(b)           In the event the Sonic Restaurant premises suffers some physical casualty, the minimum acceptable quality and appearance for the restored restaurant will be that which existed just prior to the casualty, unless the Sonic Restaurant was below minimum acceptable standards for SONIC at the time of casualty in which event the Sonic Restaurant will be restored to a condition which meets the minimum acceptable standard according to SONIC.  However, Licensee agrees to make all reasonable effort to have the restored Sonic Restaurant reflect the then current image, design and specifications of Sonic drive-in restaurants.  If the Sonic Restaurant is substantially destroyed by fire or other casualty, Licensee may, with the written consent of SONIC elect to terminate this Agreement in lieu of Licensee reconstructing the restaurant, provided that for a period of 18 months after said election, Licensee shall not enter into, become landlord of or loan money to any restaurant business within a three- mile radius of the drive-in site which is similar in nature to, or competitive with a Sonic drive-in restaurant or considered a fast food establishment. 

6.02.             Construction

(a)           Licensee agrees to complete the construction of the Sonic Restaurant within a minimum of 365 days from the effective date of this Agreement.  Unless Licensee is remodeling an existing building, Licensee shall construct the Sonic Restaurant in accordance with the site plan approved by SONIC for such site and with SONIC’s standard construction plans and specifications (“Sonic Plans and Specifications”) and layout subject, however, to any alterations thereto that may be required by any applicable law, regulation or ordinance.  If alterations of any kind are required to be made to the site plan, as approved by SONIC, or to the Sonic Plans and Specifications or layouts for any reason, such alterations must be approved by SONIC in writing before any work is begun on the Sonic Restaurant.  The Licensee shall submit the final site layout and construction plans for the Sonic Restaurant to SONIC for its written approval.  Any costs including engineering and architectural fees incurred in obtaining approvals by the appropriate governmen­tal authorities of the construction plans, specifications and layouts shall be paid by Licensee.

(b)           If Licensee is remodeling the existing restaurant, SONIC shall have the right to inspect and approve all plans and specifications prior to the commencement of any work.  The Licensee shall submit the final remodeling plans and specifications for the Sonic Restaurant to SONIC for its written approval.  Nothing in this section shall be construed as an endorsement or guarantee of the conformity of such plans to applicable local, state or federal building or safety codes, or a guarantee that construction will be done in conformity with such approved plans.  In any event, Licensee shall obtain written approval of such plans or written notice of SONIC’s waiver of the rights reserved hereunder prior to the commencement of construction. 
15


(c)           Licensee shall not deviate from the approved plans and specifications in any manner in the construction or remodeling of the restaurant without the prior written approval of SONIC.  If at any time SONIC determines (prior to opening date) that Licensee has not constructed or remodeled the Sonic Restaurant in accordance with the plans and specifications approved by SONIC, SONIC shall, in addition to any other remedies, have the right to obtain an injunction from a court of competent authority against the continued construction and opening of the Sonic Restaurant, and Licensee hereby consents to any such injunction. 

(d)           SONIC may require the Licensee to undertake extensive remodeling and renovation and substantial modifications to existing buildings necessary for the Licensee’s restaurant to conform with SONIC’s then existing system image.  SONIC may exercise the foregoing right at any time during the term of this Agreement, but may not require (1) the remodeling of the restaurant more than once every seven years or (2) the remodeling of a restaurant built within the preceding three years, unless the required remodeling will not exceed 15% of the original cost of the building, equipment and land improvements (as adjusted for increases in the consumer price index after the construction date of the restaurant).  Notwithstanding the foregoing, SONIC shall have the right to require the Licensee to modify or replace the large Sonic sign for the restaurant at any time during the term of this Agreement.  If SONIC exercises its right to require the Licensee to undertake extensive remodeling or renovation or substantial modification within five years of the end of the term of this Agreement, the Licensee may exercise any right to renew the term of this Agreement at that point in time in accordance with the applicable provisions of this Agreement, which renewal then shall take effect as of the expiration the then current term of this Agreement.
 
6.03.             Equipment and Sign

(a)           Licensee shall only install in and about the Sonic Restaurant such equipment, fixtures, furnishings and other personal property as are required and which strictly conform to the appearance, uniform standards and specifications of SONIC existing from time to time, which shall be communicated to Licensee in the Sonic Operations Manual or otherwise in writing.  Licensee may purchase the equipment from SONIC if SONIC at that time is offering such equipment for sale on a regular basis, but is not required by this or any other agreement to do so.

(b)           In order to provide maximum exposure of the Sonic name and marks, Licensee shall prominently display and maintain at Licensee’s own expense one (1) Sonic drive-in sign (“Sign”) which complies with the specifications required by SONIC from time to time and in such location as SONIC may approve.  Licensee shall not display any other sign or advertising at the Sonic Restaurant without SONIC’s prior written approval.

(c)           Licensee may lease the required Sign from SONIC or may acquire or lease the Sign from any other source approved by SONIC.  Licensee agrees to require in any lease agreement with SONIC or other suppliers a clause giving SONIC the right to remove the Sign from the Sonic Restaurant upon termination of this Agreement. 
16


(d)           Licensee hereby agrees that it shall, upon SONIC’s request, obtain from the landlord of the property at which the Sonic Restaurant is located, a landlord’s lien and waiver releasing all claims against any equipment or sign which belongs to SONIC.

(e)           If Licensee is or becomes a lessee of the Sonic Restaurant premises, he shall provide SONIC with a true and correct, complete copy of any such lease, and shall have included therein provisions, in form satisfactory to SONIC, expressly permitting both the Licensee and SONIC to take all actions and make all alterations referred to under subsection 15.01(c).  Any such lease shall also require the lessor thereunder to give SONIC reasonable notice of any contemplated termination and a reasonable time in which to take and make the above actions and alterations and provide that the Licensee has the unrestricted right to assign such lease to SONIC.

6.04.             Training .

(a)           Licensee acknowledges the importance of the quality of business operations among all restaurants in the Sonic System and, agrees that it will not allow any of its licensed establishments to be opened or operated without having at least one individual working full time at the Sonic Restaurant who has completed the Stage Career Development Program.  If the trained individual ceases to work full time at the Sonic Restaurant for whatever reason, the Licensee shall have 120 days in which to replace the individual with a person who has completed the Stage Career Development Program.

(b)           Licensee shall pay all traveling expenses, living expenses, and any other personal expenses for themselves and managers while enrolled in the training program.  As part of the initial franchise fee paid pursuant to Section 5.01 herein, Licensee shall have the right to have one principal and one manager of the Sonic Restaurant attend the Stage Career Development Program for no cost other than those set out in the preceding sentence.  Any additional parties attending the Stage Career Development Program shall bear the cost, including any fees and tuition due for such training program.
 
6.05.             Compliance with Entire System .

(a)           Licensee acknowledges that every component of the Sonic System is important to SONIC and to the operation of the Sonic Restaurant as a Sonic drive-in restaurant, including a designated menu of food and beverage products; uniformity of food specifications, preparation methods, quality and appearance; and uniformity of facilities and service.

(b)           SONIC shall have the right to inspect the Sonic Restaurant at all reasonable times to ensure that Licensee’s operation thereof is in compliance with the standards and policies of the Sonic System.  In the event that such inspection reveals any deficiency or unsatisfactory condition with respect to any aspect of the drive-in operation, Licensee shall, within 72 hours of Licensee’s receipt of notice of such condition or such other time as SONIC in its sole discretion may provide, correct or repair such deficiency or unsatisfactory condition if it is correctable or repairable within such time period, and, if not, shall within such time commence such correction or repair and thereafter diligently pursue same to completion.  The preceding sentence notwithstanding, the Licensee shall take immediate action to correct or repair any deficiency or unsatisfactory condition which poses a risk to public health or safety.  In the event Licensee fails to comply with the foregoing obligations to correct and repair, SONIC, upon 24 hours’ notice to Licensee, shall have the right, without being guilty of trespass or tort, to forthwith make or cause to be made such corrections or repairs, and the expense thereof, including board, wages, lodging and transportation of SONIC personnel, if utilized, shall be paid by Licensee upon billing by SONIC.  The foregoing shall be in addition to any other right or remedies SONIC may have.
17


(c)           Licensee shall comply with the entire Sonic System as described herein and in the Sonic Operations Manual , including but not limited to the following:

(i)           Operate the Sonic Restaurant in a clean, wholesome manner in compliance with prescribed standards of quality, service and cleanliness; comply with all business policies, practices and procedures imposed by SONIC; and maintain the building, equipment and parking area in a good, clean, wholesome condition and repair, well lighted and in compliance with designated standards as may be prescribed from time to time by SONIC.

(ii)           Purchase and install kitchen fixtures, lighting, and equipment, and office equipment and signs in accordance with the equipment specifications and layout initially designated by SONIC.

(iii)           Licensee shall not, without prior written consent of SONIC:  (a) make any building design conversion or (b) make any alterations, conversions or additions to the building or parking area.

(iv)           Make repairs or replacements required because of damage, wear and tear or in order to maintain the Sonic Restaurant building and parking area in good condition and in conformity with blueprints and plans.

(v)           Maintain the parking stalls, as required in the standard Sonic Plans and Specifications, for the exclusive use of Sonic Restaurant customers.

(vi)           Operate the Sonic Restaurant everyday of the year (except Easter, Thanksgiving and Christmas), and at least 10 hours per day or such other hours as may from time to time be reasonably prescribed by SONIC (except when the Sonic Restaurant is untenantable as a result of fire or other casualty), maintain sufficient supplies of food and paper products and employ adequate personnel so as to operate the Sonic Restaurant at its maximum capacity and efficiency.
18


(vii)           Cause all employees of Licensee, while working in the Sonic Restaurant, to:  (a) wear uniforms of such color, design and other specifications as SONIC may designate from time to time, (b) present a neat and clean appearance and (c) render competent and courteous service to Sonic Restaurant customers.

(viii)         All menu items which SONIC may deem appropriate to take fullest advantage of the potential market and achieve standardization in the Sonic System will be served, and no items which are not set forth in the Sonic Operations Manual or otherwise authorized and approved in writing by SONIC will be served.

(ix)           In the dispensing and sale of food products: (a) use only containers, cartons, bags, napkins and other paper goods and packaging bearing the approved trademarks and which meet the Sonic System specifications and quality standards, (b) use only those flavorings, garnishments and food and beverage ingredients which meet the Sonic System specifications and quality standards, which SONIC may designate from time to time and (c) employ only those methods of food handling, preparation, and serving which SONIC may designate from time to time.

(x)           Make prompt payment in accordance with the terms of invoices rendered to Licensee including but not limited to, his purchase of fixtures, equipment and food and paper supplies.

(xi)           At his own expense, comply with all federal, state, and local laws, ordinances and regulations affecting the operation of the Sonic Restaurant.

(xii)           Licensee shall not install any electronic games or other games of chance at the Sonic Restaurant without the express prior written consent of SONIC.

(xiii)          Furnish SONIC with current changes in home addresses and phone number of its owners and manager and, upon SONIC’s reasonable request, provide updates of personal financial statements or other credit information.

(xiv)                      The Licensee shall notify SONIC’s Director of Corporate Communications or, if not available, the most senior executive officer of SONIC as soon as possible and, in any event, within 12 hours after the occurrence at the Sonic Restaurant of any event which could have an adverse impact on the Sonic Restaurant and/or the Sonic System, including (without limitation) the death or serious bodily injury of any employee or customer for any reason or the risk of infection by a contagious disease.

6.06.             Approved Suppliers and Advertising Agencies .

(a) SONIC may require the Licensee (i) to purchase food, beverages, signs and equipment which meet the specifications established by SONIC, (ii) to participate in SONIC’s approved purchasing cooperative for the area in which the Sonic Restaurant is located, and (iii) to retain and utilize exclusively the marketing and advertising services of SONIC approved advertising agency of record.  In addition, the Licensee immediately shall use the Licensee’s vote or votes in all advertising cooperatives in which the Licensee participates to support the use of the advertising agency of record for the Sonic drive-in restaurant chain.
19


(b)           SONIC may require the Licensee to support the use of and to use the products and programs of the cola syrup supplier approved by SONIC and used by a majority of all Sonic drive-in restaurants, to the exclusion of any other supplier of cola syrup.

(c)           SONIC may require the Licensee to comply with the foregoing provisions not only for the Sonic Restaurant, but also (to the extent the Licensee exercises Control) for all other Sonic drive-in restaurants for which the Licensee serves as a licensee.

(d)           SONIC hereby explicitly retains the exclusive right to consider, review or approve any and all distributors which may hold, sell or distribute Sonic-labeled goods or products, except that SONIC shall not withhold unreasonably its approval of a supplier approved for use by a duly constituted purchasing cooperative.

(e)           The terms of this Section 6.06 shall continue in effect for as long as the Licensee serves as a licensee for a Sonic drive-in restaurant and shall survive the expiration or termination of this Agreement.

(f)           If at least 95% of all Sonic drive-in restaurants are in compliance with paragraphs (a) and (b) of Section 6.06, SONIC periodically shall submit the approved advertising agency or cola syrup supplier to competitive bid or review, but shall not be obligated to do so more often than once every three years.

6.07.  
          Best Efforts

Licensee shall diligently and fully exploit his rights in this License by personally devoting his best efforts and, in case more than one (1) individual has executed this License as the Licensee, at least one (1) individual Licensee shall devote his full time and best efforts to the operation of the Sonic Restaurant.  Licensee shall keep free from any activities which would be detrimental to or interfere with the business of the Sonic Restaurant, the Sonic System, or SONIC.

6.08.             Interference with Employment Relations of Others

During the term of this License, Licensee shall not employ or seek to employ any person who is at the time employed by SONIC or any of its subsidiaries in a management level position. In addition, during the term of this License, SONIC agrees not to employ or seek to employ any person who is at the time employed by Licensee in a management level position. This Subsection 6.08 shall not be violated if such person has left the employ of any of the foregoing parties for a period in excess of six months.
20


6.09.             SONIC’s Standards

Licensee shall operate the Sonic Restaurant specified in this License in conformity with the Sonic System and the obligations set forth in this Agreement and shall strictly adhere to SONIC’s standards and policies as they exist now and as they may be from time to time modified.

6.10.             Majority Interest Owner .

Licensee represents, warrants and agrees that Licensee actually owns the majority interest in the legal and equity ownership and Control of the operation of the Sonic Restaurant, and that Licensee shall maintain such interest during the term of this License except only as otherwise permitted pursuant to the terms and conditions of this License.  Licensee shall furnish SONIC with such evidence as SONIC may request from time to time for the purpose of assuring SONIC that Licensee’s interest remains as represented herein.

7.   PROPRIETARY MARKS .

7.01.            SONIC’s Representations .

SONIC represents with respect to the Proprietary Marks that SONIC will use and permit Licensee and other licensees to use the Proprietary Marks only in accordance with the Sonic System and the standards and specifications attendant thereto which underlie the goodwill associated with and symbolized by the Proprietary Marks.

7.02.             Use of Marks .

With respect to Licensee’s licensed use of the Proprietary Marks pursuant to this Agreement, Licensee agrees that:

(a)           Licensee shall use only the Proprietary Marks designated by SONIC and shall use them only in the manner authorized and permitted by SONIC.

(b)           Licensee shall use the Proprietary Marks only for the operation of the Sonic Restaurant.

(c)           During the term of this Agreement and any renewal hereof, Licensee shall identify itself as the owner of the Sonic Restaurant in conjunction with any use of the Proprietary Marks, including, but not limited to, invoices, order forms, receipts, and contracts, as well as at such conspicuous locations on the premises of the Sonic Restaurant as SONIC shall designate in writing.  The identification shall be in the form which specifies Licensee’s name, followed by the term “Licensed Proprietor”, or such other identification as shall be approved by SONIC.
21


(d)           Licensee’s rights to use the Proprietary Marks is limited to such uses as are authorized under this Agreement, and any unauthorized use thereof shall constitute an infringement of SONIC’s rights.

(e)           Licensee shall not use the Proprietary Marks to incur any obligation or indebtedness on behalf of SONIC.

(f)           Licensee shall not use the Proprietary Marks as part of its corporate or other legal name if not already in existence prior to the effective date of this Agreement.

(g)           Licensee shall comply with SONIC’s instructions in filing and maintaining the requisite trade name or fictitious name registrations, and shall execute any documents deemed necessary by SONIC or its counsel to obtain protection for the Proprietary Marks or to maintain their continued validity and enforceability.

(h)           In the event that litigation involving the Proprietary Marks is instituted or threatened against Licensee, Licensee shall promptly notify SONIC and shall cooperate fully in defending or settling such litigation.

7.03.             Licensee’s Understanding

Licensee expressly understands and acknowledges that:

(a)           As between the parties hereto, SONIC has the exclusive right and interest in and to the Proprietary Marks and the goodwill associated with and symbolized by them, and any and all use thereof by Licensee inures to the benefit of SONIC.

(b)           The Proprietary Marks are valid and serve to identify the Sonic System and those who are licensed under the Sonic System.

(c)           Licensee shall not directly or indirectly contest the validity or the ownership of the Proprietary Marks.

(d)           Licensee’s use of the Proprietary Marks pursuant to this Agreement does not give Licensee any ownership interest or other interest in or to the Proprietary Marks, except the nonexclusive license granted herein.

(e)           Any and all goodwill arising from Licensee’s use of the Proprietary Marks in its licensed operations under the Sonic System shall inure solely and exclusively to SONIC’s benefit, and upon expiration or termination of this Agreement and the License herein granted, no monetary amount shall be assigned as attributable to any goodwill associated with Licensee’s use of the Sonic System or the Proprietary Marks.
22


(f)           The right and license of the Proprietary Marks granted hereunder to Licensee is nonexclusive except as provided in subsection 2.01(a) of this Agreement, and SONIC thus has and retains the right among others:

(i)           To grant other licenses for the Proprietary Marks, in addition to those licenses already granted to existing licensees.

(ii)          To use the Proprietary Marks in connection with selling products and services.

(iii)         To develop and establish other systems for the same or similar Proprietary Marks, or any other Proprietary Marks, and grant licenses or franchises thereto without providing any rights therein to Licensee.

(g)           SONIC reserves the right to substitute different Proprietary Marks for use in identifying the Sonic System and the businesses operating thereunder if SONIC’s currently owned Proprietary Marks no longer can be used.

8.   MANUAL .

SONIC shall loan to Licensee for use at the Sonic Restaurant the Sonic Operations Manual prepared by SONIC for use by licensees of Sonic drive-in restaurants similar to the Sonic Restaurant to be operated by Licensee.  Licensee recognizes that the Sonic Operations Manual contains detailed information relating to operation of the Sonic Restaurant including: (a) food formulas and specifications for designated food and beverage products; (b) methods of inventory control; (c) bookkeeping and accounting procedures; (d) business practices and policies; and (e) other management, advertising, and personnel policies.  Licensee agrees to promptly adopt and use exclusively the formulas, methods and policies contained in the Sonic Operations Manual , now and as they may be modified by SONIC from time to time and to return said manual to SONIC at the expiration or earlier termination of this License. 

9.   CONFIDENTIAL INFORMATION

9.01.             SONIC Proprietary and Confidential Information .

SONIC possesses certain unique, proprietary and confidential information, consisting of methods and procedures for preparation of food and beverage products, confidential recipes for food products, distinctive service and accessories, plans and specifications for interior and exterior signs, designs, layouts and color schemes, and methods, techniques, formats, systems, specifications, procedures, information, trade secrets, sales and marketing programs, methods of business operations and management, and knowledge of and experience in the operation and franchising of Sonic drive-in restaurants and the Sonic System (collectively, the “Confidential Information”).  SONIC will disclose the Confidential Information to Licensee in furnishing Licensee the Sonic Plans and Specifications for a Sonic drive-in restaurant, the training program, and the Sonic Operations Manual , and in providing guidance and assistance to Licensee during the term of this Agreement.  The Sonic Operations Manual , as modified by SONIC from time to time, and the policies contained therein, are incorporated in this Agreement by reference.
23


9.02.             Licensee’s Use of Proprietary and Confidential Information .

Licensee acknowledges and agrees that Licensee shall not acquire any interest in the Confidential Information, other than the right to utilize it in the development and operation of the Sonic Restaurant (and other Sonic drive-in restaurants under license agreements with SONIC) during the term of this Agreement, and that the use or duplication of the Confidential Information in any other business would constitute an unfair method of competition.  Licensee acknowledges and agrees that the Confidential Information is proprietary to SONIC, may constitute trade secrets of SONIC and is disclosed to Licensee solely on the condition that Licensee agrees, and Licensee does hereby agree, that Licensee:

(i)  shall not use the Confidential Information in any other business or capacity, or for the benefit of any other Person or entity;

(ii) shall maintain the absolute confidentiality of the Confidential Information, and shall not disclose or divulge the Confidential Information to any unauthorized Person or entity, during and after the term of the License;

(iii) shall not make unauthorized copies of any portion of the Confidential Information disclosed in printed, audio, or video form (except in connection with instruction of employees in the operation of the Sonic Restaurant); and

(iv) shall adopt and implement all procedures prescribed from time to time by SONIC to prevent unauthorized use or disclosure of the Confidential Information, including, without limitation, restrictions on disclosure thereof to employees of the Sonic Restaurant and the use of nondisclosure and non-competition clauses in employment agreements with employees (including all owners, shareholders and partners of Licensee) who have access to the Confidential Information.

9.03.             Licensee’s Use of Sonic Operations Manual .

Licensee may not at any time, in any manner, directly or indirectly, and whether or not intentionally, copy any part of the Sonic Operations Manual , permit any part of it to be copied, disclose any part of it except to employees or other having a need to know its contents for purposes of operating the Sonic Restaurant, or permit its removal from the Sonic Restaurant without prior written consent from SONIC.  Notwithstanding anything to the contrary contained in this Agreement and provided Licensee shall have obtained SONIC’s prior written consent, the restrictions on Licensee’s disclosure and use of the Confidential Information shall not apply to the following:
24


(a)           information, processes or techniques which are or become generally known in the food service industry, other than through disclosure (whether deliberate or inadvertent) by Licensee; and

(b)           disclosure of the Confidential Information in judicial or administrative proceedings to the extent that Licensee is legally compelled to disclose such information, provided Licensee shall have used its best efforts, and shall have afforded SONIC the opportunity, to obtain an appropriate protective order or other assurance satisfactory to SONIC of confidential treatment for the information required to be so disclosed.

10.   ACCOUNTING AND RECORDS .

10.01.           Due Date .

On or before the 20th day of each month, Licensee shall submit to SONIC a complete profit and loss statement in a form prescribed by SONIC and such statistical reports in such form as SONIC shall reasonably require from time to time, for the previous month immediately ended.

10.02.          Record Retention .

Licensee shall keep and preserve full and complete records of the Sonic Restaurant business for at least three years in a manner and form satisfactory to SONIC and shall also deliver such additional financial, operating and other information and reports as SONIC may reasonably request on the forms and in the manner prescribed by SONIC; provided, however, that Licensee shall maintain, at a minimum, those books and records required to be kept by the Internal Revenue Service under the Internal Revenue Code for purposes of its regulation of Licensee’s business and make the same books available to SONIC.

10.03.           Charitable Contributions and Discounts .

In meeting the requirements set forth in Sections 10.01 and 10.02 above, Licensee shall keep records substantiating and enter as a line item on its financial statements amounts representing the valuation for goods (whether food, paper or otherwise) which constitute charitable contributions to third parties from the same goods out of the Sonic Restaurant.  Likewise, the Licensee shall maintain records and enter on its financial statements (particularly a line item on its profit and loss statement) information representing the value or amount of sales represented by coupons traded with and discounts granted by the Licensee at the Sonic Restaurant.

10.04.           Annual Reports .

Licensee further agrees to submit, within 90 days following the close of each fiscal year of the Sonic Restaurant’s operation, a profit and loss statement covering operations during such fiscal year and the balance sheet taken as of the close of such fiscal year.
25


10.05.           Audit by SONIC .

SONIC shall have the right to inspect and audit Licensee’s accounts, books, records and tax returns at all times during and after the term of this Agreement.  If such inspection discloses that Gross Sales actually exceeded the amount reported by Licensee or that Licensee failed to make advertising expenditures required by Sections 11.01(a) or 11.01(b), Licensee shall immediately pay SONIC:  (i) the additional royalty fee, brand fee and advertising expenditures; (ii) interest on all unpaid amounts (from the original due date) at a rate equal to that provided by Section 5.05 herein; and (iii) a 10% surcharge on all unpaid amounts.  If such inspection discloses that Gross Sales actually exceeded the amount reported by Licensee as Licensee’s Gross Sales by an amount equal to 3% or more of the Gross Sales originally reported to SONIC or, in the case of failing to make required advertising expenditures, that such unpaid expenditures exceeded 3% of the amount required to be expended, Licensee shall bear the cost of such inspection and audit at rates and fees customarily charged by SONIC for such auditing and inspecting services and duties.  Unpaid brand fees, including interest and surcharges collected by SONIC pursuant to this section, shall be used in accordance with the expenditures authorized by Section 5.03; nevertheless, SONIC may, on a case by case basis, at SONIC’s sole discretion, use such collected amounts in accordance with the expenditures authorized by Sections 11.01(a) and 11.01(b).  SONIC shall have the right to bring an action in its own name to collect unpaid advertising and brand expenditures required by Section 11 herein.

10.06.           Third –party Audit .

If SONIC has reason to believe that the Licensee may not have reported all of its Gross Sales, SONIC may require the Licensee to have its profit and loss statement and balance sheet certified by an independent public accountant.  Licensee shall at his expense cause a Certified Public Accountant to consult with SONIC concerning such statement and balance sheet.  The original of each such reports required by this Section 10.06 shall be mailed to SONIC’s business office at the address designated in Section 19 below.

10.07.           Licensee’s Failure to Timely Deliver Financial Records .

If Licensee fails to timely provide SONIC with complete profit and loss statements, accounts, books, records and tax returns pertaining to the Sonic Restaurant business, or fails to fully cooperate with SONIC’s audit of the Sonic Restaurant business, SONIC shall have the right to estimate Licensee’s Gross Sales for the Sonic Restaurant using information available on the Sonic Restaurant or other Sonic drive-in restaurants.  Licensee agrees to accept SONIC’s estimates as conclusively correct until Licensee fully complies with SONIC’s accounting and disclosure requirements under this Agreement.  However, if the Licensee’s subsequent accounting and disclosures reveal that Licensee under-reported Gross Sales or underpaid fees due under this Agreement, SONIC may recover all deficiencies and may litigate claims of fraud even though SONIC may have already obtained a judgment using SONIC’s estimates.  Furthermore, nothing in this Agreement or any judgment using estimates shall prevent or hinder SONIC’s further efforts and rights to obtain the accounting and disclosures which Licensee is required to give to SONIC under this Agreement.
26


10.08.           Financial Disclosure .

SONIC shall have the right to assemble and disseminate to third parties financial and other information regarding the Licensee and other licensees of SONIC to the extent required by law or to the extent necessary or appropriate to further the interests of the Sonic System as a whole.  SONIC shall have the right to disclose the business name, address and telephone number of the Licensee as they appear in SONIC’s records to any Person making inquiry as to the ownership of the Sonic Restaurant.  SONIC shall not disclose specific financial information regarding the Licensee or the Sonic Restaurant to any Person without (a) the Licensee’s prior, written consent or (b) being directed to disclose the information pursuant to the order of a court or other governmental agency.

11.   ADVERTISING AND BRAND EXPENDITURES

11.01.           Standard Program

Recognizing the value of advertising and the importance of the standardization of advertising programs to the furtherance of the goodwill and public image of the System, the parties agree as follows:

(a)           In the event the Sonic Restaurant lies within a DMA for which a SONIC-approved advertising cooperative has been formed, Licensee shall contribute to such advertising cooperative an amount required by such advertising cooperative on a schedule required by such advertising cooperative, provided that such contributions shall occur no less often than each calendar quarter and shall be of an amount not less than 3.25% of Licensee’s Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month.

(b)           In the event there exists no SONIC-approved advertising cooperative in the DMA in which the Sonic Restaurant is located, during each calendar quarter of the term of this Agreement, Licensee shall spend for approved advertising and promotion of the Sonic Restaurant (including, but not limited to, television time, radio time, newspaper display space, distributed promotional materials, but not including any amount spent on sign rent, paper products, candy or other foods which evidence SONIC’s trademarks or color patterns and the like) an amount equal to but not less than 3.25% of Licensee’s Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month.

(c)           For purposes of determining the amount which the Licensee is required to spend pursuant to Sections 11.01(a), 11.01(b) and 5.03, above, for each calendar quarter which is the subject of review, the parties hereto agree that the first two months of such calendar quarter and last month of the preceding calendar quarter shall be used in determining the Gross Sales of the Sonic Restaurant to determine the expenditures required hereunder.  For example, to determine the expenditures required for January, February and March, the parties hereto agree that they will look to December, January, and February’s sales in order to determine the Gross Sales to determine the amount which must be expended by the Licensee under these Sections 11.01(a), 11.01(b) and 5.03.  In the event the amounts required by Section 11.01(a) or 11.01(b) are not spent in a timely fashion, Licensee shall pay SONIC in accordance with Section 10.05.
27


(d)           All advertising by Licensee in any medium which utilizes the Proprietary Marks or refers in any way to the Sonic Restaurant shall be conducted in a dignified manner and shall conform to such standards and requirements as SONIC may specify from time to time in writing.  Licensee shall submit to SONIC (in accordance with the notice provisions contained herein), for SONIC’s prior approval (except with respect to prices to be charged), samples of all advertising and promotional plans and materials that Licensee desires to use, that use the Proprietary Marks or refer to the Sonic Restaurant and that have not been prepared or previously approved by SONIC.  If written disapproval thereof is not received by Licensee within 15 days from the date of receipt by SONIC of such materials, SONIC shall be deemed to have given the required approval.  Upon notice from SONIC, Licensee shall discontinue and/or remove any objectionable advertising material, whether or not same was previously approved by Franchisor.  If said materials are not discontinued and/or removed within five days after notice, Franchisor or its authorized agents, may, at any time, enter upon Franchisor’s premises, or elsewhere, and remove any objectionable signs or advertising media and may keep or destroy such signs or other media without paying therefore, and without being guilty of trespass or other tort. 

(e)           SONIC may offer from time to time to provide, upon terms subject to the discretion of SONIC, approved local advertising and promotional plans and materials, including, without limitation, newspaper display space, distributed promotional materials.

(f)           SONIC or its designee shall maintain and administer a fund for the System as follows:

(i)           As provided in Subsection 5.03 hereof, Licensee shall pay a brand contribution fee to the Sonic Brand Fund (formerly known as Sonic Advertising Fund), which shall be administered by SONIC, and shall be deposited in a separate bank account denoted as the Sonic Brand Fund (the “Fund”). 

(ii)           SONIC shall direct all brand programs with sole discretion over the creative concepts, materials, and media used in such programs.  The Fund is intended to enhance the Sonic System and maximize general public recognition and acceptance of the Proprietary Marks for the benefit of the System and the Licensee acknowledges that SONIC and its designees undertake no obligation in administering the Fund to make expenditures for Licensee which are equivalent or proportionate to Licensee’s contribution, and nothing in this Subsection shall contravene the intent in Subparagraph (iv) of Paragraph (f) of this Subsection 11.01.

(iii)           The Fund and all earnings thereof shall be used exclusively to meet any and all costs of maintaining, administering, directing and preparing advertising (including, without limitation, the cost of preparing and conducting television, radio, magazine and newspaper advertising campaigns and other public relations activities; employing advertising agencies to assist therein; and providing promotional brochures and other marketing materials to licensees in the Sonic System) as well as any other purpose that promotes, enhances or protects the Sonic System.  All sums paid by licensees to the Fund shall be maintained in a separate account from the other funds of SONIC.  The Fund shall pay SONIC monthly an amount equal to 15% of the Fund’s receipts during the preceding month, but not to exceed SONIC’s actual administrative costs and overhead, if any, as SONIC may incur in activities reasonably related to the administration or direction of the Fund for the licensees and the Sonic System, including without limitation, conducting market research, preparing marketing and advertising materials, and collecting and accounting for assessments for the Fund.  The Fund and its earnings shall not inure to the benefit of SONIC.
28


(iv)           All materials produced by the Fund shall be made available to all licensees without cost on a regular basis, excluding distribution costs.  This Subparagraph (iv) of Paragraph (f) of Subsection 11.01 shall not preclude SONIC from offering other materials not produced by the Fund upon terms subject to the discretion of SONIC.  (See Paragraph (e) of this Subsection 11.01.)

(v)           The Fund is not an asset of SONIC, and an independent certified public accountant designated by SONIC shall review the operation of the Fund annually, and the report shall be made available to Licensee upon request.  Notwithstanding the foregoing, the body approved and designated by SONIC as the body to consult with regarding SONIC’s maintenance and administration of the Fund (such as the current Franchise Advisory Council or its successor) may designate the independent public accountant to conduct the required review of the operation of the Fund, if requested in writing at least 30 but not more than 60 days prior to the end of each fiscal year.

(vi)           It is anticipated that most contributions to the Fund shall be expended during the year within which the contributions are made.  If, however, excess amounts remain in the Fund at the end of such year, all expenditures in the following year(s) shall be made first out of accumulated earnings, next out of current earnings, and finally from contributions.

(vii)           Although SONIC intends the Fund to be of perpetual duration, SONIC maintains the right to terminate the Fund.  Such Fund shall not be terminated, however, until all monies in the Fund have been expended for ad purposes as aforesaid.

(g)           On at least a quarterly basis, SONIC shall consult with the body approved and designated by Sonic (such as the current Franchise Advisory Council or its successor) regarding SONIC’s maintenance and administration of the Fund and shall report to that body on the Fund’s operation.
29


11.02.           Publicity

SONIC shall have the right to photograph the Sonic Restaurant’s exterior and/or interior, and the various foods served, and to use any such photographs in any of its publicity or advertising, and Licensee shall cooperate in securing such photographs and consent of Persons pictured.

12.  INSURANCE .

12.01.           Insurance Amounts .

Prior to opening or taking possession of the Sonic Restaurant, the Licensee shall acquire and thereafter maintain insurance from insurance companies acceptable to SONIC.  The Licensee shall determine the appropriate limits of liability insurance but SONIC shall require the following minimum amounts and policy forms of insurance:

(a)           The Licensee shall maintain statutory worker’s compensation insurance and employer’s liability insurance having a minimum limit of liability of the greater of $500,000 or the minimum amount otherwise required by applicable state law.  SONIC shall accept participation in the Texas Sonic Employee Accident Program (“TSEAP”) or in the non-subscriber program for Sonic drive-in restaurants located in Texas as long as Texas law does not require statutory worker’s compensation insurance.

(b)           The Licensee shall maintain commercial general liability insurance, including bodily injury, property damage, products, personal and advertising injury coverage on an occurrence policy form having a minimum per occurrence and general aggregate limits of at least $1,000,000 per location.

(c)           The Licensee shall maintain non-owned automobile liability insurance having a minimum limit of $1,000,000.  The automobile policy also shall provide coverage for owned automobiles if owned or leased in the name of the Licensee.

(d)           SONIC shall have the right to require the Licensee to increase the insurance specified above by giving the Licensee 60 days’ written notice in accordance with the notice provisions of this Agreement, and the Licensee shall comply no later than the first policy renewal date after that 60-day period.

12.02.          SONIC as Additional Insured .

The Licensee shall name SONIC and SONIC’s subsidiaries and Affiliates as additional insureds under the insurance policies specified in paragraphs (a), (b) and (c) of Section 12.01, above.  The Licensee’s policies shall constitute primary policies of insurance with regard to other insurance, shall contain a waiver of subrogation provision in favor of SONIC as it relates to the operation of the Sonic Restaurant, and shall provide for at least 30 days’ written notice to SONIC prior to their cancellation or amendment.
30


12.03.           General Conditions .

Prior to opening or taking possession of the Sonic Restaurant, the Licensee shall furnish SONIC with certificates of insurance evidencing that the Licensee has obtained the required insurance in the form and amounts as specified above.  In addition, the Licensee shall deliver evidence of the continuation of the required insurance policies at least 30 days prior to the expiration dates of each existing insurance policy.  If the Licensee at any time fails to acquire and maintain the required insurance coverage, SONIC shall have the right, at the Licensee’s expense, to acquire and administer the required minimum insurance coverage on behalf of the Licensee.  However, SONIC shall not have any obligation to assume the premium expense and nothing in this Agreement shall constitute a guaranty by SONIC against any losses sustained by the Licensee.  SONIC may relieve itself of all duties with respect to the administration of any required insurance policies by giving 10 days’ written notice to the Licensee.

13.  TRANSFER OF INTEREST .

13.01.           Assignment

The rights and duties created by this Agreement are personal to Licensee and SONIC has granted the License in reliance on the collective character, skill, aptitude and business and financial capacity of Licensee and Licensee’s principals.  Accordingly, except as may be otherwise permitted by this Section 13, neither Licensee nor any Person or entity with an interest in Licensee shall directly or indirectly, through one or more intermediaries, without SONIC’s prior written consent, sell, assign, transfer, convey, give away, pledge, mortgage or otherwise encumber any direct or indirect interest in the License; any interest in Licensee, if Licensee is a partnership, joint venture or closely held corporation; or any interest which, together with other related previous simultaneous or proposed transfers, constitutes a transfer of Control of Licensee where Licensee is registered under the Securities Exchange Act of 1934.  Any such purported assignment occurring by operation of law or without SONIC’s prior written consent and pursuant to the terms of this Section 13, shall constitute a default of this Agreement by Licensee and such purported assignment shall be null and void. 

13.02.           Death or Permanent Incapacity of Licensee

Upon the death or permanent incapacity of Licensee, the interest of Licensee in the License may be assigned either pursuant to the terms of Subsection 13.04 herein or to one or more of the following Persons:  Licensee’s spouse, heirs or nearest relatives by blood or marriage, subject to the following conditions:  (1) If, in the sole discretion of SONIC, such persons shall be capable of conducting the Sonic Restaurant business in accordance with the terms and conditions of the License, and (2) if such persons shall also execute an agreement by which they personally assume full and unconditional liability for and agree to perform all the terms and conditions of the License to the same extent as the original Licensee.  In the event that Licensee’s heirs do not obtain the consent of SONIC as assignees of the License, the personal representative of Licensee shall have the greater of 120 days or the completion of the probate of the Licensee’s estate to dispose of Licensee’s interest hereunder, which disposition shall be subject to all the terms and conditions for assignments under Subsection 13.04.
31


13.03.           Assignment to Licensee’s Corporation

SONIC may, upon Licensee’s compliance with the following requirements, consent to an assignment of the License to a corporation whose shares are owned and Controlled by Licensee.  Such written materials shall be supplied to SONIC within 15 days after the request by SONIC.

(a)           Licensee’s corporation shall be newly organized, and its charter shall provide that its activities are confined exclusively to operating the Sonic Restaurant.

(b)           Licensee and Licensee’s corporation shall maintain stop transfer instructions against the transfer on Licensee’s corporation’s records of any securities with any voting rights subject to the restrictions of Section 13 hereof, and shall issue no securities upon the face of which the following printed legend does not legibly and conspicuously appear. 

The transfer of this stock is subject to terms and conditions of one or more license agreements with Sonic Industries LLC.  Reference is made to said license agreement(s) and the restrictive provisions of the Articles and By-Laws of this corporation.  By agreeing to receive these securities, the transferee hereby agrees to be bound by the terms of such agreements, articles and by-laws.

(c)           At any time upon SONIC’s request, Licensee and Licensee’s corporation shall furnish company with a list of all shareholders having an interest in Licensee’s corporation, the percentage interest of such shareholder and a list of all officers and directors in such form as SONIC may require. 

(d)           The corporate name of Licensee’s corporation shall not include any of the Proprietary Marks granted by the License.  Licensee and Licensee’s corporation shall not use any mark nor any name deceptively similar thereto in a public or private offering of its securities, except to reflect Licensee’s corporation’s franchise relationship with SONIC.  Any prospectus or registration Licensee or Licensee’s corporation would propose to use in such a public or private offering shall be submitted to SONIC within a reasonable time prior to the effective date thereof for the purpose of permitting SONIC to verify compliance with this requirement by Licensee and Licensee’s corporation. 

(e)           Articles of Incorporation, By-Laws and all other documents governing Licensee’s corporation shall be forwarded to SONIC for approval.  The Articles of Incorporation, By-Laws and other organization and governing documents shall recite that the issuance and transfer of any interest in Licensee’s corporation are restricted by the terms of Section 13 of this Agreement.
32


(f)           Each shareholder of the Licensee’s corporation shall personally guarantee performance under this Agreement and shall be personally bound by the terms thereof. 

(g)           Any breach of this Agreement by Licensee’s corporation shall be deemed a breach of this Agreement by each shareholder of Licensee’s corporation and each shareholder shall be personally and fully liable and obligated by any and all such breaches.

(h)           Licensee and Licensee’s corporation shall submit to SONIC, prior to any assignment hereunder, a shareholders agreement executed by the Board of Directors and ratified by all shareholders, which states that, except as may be permitted by Section 13 of this Agreement, no shares of stock or other interest in Licensee’s corporation shall be issued, transferred, or assigned to any Person or entity without SONIC’s prior written consent. 

(i)           Each and every shareholder of Licensee’s corporation or any party owning a security issued by, or owning any legal or equitable interest in Licensee’s corporation or in any security convertible to a legal or equitable interest in Licensee’s corporation shall meet those same standards of approval as an individual licensee shall be required to meet prior to being included as a licensee on a standard license agreement with SONIC.

13.04.           Other Assignment

(a)           In addition to any assignments or contingent assignments contemplated by the terms of Subsections 13.02 and 13.03 of this Section 13, Licensee shall not sell, transfer or assign the License to any Person or Persons without SONIC’s prior written consent.  Such consent shall not be unreasonably withheld.

(b)           In determining whether to grant or to withhold such consent, the following requirements must be met by Licensee:

(i)           All of Licensee’s accrued monetary obligations shall have been satisfied whether due under this Agreement or otherwise.

(ii)           SONIC and the Licensee execute a general release of each other, in a form satisfactory to SONIC, of any and all claims the Licensee may have against SONIC and its Affiliates, including (without limitation) all claims arising under any federal, state or local law, rule or ordinance, but excluding (as to SONIC) any claims against the Licensee for (a) unpaid moneys due SONIC or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of SONIC’s legal rights regarding the Proprietary Marks.  SONIC may waive the requirements of this subparagraph (ii) at SONIC’s election.
33


(iii)           Licensee shall not be in material breach of this Agreement or any other agreement between SONIC and Licensee. 

(iv)           Assignee (or the assignee’s management, as the case may be) shall at SONIC’s sole discretion, enroll in and successfully complete such training programs as SONIC shall at that time designate according to Section 6.04 hereof.

(v)           SONIC shall consider of each prospective transferee, by way of illustration, the following:  (a) work experience and aptitude, (b) financial background, (c) character, (d) ability to personally devote full time and best efforts to managing the Sonic Restaurant, (e) residence in the locality of the Sonic Restaurant, (f) equity interest in the Sonic Restaurant, (g) conflicting interests and (h) such other criteria and conditions as SONIC shall apply in the case of an application for a new license to operate a Sonic drive-in restaurant.  SONIC’s consent shall also be conditioned each upon such transferee’s execution of an agreement by which transferee personally assumes full and unconditional liability for and agrees to perform from the date of such transfer all obligations, covenants and agreements contained in the License to the same extent as if transferee had been an original party to the License.

13.05.           SONIC’s Right of First Refusal

(a)           If Licensee or any Person or entity with an interest in Licensee has received and desires to accept any bona fide offer to purchase all or any part of Licensee’s interest in this Agreement or in Licensee and the transfer of such interest would: (1) result in a change of Control of Licensee of this Agreement or (2) constitute a transfer of interest held by a Controlling Person of Licensee or of the License, Licensee or such Person shall notify SONIC in writing of each such offer, with such notice including the name and address of the proposed purchaser, the amount and terms of the proposed purchase price, a copy of the proposed purchase contract (signed by the parties, but expressly subject to SONIC’s right of first refusal), and all other terms and conditions of such offer.  SONIC shall have the right and option, exercisable within 20 days after SONIC’s receipt of such written notification, to send written notice to Licensee or such Person or entity that SONIC or its designee intends to purchase the interest which is proposed to be transferred on the same terms and conditions offered by the third party.  Any material change in the terms of an offer prior to closing shall cause it to be deemed a new offer, subject to the same right of first refusal by SONIC or its designee as in the initial offer.  SONIC’s failure to exercise such option shall not constitute a waiver of any other provision of this Agreement, including any of the requirements of this Section with respect to the proposed transfer.  Silence on the part of SONIC shall constitute rejection.  If the proposed sale includes assets of Licensee not related to the operation of a licensed Sonic drive-in restaurant, SONIC may purchase not only the assets related to the operation of a licensed Sonic drive-in restaurant, but may also purchase the other assets.  An equitable purchase price shall be allocated to each asset included in the proposed sale. 
34


(b)           The election by SONIC not to exercise its right of first refusal as to any offer shall not affect its right of first refusal as to any subsequent offer. 

(c)           Any sale or attempted sale effected without first giving SONIC the right of first refusal described above shall be void and of no force and effect. 

(d)           If SONIC does not accept the offer to purchase the Sonic Restaurant, Licensee may conclude the sale to the purchaser who made the offer so long as the terms and conditions of such sale are identical to those originally offered to SONIC; provided, however, that SONIC’s approval of the assignee be first obtained, which consent shall not be unreasonably withheld upon compliance with the conditions on assignment imposed by this Agreement.

(e)           The provisions of this Section 13.05 shall not apply to any proposed transfers to members of the Licensee’s immediate family.  For the purposes of this Section 13.05, a member of the Licensee’s immediate family shall mean the Licensee’s spouse and children (by birth or adoption).  In addition, the provisions of this Section 13.05 shall not apply to any proposed transfers to Person who already own an interest (directly or indirectly) in this Agreement or the License as long as the transfer will not result in a change in Control of the Licensee or the License.

13.06.           Consent to Assignments

With regard to any transfer, assignment or pledge of any interest in this Agreement or in the Licensee pursuant to the foregoing provisions of this Section 13, SONIC shall not withhold its consent unreasonably as long as the proposed transfer, assignment or pledge otherwise complies with the other requirements set forth in this Section 13.

14.  DEFAULT AND TERMINATION .

14.01.           Automatic Termination

Licensee shall be deemed to be in breach of this Agreement and all rights granted herein shall automatically terminate with notice from SONIC if any of the following events occur: 

(a)           Licensee shall become insolvent. 

(b)           Licensee, either personally, through an equity owner, or through Licensee’s attorney, shall give oral or written notice to SONIC of Licensee’s intent to file a voluntary petition under any bankruptcy law. 

(c)           A final judgment aggregating in excess of $5,000 against the Sonic Restaurant or property connected with the Sonic Restaurant which remains unpaid for 30 days.

(d)           Suit to foreclose any lien against any assets of the Sonic Restaurant is instituted against Licensee and (i) is not dismissed within 30 days, (ii) such lien is not contested and challenged through the applicable administrative agencies or courts, or (iii) a bond is not posted (if such remedy is available) to delay any such foreclosure and guarantee performance. 
35


(e)           The assets of the Sonic Restaurant are sold after being levied thereupon by sheriff, marshal or a constable. 

(f)           Transfer of this Agreement, in whole or in part, is effected in any manner inconsistent with Section 13 hereof. 

14.02.           Optional Termination

Licensee shall be deemed to be in breach of this Agreement and SONIC may, at its option, terminate this Agreement and all rights granted herein at any time during the term hereof without affording Licensee any opportunity to cure the breach, effective immediately upon Licensee’s receipt of a notice of termination, upon the occurrence of any of the following events:

(a)           If Licensee ceases to operate the Sonic Restaurant or otherwise abandons the Sonic Restaurant (other than closure permitted pursuant to Section 6.05(c)(vi) herein) or forfeits the legal right to do or transact business at the location licensed herein.

(b)           If Licensee is convicted of a felony, a crime involving moral turpitude, or any other crime or offense that is reasonably likely, in the sole opinion of SONIC, to adversely affect the Sonic System, the Proprietary Marks, the goodwill associated therewith or SONIC’s rights therein.

(c)           If Licensee misuses or makes any unauthorized use of any of the Proprietary Marks or any other identifying characteristic of the Sonic System or otherwise materially impairs the goodwill associated therewith or SONIC’s rights therein and the Licensee cannot cure the default within 30 days.

(d)           If Licensee improperly discloses trade secrets or confidential information and the Licensee cannot cure the default within 30 days.

(e)           If continued operation of the Sonic Restaurant might endanger public health or safety.

(f)           If Licensee knowingly or through gross negligence maintains false books or records or knowingly or through gross negligence submits any false report to SONIC. 

14.03.           Period to Cure

Except as provided in Subsections 14.01 and 14.02, Licensee shall have 30 days after receipt from SONIC of a written notice of breach of this Agreement or such notice period as is required by the law of the state where the Sonic Restaurant is located, within which to remedy any breach hereunder.  However, this period to cure will not be available to Licensee, and SONIC will not be required to delay termination of this Agreement, where the breach involved is one which Licensee cannot cure within the prescribed cure period or is one which is impossible to cure.  SONIC shall have the right to terminate this Agreement and the License upon written notice to the Licensee and without any opportunity to cure after three willful and material breaches of the same provision of this Agreement within any 12-month period for which the Licensee has received written notice and an opportunity to cure.  If any such breach is not cured within that time, SONIC may, at its option, terminate this Agreement and all rights granted hereunder effective immediately on the date of receipt by Licensee of written notice of termination.  Licensee shall be in breach hereunder for any failure to comply with any of the terms of this Agreement or to carry out the terms of this Agreement in good faith.  Such breach shall include, but shall not be limited to, the occurrence of any of the following illustrative events:
36


(a)           If the Licensee fails to pay any past due amounts owed to SONIC after SONIC has mailed the Licensee two or more statements at least 20 days apart.

(b)           If Licensee fails to promptly pay, or repeatedly delays the prompt payment of undisputed invoices from his suppliers or in the remittance of rent and property tax as required in Licensee’s lease.

(c)           If Licensee fails to maintain and operate the Sonic Restaurant in a good, clean, and wholesome manner or otherwise is not in compliance with the standards prescribed by the Sonic System.

(d)           If Licensee attempts to assign or transfer any interest in this Agreement in violation of Section 13 herein.

(e)           If Licensee denies SONIC the right to inspect the Sonic Restaurant at reasonable times, which includes the right to photograph the interior and exterior of the Sonic Restaurant in its entirety.

(f)           If Licensee fails, refuses, or neglects to obtain SONIC’s prior written approval or consent as required by this Agreement.

(g)           If Licensee acquires any interest in another business in violation of Section 16.

(h)           If Licensee fails, refuses or neglects to provide SONIC with Licensee’s home address and home telephone number.

(i)           If Licensee breaches any other requirement set forth in this Agreement.

(j)           If Licensee, upon the destruction of the Sonic Restaurant, fails to rebuild the franchise premises and resume operation within a reasonable time (cessation of the business from a franchise premises shall not constitute default of this Agreement if caused by condemnation, expiration of a location lease pursuant to its terms at execution or when failure to rebuild following destruction of the franchised premises is prohibited by law or the location lease). 
37


14.04.           Resolution of Disputes .

The following provisions shall apply to any controversy between the Licensee and SONIC (including an Affiliate of SONIC) and relating (a) to this Agreement (including any claim that any part of this Agreement is invalid, illegal or otherwise void or voidable), (b) to the parties’ business activities conducted as a result of this Agreement, or (c) the parties’ relationship or business dealings with one another generally, including all disputes and litigation pending or in existence as of the date of this Agreement.

(a)            Negotiation .

The parties first shall use their best efforts to discuss and negotiate a resolution of the controversy.

(b)            Mediation .

If the efforts to negotiate a resolution do not succeed, the parties shall submit the controversy to mediation by a mediation firm agreeable to the parties or by the American Arbitration Association, if the parties cannot agree.  The mediation shall take place in Oklahoma City, Oklahoma.

(c)            Arbitration .

If the efforts to negotiate and mediate a resolution do not succeed, the parties shall resolve the controversy by final and binding arbitration in accordance with the Rules for Commercial Arbitration (the “Rules”) of the American Arbitration Association in effect at the time of the execution of this Agreement and pursuant to the following additional provisions:

(i)            Applicable Law .  The Federal Arbitration Act (the “Federal Act”), as supplemented by the Oklahoma Arbitration Act (to the extent not inconsistent with the Federal Act), shall apply to the arbitration.

(ii)            Selection of Arbitrators .  The parties shall select three arbitrators within 10 days after the filing of a demand and submission in accordance with the Rules.  If the parties fail to agree on three arbitrators within that 10-day period or fail to agree to an extension of that period, the arbitration shall take place before three arbitrators selected in accordance the Rules.  At least one of the arbitrators shall constitute an individual selected by Sonic (or its Affiliate) who has experience with franchise law or franchise relations.  A decision or award by a majority of the arbitrators shall constitute the decision or award of the arbitrators.
38


(iii)            Location of Arbitration .  The arbitration shall take place in Oklahoma City, Oklahoma, and the arbitrators shall issue any award at the place of arbitration.  The arbitrators may conduct hearings and meetings at any other place agreeable to the parties or, upon the motion of a party, determined by the arbitrators as necessary to obtain significant testimony or evidence.

(iv)            Discovery .  The arbitrators shall have the power to authorize all forms of discovery (including depositions, interrogatories and document production) upon the showing of (a) a specific need for the discovery, (b) that the discovery likely will lead to material evidence needed to resolve the controversy, and (c) that the scope, timing and cost of the discovery is not excessive.

(v)            Authority of Arbitrators .  The arbitrators shall not have the power (a) to alter, modify, amend, add to, or subtract from any term or provision of this Agreement; (b) to rule upon or grant any extension, renewal or continuance of this Agreement; (c) to award damages or other remedies expressly prohibited by this Agreement; or (d) to grant interim injunctive relief prior to the award.

(vi)            Scope of Proceeding .  The parties shall conduct any arbitration proceeding and resolve any controversy on an individual basis only and not on a class-wide, multiple-party, or similar basis.

(vii)            Enforcement of Award .  The prevailing party shall have the right to enter the award of the arbitrators in any court having jurisdiction over one or more of the parties or their assets.  The parties specifically waive any right they may have to apply to any court for relief from the provisions of this Agreement or from any decision of the arbitrators made prior to the award.  The award of the arbitrators shall not have any precedential or collateral estoppel effect on any other controversy involving SONIC or its Affiliates.

(d)            Excluded Controversies .

At the election of SONIC or its Affiliate, the provisions of this Section 14.04 shall not apply to any controversies relating to any fee due SONIC or its Affiliate; any promissory note payments due SONIC or its Affiliate; or any trade payables due SONIC or its Affiliate as a result of the purchase of equipment, goods or supplies.  The provisions of this Section 14.04 also shall not apply to any controversies relating to the use and protection of the Proprietary Marks or the Sonic System, including (without limitation) SONIC’s right to apply to any court of competent jurisdiction for appropriate injunctive relief for the infringement of the Proprietary Marks or the Sonic System.

39

 
(e)            Attorneys’ Fees and Costs .

The prevailing party to the arbitration shall have the right to an award of its reasonable attorneys’ fees and costs incurred after the filing of the demand and submission, including a portion of the direct costs of any in-house legal staff reasonably allocable to the time devoted to the arbitration.

15.  OBLIGATIONS UPON TERMINATION .

15.01.          Effect of Termination, Cancellation or Expiration of this Agreement .

Except as otherwise authorized pursuant to the terms of any other license agreement between SONIC and the Licensee, the Licensee shall comply with the following provisions after the expiration or termination of this Agreement and the License:

(a)           Licensee, upon any termination, cancellation or expiration of this Agreement, shall promptly pay to SONIC and SONIC’s subsidiaries any and all sums owed to them.  In the event of termination for any breach by Licensee, such sums shall include all damages, costs and expenses, including reasonable attorneys’ fees, incurred by SONIC as a result of the breach, which obligation shall give rise to and remain, until paid in full, a lien in favor of SONIC against any and all of the assets of the Sonic Restaurant owned by Licensee at the time of default.

(b)           Upon termination, cancellation or expiration hereof for any reason, all Licensee’s rights hereunder shall terminate. Licensee shall not thereafter use or adopt any trade secrets disclosed to Licensee hereunder or any paper goods, emblems, signs, displays, menu housings or other property on which SONIC’s name or Proprietary Marks are imprinted or otherwise form a part thereof or any confusing simulations thereof.  Licensee shall not otherwise use or duplicate the Sonic System or any portion thereof or assist others to do so. Licensee shall remove from the premises all signs, emblems and displays identifying it as associated with SONIC or the Sonic System.  Licensee shall cease to use and shall return to SONIC all copies of the Sonic Operations Manual, instructions or materials delivered to Licensee hereunder.

(c)           Upon termination, cancellation or expiration of this Agreement, unless otherwise directed in writing by SONIC, Licensee shall change the exterior and interior design and the decor of said premises, including, but not limited to, changing the color scheme, and shall make or cause to be made such changes in signs, buildings and structures (excluding major structural changes) as SONIC shall reasonably direct so as to effectively distinguish the same from its former appearance and from any other Sonic drive-in restaurant unit, and if Licensee fails or refuses to comply herewith, then SONIC shall have the right to enter upon the premises where said business is being conducted without being guilty of trespass or any other tort for the purpose of making or causing to be made such changes at the expense of Licensee which expense Licensee agrees to pay on demand.
40


(d)           Upon termination, cancellation or expiration of this Agreement, in the event Licensee is the owner of the Sign, SONIC shall have an irrevocable option to purchase the Sign for its fair market value.  In any event, Licensee shall not thereafter use any sign panels displaying SONIC’s name or Proprietary Marks or which primarily display the colors used in any other such sign at any other Sonic drive-in restaurant unit (See Subsection 15.04 for determining fair market value).  Any agent, servant or employee of SONIC may remove the Sign or any objectionable signs or advertising from the Sonic Restaurant without being guilty of trespass or other tort, and Licensee shall be liable for SONIC’s costs plus attorneys’ fees for any interference therewith.

(e)           Upon termination, cancellation or expiration of this Agreement, Licensee shall cease to hold Licensee out in any way as a licensee of SONIC or to do anything which would indicate any relationship between Licensee and SONIC.

(f)           The covenants set forth in Paragraphs (a), (b), (c), (d) and (e) of this Subsection 15.01 shall survive the termination, cancellation or expiration of this Agreement.

(g)           All rights, claims and indebtedness which may accrue to SONIC prior to termination, cancellation or expiration of this Agreement shall survive termination, cancellation or expiration and be enforceable by SONIC.

(h)           Licensee shall complete all such modifications within 30 days after this Agreement has been terminated or canceled or has expired.  Licensee and SONIC agree that SONIC’s damages resulting from a breach of the provisions of this Subsection are difficult to estimate or determine accurately.  In the event of a breach by Licensee of the provisions of this Subsection, Licensee, in addition to any and all other remedies available to SONIC herein and elsewhere, will pay SONIC double the royalty and brand fees prescribed in this Agreement until Licensee satisfactorily de-identifies the restaurant premises in the manner prescribed by this Section.  This payment shall constitute liquidated damages and shall not be construed as a penalty since such payment has been agreed to by Licensee and SONIC as reasonably representative of the actual damage sustained by SONIC in the event of such a breach.  The liquidated damages shall start on the 31st day after this Agreement has been terminated or canceled or has expired.  These liquidated damages shall not constitute either a waiver of Licensee’s obligation to de-identify or a license to use the Sonic System.  These remedies will be in addition to any other remedies SONIC may have hereunder or under federal or state law.

15.02.           SONIC’s Option to Purchase

(a)           Upon termination, cancellation or expiration hereof, SONIC shall have the right and option to purchase all or any patented, special or unique Sonic restaurant equipment, menu housings, signs, menus and supplies of Licensee at their fair market value (See Subsection 15.04 for determining fair market value).  Such right or option of SONIC shall be exercised as provided in Paragraph (b) of this Subsection 15.02.  If SONIC elects to exercise any option to purchase herein provided, it shall have the right to set off all amounts due from Licensee to SONIC and one-half of the cost of any appraisals against any payment therefor.
41


(b)           In the case of termination by expiration, SONIC shall exercise SONIC’s option contained in this Subsection 15.02 by giving Licensee written notice at least 30 days prior to expiration.  In the case of termination for any other reason, SONIC shall exercise its option by giving Licensee written notice within 30 days after termination.

(c)           SONIC’s option hereunder is without prejudice to SONIC’s rights under any security agreement held by SONIC or with respect to which SONIC may have a guarantor’s or surety’s subrogation interest.  If SONIC exercises this option, SONIC may pay any debt which Licensee owes to SONIC and shall remit any balance of the purchase price to Licensee.  There shall be no allowance for goodwill.

15.03.           SONIC’s Obligation to Purchase

(a)           Upon termination, cancellation or expiration of this Agreement, if Licensee desires to sell Licensee’s unbroken inventory packages of approved imprinted items and supplies with Proprietary Marks to SONIC, excluding all food items, SONIC shall have the obligation to repurchase such items at Licensee’s cost.

(b)           If Licensee desires to sell such items to SONIC, Licensee shall, not later than 10 days after termination, cancellation or expiration of this Agreement, give SONIC 10 days written notice of Licensee’s election and, at the expiration of the 10-days notice period, deliver such items at Licensee’s expense with an itemized inventory to the nearest Sonic drive-in restaurant owned by SONIC or other unit designated by SONIC. SONIC agrees to pay Licensee or credit Licensee’s account within seven days after said delivery.

15.04.          Fair Market Value Determination

If the parties cannot agree on the fair market value of any item subject to an option to purchase in this Agreement within a reasonable time, one appraiser shall be designated by SONIC, one by Licensee and the two appraisers shall designate an independent appraiser, and the valuation of such third appraiser alone shall be binding.  SONIC and the Licensee each shall pay one-half of the cost of any appraisals required pursuant to this Section 15.04.

16.  COVENANTS .

16.01.           Restrictions on Licensee

Licensee agrees and covenants as follows:

(a)           During the term of this License, Licensee shall not directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, partnerships, trusts, unincorporated associations or joint ventures) in, (iii) loan money to or (iv) become landlord of any restaurant business which has a menu similar to that of a Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by Sonic drive-in restaurants) or which has an appearance similar to that of a Sonic drive-in restaurant (such as color pattern, use of canopies, use of speakers and menu housings for ordering food, or other items that are customarily used by a Sonic drive-in restaurant).
42


(b)           Licensee shall not, for a period of 18 months after termination of this License for any reason, directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, partnerships, trusts, unincorporated associations or joint ventures) in, (iii) loan money to or (iv) become a landlord of any restaurant business which has a menu similar to that of a Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by Sonic drive-in restaurants) or which has an appearance similar to that of a Sonic drive-in restaurants (such as color pattern, use of canopies, use of speakers and menu housings for ordering food, or other items that are customarily used by a Sonic drive-in restaurants), and which (i) is within a three- mile radius of the Sonic Restaurant formerly licensed by this Agreement, (ii) is within a 20-mile radius of a Sonic drive-in restaurant in operation or under construction, or (iii) is located within the MSA of the Sonic Restaurant.

(c)           Licensee shall not appropriate, use or duplicate the Sonic System, or any portion thereof, for use at any other restaurant business.

(d)           During the term of this Agreement, Licensee shall (i) use Licensee’s best efforts to promote the business of the Sonic Restaurant, (ii) devote Licensee’s full time, energies and attention to the operation and management of the Sonic Restaurant, and (iii) not engage in any other business or activity that might detract from, interfere with or be detrimental to the Sonic System or Licensee’s full and timely performance under this Agreement (except the ownership and operation of other Sonic drive-in restaurants under license agreements with SONIC).

(e)           During the term of this Agreement, Licensee shall not perform or provide services as a director, officer, employee, agent, representative, consultant or in any other capacity for any other restaurant business which has a menu or appearance similar to that of a Sonic drive-in restaurant.

(f)           During the term of this Agreement, Licensee shall not directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest in, (iii) loan money, or (iv) become landlord of any operation which has granted or is granting franchises or licenses (except for those granted by SONIC) to others to operate any other restaurant business which has a menu or appearance similar to that of a Sonic drive-in restaurant.

(g)           Paragraphs (a), (b) and (f) of this Subsection 16.01 shall not apply to ownership by Licensee of less than 2% beneficial interest in the outstanding equity securities of any corporation which is registered under the Securities Exchange Act of 1934; however, this Subsection 16.01(g) shall apply to all shareholders or partners of Licensee (in the event Licensee is a corporation or partnership) and all members of Licensees’ and their immediate families, and all Persons or entities guaranteeing this Agreement.
43


(h)           The parties agree that each of the foregoing covenants shall be construed as independent of any covenant or provision of this Agreement.  If all or any portion of a covenant in this Section 16 is held unreasonable or unenforceable by a court or agency having valid jurisdiction in an unappealed final decision to which SONIC is a party, Licensee expressly agrees to be bound by any lesser covenant subsumed with the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this Section 16.

(i)           Licensee understands and acknowledges that SONIC shall have the right, in SONIC’s sole discretion, to reduce the scope of any covenant set forth in Paragraphs (a), (b) and (f) of this Subsection 16.01, or any portion thereof, without Licensee’s consent effective immediately upon receipt by Licensee of written notice thereof, and Licensee agrees that it shall comply forthwith with any covenant as so modified, which shall be fully enforceable notwithstanding the provisions of Paragraph (k) of this Subsection 16.01.

(j)           Licensee expressly agrees that the existence of any claims Licensee may have against SONIC, whether or not arising from this Agreement, shall not constitute a defense to the enforcement by SONIC of the covenants in this Section 16.

(k)           Licensee acknowledges that Licensee’s violation of the terms of this Section 16 would result in irreparable injury to SONIC for which no adequate remedy at law is available, and Licensee accordingly consents to the ex parte issuance of restraining orders, temporary and permanent injunctions and cease and desist orders prohibiting any conduct by Licensee in violation of the terms of this Section 16.

(l)           Licensee shall utilize at the Sonic Restaurant a cash register previously approved by SONIC, which such cash register shall at all times during the term of this Agreement have a non-alterable grand total function so that each item entered in such register and each day’s totals may not be altered once entered.

16.02.           Covenants by Others

At the time of execution of this Agreement, Licensee shall provide SONIC with covenants similar in substance to those set forth in this Section 16 (including covenants applicable upon the termination of a Person’s relationship with Licensee) from the following persons:  (1) all persons employed by Licensee; and (2) all officers, directors, and holders of a direct or indirect beneficial ownership interest Licensee.  With respect to each Person who becomes associated with Licensee in one of the capacities enumerated above subsequent to execution of this Agreement, Licensee shall require and obtain such covenants and promptly provide SONIC with executed copies of such covenants.  In no event shall any Person enumerated be granted access to any confidential aspect of the Sonic System or the Sonic Restaurant prior to execution of such a covenant.  All covenants required by this Section 16 shall be furnished by SONIC to Licensee and shall include, without limitation, specific identification of SONIC as a third party beneficiary of such covenants with the independent right to enforce them.  Failure by Licensee to obtain execution of a covenant required by this Section 16 shall constitute a breach of this Agreement.
44


17.  INDEPENDENT CONTRACTOR & INDEMNIFICATION .

17.01.           Licensee not an Agent of SONIC

It is understood and agreed that this Agreement does not create a fiduciary relationship between SONIC and Licensee, and that nothing herein contained shall constitute Licensee as the agent, legal representative, partner, joint venturer or employee of SONIC. Licensee is, and shall remain, an independent contractor responsible for all obligations and liabilities of, and for all loss or damage to, the Sonic Restaurant and its business, including any personal property, equipment, fixtures or real property connected therewith and for all claims or demands based on damage or destruction of property or based on injury, illness or death of any person or persons, directly or indirectly, resulting from the operation of the Sonic Restaurant.

17.02.           Cost of Enforcement

If SONIC or SONIC’s subsidiaries becomes involved in any action at law or in equity or in any proceeding opposing Licensee to secure, enforce, protect, or defend SONIC’s rights and remedies under this License, in addition to any judgment entered in SONIC’s favor, SONIC shall be entitled to demand of and (in the event SONIC prevails in such actions or proceedings) recover from Licensee the reasonable costs, expenses and attorneys’ fees incurred by SONIC.  If, in such applicable final judgment SONIC does not prevail, Licensee shall be entitled to recover from SONIC in any such action or proceeding the reasonable costs, expenses and attorneys’ fees incurred by Licensee.

17.03.           Indemnification

If SONIC or SONIC’s subsidiaries shall be subject to any claim, demand or penalty or become a party to any suit or other judicial or administrative proceeding by reason of any claimed act or omission by Licensee, Licensee’s employees or agents, or by reason of any act occurring on the Sonic Restaurant premises, or by reason of any act or omission with respect to the business or operation of the Sonic Restaurant, Licensee shall indemnify and hold SONIC and SONIC’s subsidiaries harmless against all judgments, settlements, penalties and expenses, including attorneys’ fees, court costs and other expenses of litigation or administrative proceeding, incurred by or imposed on SONIC in connection with the investigation or defense relating to such claim or litigation or administrative proceeding and, at the election of SONIC, Licensee shall also defend SONIC and SONIC’s subsidiaries.  The Licensee shall not have any obligation to indemnify, defend or hold harmless SONIC or any other Person pursuant to the provisions of this Section 17.03 to extent the obligation arises predominantly as a proximate result of SONIC’s act or failure to act when under a duty to act.

45

 
18.  EFFECT OF WAIVERS .

No waiver by SONIC of any breach or series of breaches of this Agreement shall constitute a waiver of any subsequent breach or waiver of the terms of this Agreement.

19.  NOTICES

19.01.          Address .

Any notice required hereunder, if not specified, shall be in writing and shall be delivered by (i) personal service, (ii) by overnight, receipted delivery service, or (iii) by United States certified or registered mail, with postage prepaid, addressed to Licensee at the Sonic Restaurant or at such other address of Licensee then appearing on the records of SONIC or to SONIC at 300 Johnny Bench Drive, Oklahoma City, Oklahoma 73104, attention General Counsel, or at the subsequent address of SONIC’s corporate headquarters.  Either party, by a similar written notice, may change the address to which notices shall be sent.

19.02.           Failure to Accept .

If SONIC is unable to give actual notice of any breach or termination of this Agreement because Licensee has failed to provide SONIC with a current address, because Licensee fails to accept or pick up this mailed notice, or due to any reason which is not the fault of SONIC, then such notice shall be deemed as given when SONIC sends such notice by overnight receipted delivery service or registered or certified mail, postage prepaid.

19.03.           Licensee’s Principal .

Licensee has designated on the first page of this Agreement a Principal to serve as the party receiving primary notice on behalf of the parties hereto.  Each Licensee hereby agrees that SONIC may send its notices and communications under this Agreement to the Principal provided for herein, that each SONIC may use the Principal as its primary contact for purposes of communications and notices permitted or required hereunder, and that all communications and notices given by SONIC to the Principal will be just as effective on each Licensee as though the same had been given to each Licensee.

20.  ENTIRE AGREEMENT .

20.01.           No Oral Agreements

This Agreement and all addenda, appendices and amendments hereto constitute the entire agreement between the parties and supersede all prior and contemporaneous, oral or written agreements or understandings of the parties. 
46


20.02.           Scope and Modification of License

No interpretation, change, termination or waiver of any of the provisions hereof shall be binding upon SONIC unless in writing signed by an officer of SONIC.  No modification, waiver, termination, rescission, discharge or cancellation of this Agreement shall affect the right of any party hereto to enforce any claim or right hereunder, whether or not liquidated, which occurred prior to the date of such modification, waiver, termination, rescission, discharge or cancellation.

21.  CONSTRUCTION AND SEVERABILITY .

21.01.           Interpretation

The recitals shall be considered a part of this Agreement.  Section and Subsection captions are used only for convenience and are in no way to be construed as part of this Agreement or as a limitation of the scope of the particular Sections, Subsections, Paragraphs and Subparagraphs to which they refer.  Words of any gender used in this Agreement shall include any other gender, and words in the singular shall include the plural where the context requires.

21.02.          Scope of Protected Area .

Neither party to this Agreement intends to expand the scope of any covenants or commitments contained in Section 2 beyond the terms and provisions expressly stated in Section 2, and the parties to this Agreement agree that no Person, court or arbitrator may interpret any of the foregoing covenants or commitments in Section 2 in that manner.

21.03.          Invalidity

If any part of this Agreement for any reason shall be declared invalid, such decision shall not affect the validity of any remaining portion, which shall remain in full force and effect.  In the event any material provision of this Agreement shall be stricken or declared invalid, SONIC reserves the right to terminate this Agreement.

21.04.          Binding Effect

This Agreement shall be binding upon the parties, their heirs, executors, personal representatives, successors or assigns.

21.05.           Survival

Any provisions of this Agreement which impose an obligation after termination or expiration of this Agreement shall survive the termination or expiration of this Agreement and be binding on the parties.
47


21.06.          Liability of Multiple Licensees

If Licensee consists of more than one Person or entity, each such Person and entity, and each proprietor, partner or shareholder of each such entity shall be jointly and severally liable for any and all of Licensee’s obligations and prohibitions under this Agreement.  Consequently, if and when a Person or entity as Licensee is in breach of this Agreement and fails or is unable to cure such breach in a timely manner, SONIC may terminate the rights of the so-affected Person or entity under this Agreement whereby this Agreement is terminated as to only such Person or entity while remaining fully effective as to all other Persons and entities remaining as Licensee on this Agreement.  This Person or entity removed as Licensee shall remain jointly and severally obligated with the Persons and entities remaining as Licensee for any and all obligations and liabilities of Licensee which occurred or accrued through the date of removal of said Person or entity.

22.  BUSINESS ENTITY LICENSEES

22.01.           Corporate Licensee .

If the Licensee is a corporation, the Licensee shall comply with the following provisions:

(a)            Purpose .  The certificate of incorporation of the Licensee, if incorporated after August 31, 1994, shall provide that the purpose of the corporation shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants.

(b)            Transfer Restrictions .  The certificate of incorporation of the Licensee shall provide that the Licensee shall not issue any additional capital stock of the Licensee and that no stockholder may transfer, assign or pledge any issued capital stock of the Licensee without the prior, written consent of SONIC, and each stock certificate issued to evidence the capital stock of the Licensee shall contain a legend disclosing the foregoing restriction.  SONIC shall not withhold its consent to the issuance of additional capital stock or a transfer, assignment or pledge without a reasonable basis.  In giving its consent, SONIC shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the capital stock execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement.

(c)            Stockholder Guaranty .  Each stockholder of the Licensee shall execute the Guaranty and Restriction Agreement attached as Attachment I to this Agreement.

(d)           Documents.  Prior to SONIC’s execution of this Agreement, the Licensee shall deliver to SONIC photocopies of its certificate of incorporation and issued stock certificates reflecting compliance with the provisions of this Section 22.01.

22.02.          Partnership Licensee .

If the Licensee is a partnership, the Licensee shall comply with the following provisions:
48


(a)            Purpose .  The partnership agreement and certificate of limited partnership (if applicable) of the Licensee, if formed after August 31, 1994, shall provide that the purpose of the partnership shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants.

(b)            Transfer Restrictions .  The partnership agreement and certificate of limited partnership (if applicable) of the Licensee shall provide that the Licensee shall not issue any additional partnership interests in the Licensee and that no partner may transfer, assign or pledge a partnership interest in the Licensee without the prior, written consent of SONIC.  SONIC shall not withhold its consent to the issuance of additional partnership interests or a transfer, assignment or pledge without a reasonable basis.  In giving its consent, SONIC shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the partnership interest execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement.

(c)            Partner Guaranty .  Each partner of the Licensee shall execute the Guaranty and Restriction Agreement appearing as Attachment I to this Agreement.

(d)            Documents .  Prior to SONIC’s execution of this Agreement, the Licensee shall deliver to SONIC photocopies of its partnership agreement and certificate of limited partnership (if applicable) reflecting compliance with the provisions of this Section 22.02.

22.03.           Limited Liability Company Licensee .

If the Licensee is a limited liability company, the Licensee shall comply with the following provisions:

(a)            Purpose .  The articles of organization and operating agreement of the Licensee, if organized after August 31, 1994, shall provide that the purpose of the limited liability company shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants.

(b)            Transfer Restrictions .  The articles of organization and operating agreement of the Licensee shall provide that the Licensee shall not issue any additional membership interests in the Licensee and that no member may transfer, assign or pledge any membership interests in the Licensee without the prior, written consent of SONIC.  SONIC shall not withhold its consent to the issuance of additional membership interests or a transfer, assignment or pledge without a reasonable basis.  In giving its consent, SONIC shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the membership interest execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement.
49


(c)            Member Guaranty .  Each member of the Licensee shall execute the Guaranty and Restriction Agreement appearing as Attachment I to this Agreement.

(d)            Documents .  Prior to SONIC’s execution of this Agreement, the Licensee shall deliver to SONIC photocopies of its articles of organization and operating agreement reflecting compliance with the provisions of this Section 22.03.

 22.04.          Other Entity Licensee .

If the Licensee is any other form of business entity, the Licensee shall deliver to SONIC photocopies of its organizational documents containing provisions substantially similar to those required by Sections 22.01 through 22.03.

22.05.           Employee Stock Purchase Plans .

The Licensee shall have the right to transfer up to 49% of its outstanding capital stock or other equity interests to an employee stock purchase plan as long as one individual who qualifies as a licensee of SONIC continues to own and Control, directly or indirectly, at least 51% of the Licensee’s outstanding capital stock or other equity interests.

23.   APPLICABLE LAWS .

The terms and provisions of this Agreement shall be interpreted in accordance with and governed by the laws of the State of Oklahoma, provided that if the laws of the State of Oklahoma would not permit full enforcement of Section 16 of this Agreement, then the laws of the state in which the Sonic Restaurant is located or Licensee is domiciled shall apply to the extent that any or all of such laws more fully permit enforcement of Section 16 of this Agreement.  Notwithstanding the foregoing, the franchise laws or regulations of the state in which the Sonic Restaurant is located, in effect on the original date of this Agreement, shall apply to this Agreement.  Licensee agrees that jurisdiction over Licensee and venue exist and are proper within the same federal judicial district where the corporate headquarters of SONIC are located and within any and all other courts, whether federal, state, or local, located within that district.  Licensee waives any and all defenses and objections, and Licensee agrees not to assert any defense or objection to jurisdiction over Licensee and to venue as described hereinabove regarding any action, proceeding or litigation instituted by SONIC against Licensee.  SONIC and Licensee agree that any and all breaches of this Agreement, including breaches occurring after termination, cancellation, or expiration of this Agreement, shall be deemed to have occurred where the corporate headquarters of SONIC are located.

24.  ACKNOWLEDGEMENT .

Licensee acknowledges that:

50

 
24.01.           Initial Term

The term of this Agreement is for a single 20-year term with no promise or representation as to the renewal of this Agreement or the grant of a new license except as provided herein.

24.02.           Consultation with Counsel

Licensee hereby represents that Licensee has received a copy of this Agreement and has had an opportunity to consult with Licensee’s attorney with respect thereto at least 10 days prior to Licensee’s execution hereof.  Licensee further represents that Licensee has had this Agreement in hand for review at least five business days prior to Licensee’s execution hereof.

24.03.           Profitability

No representation has been made by SONIC as to the future profitability of the Sonic Restaurant.

24.04.           Licensee’s Investigation

Prior to the execution of this Agreement, Licensee has had ample opportunity to contact existing licensees of SONIC and to investigate all representations made by SONIC relating to the Sonic System.  The Licensee has conducted an independent investigation of the business contemplated by this Agreement and recognizes that it involves substantial business risks making the success of the venture largely dependent on the business abilities of the Licensee.  SONIC disclaims and the Licensee has not received from SONIC or its Affiliates any express or implied warranty or guaranty from regarding the potential volume, profits or success of the business venture contemplated by this Agreement.  The Licensee has not relied on any express or implied warranty or guaranty from SONIC or its Affiliates regarding the potential volume, profits or success of the business venture contemplated by this Agreement.

24.05.           Contrary Representations .

The Licensee knows of no representations by SONIC or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement.  The Licensee has not relied on any representations from SONIC or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement or the disclosures set forth in the Franchise Offering Circular delivered to the Licensee in connection with the issuance of this Agreement.
51


24.06.           Variances to Other Licensees .

The Licensee understands that other developers and licensees may operate under different forms of agreements and, consequently, that SONIC’s rights and obligations with regard to its various licensees may differ materially in certain circumstances.

24.07.           Complete Agreement

This agreement supersedes any and all other agreements or representations respecting the Sonic Restaurant and contains all the terms, conditions and obligations of the parties with respect to the grant of this Agreement.

25.    INPUT AND ADVICE FROM LICENSEES .

In connection with the implementation of or significant changes in the programs or policies referred to in Sections 6.04, 6.05(c), 6.06, 8, and 11.01(f) of this Agreement, SONIC shall solicit input and advice from a group of licensees gathered together for such purpose (whether established ongoing for such purpose or gathered on an ad hoc basis from time-to-time).  SONIC further shall use its best efforts to ensure that such groups are balanced in terms of geographic base, size of operating group, and period of tenure within the Sonic system.  Notwithstanding the foregoing, this Section 25 shall not have any effect unless the license agreements in effect for at least one-third of all Sonic drive-in restaurants contain this provision or a substantially similar provision.

26.    INJUNCTIVE RELIEF .

The Licensee acknowledges that SONIC’s remedy at law for any breach of any of the Licensee’s covenants under this Agreement (other than involving only the payment of money) would not constitute an adequate remedy at law and, therefore, SONIC shall have the right to obtain temporary and permanent injunctive relief in any proceeding brought to enforce any of those provisions, without the necessity of proof of actual damages.  However, nothing in this Section 26 shall prevent SONIC from pursuing separately or concurrently one or more of any other remedies available at law, subject to the provisions of Section 14.04 of this Agreement.

27.    GENERAL RELEASE AND COVENANT NOT TO SUE .

The Licensee hereby releases Sonic Corp., its subsidiaries, and the officers, directors, employees and agents of Sonic Corp. and its subsidiaries from any and all claims and causes of action, known or unknown, which may exist in favor of the Licensee as of the date of this Agreement.  In addition, the Licensee covenants that the Licensee shall not file or pursue any legal action or complaint against any of the foregoing entities or Persons with regard to any of the foregoing claims or causes of action released pursuant to this Section 27.  SONIC hereby releases the Licensee and its officers, directors, employees and agents from any and all claims and causes of action, known or unknown, which may exist in favor of SONIC as of the date of this Agreement, except for any claims for (a) unpaid moneys due SONIC or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of SONIC’s legal rights regarding the Proprietary Marks.  In addition, SONIC covenants that SONIC shall not file or pursue any legal action or complaint against any of the foregoing entities or Persons with regard to any of the claims or causes of action released by SONIC pursuant to this Section 27.
52


Executed on the dates set forth below, to have effect as of ______________, 200___.

Licensee is converting the following license agreement, which originally expired on _____________________, ________ (select one):

Number 4.0 ___ (converts to Number 4.4 License Agreement)
Number 4.1 ___ (converts to Number 4.4 License Agreement)
Number 4.2 Table I* ___ (converts to Number 4.4 License Agreement)
Number 4.2 Table II ___ (converts to Number 4.4 License Agreement)
Number 5.0 ___ (converts to Number 5.4 License Agreement)
Number 5.1 ___ (converts to Number 5.4 License Agreement)

 
*For conversions from Number 4.2 license agreements operating under the Table I royalty rate, as elected in the Number 4.2 license agreement, the original expiration date of the license agreement converted to the Number 4.2 license agreement, or the date elected to convert to the Table II royalty rate as allowed by Section 5.02(a)(3) of the Number 4.2 license agreement, whichever is earlier,  was ___________________, _____.


SONIC:                                                                                                   Sonic Industries LLC

By: _________________________________
      (Vice) President
Date: _______________________, 200__

Licensee:                                                                                               ____________________________________

Date:_______________________, 200__

____________________________________
 
                                                                                                                Date:_______________________, 200__

53

Schedule I


Guaranty and Restriction Agreement



GUARANTY AND RESTRICTION AGREEMENT

The undersigned (jointly and severally or individually, the “Guarantor”), Sonic Industries LLC (“SONIC”), and       (the “Licensee”) enter into this Guaranty and Restriction Agreement (this “Guaranty”) as of            , 200__.

W I T N E S S E T H :

Whereas, SONIC is entering into a license agreement (the “License Agreement”) dated the same date as this Agreement with the Licensee for the Sonic drive-in located at      ,      ,             (the “Drive-in”); and

Whereas, as a condition to entering into the License Agreement, SONIC has asked the Guarantor to provide a personal guaranty of all obligations of the Licensee Agreement; and

Whereas, SONIC has also asked the Guarantor and the Licensee to agree to a restriction on the transfer of interests in the Licensee; and

Whereas SONIC, the Guarantor, and the Licensee are willing to enter into those agreements based upon the terms and conditions of this Agreement.

Now, therefore, in consideration of the mutual covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties agree as follows:

1.            Personal Guaranty of Payments .  The Guarantor hereby guarantees the prompt and full payment of all obligations under the License Agreement including:

(a)           all royalties due SONIC pursuant to the License Agreement,

(b)           all brand contribution fees to the Sonic Brand Fund pursuant to the License Agreement,

(c)           all contributions to approved advertising cooperatives pursuant to the License Agreement, and

(d)           any other obligations owing to SONIC or its Affiliates (as defined in the License Agreement) relating to the Drive-in, including any sign lease agreement.

2.            Nature of Guaranty .  This guaranty shall constitute an absolute, unconditional, irrevocable, and continuing guaranty.  SONIC shall not have any obligation to take any action against any other person or entity for collection of any payments prior to making any demand for payment or bringing any action against the Guarantor.


3.            Permitted Actions .  From time to time, SONIC shall have the right to take, permit, or suffer to occur any “Permitted Action,” as defined below, without modifying, reducing, waiving, releasing, impairing or otherwise affecting the obligations of the Guarantor under this Agreement, without giving notice to the Guarantor or obtaining the Guarantor’s consent, without the necessity of any reservations of rights against the Guarantor, and without liability on the part of SONIC.  As used in this Section 3, the phrase “Permitted Action” shall mean (a) an agreed extension of time for payment of any sum due under the License Agreement, (b) an agreed change in the manner or place of payment of any sums due under the License Agreement, (c) any waiver by SONIC of any defaults under the provisions of the License Agreement, (d) any delay or failure by SONIC to exercise any right or remedy SONIC may have under the License Agreement, (e) the granting by SONIC of any leniencies, waivers, extensions, and indulgences under the License Agreement, and (f) any agreed amendments to the License Agreement.

4.            Waiver of Notice of Acceptance .  The Guarantor acknowledges and waives notice of SONIC’s acceptance of the Guarantor’s guaranty pursuant to the terms of this Agreement.

5.            Restrictions on Transfer .  The Licensee shall not issue any additional shares of capital stock without the prior, written consent of SONIC.  The Guarantor shall not transfer, assign, or pledge any of its shares of capital stock in the Licensee to any person without the prior, written consent of SONIC.

6.            Disputes .  Any dispute between the parties concerning this Agreement will be resolved in accordance with the mediation and arbitration provisions contained in the License Agreement.

7.            Attorneys’ Fees, Costs and Expenses .  In any action brought by SONIC to enforce the obligations of the Guarantor, SONIC shall also have the right to collect its reasonable attorneys’ fees, court costs, and expenses incurred in the action.

8.            Headings .  The headings used in this Agreement appear strictly for the parties’ convenience in identifying the provisions of this Agreement and shall not affect the construction or interpretation of the provisions of this Agreement.

9.            Binding Effect .  This Agreement binds and inures to the benefit of the parties and their respective successors, legal representatives, heirs, and permitted assigns.

10.          Waiver .  The failure of a party to insist in any one or more instances on the performance of any term or condition of this Agreement shall not operate as a waiver of any future performance of that term or condition.


11.          Governing Law .  Notwithstanding the place where the parties execute this Agreement, the internal laws of Oklahoma shall govern the construction of the terms and the application of the provisions of this Agreement.

12.          Amendments .  No amendments to this Agreement shall become effective or binding on the parties, unless agreed to in writing by all of the parties to be bound by the amendment.

13.          Time .  Time constitutes an essential part of each and every part of this Agreement.

14.          Notice .  Except as otherwise provided in this Agreement, when this Agreement makes provision for notice or concurrence of any kind, the sending party shall deliver or address the notice to the other party by certified mail, telecopy, or nationally-recognized overnight delivery service to the addresses shown on exhibit “A” to this Agreement.

All notices pursuant to the provisions of this Agreement shall run from the date that the other party receives the notice or three business days after the party places the notice in the United States mail.  Each party may change the party’s address by giving written notice to the other parties.

15.          Release and Covenant Not To Sue .  The Guarantor and the Licensee, and each of them, hereby release all claims and causes of action which the Guarantor or the Licensee, or both of them, may have against Sonic Corp., its subsidiaries, and the stockholders, directors, officers, employees, and agents of Sonic Corp. and its subsidiaries.  The Guarantor and the Licensee, and each of them, further covenant not to sue any of the foregoing persons or entities on account of any of the foregoing claims or causes of action.

Executed and delivered as of the day and year first set forth above.

SONIC:                                                                                                                   Sonic Industries LLC

By: _________________________________
                                                               (Vice) President


Guarantor:                                                                                                              ____________________________________
     

                                 ____________________________________
     

Licensee:                                                                
By: ________________________________
       Its:      


This Guaranty and Restriction Agreement signature page is for the following:
Sonic Drive-In # _______

EXHIBIT “A”

Notice addresses are as follows:

SONIC:                                                                                   300 Johnny Bench Drive
Oklahoma City, OK 73104
Attention:  General Counsel
(405) 225-5973 Fax

Guarantors:                                                                           
     
     
(___) ___-____ Fax

     
     
     
(___) ___-____ Fax


Licensee:                                                                      
 
(___) ___-____Fax


 
SONIC INDUSTRIES LLC

NUMBER 5.5 LICENSE AGREEMENT






BY AND BETWEEN SONIC INDUSTRIES LLC, Licensor and


________________________, Licensee



Sonic Drive-In of ____________________, ______________________

located at _____________________________

_________________________, ______________________.





 





Dated:  ___________, _______.







Store No. _________
CIF No. __________





 
TABLE OF CONTENTS
 
1. DEFINITIONS.
 
2
 
1.01.
Affiliate.
2
 
1.02.
Control.
2
 
1.03.
DMA.
2
 
1.04.
Gross Sales.
2
 
1.05.
License.
3
 
1.06.
MSA.
3
 
1.07.
Person.
3
 
1.08.
Proprietary Marks.
3
 
1.09.
Protected Area.
4
 
1.10.
Sonic Restaurant.
4
 
1.11.
Sonic System.
4
 
1.12.
Non-traditional Locations.
4
2.  LICENSE GRANT.  
4
 
2.01.
Location.
5
 
2.02.
Trade Radius.
5
 
2.03.
Efficient Market Development and Sales Dilution.
6
 
2.04.
Licensee.
7
 
2.05.
Use of Sonic’s Marks.
7
 
2.06.
Site Selection.
7
 
2.07.
Relocation.
7
3.  TERM.  
8
 
3.01.
Initial Term.
8
 
3.02.
Opening of Restaurant.
8
 
3.03.
Option.
8
4.  DUTIES OF LICENSOR.  
9
 
4.01.
Plans.
9
 
4.02.
Operations Manual.
9
 
4.03.
Marketing Assistance.
9
 
4.04.
Communication.
10
 
4.05.
Evaluation Program.
10
5.  FEES.
 
 
10
 
5.01.
License Fee.
10


 
 
5.02.
Royalty Fees.
10
 
5.03.
Brand Fee.
12
 
5.04.
Transfer Fee.
12
 
5.05.
Late Charges.
12
6.  DUTIES OF LICENSEE.  
15
 
6.01.
Sonic Restaurant Site.
12
 
6.02.
Construction.                                                                                                                                                                                                                                                                                                                 
13
 
6.03.
Equipment and Sign.
14
 
6.04.
Training.
14
 
6.05.
Compliance with Entire System.
15
 
6.06.
Approved Suppliers and Advertising Agencies.
17
 
6.07.
Best Efforts.
18
 
6.08.
Interference with Employment Relations of Others.
18
 
6.09.
SONIC’s Standards.
18
 
6.10.
Majority Interest Owner.
18
7.  PROPRIETARY MARKS.  
19
 
7.01.
SONIC’s Representations.
19
 
7.02.
Use of Marks.
19
 
7.03.
Licensee’s Understanding.
20
8.  MANUAL.
 
 
21
9.  CONFIDENTIAL INFORMATION.  
21
 
9.01.
SONIC Proprietary and Confidential Information.
21
 
9.02.
Licensee’s Use of Proprietary and Confidential Information.
21
 
9.03.
Licensee’s Use of Sonic Operations Manual.
22
10.  ACCOUNTING AND RECORDS.  
22
 
10.01.
Due Date.
23
 
10.02.
Record Retention.
23
 
10.03.
Charitable Contributions and Discounts.
23
 
10.04.
Annual Reports.
23
 
10.05.
Audit by SONIC.
23
 
10.06.
Third –Party Audit.
24
 
10.07.
Licensee’s Failure to Timely Deliver Financial Records.
24
 
10.08.
Financial Disclosure.
24
11.  ADVERTISING AND BRAND EXPENDITURES.  
25


 
 
11.01.
Standard Program.
25
 
11.02.
Publicity.
27
1 2.  INSURANCE.
 
 
27
 
12.01.
Insurance Amounts.
28
 
12.02.
SONIC as Additional Insured.
28
 
12.03.
General Conditions.
28
13.  TRANSFER OF INTEREST.  
29
 
13.01.
Assignment.
29
 
13.02.
Death or Permanent Incapacity of Licensee.
29
 
13.03.
Assignment to Licensee’s Corporation.
29
 
13.04.
Other Assignment.
31
 
13.05.
SONIC’s Right of First Refusal.
32
 
13.06.
Consent to Assignments.
33
14.  DEFAULT AND TERMINATION.  
33
 
14.01.
Automatic Termination.
33
 
14.02.
Optional Termination.
33
 
14.03.
Period to Cure.
33
 
14.04.
Resolution of Disputes.
35
 
     (a)
Negotiation.
36
 
     (b)
Mediation.
36
 
     (c)
Arbitration.
36
 
     (d)
Excluded Controversies.
37
 
     (e)
Attorneys’ Fees and Costs.
37
15.  OBLIGATIONS UPON TERMINATION.  
37
 
15.01.
Effect of Termination, Cancellation or Expiration of this Agreement.
37
 
15.02.
SONIC’s Option to Purchase.
39
 
15.03.
SONIC’s Obligation to Purchase.
39
 
15.04.
Fair Market Value Determination.
40
16.  COVENANTS.
 
 
40
 
16.01.
Restrictions on Licensee.
40
 
16.02.
Covenants by Others.
42
17.  INDEPENDENT CONTRACTOR & INDEMNIFICATION.  
42
 
17.01.
Licensee not an Agent of SONIC.      
42  


 
 
17.02.
Cost of Enforcement.
43
 
17.03.
Indemnification.
43
1 8.  EFFECT OF WAIVERS.  
43
19.  NOTICES.  
44
 
19.01.
Address.
44
 
19.02.
Failure to Accept.
44
 
19.03.
Licensee’s Principal.
44
20.  ENTIRE AGREEMENT.  
44
 
20.01.
No Oral Agreements.
44
 
20.02.
Scope and Modification of License.
45
21.  CONSTRUCTION AND SEVERABILITY.  
45
 
21.01.
Interpretation.
44
 
21.02.
Scope of Protected Area.
45
 
21.03.
Invalidity.
45
 
21.04.
Binding Effect.
45
 
21.05.
Survival.
45
 
21.06.
Liability of Multiple Licensees.
46
22.  BUSINESS ENTITY LICENSEES  
46
 
22.01.
Corporate Licensee.
46
 
22.02.
Partnership Licensee.
46
 
22.03.
Limited Liability Company Licensee.
47
 
22.04.
Other Entity Licensee.
48
 
22.05.
Employee Stock Purchase Plans.
48
23.  APPLICABLE LAWS.  
48
24.  ACKNOWLEDGEMENT.  
48
 
24.01.
Initial Term.
49
 
24.02.
Consultation with Counsel.
49
 
24.03.
Profitability.
49
 
24.04.
Licensee’s Investigation.
49
 
24.05.
Contrary Representations.
49
 
24.06.
Variances to Other Licensees.
50
 
24.07.
Complete Agreement.
50
 
 

 
25.   INPUT AND ADVICE FROM LICENSEES.  
50
26.   INJUNCTIVE RELIEF.  
50
27.   GENERAL RELEASE AND COVENANT NOT TO SUE.  
50
 

SCHEDULE I – GUARANTY AND RESTRICTION AGREEMENT



           Store No._________
CIF No. _______

LICENSE AGREEMENT

THIS AGREEMENT made this ___day of ______, 200_, by and between SONIC INDUSTRIES LLC, a Delaware limited liability company (“SONIC”), and

_________________________ (“Principal”)
_________________________


(all of whom shall be jointly referred to herein as the “Licensee”).

RECITALS

SONIC is the developer and the sole and exclusive owner of the right to license the distinctive and proprietary drive-in, food service system under which food is sold to the public from drive-in restaurants operated under the trade name and federally registered trademark and service mark “Sonic”.  The Sonic System so developed now includes, among other things, the following elements, all or some of which may be deleted, changed, improved or further developed by SONIC from time to time:

A.  Methods and procedures for the preparation and serving of food and beverage products.

B.  Confidential recipes for food products and distinctive service accessories (including, but not limited to, uniforms, menus, packages, containers and additional paper or plastic items). 

C.  Plans and specifications for distinctive standardized premises featuring characteristic exterior style, colors, and design (including angled parking stalls equipped with menu housings, speakers and tray supports), interior furnishings, equipment layout, exterior signage, and marketing techniques and materials.

D.  A uniform method of operating which is described in the Sonic Operations Manual .

E.  Distinctive and characteristic trade names, trade dress, trademarks and service marks, including, but not limited to: “Sonic”, “Sonic Happy Eating,” “America’s Favorite Drive-In Sonic,” signs, menu housings, designs, color schemes, standardized premises featuring characteristic exterior style, canopies, colors, and design (including angled parking stalls equipped with menu housings, speakers and tray supports), interior furnishings and equipment layout, and emblems as SONIC designates in the Sonic Operations Manual or otherwise in writing or through usage as prescribed for use with the Sonic System and as may from time to time be developed.
1


F.  Such exclusive and trade secrets as have been and may from time to time be developed, which are owned by SONIC and which are disclosed to its licensees in confidence in connection with the construction and operation of a Sonic drive-in restaurant.

Licensee wishes to obtain a license from SONIC to operate a Sonic drive-in restaurant pursuant to the Sonic System and to be afforded the assistance provided by SONIC in connection therewith, and understands and accepts the terms, conditions and covenants set forth herein as those which are reasonably necessary to maintain SONIC’s high and uniform standards of quality and service designed to protect the goodwill and enhance the public image of the Proprietary Marks and the Sonic System, and recognizes the necessity of operating the licensed Sonic drive-in restaurant in faithful compliance therewith, and with SONIC’s standards and specifications.

1.   DEFINITIONS .

Unless the context of their use in this Agreement requires otherwise, the following words and phrases shall have the following meanings when used in initially-capitalized form in this Agreement.

1.01.       Affiliate .

The word “Affiliate” shall mean (a) any stockholder, director or officer of a specified Person (if the specified Person is a corporation), (b) any partner of a specified Person (if the specified Person is a partnership), (c) any member of a specified Person (if the specified Person is a limited liability company), (d) any employee of a specified Person, and (e) any Person which directly or indirectly through one or more intermediaries Controls the specified Person, the specified Person Controls, or shares a common Control with the specified Person.

1.02.       Control .

The word “Control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person or entity, whether through the ownership of voting securities, by contract, or otherwise.

1.03.       DMA .

The term “DMA” shall mean a Designated Market Area as defined by A.C. Nielsen Company from time to time.

1.04.       Gross Sales .

The phrase “Gross Sales” shall mean all revenues from sales resulting from all business conducted upon or from the Sonic Restaurant, whether evidenced by check, cash, credit, charge account, exchange or otherwise, and shall include (without limitation) the amounts received from the sale of goods, wares and merchandise, including sales of food, beverages and tangible property of every kind and nature, promotional or otherwise (excluding restaurant equipment) and for services performed from or at the Sonic Restaurant, whether the Licensee fills the orders from the Sonic Restaurant or elsewhere.  Each charge or sale upon credit shall constitute a sale for the full price in the month during which the charge or sale occurs, regardless of the time when the Licensee receives payment (in whole or in part) for the charge or sale.  The phrase “Gross Sales” shall not include (a) sales of merchandise for which the Licensee makes a cash refund, if previously included in Gross Sales; (b) the price of merchandise returned by customers for exchange, if the Licensee previously included the sales price of the merchandise returned by the customer in Gross Sales and includes the sales price of merchandise delivered to the customer in exchange in Gross Sales; (c) amounts received from the sale of tobacco products; (d) the amount of any sales tax imposed by any governmental authority directly on sales and collected from customers, if the Licensee adds the amount of the tax to the sales price or absorbs the amount of the sales tax in the sales price and the Licensee actually pays the tax to the governmental authority; and (e) amounts not received for menu items because of discounts or coupons, if properly documented.  The phrase “Gross Sales” also shall not include any proceeds received by the Licensee pursuant to an assignment made in accordance with the provisions of Section 13.
2


1.05.       License .

The word “License” shall mean the rights granted the Licensee pursuant to Section 2 of this Agreement.

1.06.       MSA .

The term “MSA” shall mean a Metropolitan Statistical Area as defined by the United States Census Bureau from time to time.  An MSA shall not include any city or town otherwise falling within the MSA which has at least 10 miles of continuous undeveloped and sparsely populated rural land between every portion of its boundary and the boundary of the city which serves as the primary metropolitan area for the MSA.

1.07.       Person .

The word “Person” shall mean any individual or business entity, including (without limitation) corporation, joint venture, general partnership, limited partnership, limited liability company, or trust.

1.08.       Proprietary Marks .

The phrase “Proprietary Marks” shall mean the distinctive and characteristic trade names, trademarks, service marks, and trade dress which SONIC designates in writing or through usage from time to time as prescribed for use with the Sonic System, including (without limitation) the terms “Sonic,” “Happy Eating,” and “America’s Favorite Drive-In”; signs; emblems; menu housings; designs; color schemes; standardized premises featuring characteristic exterior style, canopies, colors and design (including angled parking stalls equipped with menu housings, speakers and tray supports); interior furnishings; and equipment layout.
3


1.09.       Protected Area .

The phrase “Protected Area” shall mean the area defined by Sections 2.02 and 2.03 of this Agreement.

1.10.       Sonic Restaurant .

The phrase “Sonic Restaurant” shall mean the Sonic drive-in restaurant licensed by this Agreement.

1.11.       Sonic System .

The phrase “Sonic System” shall mean the unique, proprietary and confidential information of SONIC, including (without limitation) the Sonic Operations Manual and consisting of (a) methods and procedures for the preparation of food and beverage products; (b) confidential recipes for food products; (c) distinctive service and accessories; (d) plans and specifications for interior and exterior signs, designs, layouts and color schemes (whether copyrighted or not); (e) methods, techniques, formats, systems, specifications, procedures, information, trade secrets, sales and marketing programs; (f) methods of business operations and management; and (g) knowledge and experience regarding the operation and franchising of Sonic drive-in restaurants.

1.12.       Non-traditional Locations .

The phrase “Non-traditional Locations” shall mean permanent or temporary food service facilities operating under one or more of the Proprietary Marks at locations featuring facilities other than free-standing buildings with canopies devoted solely to the operation of a Sonic drive-in restaurant and accessible to the general public by automobile from public thoroughfares.  Non-traditional Locations shall include (without limitation) (a) military bases and other governmental facilities; (b) universities and schools; (c) airports and other transportation facilities; (d) stadiums, arenas and other sports and entertainment venues; (e) amusement and theme parks; (f) cafeterias and food courts in shopping centers, shopping malls, office buildings, and industrial buildings; (g) hotels and convention centers; (h) hospitals and nursing facilities; (i) museums, zoos and other public facilities; and (j) highway travel plazas, convenience stores, and gasoline filling stations.

2.   LICENSE GRANT .

SONIC grants to Licensee for the following stated term the right, license and privilege:
4


2.01.       Location .

(a)           To adopt and use the Sonic System at the Sonic Restaurant located at __________________________, ______________, _______________.

(b)           To have the exclusive rights to adopt and use the Sonic System for a Sonic Restaurant to be constructed within the current boundaries of the town or city of __________________, ________________, for a period of six months from the date hereof, with the obligation of selecting and having such site approved within such six month period and completing Section 2.01(a), above, within such six month period.

2.02.       Trade Radius .

Subject to the provisions of paragraphs (c) and (d), below, SONIC shall not own or operate a Sonic Restaurant and shall not franchise any other Person to own or operate a Sonic Restaurant (other than a Sonic drive-in restaurant licensed prior to the date of this Agreement) within the area determined by the following provisions:

 
(a)
(i)
An area defined by a radius extending one and one-half miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of 75,000 or more.

 
(ii)
An area defined by a radius extending two miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of less than 75,000 but more than 25,000.

 
(iii)
An area defined by a radius extending three miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of 25,000 or less.

 
(iv)
An area defined by a radius extending three miles from the front door of the Sonic Restaurant if located outside a city, town or MSA.

(b)           The foregoing radius shall not extend into the contractually-granted protected radius of any Sonic drive-in restaurant in existence as of the date of this Agreement and shall not extend into the franchised area of any developer under an existing area development agreement with SONIC.  SONIC shall determine the population of an MSA from time to time after the date of this Agreement according to the latest published federal census.

(c)           SONIC shall not own, operate or license any other Person to own or operate a Non-traditional Location (other than a Non-traditional Location owned, operated or licensed prior to the date of this Agreement) within the Protected Area without the Licensee’s prior written consent.  Simultaneously with the request for that written consent, SONIC shall offer the Licensee a right of first refusal to develop the Non-traditional Location.  The Licensee must notify SONIC in writing of its decision regarding the right of first refusal to license and operate the Non-traditional Location within 30 days after SONIC notifies the Licensee of SONIC’s request for the Licensee’s written consent to own, operate and/or license the Non-traditional Location.  If the Licensee chooses to exercise its right of first refusal, the Licensee must sign SONIC’s then current form of license agreement for a Non-traditional Location for the applicable jurisdiction within 30 days after the Licensee notifies SONIC of its decision.  The Licensee then must open the Non-traditional Location within the time period specified in the license agreement (if specified) or within 12 months after the date of the license agreement (if not specified).  If the Licensee does not execute that agreement within the foregoing 30-day period or does not exercise its right of first refusal within the foregoing 30-day period, SONIC shall have the right to proceed with the ownership, operation and/or licensing of the Non-traditional Location as disclosed to the Licensee only if the Licensee has given its written consent to SONIC.  If the Licensee elects, in its sole and absolute discretion, not to give its written consent, SONIC shall not own, operate or license any other Person to own or operate the Non-traditional Location.
5


(d)           SONIC has and hereby further reserves the right, in its sole discretion, to acquire the assets or controlling ownership of an existing restaurant within the Protected Area. However, prior to converting an acquired restaurant to a Sonic drive-in restaurant or a Non-traditional Location within the Protected Area, SONIC shall offer the Licensee a right of first refusal to acquire the restaurant at a price equal to SONIC’s cost of acquiring the restaurant.  If the restaurant represents a part of an acquisition of multiple restaurants, SONIC shall make a reasonable allocation of its cost to acquire the restaurant.  The Licensee must notify SONIC of its decision regarding the right of first refusal within 30 days after SONIC gives the Licensee written notice of its intention to convert the restaurant to a Sonic drive-in restaurant or Non-traditional Location.  If the Licensee chooses to exercise its right of first refusal, the Licensee must sign SONIC’s then current form of license agreement for a Sonic drive-in restaurant or Non-traditional Location, and pay the required license fee, as applicable, within 20 days after the Licensee notifies SONIC of its decision.  In the event the Licensee fails to convert the restaurant to a Sonic drive-in restaurant or Non-traditional Location pursuant to the terms of the applicable license agreement, SONIC shall have the right to repurchase the restaurant from the Licensee at the same purchase price.  If the Licensee does not exercise its right of first refusal, SONIC shall have the right to own, operate and/or license other Persons to operate the restaurant in any manner which does not violate the provisions of this Agreement or SONIC may sell or otherwise dispose of the restaurant to any person or entity under any terms or conditions SONIC deems appropriate.  SONIC shall not own, operate or license any Person to operate the restaurant if the ownership or operation of the restaurant otherwise would violate the non-compete provisions of 16.01 of this Agreement if owned or operated by a Sonic licensee.

2.03.       Efficient Market Development and Sales Dilution .

The following additional provisions shall apply to the Sonic Restaurant:

(a)           In utilizing its best efforts to reduce the dilution of sales and profitability, in the event SONIC develops or licenses another Person to develop a Sonic drive-in restaurant on the same street as the Sonic Restaurant (according to the Sonic Restaurant’s designated street address) and no traffic barrier or break (such as a river or other waterway, interceding roadway, unpaved landmass, or other similar structure blocking through traffic) exists between the Sonic Restaurant and the proposed new site, notwithstanding the provisions of Section 2.02, above, the Protected Area provided by Section 2.02 shall equal two and one-half miles (each way) on that street and an additional 500 feet (each way from the center of the intersection) on any street crossing that street within the foregoing 2 1/2-mile distance.
6


(b)           In order to achieve efficient market development and in utilizing its best efforts to reduce the dilution of sales and profitability, in the event SONIC develops or licenses another Person to develop a Sonic drive-in restaurant within two miles of the Sonic Restaurant (if permitted under Section 2.02, above), SONIC shall apply at least the level of demographic analysis, market impact analysis, and site and market review used by SONIC as of the date of this Agreement in considering the additional site for the development of a Sonic drive-in restaurant.

2.04.       Licensee .

Licensee shall advertise to the public as a Licensee of SONIC.

2.05.       Use of Sonic’s Marks .

Licensee shall adopt and use, but only in connection with the sale of those food and beverage products which have been designated in the Sonic menu as specified in the Sonic Operations Manual , the trade names, trademarks and service marks which SONIC shall designate from time to time to be part of the Sonic System.

2.06.       Site Selection .

In the event the Licensee receives this license pursuant to Section 2.01(b), above, the selection of a site by Licensee shall be subject to the approval of SONIC in accordance with the standard site approval procedures required by this Agreement and the standard practices of SONIC.  In the event a site for the Sonic Restaurant has not been approved by SONIC before the expiration of the six month period provided for by Section 2.01(b), above, then this Agreement shall expire and be of no further force or effect.

2.07.       Relocation .

If the Licensee relocates the Sonic Restaurant during the term of this Agreement with the written consent of SONIC (which consent SONIC shall not withhold unreasonably), this Agreement shall continue to apply to the Sonic Restaurant in accordance with the terms contained in this Agreement, except that SONIC and the Licensee shall enter into an amendment to this Agreement to change the address of the Sonic Restaurant accordingly.

7

 
3.   TERM .

3.01.       Initial Term .

Unless sooner terminated as hereafter provided, the term of this License shall end 20 years from the effective date of this Agreement as set forth on the cover page to this Agreement.

3.02.       Opening of Restaurant .

Licensee expressly acknowledges and agrees that a pre-condition to opening the Sonic Restaurant shall be SONIC’s written authorization to open, which authorization shall be given only upon Licensee’s completing, to SONIC’s satisfaction, (i) construction of the Sonic Restaurant, (ii) preparation of the Sonic Restaurant for commencement of operations, and (iii) training as required by Section 6.04 of this Agreement.

3.03.       Option .

At the end of the term, if Licensee desires, Licensee may renew the License to adopt and use the Sonic System at the Sonic Restaurant for an additional 10-year term, provided that prior to the expiration of the initial term:

(a)           Licensee gives SONIC written notice of Licensee’s election to renew not less than six months nor more than 12 months prior to the end of the initial term.

(b)           Licensee is not, when notice is given, in material default of any provision of this Agreement or any amendment hereof or successor agreement hereto or in material default of any other agreement between Licensee and SONIC or SONIC’s Affiliates involving any other License Agreement and has substantially complied with the terms and conditions of this Agreement and all other such agreements, during the term thereof.

(c)           All monetary obligations owed by Licensee to SONIC or SONIC’s Affiliates from any source whatsoever (whether under this Agreement or otherwise) have been satisfied prior to renewal.

(d)           The Licensee executes a license agreement containing the same terms and conditions as this Agreement, except that the license agreement shall provide for a term of 10 years and shall contain the then current royalty rate and the then current national and local advertising and brand expenditure requirements; provided, however, that in lieu of an initial license fee, a renewal fee shall be paid to SONIC in the amount of:  (i) $3,000.00, or (ii) 20% of the then current initial license fee, whichever is greater.  However, the renewal fee shall not exceed $6,000 as adjusted for inflation on September 1 of each year in accordance with the consumer price index and using August of 1994 as the base amount.
8


(e)           Licensee performs such remodeling, repairs, replacements and redecorations as SONIC may reasonably require to cause the restaurant equipment and fixtures to conform to the plans and specifications being used for new or remodeled Sonic drive-in restaurants on the renewal date, provided SONIC notifies Licensee of such requirements within 30 days after receipt of Licensee’s notice of renewal.

(f)           SONIC and the Licensee execute a general release of each other, in a form satisfactory to SONIC, of any and all claims the Licensee may have against SONIC and its Affiliates, including (without limitation) all claims arising under any federal, state or local law, rule or ordinance, but excluding (as to SONIC) any claims against the Licensee for (a) unpaid moneys due SONIC or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of SONIC’s legal rights regarding the Proprietary Marks.  SONIC may waive the requirements of this paragraph (f) at SONIC’s election.

(g)           Licensee principal and/or manager at their expense attend and satisfactorily complete such retraining program as SONIC may require at its sole discretion. 

(h)           Licensee meets the remodeling requirements set forth in Section 6.02(d) herein.
 
4.   DUTIES OF LICENSOR .

SONIC agrees to regularly advise and consult with Licensee in connection with the operation of the Sonic Restaurant and to provide to Licensee:

4.01.       Plans .

Standard Sonic Plans and Specifications for a free standing building, equipment layout and signs (See Subsection 6.03), together with advice and consultation.  Any modifications for non­standard buildings, whether required by local zoning or building laws or otherwise, must be approved in writing by SONIC and are to be paid by Licensee.

4.02.       Operations Manual

The Sonic Operations Manual containing the standards, specifications, procedures and methods for operating a Sonic drive-in restaurant, a copy of which will be loaned to Licensee for the term of this Agreement.

4.03.       Marketing Assistance .

Certain marketing materials and such merchandising, marketing and advertising research data and advice as may be developed from time to time by SONIC and deemed to be helpful in the operation of a Sonic drive-in restaurant.
9


4.04.       Communication .

Certain management development and motivational seminars and periodic newsletters which communicate to Licensee available advertising materials and new developments, techniques and improvements in areas of restaurant equipment, management, food preparation and service which are pertinent to the operation of a restaurant using the Sonic System.
 
4.05.       Evaluation Program .

A field evaluation of the Restaurant will be conducted for the mutual benefit of both SONIC and Licensee to promote uniform standards of operation and quality control.

5.   FEES .

5.01.       License Fee

The Licensee shall not pay any conversion fee or initial license fee for this Agreement.

5.02.       Royalty Fees .

On or before the 20th day of each calendar month, the Licensee shall pay a royalty fee determined by the following provisions:

(a)            Through Original Expiration Date .  Through the original expiration date of the license agreement converted to this Agreement, the Licensee shall pay a royalty fee determined by the following scale based on Gross Sales:
 
 
Gross Sales
But Not
Royalty
 
Greater Than
More Than
Rate
 
$         0.00
$5,000.00
1.000%
  $  5,000.00 $10,000.00  1.750%
  $10,000.00  $15,000.00 2.500%
 
$15,000.00
$20,000.00
3.250%
 
$20,000.00
$30,000.00
3.500%
 
$30,000.00
$40,000.00
3.875%
 
$40,000.00
$50,000.00
4.250%
  $50,000.00 $60,000.00 4.375%
  $60,000.00 N/A  4.500% 

The calculation of Gross Sales and the corresponding royalty fees shall take place on a cumulative basis.  For example, the following formula results in the calculation of the royalty fee on $50,000 of gross sales:  Royalty Fee = ($5,000 x .01) + ($5,000 x .0175) + ($5,000 x .025) + ($5,000 x .0325) + ($10,000 x .035) + ($10,000 x .03875) + ($10,000 x .0425).
10


(b)            Conversion of Rate .   After the original expiration date of the license agreement converted to this Agreement, the Licensee shall pay a monthly amount equal to the royalty fee determined by the following scale based on Gross Sales:
 
 
Gross Sales
But Not
Royalty
 
Greater Than
More Than
Rate
 
$         0.00
$5,000.00
1.00%
  $  5,000.00 $10,000.00  2.00%
  $10,000.00  $15,000.00 3.00%
 
$15,000.00
$30,000.00
4.00%
 
$30,000.00
$40,000.00
4.25%
 
$40,000.00
$50,000.00
4.50%
  $50,000.00 $60,000.00 4.75%
  $60,000.00 N/A  5.00% 


The calculation of Gross Sales and the corresponding royalty fees shall take place on a cumulative basis.  For example, the following formula results in the calculation of the royalty fee on $50,000 of gross sales:  Royalty Fee = ($5,000 x .01) + ($5,000 x .02) + ($5,000 x .03) + ($15,000 x .04) + ($10,000 x .0425) + ($10,000 x .0450).

5.03.       Brand Fee .

(a)           On or before the 20th day of each calendar month throughout the term of this Agreement, Licensee shall pay to Sonic Brand Fund, which is administered by SONIC, a brand contribution fee in an amount equal to .75% of the Gross Sales received by Licensee from the operation of the Sonic Restaurant during the calendar month next preceding the date of such payment.  Such payment shall be forwarded with the profit and loss statement required to be provided pursuant to Section 10.01 herein.

(b)           The amount due to SONIC by Licensee pursuant to Section 5.03, above, shall be in addition to and separate from that which Licensee is obligated to spend pursuant to Section 11.01(a) of this Agreement.

5.04.      Transfer Fee

(a)           A transfer fee in the amount of $500 shall be paid by Licensee in the event of a transfer or assignment of this Agreement (resulting in a change in Control of the License) to a licensee then-currently qualified as a licensee, excluding assignments under Subsections 13.02 and 13.03. 

(b)           A transfer fee in the amount of $1,500 shall be paid by Licensee in the event of a transfer or assignment of this Agreement (resulting in a change in Control of this license) to a new licensee not then-currently qualified as a licensee, excluding assignments under Subsections 13.02 and 13.03.
11


5.05.      Late Charges .

In the event any payments required by Sections 5.02, 5.03 or 5.04, above, are not paid on or before the date on which they are due, a late charge in an amount equal to 1.75% per month shall be levied against such amounts due and shall be owing to SONIC by the Licensee from the date on which such obligations were due until any such obligations are paid in full.  In the event the interest rate set out in this Section 5.05 exceeds that amount permitted by Oklahoma law, then the maximum interest rate permitted by Oklahoma law shall be charged.

6.   DUTIES OF LICENSEE .

6.01.       Sonic Restaurant Site

(a)           The site at which Licensee shall operate the Sonic Restaurant is more fully described in paragraph (a) of Section 2.01.  During the term of this Agreement, the site shall be used exclusively for the purpose of operating a franchised Sonic drive-in restaurant.

(b)           In the event the Sonic Restaurant premises suffers some physical casualty, the minimum acceptable quality and appearance for the restored restaurant will be that which existed just prior to the casualty, unless the Sonic Restaurant was below minimum acceptable standards for SONIC at the time of casualty in which event the Sonic Restaurant will be restored to a condition which meets the minimum acceptable standard according to SONIC.  However, Licensee agrees to make all reasonable effort to have the restored Sonic Restaurant reflect the then current image, design and specifications of Sonic drive-in restaurants.  If the Sonic Restaurant is substantially destroyed by fire or other casualty, Licensee may, with the written consent of SONIC elect to terminate this Agreement in lieu of Licensee reconstructing the restaurant, provided that for a period of 18 months after said election, Licensee shall not enter into, become landlord of or loan money to any restaurant business within a three- mile radius of the drive-in site which is similar in nature to, or competitive with a Sonic drive-in restaurant or considered a fast food establishment. 

6.02.       Construction

(a)           Licensee agrees to complete the construction of the Sonic Restaurant within a minimum of 365 days from the effective date of this Agreement.  Unless Licensee is remodeling an existing building, Licensee shall construct the Sonic Restaurant in accordance with the site plan approved by SONIC for such site and with SONIC’s standard construction plans and specifications (“Sonic Plans and Specifications”) and layout subject, however, to any alterations thereto that may be required by any applicable law, regulation or ordinance.  If alterations of any kind are required to be made to the site plan, as approved by SONIC, or to the Sonic Plans and Specifications or layouts for any reason, such alterations must be approved by SONIC in writing before any work is begun on the Sonic Restaurant.  The Licensee shall submit the final site layout and construction plans for the Sonic Restaurant to SONIC for its written approval.  Any costs including engineering and architectural fees incurred in obtaining approvals by the appropriate governmen­tal authorities of the construction plans, specifications and layouts shall be paid by Licensee.
12


(b)           If Licensee is remodeling the existing restaurant, SONIC shall have the right to inspect and approve all plans and specifications prior to the commencement of any work.  The Licensee shall submit the final remodeling plans and specifications for the Sonic Restaurant to SONIC for its written approval.  Nothing in this section shall be construed as an endorsement or guarantee of the conformity of such plans to applicable local, state or federal building or safety codes, or a guarantee that construction will be done in conformity with such approved plans.  In any event, Licensee shall obtain written approval of such plans or written notice of SONIC’s waiver of the rights reserved hereunder prior to the commencement of construction. 

(c)           Licensee shall not deviate from the approved plans and specifications in any manner in the construction or remodeling of the restaurant without the prior written approval of SONIC.  If at any time SONIC determines (prior to opening date) that Licensee has not constructed or remodeled the Sonic Restaurant in accordance with the plans and specifications approved by SONIC, SONIC shall, in addition to any other remedies, have the right to obtain an injunction from a court of competent authority against the continued construction and opening of the Sonic Restaurant, and Licensee hereby consents to any such injunction. 

(d)           SONIC may require the Licensee to undertake extensive remodeling and renovation and substantial modifications to existing buildings necessary for the Licensee’s restaurant to conform with SONIC’s then existing system image.  SONIC may exercise the foregoing right at any time during the term of this Agreement, but may not require (1) the remodeling of the restaurant more than once every seven years or (2) the remodeling of a restaurant built within the preceding three years, unless the required remodeling will not exceed 15% of the original cost of the building, equipment and land improvements (as adjusted for increases in the consumer price index after the construction date of the restaurant).  Notwithstanding the foregoing, SONIC shall have the right to require the Licensee to modify or replace the large Sonic sign for the restaurant at any time during the term of this Agreement.  If SONIC exercises its right to require the Licensee to undertake extensive remodeling or renovation or substantial modification within five years of the end of the term of this Agreement, the Licensee may exercise any right to renew the term of this Agreement at that point in time in accordance with the applicable provisions of this Agreement, which renewal then shall take effect as of the expiration the then current term of this Agreement.

6.03.       Equipment and Sign

(a)           Licensee shall only install in and about the Sonic Restaurant such equipment, fixtures, furnishings and other personal property as are required and which strictly conform to the appearance, uniform standards and specifications of SONIC existing from time to time, which shall be communicated to Licensee in the Sonic Operations Manual or otherwise in writing.  Licensee may purchase the equipment from SONIC if SONIC at that time is offering such equipment for sale on a regular basis, but is not required by this or any other agreement to do so.
13


(b)           In order to provide maximum exposure of the Sonic name and marks, Licensee shall prominently display and maintain at Licensee’s own expense one (1) Sonic drive-in sign (“Sign”) which complies with the specifications required by SONIC from time to time and in such location as SONIC may approve.  Licensee shall not display any other sign or advertising at the Sonic Restaurant without SONIC’s prior written approval.

(c)           Licensee may lease the required Sign from SONIC or may acquire or lease the Sign from any other source approved by SONIC.  Licensee agrees to require in any lease agreement with SONIC or other suppliers a clause giving SONIC the right to remove the Sign from the Sonic Restaurant upon termination of this Agreement. 

(d)           Licensee hereby agrees that it shall, upon SONIC’s request, obtain from the landlord of the property at which the Sonic Restaurant is located, a landlord’s lien and waiver releasing all claims against any equipment or sign which belongs to SONIC.

(e)           If Licensee is or becomes a lessee of the Sonic Restaurant premises, he shall provide SONIC with a true and correct, complete copy of any such lease, and shall have included therein provisions, in form satisfactory to SONIC, expressly permitting both the Licensee and SONIC to take all actions and make all alterations referred to under subsection 15.01(c).  Any such lease shall also require the lessor thereunder to give SONIC reasonable notice of any contemplated termination and a reasonable time in which to take and make the above actions and alterations and provide that the Licensee has the unrestricted right to assign such lease to SONIC.

6.04.       Training .

(a)           Licensee acknowledges the importance of the quality of business operations among all restaurants in the Sonic System and, agrees that it will not allow any of its licensed establishments to be opened or operated without having at least one individual working full time at the Sonic Restaurant who has completed the Stage Career Development Program.  If the trained individual ceases to work full time at the Sonic Restaurant for whatever reason, the Licensee shall have 120 days in which to replace the individual with a person who has completed the Stage Career Development Program.

(b)           Licensee shall pay all traveling expenses, living expenses, and any other personal expenses for themselves and managers while enrolled in the training program.  As part of the initial franchise fee paid pursuant to Section 5.01 herein, Licensee shall have the right to have one principal and one manager of the Sonic Restaurant attend the Stage Career Development Program for no cost other than those set out in the preceding sentence.  Any additional parties attending the Stage Career Development Program shall bear the cost, including any fees and tuition due for such training program.

6.05.       Compliance with Entire System .
14


(a)           Licensee acknowledges that every component of the Sonic System is important to SONIC and to the operation of the Sonic Restaurant as a Sonic drive-in restaurant, including a designated menu of food and beverage products; uniformity of food specifications, preparation methods, quality and appearance; and uniformity of facilities and service.

(b)           SONIC shall have the right to inspect the Sonic Restaurant at all reasonable times to ensure that Licensee’s operation thereof is in compliance with the standards and policies of the Sonic System.  In the event that such inspection reveals any deficiency or unsatisfactory condition with respect to any aspect of the drive-in operation, Licensee shall, within 72 hours of Licensee’s receipt of notice of such condition or such other time as SONIC in its sole discretion may provide, correct or repair such deficiency or unsatisfactory condition if it is correctable or repairable within such time period, and, if not, shall within such time commence such correction or repair and thereafter diligently pursue same to completion.  The preceding sentence notwithstanding, the Licensee shall take immediate action to correct or repair any deficiency or unsatisfactory condition which poses a risk to public health or safety.  In the event Licensee fails to comply with the foregoing obligations to correct and repair, SONIC, upon 24 hours’ notice to Licensee, shall have the right, without being guilty of trespass or tort, to forthwith make or cause to be made such corrections or repairs, and the expense thereof, including board, wages, lodging and transportation of SONIC personnel, if utilized, shall be paid by Licensee upon billing by SONIC.  The foregoing shall be in addition to any other right or remedies SONIC may have.

(c)           Licensee shall comply with the entire Sonic System as described herein and in the Sonic Operations Manual , including but not limited to the following:

(i)           Operate the Sonic Restaurant in a clean, wholesome manner in compliance with prescribed standards of quality, service and cleanliness; comply with all business policies, practices and procedures imposed by SONIC; and maintain the building, equipment and parking area in a good, clean, wholesome condition and repair, well lighted and in compliance with designated standards as may be prescribed from time to time by SONIC.

(ii)           Purchase and install kitchen fixtures, lighting, and equipment, and office equipment and signs in accordance with the equipment specifications and layout initially designated by SONIC.

(iii)           Licensee shall not, without prior written consent of SONIC:  (a) make any building design conversion or (b) make any alterations, conversions or additions to the building or parking area.

(iv)           Make repairs or replacements required because of damage, wear and tear or in order to maintain the Sonic Restaurant building and parking area in good condition and in conformity with blueprints and plans.
15


(v)           Maintain the parking stalls, as required in the standard Sonic Plans and Specifications, for the exclusive use of Sonic Restaurant customers.

(vi)           Operate the Sonic Restaurant everyday of the year (except Easter, Thanksgiving and Christmas), and at least 10 hours per day or such other hours as may from time to time be reasonably prescribed by SONIC (except when the Sonic Restaurant is untenantable as a result of fire or other casualty), maintain sufficient supplies of food and paper products and employ adequate personnel so as to operate the Sonic Restaurant at its maximum capacity and efficiency.

(vii)           Cause all employees of Licensee, while working in the Sonic Restaurant, to:  (a) wear uniforms of such color, design and other specifications as SONIC may designate from time to time, (b) present a neat and clean appearance and (c) render competent and courteous service to Sonic Restaurant customers.

(viii)         All menu items which SONIC may deem appropriate to take fullest advantage of the potential market and achieve standardization in the Sonic System will be served, and no items which are not set forth in the Sonic Operations Manual or otherwise authorized and approved in writing by SONIC will be served.

(ix)           In the dispensing and sale of food products: (a) use only containers, cartons, bags, napkins and other paper goods and packaging bearing the approved trademarks and which meet the Sonic System specifications and quality standards, (b) use only those flavorings, garnishments and food and beverage ingredients which meet the Sonic System specifications and quality standards, which SONIC may designate from time to time and (c) employ only those methods of food handling, preparation, and serving which SONIC may designate from time to time.

(x)           Make prompt payment in accordance with the terms of invoices rendered to Licensee including but not limited to, his purchase of fixtures, equipment and food and paper supplies.

(xi)           At his own expense, comply with all federal, state, and local laws, ordinances and regulations affecting the operation of the Sonic Restaurant.

(xii)           Licensee shall not install any electronic games or other games of chance at the Sonic Restaurant without the express prior written consent of SONIC.

(xiii)          Furnish SONIC with current changes in home addresses and phone number of its owners and manager and, upon SONIC’s reasonable request, provide updates of personal financial statements or other credit information.

(xiv)         The Licensee shall notify SONIC’s Director of Corporate Communications or, if not available, the most senior executive officer of SONIC as soon as possible and, in any event, within 12 hours after the occurrence at the Sonic Restaurant of any event which could have an adverse impact on the Sonic Restaurant and/or the Sonic System, including (without limitation) the death or serious bodily injury of any employee or customer for any reason or the risk of infection by a contagious disease.
16


6.06.       Approved Suppliers and Advertising Agencies .

(a) SONIC may require the Licensee (i) to purchase food, beverages, signs and equipment which meet the specifications established by SONIC, (ii) to participate in SONIC’s approved purchasing cooperative for the area in which the Sonic Restaurant is located, and (iii) to retain and utilize exclusively the marketing and advertising services of SONIC approved advertising agency of record.  In addition, the Licensee immediately shall use the Licensee’s vote or votes in all advertising cooperatives in which the Licensee participates to support the use of the advertising agency of record for the Sonic drive-in restaurant chain.

(b)           SONIC may require the Licensee to support the use of and to use the products and programs of the cola syrup supplier approved by SONIC and used by a majority of all Sonic drive-in restaurants, to the exclusion of any other supplier of cola syrup.

(c)           SONIC may require the Licensee to comply with the foregoing provisions not only for the Sonic Restaurant, but also (to the extent the Licensee exercises Control) for all other Sonic drive-in restaurants for which the Licensee serves as a licensee.

(d)           SONIC hereby explicitly retains the exclusive right to consider, review or approve any and all distributors which may hold, sell or distribute Sonic-labeled goods or products, except that SONIC shall not withhold unreasonably its approval of a supplier approved for use by a duly constituted purchasing cooperative.

(e)           The terms of this Section 6.06 shall continue in effect for as long as the Licensee serves as a licensee for a Sonic drive-in restaurant and shall survive the expiration or termination of this Agreement.

(f)           If at least 95% of all Sonic drive-in restaurants are in compliance with paragraphs (a) and (b) of Section 6.06, SONIC periodically shall submit the approved advertising agency or cola syrup supplier to competitive bid or review, but shall not be obligated to do so more often than once every three years.

                6.07.  
Best Efforts

Licensee shall diligently and fully exploit his rights in this License by personally devoting his best efforts and, in case more than one (1) individual has executed this License as the Licensee, at least one (1) individual Licensee shall devote his full time and best efforts to the operation of the Sonic Restaurant.  Licensee shall keep free from any activities which would be detrimental to or interfere with the business of the Sonic Restaurant, the Sonic System, or SONIC.
17


6.08.             Interference with Employment Relations of Others

During the term of this License, Licensee shall not employ or seek to employ any person who is at the time employed by SONIC or any of its subsidiaries in a management level position. In addition, during the term of this License, SONIC agrees not to employ or seek to employ any person who is at the time employed by Licensee in a management level position. This Subsection 6.08 shall not be violated if such person has left the employ of any of the foregoing parties for a period in excess of six months.

6.09.             SONIC’s Standards

Licensee shall operate the Sonic Restaurant specified in this License in conformity with the Sonic System and the obligations set forth in this Agreement and shall strictly adhere to SONIC’s standards and policies as they exist now and as they may be from time to time modified.

6.10.             Majority Interest Owner .

Licensee represents, warrants and agrees that Licensee actually owns the majority interest in the legal and equity ownership and Control of the operation of the Sonic Restaurant, and that Licensee shall maintain such interest during the term of this License except only as otherwise permitted pursuant to the terms and conditions of this License.  Licensee shall furnish SONIC with such evidence as SONIC may request from time to time for the purpose of assuring SONIC that Licensee’s interest remains as represented herein.

7.   PROPRIETARY MARKS .

7.01.             SONIC’s Representations .

SONIC represents with respect to the Proprietary Marks that SONIC will use and permit Licensee and other licensees to use the Proprietary Marks only in accordance with the Sonic System and the standards and specifications attendant thereto which underlie the goodwill associated with and symbolized by the Proprietary Marks.

7.02.             Use of Marks .

With respect to Licensee’s licensed use of the Proprietary Marks pursuant to this Agreement, Licensee agrees that:

(a)           Licensee shall use only the Proprietary Marks designated by SONIC and shall use them only in the manner authorized and permitted by SONIC.
18


(b)           Licensee shall use the Proprietary Marks only for the operation of the Sonic Restaurant.

(c)           During the term of this Agreement and any renewal hereof, Licensee shall identify itself as the owner of the Sonic Restaurant in conjunction with any use of the Proprietary Marks, including, but not limited to, invoices, order forms, receipts, and contracts, as well as at such conspicuous locations on the premises of the Sonic Restaurant as SONIC shall designate in writing.  The identification shall be in the form which specifies Licensee’s name, followed by the term “Licensed Proprietor”, or such other identification as shall be approved by SONIC.

(d)           Licensee’s rights to use the Proprietary Marks is limited to such uses as are authorized under this Agreement, and any unauthorized use thereof shall constitute an infringement of SONIC’s rights.

(e)           Licensee shall not use the Proprietary Marks to incur any obligation or indebtedness on behalf of SONIC.

(f)           Licensee shall not use the Proprietary Marks as part of its corporate or other legal name if not already in existence prior to the effective date of this Agreement.

(g)           Licensee shall comply with SONIC’s instructions in filing and maintaining the requisite trade name or fictitious name registrations, and shall execute any documents deemed necessary by SONIC or its counsel to obtain protection for the Proprietary Marks or to maintain their continued validity and enforceability.

(h)           In the event that litigation involving the Proprietary Marks is instituted or threatened against Licensee, Licensee shall promptly notify SONIC and shall cooperate fully in defending or settling such litigation.

7.03.             Licensee’s Understanding

Licensee expressly understands and acknowledges that:

(a)           As between the parties hereto, SONIC has the exclusive right and interest in and to the Proprietary Marks and the goodwill associated with and symbolized by them, and any and all use thereof by Licensee inures to the benefit of SONIC.

(b)           The Proprietary Marks are valid and serve to identify the Sonic System and those who are licensed under the Sonic System.

(c)           Licensee shall not directly or indirectly contest the validity or the ownership of the Proprietary Marks.
19


(d)           Licensee’s use of the Proprietary Marks pursuant to this Agreement does not give Licensee any ownership interest or other interest in or to the Proprietary Marks, except the nonexclusive license granted herein.

(e)           Any and all goodwill arising from Licensee’s use of the Proprietary Marks in its licensed operations under the Sonic System shall inure solely and exclusively to SONIC’s benefit, and upon expiration or termination of this Agreement and the License herein granted, no monetary amount shall be assigned as attributable to any goodwill associated with Licensee’s use of the Sonic System or the Proprietary Marks.

(f)           The right and license of the Proprietary Marks granted hereunder to Licensee is nonexclusive except as provided in subsection 2.01(a) of this Agreement, and SONIC thus has and retains the right among others:

(i)           To grant other licenses for the Proprietary Marks, in addition to those licenses already granted to existing licensees.

(ii)          To use the Proprietary Marks in connection with selling products and services.

(iii)         To develop and establish other systems for the same or similar Proprietary Marks, or any other Proprietary Marks, and grant licenses or franchises thereto without providing any rights therein to Licensee.

(g)           SONIC reserves the right to substitute different Proprietary Marks for use in identifying the Sonic System and the businesses operating thereunder if SONIC’s currently owned Proprietary Marks no longer can be used.

8.   MANUAL .

SONIC shall loan to Licensee for use at the Sonic Restaurant the Sonic Operations Manual prepared by SONIC for use by licensees of Sonic drive-in restaurants similar to the Sonic Restaurant to be operated by Licensee.  Licensee recognizes that the Sonic Operations Manual contains detailed information relating to operation of the Sonic Restaurant including: (a) food formulas and specifications for designated food and beverage products; (b) methods of inventory control; (c) bookkeeping and accounting procedures; (d) business practices and policies; and (e) other management, advertising, and personnel policies.  Licensee agrees to promptly adopt and use exclusively the formulas, methods and policies contained in the Sonic Operations Manual , now and as they may be modified by SONIC from time to time and to return said manual to SONIC at the expiration or earlier termination of this License. 

9.   CONFIDENTIAL INFORMATION
20


9.01.             SONIC Proprietary and Confidential Information .

SONIC possesses certain unique, proprietary and confidential information, consisting of methods and procedures for preparation of food and beverage products, confidential recipes for food products, distinctive service and accessories, plans and specifications for interior and exterior signs, designs, layouts and color schemes, and methods, techniques, formats, systems, specifications, procedures, information, trade secrets, sales and marketing programs, methods of business operations and management, and knowledge of and experience in the operation and franchising of Sonic drive-in restaurants and the Sonic System (collectively, the “Confidential Information”).  SONIC will disclose the Confidential Information to Licensee in furnishing Licensee the Sonic Plans and Specifications for a Sonic drive-in restaurant, the training program, and the Sonic Operations Manual , and in providing guidance and assistance to Licensee during the term of this Agreement.  The Sonic Operations Manual , as modified by SONIC from time to time, and the policies contained therein, are incorporated in this Agreement by reference.

9.02.             Licensee’s Use of Proprietary and Confidential Information .

Licensee acknowledges and agrees that Licensee shall not acquire any interest in the Confidential Information, other than the right to utilize it in the development and operation of the Sonic Restaurant (and other Sonic drive-in restaurants under license agreements with SONIC) during the term of this Agreement, and that the use or duplication of the Confidential Information in any other business would constitute an unfair method of competition.  Licensee acknowledges and agrees that the Confidential Information is proprietary to SONIC, may constitute trade secrets of SONIC and is disclosed to Licensee solely on the condition that Licensee agrees, and Licensee does hereby agree, that Licensee:

(i)  shall not use the Confidential Information in any other business or capacity, or for the benefit of any other Person or entity;

(ii) shall maintain the absolute confidentiality of the Confidential Information, and shall not disclose or divulge the Confidential Information to any unauthorized Person or entity, during and after the term of the License;

(iii) shall not make unauthorized copies of any portion of the Confidential Information disclosed in printed, audio, or video form (except in connection with instruction of employees in the operation of the Sonic Restaurant); and

(iv) shall adopt and implement all procedures prescribed from time to time by SONIC to prevent unauthorized use or disclosure of the Confidential Information, including, without limitation, restrictions on disclosure thereof to employees of the Sonic Restaurant and the use of nondisclosure and non-competition clauses in employment agreements with employees (including all owners, shareholders and partners of Licensee) who have access to the Confidential Information.
21


9.03.             Licensee’s Use of Sonic Operations Manual .

Licensee may not at any time, in any manner, directly or indirectly, and whether or not intentionally, copy any part of the Sonic Operations Manual , permit any part of it to be copied, disclose any part of it except to employees or other having a need to know its contents for purposes of operating the Sonic Restaurant, or permit its removal from the Sonic Restaurant without prior written consent from SONIC.  Notwithstanding anything to the contrary contained in this Agreement and provided Licensee shall have obtained SONIC’s prior written consent, the restrictions on Licensee’s disclosure and use of the Confidential Information shall not apply to the following:

(a)           information, processes or techniques which are or become generally known in the food service industry, other than through disclosure (whether deliberate or inadvertent) by Licensee; and

(b)           disclosure of the Confidential Information in judicial or administrative proceedings to the extent that Licensee is legally compelled to disclose such information, provided Licensee shall have used its best efforts, and shall have afforded SONIC the opportunity, to obtain an appropriate protective order or other assurance satisfactory to SONIC of confidential treatment for the information required to be so disclosed.

10.   ACCOUNTING AND RECORDS .

10.01.           Due Date .

On or before the 20th day of each month, Licensee shall submit to SONIC a complete profit and loss statement in a form prescribed by SONIC and such statistical reports in such form as SONIC shall reasonably require from time to time, for the previous month immediately ended.

10.02.          Record Retention .

Licensee shall keep and preserve full and complete records of the Sonic Restaurant business for at least three years in a manner and form satisfactory to SONIC and shall also deliver such additional financial, operating and other information and reports as SONIC may reasonably request on the forms and in the manner prescribed by SONIC; provided, however, that Licensee shall maintain, at a minimum, those books and records required to be kept by the Internal Revenue Service under the Internal Revenue Code for purposes of its regulation of Licensee’s business and make the same books available to SONIC.

10.03.           Charitable Contributions and Discounts .

In meeting the requirements set forth in Sections 10.01 and 10.02 above, Licensee shall keep records substantiating and enter as a line item on its financial statements amounts representing the valuation for goods (whether food, paper or otherwise) which constitute charitable contributions to third parties from the same goods out of the Sonic Restaurant.  Likewise, the Licensee shall maintain records and enter on its financial statements (particularly a line item on its profit and loss statement) information representing the value or amount of sales represented by coupons traded with and discounts granted by the Licensee at the Sonic Restaurant.
22


10.04.           Annual Reports .

Licensee further agrees to submit, within 90 days following the close of each fiscal year of the Sonic Restaurant’s operation, a profit and loss statement covering operations during such fiscal year and the balance sheet taken as of the close of such fiscal year.

10.05.           Audit by SONIC .

SONIC shall have the right to inspect and audit Licensee’s accounts, books, records and tax returns at all times during and after the term of this Agreement.  If such inspection discloses that Gross Sales actually exceeded the amount reported by Licensee or that Licensee failed to make advertising expenditures required by Sections 11.01(a) or 11.01(b), Licensee shall immediately pay SONIC:  (i) the additional royalty fee, brand fee and advertising expenditures; (ii) interest on all unpaid amounts (from the original due date) at a rate equal to that provided by Section 5.05 herein; and (iii) a 10% surcharge on all unpaid amounts.  If such inspection discloses that Gross Sales actually exceeded the amount reported by Licensee as Licensee’s Gross Sales by an amount equal to 3% or more of the Gross Sales originally reported to SONIC or, in the case of failing to make required advertising expenditures, that such unpaid expenditures exceeded 3% of the amount required to be expended, Licensee shall bear the cost of such inspection and audit at rates and fees customarily charged by SONIC for such auditing and inspecting services and duties.  Unpaid brand fees, including interest and surcharges collected by SONIC pursuant to this section, shall be used in accordance with the expenditures authorized by Section 5.03; nevertheless, SONIC may, on a case by case basis, at SONIC’s sole discretion, use such collected amounts in accordance with the expenditures authorized by Sections 11.01(a) and 11.01(b).  SONIC shall have the right to bring an action in its own name to collect unpaid advertising and brand expenditures required by Section 11 herein.

10.06.           Third –party Audit .

If SONIC has reason to believe that the Licensee may not have reported all of its Gross Sales, SONIC may require the Licensee to have its profit and loss statement and balance sheet certified by an independent public accountant.  Licensee shall at his expense cause a Certified Public Accountant to consult with SONIC concerning such statement and balance sheet.  The original of each such reports required by this Section 10.06 shall be mailed to SONIC’s business office at the address designated in Section 19 below.

10.07.           Licensee’s Failure to Timely Deliver Financial Records .
23


If Licensee fails to timely provide SONIC with complete profit and loss statements, accounts, books, records and tax returns pertaining to the Sonic Restaurant business, or fails to fully cooperate with SONIC’s audit of the Sonic Restaurant business, SONIC shall have the right to estimate Licensee’s Gross Sales for the Sonic Restaurant using information available on the Sonic Restaurant or other Sonic drive-in restaurants.  Licensee agrees to accept SONIC’s estimates as conclusively correct until Licensee fully complies with SONIC’s accounting and disclosure requirements under this Agreement.  However, if the Licensee’s subsequent accounting and disclosures reveal that Licensee under-reported Gross Sales or underpaid fees due under this Agreement, SONIC may recover all deficiencies and may litigate claims of fraud even though SONIC may have already obtained a judgment using SONIC’s estimates.  Furthermore, nothing in this Agreement or any judgment using estimates shall prevent or hinder SONIC’s further efforts and rights to obtain the accounting and disclosures which Licensee is required to give to SONIC under this Agreement.

10.08.           Financial Disclosure .

SONIC shall have the right to assemble and disseminate to third parties financial and other information regarding the Licensee and other licensees of SONIC to the extent required by law or to the extent necessary or appropriate to further the interests of the Sonic System as a whole.  SONIC shall have the right to disclose the business name, address and telephone number of the Licensee as they appear in SONIC’s records to any Person making inquiry as to the ownership of the Sonic Restaurant.  SONIC shall not disclose specific financial information regarding the Licensee or the Sonic Restaurant to any Person without (a) the Licensee’s prior, written consent or (b) being directed to disclose the information pursuant to the order of a court or other governmental agency.

11.   ADVERTISING AND BRAND EXPENDITURES

11.01.           Standard Program

Recognizing the value of advertising and the importance of the standardization of advertising programs to the furtherance of the goodwill and public image of the System, the parties agree as follows:

(a)           In the event the Sonic Restaurant lies within a DMA for which a SONIC-approved advertising cooperative has been formed, Licensee shall contribute to such advertising cooperative an amount required by such advertising cooperative on a schedule required by such advertising cooperative, provided that such contributions shall occur no less often than each calendar quarter and shall be of an amount not less than 3.25% of Licensee’s Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month.

(b)           In the event there exists no SONIC-approved advertising cooperative in the DMA in which the Sonic Restaurant is located, during each calendar quarter of the term of this Agreement, Licensee shall spend for approved advertising and promotion of the Sonic Restaurant (including, but not limited to, television time, radio time, newspaper display space, distributed promotional materials, but not including any amount spent on sign rent, paper products, candy or other foods which evidence SONIC’s trademarks or color patterns and the like) an amount equal to but not less than 3.25% of Licensee’s Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month.
24


(c)           For purposes of determining the amount which the Licensee is required to spend pursuant to Sections 11.01(a), 11.01(b) and 5.03, above, for each calendar quarter which is the subject of review, the parties hereto agree that the first two months of such calendar quarter and last month of the preceding calendar quarter shall be used in determining the Gross Sales of the Sonic Restaurant to determine the expenditures required hereunder.  For example, to determine the expenditures required for January, February and March, the parties hereto agree that they will look to December, January, and February’s sales in order to determine the Gross Sales to determine the amount which must be expended by the Licensee under these Sections 11.01(a), 11.01(b) and 5.03.  In the event the amounts required by Section 11.01(a) or 11.01(b) are not spent in a timely fashion, Licensee shall pay SONIC in accordance with Section 10.05.

(d)           All advertising by Licensee in any medium which utilizes the Proprietary Marks or refers in any way to the Sonic Restaurant shall be conducted in a dignified manner and shall conform to such standards and requirements as SONIC may specify from time to time in writing.  Licensee shall submit to SONIC (in accordance with the notice provisions contained herein), for SONIC’s prior approval (except with respect to prices to be charged), samples of all advertising and promotional plans and materials that Licensee desires to use, that use the Proprietary Marks or refer to the Sonic Restaurant and that have not been prepared or previously approved by SONIC.  If written disapproval thereof is not received by Licensee within 15 days from the date of receipt by SONIC of such materials, SONIC shall be deemed to have given the required approval.  Upon notice from SONIC, Licensee shall discontinue and/or remove any objectionable advertising material, whether or not same was previously approved by Franchisor.  If said materials are not discontinued and/or removed within five days after notice, Franchisor or its authorized agents, may, at any time, enter upon Franchisor’s premises, or elsewhere, and remove any objectionable signs or advertising media and may keep or destroy such signs or other media without paying therefore, and without being guilty of trespass or other tort. 

(e)           SONIC may offer from time to time to provide, upon terms subject to the discretion of SONIC, approved local advertising and promotional plans and materials, including, without limitation, newspaper display space, distributed promotional materials.

(f)           SONIC or its designee shall maintain and administer a fund for the System as follows:

(i)           As provided in Subsection 5.03 hereof, Licensee shall pay a brand contribution fee to the Sonic Brand Fund (formerly known as Sonic Advertising Fund), which shall be administered by SONIC, and shall be deposited in a separate bank account denoted as the Sonic Brand Fund (the “Fund”). 
25


(ii)           SONIC shall direct all brand programs with sole discretion over the creative concepts, materials, and media used in such programs.  The Fund is intended to enhance the Sonic System and maximize general public recognition and acceptance of the Proprietary Marks for the benefit of the System and the Licensee acknowledges that SONIC and its designees undertake no obligation in administering the Fund to make expenditures for Licensee which are equivalent or proportionate to Licensee’s contribution, and nothing in this Subsection shall contravene the intent in Subparagraph (iv) of Paragraph (f) of this Subsection 11.01.

(iii)           The Fund and all earnings thereof shall be used exclusively to meet any and all costs of maintaining, administering, directing and preparing advertising (including, without limitation, the cost of preparing and conducting television, radio, magazine and newspaper advertising campaigns and other public relations activities; employing advertising agencies to assist therein; and providing promotional brochures and other marketing materials to licensees in the Sonic System) as well as any other purpose that promotes, enhances or protects the Sonic System.  All sums paid by licensees to the Fund shall be maintained in a separate account from the other funds of SONIC.  The Fund shall pay SONIC monthly an amount equal to 15% of the Fund’s receipts during the preceding month, but not to exceed SONIC’s actual administrative costs and overhead, if any, as SONIC may incur in activities reasonably related to the administration or direction of the Fund for the licensees and the Sonic System, including without limitation, conducting market research, preparing marketing and advertising materials, and collecting and accounting for assessments for the Fund.  The Fund and its earnings shall not inure to the benefit of SONIC.

(iv)           All materials produced by the Fund shall be made available to all licensees without cost on a regular basis, excluding distribution costs.  This Subparagraph (iv) of Paragraph (f) of Subsection 11.01 shall not preclude SONIC from offering other materials not produced by the Fund upon terms subject to the discretion of SONIC.  (See Paragraph (e) of this Subsection 11.01.)

(v)           The Fund is not an asset of SONIC, and an independent certified public accountant designated by SONIC shall review the operation of the Fund annually, and the report shall be made available to Licensee upon request.  Notwithstanding the foregoing, the body approved and designated by SONIC as the body to consult with regarding SONIC’s maintenance and administration of the Fund (such as the current Franchise Advisory Council or its successor) may designate the independent public accountant to conduct the required review of the operation of the Fund, if requested in writing at least 30 but not more than 60 days prior to the end of each fiscal year.

(vi)           It is anticipated that most contributions to the Fund shall be expended during the year within which the contributions are made.  If, however, excess amounts remain in the Fund at the end of such year, all expenditures in the following year(s) shall be made first out of accumulated earnings, next out of current earnings, and finally from contributions.
26


(vii)           Although SONIC intends the Fund to be of perpetual duration, SONIC maintains the right to terminate the Fund.  Such Fund shall not be terminated, however, until all monies in the Fund have been expended for ad purposes as aforesaid.

(g)           On at least a quarterly basis, SONIC shall consult with the body approved and designated by Sonic (such as the current Franchise Advisory Council or its successor) regarding SONIC’s maintenance and administration of the Fund and shall report to that body on the Fund’s operation.

11.02.           Publicity

SONIC shall have the right to photograph the Sonic Restaurant’s exterior and/or interior, and the various foods served, and to use any such photographs in any of its publicity or advertising, and Licensee shall cooperate in securing such photographs and consent of Persons pictured.

12.  INSURANCE .

12.01.           Insurance Amounts .

Prior to opening or taking possession of the Sonic Restaurant, the Licensee shall acquire and thereafter maintain insurance from insurance companies acceptable to SONIC.  The Licensee shall determine the appropriate limits of liability insurance but SONIC shall require the following minimum amounts and policy forms of insurance:

(a)           The Licensee shall maintain statutory worker’s compensation insurance and employer’s liability insurance having a minimum limit of liability of the greater of $500,000 or the minimum amount otherwise required by applicable state law.  SONIC shall accept participation in the Texas Sonic Employee Accident Program (“TSEAP”) or in the non-subscriber program for Sonic drive-in restaurants located in Texas as long as Texas law does not require statutory worker’s compensation insurance.

(b)           The Licensee shall maintain commercial general liability insurance, including bodily injury, property damage, products, personal and advertising injury coverage on an occurrence policy form having a minimum per occurrence and general aggregate limits of at least $1,000,000 per location.

(c)           The Licensee shall maintain non-owned automobile liability insurance having a minimum limit of $1,000,000.  The automobile policy also shall provide coverage for owned automobiles if owned or leased in the name of the Licensee.
27


(d)           SONIC shall have the right to require the Licensee to increase the insurance specified above by giving the Licensee 60 days’ written notice in accordance with the notice provisions of this Agreement, and the Licensee shall comply no later than the first policy renewal date after that 60-day period.

12.02.           SONIC as Additional Insured .

The Licensee shall name SONIC and SONIC’s subsidiaries and Affiliates as additional insureds under the insurance policies specified in paragraphs (a), (b) and (c) of Section 12.01, above.  The Licensee’s policies shall constitute primary policies of insurance with regard to other insurance, shall contain a waiver of subrogation provision in favor of SONIC as it relates to the operation of the Sonic Restaurant, and shall provide for at least 30 days’ written notice to SONIC prior to their cancellation or amendment.

12.03.           General Conditions .

Prior to opening or taking possession of the Sonic Restaurant, the Licensee shall furnish SONIC with certificates of insurance evidencing that the Licensee has obtained the required insurance in the form and amounts as specified above.  In addition, the Licensee shall deliver evidence of the continuation of the required insurance policies at least 30 days prior to the expiration dates of each existing insurance policy.  If the Licensee at any time fails to acquire and maintain the required insurance coverage, SONIC shall have the right, at the Licensee’s expense, to acquire and administer the required minimum insurance coverage on behalf of the Licensee.  However, SONIC shall not have any obligation to assume the premium expense and nothing in this Agreement shall constitute a guaranty by SONIC against any losses sustained by the Licensee.  SONIC may relieve itself of all duties with respect to the administration of any required insurance policies by giving 10 days’ written notice to the Licensee.

13.  TRANSFER OF INTEREST .

13.01.          Assignment

The rights and duties created by this Agreement are personal to Licensee and SONIC has granted the License in reliance on the collective character, skill, aptitude and business and financial capacity of Licensee and Licensee’s principals.  Accordingly, except as may be otherwise permitted by this Section 13, neither Licensee nor any Person or entity with an interest in Licensee shall directly or indirectly, through one or more intermediaries, without SONIC’s prior written consent, sell, assign, transfer, convey, give away, pledge, mortgage or otherwise encumber any direct or indirect interest in the License; any interest in Licensee, if Licensee is a partnership, joint venture or closely held corporation; or any interest which, together with other related previous simultaneous or proposed transfers, constitutes a transfer of Control of Licensee where Licensee is registered under the Securities Exchange Act of 1934.  Any such purported assignment occurring by operation of law or without SONIC’s prior written consent and pursuant to the terms of this Section 13, shall constitute a default of this Agreement by Licensee and such purported assignment shall be null and void. 
28


13.02.           Death or Permanent Incapacity of Licensee

Upon the death or permanent incapacity of Licensee, the interest of Licensee in the License may be assigned either pursuant to the terms of Subsection 13.04 herein or to one or more of the following Persons:  Licensee’s spouse, heirs or nearest relatives by blood or marriage, subject to the following conditions:  (1) If, in the sole discretion of SONIC, such persons shall be capable of conducting the Sonic Restaurant business in accordance with the terms and conditions of the License, and (2) if such persons shall also execute an agreement by which they personally assume full and unconditional liability for and agree to perform all the terms and conditions of the License to the same extent as the original Licensee.  In the event that Licensee’s heirs do not obtain the consent of SONIC as assignees of the License, the personal representative of Licensee shall have the greater of 120 days or the completion of the probate of the Licensee’s estate to dispose of Licensee’s interest hereunder, which disposition shall be subject to all the terms and conditions for assignments under Subsection 13.04.

13.03.           Assignment to Licensee’s Corporation

SONIC may, upon Licensee’s compliance with the following requirements, consent to an assignment of the License to a corporation whose shares are owned and Controlled by Licensee.  Such written materials shall be supplied to SONIC within 15 days after the request by SONIC.

(a)           Licensee’s corporation shall be newly organized, and its charter shall provide that its activities are confined exclusively to operating the Sonic Restaurant.

(b)           Licensee and Licensee’s corporation shall maintain stop transfer instructions against the transfer on Licensee’s corporation’s records of any securities with any voting rights subject to the restrictions of Section 13 hereof, and shall issue no securities upon the face of which the following printed legend does not legibly and conspicuously appear. 

The transfer of this stock is subject to terms and conditions of one or more license agreements with Sonic Industries LLC.  Reference is made to said license agreement(s) and the restrictive provisions of the Articles and By-Laws of this corporation.  By agreeing to receive these securities, the transferee hereby agrees to be bound by the terms of such agreements, articles and by-laws.

(c)           At any time upon SONIC’s request, Licensee and Licensee’s corporation shall furnish company with a list of all shareholders having an interest in Licensee’s corporation, the percentage interest of such shareholder and a list of all officers and directors in such form as SONIC may require. 
29


(d)           The corporate name of Licensee’s corporation shall not include any of the Proprietary Marks granted by the License.  Licensee and Licensee’s corporation shall not use any mark nor any name deceptively similar thereto in a public or private offering of its securities, except to reflect Licensee’s corporation’s franchise relationship with SONIC.  Any prospectus or registration Licensee or Licensee’s corporation would propose to use in such a public or private offering shall be submitted to SONIC within a reasonable time prior to the effective date thereof for the purpose of permitting SONIC to verify compliance with this requirement by Licensee and Licensee’s corporation. 

(e)           Articles of Incorporation, By-Laws and all other documents governing Licensee’s corporation shall be forwarded to SONIC for approval.  The Articles of Incorporation, By-Laws and other organization and governing documents shall recite that the issuance and transfer of any interest in Licensee’s corporation are restricted by the terms of Section 13 of this Agreement.

(f)           Each shareholder of the Licensee’s corporation shall personally guarantee performance under this Agreement and shall be personally bound by the terms thereof. 

(g)           Any breach of this Agreement by Licensee’s corporation shall be deemed a breach of this Agreement by each shareholder of Licensee’s corporation and each shareholder shall be personally and fully liable and obligated by any and all such breaches.

(h)           Licensee and Licensee’s corporation shall submit to SONIC, prior to any assignment hereunder, a shareholders agreement executed by the Board of Directors and ratified by all shareholders, which states that, except as may be permitted by Section 13 of this Agreement, no shares of stock or other interest in Licensee’s corporation shall be issued, transferred, or assigned to any Person or entity without SONIC’s prior written consent. 

(i)           Each and every shareholder of Licensee’s corporation or any party owning a security issued by, or owning any legal or equitable interest in Licensee’s corporation or in any security convertible to a legal or equitable interest in Licensee’s corporation shall meet those same standards of approval as an individual licensee shall be required to meet prior to being included as a licensee on a standard license agreement with SONIC.

13.04.           Other Assignment

(a)           In addition to any assignments or contingent assignments contemplated by the terms of Subsections 13.02 and 13.03 of this Section 13, Licensee shall not sell, transfer or assign the License to any Person or Persons without SONIC’s prior written consent.  Such consent shall not be unreasonably withheld.

(b)           In determining whether to grant or to withhold such consent, the following requirements must be met by Licensee:
30


(i)           All of Licensee’s accrued monetary obligations shall have been satisfied whether due under this Agreement or otherwise.

(ii)           SONIC and the Licensee execute a general release of each other, in a form satisfactory to SONIC, of any and all claims the Licensee may have against SONIC and its Affiliates, including (without limitation) all claims arising under any federal, state or local law, rule or ordinance, but excluding (as to SONIC) any claims against the Licensee for (a) unpaid moneys due SONIC or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of SONIC’s legal rights regarding the Proprietary Marks.  SONIC may waive the requirements of this subparagraph (ii) at SONIC’s election.

(iii)           Licensee shall not be in material breach of this Agreement or any other agreement between SONIC and Licensee. 

(iv)           Assignee (or the assignee’s management, as the case may be) shall at SONIC’s sole discretion, enroll in and successfully complete such training programs as SONIC shall at that time designate according to Section 6.04 hereof.

(v)           SONIC shall consider of each prospective transferee, by way of illustration, the following:  (a) work experience and aptitude, (b) financial background, (c) character, (d) ability to personally devote full time and best efforts to managing the Sonic Restaurant, (e) residence in the locality of the Sonic Restaurant, (f) equity interest in the Sonic Restaurant, (g) conflicting interests and (h) such other criteria and conditions as SONIC shall apply in the case of an application for a new license to operate a Sonic drive-in restaurant.  SONIC’s consent shall also be conditioned each upon such transferee’s execution of an agreement by which transferee personally assumes full and unconditional liability for and agrees to perform from the date of such transfer all obligations, covenants and agreements contained in the License to the same extent as if transferee had been an original party to the License.

13.05.           SONIC’s Right of First Refusal

(a)           If Licensee or any Person or entity with an interest in Licensee has received and desires to accept any bona fide offer to purchase all or any part of Licensee’s interest in this Agreement or in Licensee and the transfer of such interest would: (1) result in a change of Control of Licensee of this Agreement or (2) constitute a transfer of interest held by a Controlling Person of Licensee or of the License, Licensee or such Person shall notify SONIC in writing of each such offer, with such notice including the name and address of the proposed purchaser, the amount and terms of the proposed purchase price, a copy of the proposed purchase contract (signed by the parties, but expressly subject to SONIC’s right of first refusal), and all other terms and conditions of such offer.  SONIC shall have the right and option, exercisable within 20 days after SONIC’s receipt of such written notification, to send written notice to Licensee or such Person or entity that SONIC or its designee intends to purchase the interest which is proposed to be transferred on the same terms and conditions offered by the third party.  Any material change in the terms of an offer prior to closing shall cause it to be deemed a new offer, subject to the same right of first refusal by SONIC or its designee as in the initial offer.  SONIC’s failure to exercise such option shall not constitute a waiver of any other provision of this Agreement, including any of the requirements of this Section with respect to the proposed transfer.  Silence on the part of SONIC shall constitute rejection.  If the proposed sale includes assets of Licensee not related to the operation of a licensed Sonic drive-in restaurant, SONIC may purchase not only the assets related to the operation of a licensed Sonic drive-in restaurant, but may also purchase the other assets.  An equitable purchase price shall be allocated to each asset included in the proposed sale. 
31


(b)           The election by SONIC not to exercise its right of first refusal as to any offer shall not affect its right of first refusal as to any subsequent offer. 

(c)           Any sale or attempted sale effected without first giving SONIC the right of first refusal described above shall be void and of no force and effect. 

(d)           If SONIC does not accept the offer to purchase the Sonic Restaurant, Licensee may conclude the sale to the purchaser who made the offer so long as the terms and conditions of such sale are identical to those originally offered to SONIC; provided, however, that SONIC’s approval of the assignee be first obtained, which consent shall not be unreasonably withheld upon compliance with the conditions on assignment imposed by this Agreement.

(e)           The provisions of this Section 13.05 shall not apply to any proposed transfers to members of the Licensee’s immediate family.  For the purposes of this Section 13.05, a member of the Licensee’s immediate family shall mean the Licensee’s spouse and children (by birth or adoption).  In addition, the provisions of this Section 13.05 shall not apply to any proposed transfers to Person who already own an interest (directly or indirectly) in this Agreement or the License as long as the transfer will not result in a change in Control of the Licensee or the License.

13.06.           Consent to Assignments

With regard to any transfer, assignment or pledge of any interest in this Agreement or in the Licensee pursuant to the foregoing provisions of this Section 13, SONIC shall not withhold its consent unreasonably as long as the proposed transfer, assignment or pledge otherwise complies with the other requirements set forth in this Section 13.

14.  DEFAULT AND TERMINATION .

14.01.           Automatic Termination

Licensee shall be deemed to be in breach of this Agreement and all rights granted herein shall automatically terminate with notice from SONIC if any of the following events occur: 
32


(a)           Licensee shall become insolvent. 

(b)           Licensee, either personally, through an equity owner, or through Licensee’s attorney, shall give oral or written notice to SONIC of Licensee’s intent to file a voluntary petition under any bankruptcy law. 

(c)           A final judgment aggregating in excess of $5,000 against the Sonic Restaurant or property connected with the Sonic Restaurant which remains unpaid for 30 days.

(d)           Suit to foreclose any lien against any assets of the Sonic Restaurant is instituted against Licensee and (i) is not dismissed within 30 days, (ii) such lien is not contested and challenged through the applicable administrative agencies or courts, or (iii) a bond is not posted (if such remedy is available) to delay any such foreclosure and guarantee performance. 

(e)           The assets of the Sonic Restaurant are sold after being levied thereupon by sheriff, marshal or a constable. 

(f)           Transfer of this Agreement, in whole or in part, is effected in any manner inconsistent with Section 13 hereof. 

14.02.           Optional Termination

Licensee shall be deemed to be in breach of this Agreement and SONIC may, at its option, terminate this Agreement and all rights granted herein at any time during the term hereof without affording Licensee any opportunity to cure the breach, effective immediately upon Licensee’s receipt of a notice of termination, upon the occurrence of any of the following events:

(a)           If Licensee ceases to operate the Sonic Restaurant or otherwise abandons the Sonic Restaurant (other than closure permitted pursuant to Section 6.05(c)(vi) herein) or forfeits the legal right to do or transact business at the location licensed herein.

(b)           If Licensee is convicted of a felony, a crime involving moral turpitude, or any other crime or offense that is reasonably likely, in the sole opinion of SONIC, to adversely affect the Sonic System, the Proprietary Marks, the goodwill associated therewith or SONIC’s rights therein.

(c)           If Licensee misuses or makes any unauthorized use of any of the Proprietary Marks or any other identifying characteristic of the Sonic System or otherwise materially impairs the goodwill associated therewith or SONIC’s rights therein and the Licensee cannot cure the default within 30 days.

(d)           If Licensee improperly discloses trade secrets or confidential information and the Licensee cannot cure the default within 30 days.
33


(e)           If continued operation of the Sonic Restaurant might endanger public health or safety.

(f)           If Licensee knowingly or through gross negligence maintains false books or records or knowingly or through gross negligence submits any false report to SONIC. 

14.03.           Period to Cure

Except as provided in Subsections 14.01 and 14.02, Licensee shall have 30 days after receipt from SONIC of a written notice of breach of this Agreement or such notice period as is required by the law of the state where the Sonic Restaurant is located, within which to remedy any breach hereunder.  However, this period to cure will not be available to Licensee, and SONIC will not be required to delay termination of this Agreement, where the breach involved is one which Licensee cannot cure within the prescribed cure period or is one which is impossible to cure.  SONIC shall have the right to terminate this Agreement and the License upon written notice to the Licensee and without any opportunity to cure after three willful and material breaches of the same provision of this Agreement within any 12-month period for which the Licensee has received written notice and an opportunity to cure.  If any such breach is not cured within that time, SONIC may, at its option, terminate this Agreement and all rights granted hereunder effective immediately on the date of receipt by Licensee of written notice of termination.  Licensee shall be in breach hereunder for any failure to comply with any of the terms of this Agreement or to carry out the terms of this Agreement in good faith.  Such breach shall include, but shall not be limited to, the occurrence of any of the following illustrative events:

(a)           If the Licensee fails to pay any past due amounts owed to SONIC after SONIC has mailed the Licensee two or more statements at least 20 days apart.

(b)           If Licensee fails to promptly pay, or repeatedly delays the prompt payment of undisputed invoices from his suppliers or in the remittance of rent and property tax as required in Licensee’s lease.

(c)           If Licensee fails to maintain and operate the Sonic Restaurant in a good, clean, and wholesome manner or otherwise is not in compliance with the standards prescribed by the Sonic System.

(d)           If Licensee attempts to assign or transfer any interest in this Agreement in violation of Section 13 herein.

(e)           If Licensee denies SONIC the right to inspect the Sonic Restaurant at reasonable times, which includes the right to photograph the interior and exterior of the Sonic Restaurant in its entirety.

(f)           If Licensee fails, refuses, or neglects to obtain SONIC’s prior written approval or consent as required by this Agreement.
34


(g)           If Licensee acquires any interest in another business in violation of Section 16.

(h)           If Licensee fails, refuses or neglects to provide SONIC with Licensee’s home address and home telephone number.

(i)           If Licensee breaches any other requirement set forth in this Agreement.

(j)           If Licensee, upon the destruction of the Sonic Restaurant, fails to rebuild the franchise premises and resume operation within a reasonable time (cessation of the business from a franchise premises shall not constitute default of this Agreement if caused by condemnation, expiration of a location lease pursuant to its terms at execution or when failure to rebuild following destruction of the franchised premises is prohibited by law or the location lease). 

14.04.           Resolution of Disputes .

The following provisions shall apply to any controversy between the Licensee and SONIC (including an Affiliate of SONIC) and relating (a) to this Agreement (including any claim that any part of this Agreement is invalid, illegal or otherwise void or voidable), (b) to the parties’ business activities conducted as a result of this Agreement, or (c) the parties’ relationship or business dealings with one another generally, including all disputes and litigation pending or in existence as of the date of this Agreement.

(a)            Negotiation .

The parties first shall use their best efforts to discuss and negotiate a resolution of the controversy.

(b)            Mediation .

If the efforts to negotiate a resolution do not succeed, the parties shall submit the controversy to mediation by a mediation firm agreeable to the parties or by the American Arbitration Association, if the parties cannot agree.  The mediation shall take place in Oklahoma City, Oklahoma.

(c)            Arbitration .

If the efforts to negotiate and mediate a resolution do not succeed, the parties shall resolve the controversy by final and binding arbitration in accordance with the Rules for Commercial Arbitration (the “Rules”) of the American Arbitration Association in effect at the time of the execution of this Agreement and pursuant to the following additional provisions:
35


(i)            Applicable Law .  The Federal Arbitration Act (the “Federal Act”), as supplemented by the Oklahoma Arbitration Act (to the extent not inconsistent with the Federal Act), shall apply to the arbitration.

(ii)            Selection of Arbitrators .  The parties shall select three arbitrators within 10 days after the filing of a demand and submission in accordance with the Rules.  If the parties fail to agree on three arbitrators within that 10-day period or fail to agree to an extension of that period, the arbitration shall take place before three arbitrators selected in accordance the Rules.  At least one of the arbitrators shall constitute an individual selected by Sonic (or its Affiliate) who has experience with franchise law or franchise relations.  A decision or award by a majority of the arbitrators shall constitute the decision or award of the arbitrators.

(iii)            Location of Arbitration .  The arbitration shall take place in Oklahoma City, Oklahoma, and the arbitrators shall issue any award at the place of arbitration.  The arbitrators may conduct hearings and meetings at any other place agreeable to the parties or, upon the motion of a party, determined by the arbitrators as necessary to obtain significant testimony or evidence.

(iv)            Discovery .  The arbitrators shall have the power to authorize all forms of discovery (including depositions, interrogatories and document production) upon the showing of (a) a specific need for the discovery, (b) that the discovery likely will lead to material evidence needed to resolve the controversy, and (c) that the scope, timing and cost of the discovery is not excessive.

(v)            Authority of Arbitrators .  The arbitrators shall not have the power (a) to alter, modify, amend, add to, or subtract from any term or provision of this Agreement; (b) to rule upon or grant any extension, renewal or continuance of this Agreement; (c) to award damages or other remedies expressly prohibited by this Agreement; or (d) to grant interim injunctive relief prior to the award.

(vi)            Scope of Proceeding .  The parties shall conduct any arbitration proceeding and resolve any controversy on an individual basis only and not on a class-wide, multiple-party, or similar basis.

(vii)            Enforcement of Award .  The prevailing party shall have the right to enter the award of the arbitrators in any court having jurisdiction over one or more of the parties or their assets.  The parties specifically waive any right they may have to apply to any court for relief from the provisions of this Agreement or from any decision of the arbitrators made prior to the award.  The award of the arbitrators shall not have any precedential or collateral estoppel effect on any other controversy involving SONIC or its Affiliates.
36


(d)            Excluded Controversies .

At the election of SONIC or its Affiliate, the provisions of this Section 14.04 shall not apply to any controversies relating to any fee due SONIC or its Affiliate; any promissory note payments due SONIC or its Affiliate; or any trade payables due SONIC or its Affiliate as a result of the purchase of equipment, goods or supplies.  The provisions of this Section 14.04 also shall not apply to any controversies relating to the use and protection of the Proprietary Marks or the Sonic System, including (without limitation) SONIC’s right to apply to any court of competent jurisdiction for appropriate injunctive relief for the infringement of the Proprietary Marks or the Sonic System.

(e)            Attorneys’ Fees and Costs .

The prevailing party to the arbitration shall have the right to an award of its reasonable attorneys’ fees and costs incurred after the filing of the demand and submission, including a portion of the direct costs of any in-house legal staff reasonably allocable to the time devoted to the arbitration.

15.  OBLIGATIONS UPON TERMINATION .

15.01.           Effect of Termination, Cancellation or Expiration of this Agreement .

Except as otherwise authorized pursuant to the terms of any other license agreement between SONIC and the Licensee, the Licensee shall comply with the following provisions after the expiration or termination of this Agreement and the License:

(a)           Licensee, upon any termination, cancellation or expiration of this Agreement, shall promptly pay to SONIC and SONIC’s subsidiaries any and all sums owed to them.  In the event of termination for any breach by Licensee, such sums shall include all damages, costs and expenses, including reasonable attorneys’ fees, incurred by SONIC as a result of the breach, which obligation shall give rise to and remain, until paid in full, a lien in favor of SONIC against any and all of the assets of the Sonic Restaurant owned by Licensee at the time of default.

(b)           Upon termination, cancellation or expiration hereof for any reason, all Licensee’s rights hereunder shall terminate. Licensee shall not thereafter use or adopt any trade secrets disclosed to Licensee hereunder or any paper goods, emblems, signs, displays, menu housings or other property on which SONIC’s name or Proprietary Marks are imprinted or otherwise form a part thereof or any confusing simulations thereof.  Licensee shall not otherwise use or duplicate the Sonic System or any portion thereof or assist others to do so. Licensee shall remove from the premises all signs, emblems and displays identifying it as associated with SONIC or the Sonic System.  Licensee shall cease to use and shall return to SONIC all copies of the Sonic Operations Manual, instructions or materials delivered to Licensee hereunder.
37


(c)           Upon termination, cancellation or expiration of this Agreement, unless otherwise directed in writing by SONIC, Licensee shall change the exterior and interior design and the decor of said premises, including, but not limited to, changing the color scheme, and shall make or cause to be made such changes in signs, buildings and structures (excluding major structural changes) as SONIC shall reasonably direct so as to effectively distinguish the same from its former appearance and from any other Sonic drive-in restaurant unit, and if Licensee fails or refuses to comply herewith, then SONIC shall have the right to enter upon the premises where said business is being conducted without being guilty of trespass or any other tort for the purpose of making or causing to be made such changes at the expense of Licensee which expense Licensee agrees to pay on demand.

(d)           Upon termination, cancellation or expiration of this Agreement, in the event Licensee is the owner of the Sign, SONIC shall have an irrevocable option to purchase the Sign for its fair market value.  In any event, Licensee shall not thereafter use any sign panels displaying SONIC’s name or Proprietary Marks or which primarily display the colors used in any other such sign at any other Sonic drive-in restaurant unit (See Subsection 15.04 for determining fair market value).  Any agent, servant or employee of SONIC may remove the Sign or any objectionable signs or advertising from the Sonic Restaurant without being guilty of trespass or other tort, and Licensee shall be liable for SONIC’s costs plus attorneys’ fees for any interference therewith.

(e)           Upon termination, cancellation or expiration of this Agreement, Licensee shall cease to hold Licensee out in any way as a licensee of SONIC or to do anything which would indicate any relationship between Licensee and SONIC.

(f)           The covenants set forth in Paragraphs (a), (b), (c), (d) and (e) of this Subsection 15.01 shall survive the termination, cancellation or expiration of this Agreement.

(g)           All rights, claims and indebtedness which may accrue to SONIC prior to termination, cancellation or expiration of this Agreement shall survive termination, cancellation or expiration and be enforceable by SONIC.

(h)           Licensee shall complete all such modifications within 30 days after this Agreement has been terminated or canceled or has expired.  Licensee and SONIC agree that SONIC’s damages resulting from a breach of the provisions of this Subsection are difficult to estimate or determine accurately.  In the event of a breach by Licensee of the provisions of this Subsection, Licensee, in addition to any and all other remedies available to SONIC herein and elsewhere, will pay SONIC double the royalty and brand fees prescribed in this Agreement until Licensee satisfactorily de-identifies the restaurant premises in the manner prescribed by this Section.  This payment shall constitute liquidated damages and shall not be construed as a penalty since such payment has been agreed to by Licensee and SONIC as reasonably representative of the actual damage sustained by SONIC in the event of such a breach.  The liquidated damages shall start on the 31st day after this Agreement has been terminated or canceled or has expired.  These liquidated damages shall not constitute either a waiver of Licensee’s obligation to de-identify or a license to use the Sonic System.  These remedies will be in addition to any other remedies SONIC may have hereunder or under federal or state law.
38


15.02.           SONIC’s Option to Purchase

(a)           Upon termination, cancellation or expiration hereof, SONIC shall have the right and option to purchase all or any patented, special or unique Sonic restaurant equipment, menu housings, signs, menus and supplies of Licensee at their fair market value (See Subsection 15.04 for determining fair market value).  Such right or option of SONIC shall be exercised as provided in Paragraph (b) of this Subsection 15.02.  If SONIC elects to exercise any option to purchase herein provided, it shall have the right to set off all amounts due from Licensee to SONIC and one-half of the cost of any appraisals against any payment therefor.

(b)           In the case of termination by expiration, SONIC shall exercise SONIC’s option contained in this Subsection 15.02 by giving Licensee written notice at least 30 days prior to expiration.  In the case of termination for any other reason, SONIC shall exercise its option by giving Licensee written notice within 30 days after termination.

(c)           SONIC’s option hereunder is without prejudice to SONIC’s rights under any security agreement held by SONIC or with respect to which SONIC may have a guarantor’s or surety’s subrogation interest.  If SONIC exercises this option, SONIC may pay any debt which Licensee owes to SONIC and shall remit any balance of the purchase price to Licensee.  There shall be no allowance for goodwill.

15.03.           SONIC’s Obligation to Purchase

(a)           Upon termination, cancellation or expiration of this Agreement, if Licensee desires to sell Licensee’s unbroken inventory packages of approved imprinted items and supplies with Proprietary Marks to SONIC, excluding all food items, SONIC shall have the obligation to repurchase such items at Licensee’s cost.

(b)           If Licensee desires to sell such items to SONIC, Licensee shall, not later than 10 days after termination, cancellation or expiration of this Agreement, give SONIC 10 days written notice of Licensee’s election and, at the expiration of the 10-days notice period, deliver such items at Licensee’s expense with an itemized inventory to the nearest Sonic drive-in restaurant owned by SONIC or other unit designated by SONIC. SONIC agrees to pay Licensee or credit Licensee’s account within seven days after said delivery.

15.04.           Fair Market Value Determination

If the parties cannot agree on the fair market value of any item subject to an option to purchase in this Agreement within a reasonable time, one appraiser shall be designated by SONIC, one by Licensee and the two appraisers shall designate an independent appraiser, and the valuation of such third appraiser alone shall be binding.  SONIC and the Licensee each shall pay one-half of the cost of any appraisals required pursuant to this Section 15.04.
39


16.  COVENANTS .

16.01.          Restrictions on Licensee

Licensee agrees and covenants as follows:

(a)           During the term of this License, Licensee shall not directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, partnerships, trusts, unincorporated associations or joint ventures) in, (iii) loan money to or (iv) become landlord of any restaurant business which has a menu similar to that of a Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by Sonic drive-in restaurants) or which has an appearance similar to that of a Sonic drive-in restaurant (such as color pattern, use of canopies, use of speakers and menu housings for ordering food, or other items that are customarily used by a Sonic drive-in restaurant).

(b)           Licensee shall not, for a period of 18 months after termination of this License for any reason, directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, partnerships, trusts, unincorporated associations or joint ventures) in, (iii) loan money to or (iv) become a landlord of any restaurant business which has a menu similar to that of a Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by Sonic drive-in restaurants) or which has an appearance similar to that of a Sonic drive-in restaurants (such as color pattern, use of canopies, use of speakers and menu housings for ordering food, or other items that are customarily used by a Sonic drive-in restaurants), and which (i) is within a three- mile radius of the Sonic Restaurant formerly licensed by this Agreement, (ii) is within a 20-mile radius of a Sonic drive-in restaurant in operation or under construction, or (iii) is located within the MSA of the Sonic Restaurant.

(c)           Licensee shall not appropriate, use or duplicate the Sonic System, or any portion thereof, for use at any other restaurant business.

(d)           During the term of this Agreement, Licensee shall (i) use Licensee’s best efforts to promote the business of the Sonic Restaurant, (ii) devote Licensee’s full time, energies and attention to the operation and management of the Sonic Restaurant, and (iii) not engage in any other business or activity that might detract from, interfere with or be detrimental to the Sonic System or Licensee’s full and timely performance under this Agreement (except the ownership and operation of other Sonic drive-in restaurants under license agreements with SONIC).

(e)           During the term of this Agreement, Licensee shall not perform or provide services as a director, officer, employee, agent, representative, consultant or in any other capacity for any other restaurant business which has a menu or appearance similar to that of a Sonic drive-in restaurant.
40


(f)           During the term of this Agreement, Licensee shall not directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest in, (iii) loan money, or (iv) become landlord of any operation which has granted or is granting franchises or licenses (except for those granted by SONIC) to others to operate any other restaurant business which has a menu or appearance similar to that of a Sonic drive-in restaurant.

(g)           Paragraphs (a), (b) and (f) of this Subsection 16.01 shall not apply to ownership by Licensee of less than 2% beneficial interest in the outstanding equity securities of any corporation which is registered under the Securities Exchange Act of 1934; however, this Subsection 16.01(g) shall apply to all shareholders or partners of Licensee (in the event Licensee is a corporation or partnership) and all members of Licensees’ and their immediate families, and all Persons or entities guaranteeing this Agreement.

(h)           The parties agree that each of the foregoing covenants shall be construed as independent of any covenant or provision of this Agreement.  If all or any portion of a covenant in this Section 16 is held unreasonable or unenforceable by a court or agency having valid jurisdiction in an unappealed final decision to which SONIC is a party, Licensee expressly agrees to be bound by any lesser covenant subsumed with the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this Section 16.

(i)           Licensee understands and acknowledges that SONIC shall have the right, in SONIC’s sole discretion, to reduce the scope of any covenant set forth in Paragraphs (a), (b) and (f) of this Subsection 16.01, or any portion thereof, without Licensee’s consent effective immediately upon receipt by Licensee of written notice thereof, and Licensee agrees that it shall comply forthwith with any covenant as so modified, which shall be fully enforceable notwithstanding the provisions of Paragraph (k) of this Subsection 16.01.

(j)           Licensee expressly agrees that the existence of any claims Licensee may have against SONIC, whether or not arising from this Agreement, shall not constitute a defense to the enforcement by SONIC of the covenants in this Section 16.
 
(k)           Licensee acknowledges that Licensee’s violation of the terms of this Section 16 would result in irreparable injury to SONIC for which no adequate remedy at law is available, and Licensee accordingly consents to the ex parte issuance of restraining orders, temporary and permanent injunctions and cease and desist orders prohibiting any conduct by Licensee in violation of the terms of this Section 16.

(l)           Licensee shall utilize at the Sonic Restaurant a cash register previously approved by SONIC, which such cash register shall at all times during the term of this Agreement have a non-alterable grand total function so that each item entered in such register and each day’s totals may not be altered once entered.
41


16.02.          Covenants by Others

At the time of execution of this Agreement, Licensee shall provide SONIC with covenants similar in substance to those set forth in this Section 16 (including covenants applicable upon the termination of a Person’s relationship with Licensee) from the following persons:  (1) all persons employed by Licensee; and (2) all officers, directors, and holders of a direct or indirect beneficial ownership interest Licensee.  With respect to each Person who becomes associated with Licensee in one of the capacities enumerated above subsequent to execution of this Agreement, Licensee shall require and obtain such covenants and promptly provide SONIC with executed copies of such covenants.  In no event shall any Person enumerated be granted access to any confidential aspect of the Sonic System or the Sonic Restaurant prior to execution of such a covenant.  All covenants required by this Section 16 shall be furnished by SONIC to Licensee and shall include, without limitation, specific identification of SONIC as a third party beneficiary of such covenants with the independent right to enforce them.  Failure by Licensee to obtain execution of a covenant required by this Section 16 shall constitute a breach of this Agreement.

17.  INDEPENDENT CONTRACTOR & INDEMNIFICATION .

17.01.           Licensee not an Agent of SONIC

It is understood and agreed that this Agreement does not create a fiduciary relationship between SONIC and Licensee, and that nothing herein contained shall constitute Licensee as the agent, legal representative, partner, joint venturer or employee of SONIC. Licensee is, and shall remain, an independent contractor responsible for all obligations and liabilities of, and for all loss or damage to, the Sonic Restaurant and its business, including any personal property, equipment, fixtures or real property connected therewith and for all claims or demands based on damage or destruction of property or based on injury, illness or death of any person or persons, directly or indirectly, resulting from the operation of the Sonic Restaurant.

17.02.           Cost of Enforcement

If SONIC or SONIC’s subsidiaries becomes involved in any action at law or in equity or in any proceeding opposing Licensee to secure, enforce, protect, or defend SONIC’s rights and remedies under this License, in addition to any judgment entered in SONIC’s favor, SONIC shall be entitled to demand of and (in the event SONIC prevails in such actions or proceedings) recover from Licenseethe reasonable costs, expenses and attorneys’ fees incurred by SONIC.  If, in such applicable final judgment SONIC does not prevail, Licensee shall be entitled to recover from SONIC in any such action or proceeding the reasonable costs, expenses and attorneys’ fees incurred by Licensee.

17.03.           Indemnification

If SONIC or SONIC’s subsidiaries shall be subject to any claim, demand or penalty or become a party to any suit or other judicial or administrative proceeding by reason of any claimed act or omission by Licensee, Licensee’s employees or agents, or by reason of any act occurring on the Sonic Restaurant premises, or by reason of any act or omission with respect to the business or operation of the Sonic Restaurant, Licensee shall indemnify and hold SONIC and SONIC’s subsidiaries harmless against all judgments, settlements, penalties and expenses, including attorneys’ fees, court costs and other expenses of litigation or administrative proceeding, incurred by or imposed on SONIC in connection with the investigation or defense relating to such claim or litigation or administrative proceeding and, at the election of SONIC, Licensee shall also defend SONIC and SONIC’s subsidiaries.  The Licensee shall not have any obligation to indemnify, defend or hold harmless SONIC or any other Person pursuant to the provisions of this Section 17.03 to extent the obligation arises predominantly as a proximate result of SONIC’s act or failure to act when under a duty to act.
42


18.  EFFECT OF WAIVERS .

No waiver by SONIC of any breach or series of breaches of this Agreement shall constitute a waiver of any subsequent breach or waiver of the terms of this Agreement.
19.  NOTICES

19.01.           Address .

Any notice required hereunder, if not specified, shall be in writing and shall be delivered by (i) personal service, (ii) by overnight, receipted delivery service, or (iii) by United States certified or registered mail, with postage prepaid, addressed to Licensee at the Sonic Restaurant or at such other address of Licensee then appearing on the records of SONIC or to SONIC at 300 Johnny Bench Drive, Oklahoma City, Oklahoma 73104, attention General Counsel, or at the subsequent address of SONIC’s corporate headquarters.  Either party, by a similar written notice, may change the address to which notices shall be sent.

19.02.          Failure to Accept .

If SONIC is unable to give actual notice of any breach or termination of this Agreement because Licensee has failed to provide SONIC with a current address, because Licensee fails to accept or pick up this mailed notice, or due to any reason which is not the fault of SONIC, then such notice shall be deemed as given when SONIC sends such notice by overnight receipted delivery service or registered or certified mail, postage prepaid.

19.03.           Licensee’s Principal .

Licensee has designated on the first page of this Agreement a Principal to serve as the party receiving primary notice on behalf of the parties hereto.  Each Licensee hereby agrees that SONIC may send its notices and communications under this Agreement to the Principal provided for herein, that each SONIC may use the Principal as its primary contact for purposes of communications and notices permitted or required hereunder, and that all communications and notices given by SONIC to the Principal will be just as effective on each Licensee as though the same had been given to each Licensee.
43

 
20.  ENTIRE AGREEMENT .

20.01.           No Oral Agreements

This Agreement and all addenda, appendices and amendments hereto constitute the entire agreement between the parties and supersede all prior and contemporaneous, oral or written agreements or understandings of the parties. 

20.02.          Scope and Modification of License

No interpretation, change, termination or waiver of any of the provisions hereof shall be binding upon SONIC unless in writing signed by an officer of SONIC.  No modification, waiver, termination, rescission, discharge or cancellation of this Agreement shall affect the right of any party hereto to enforce any claim or right hereunder, whether or not liquidated, which occurred prior to the date of such modification, waiver, termination, rescission, discharge or cancellation.

21.  CONSTRUCTION AND SEVERABILITY .

21.01.           Interpretation

The recitals shall be considered a part of this Agreement.  Section and Subsection captions are used only for convenience and are in no way to be construed as part of this Agreement or as a limitation of the scope of the particular Sections, Subsections, Paragraphs and Subparagraphs to which they refer.  Words of any gender used in this Agreement shall include any other gender, and words in the singular shall include the plural where the context requires.

21.02.           Scope of Protected Area .

Neither party to this Agreement intends to expand the scope of any covenants or commitments contained in Section 2 beyond the terms and provisions expressly stated in Section 2, and the parties to this Agreement agree that no Person, court or arbitrator may interpret any of the foregoing covenants or commitments in Section 2 in that manner.

21.03.           Invalidity

If any part of this Agreement for any reason shall be declared invalid, such decision shall not affect the validity of any remaining portion, which shall remain in full force and effect.  In the event any material provision of this Agreement shall be stricken or declared invalid, SONIC reserves the right to terminate this Agreement.
44


21.04.           Binding Effect

This Agreement shall be binding upon the parties, their heirs, executors, personal representatives, successors or assigns.

21.05.          Survival

Any provisions of this Agreement which impose an obligation after termination or expiration of this Agreement shall survive the termination or expiration of this Agreement and be binding on the parties.

21.06.           Liability of Multiple Licensees

If Licensee consists of more than one Person or entity, each such Person and entity, and each proprietor, partner or shareholder of each such entity shall be jointly and severally liable for any and all of Licensee’s obligations and prohibitions under this Agreement.  Consequently, if and when a Person or entity as Licensee is in breach of this Agreement and fails or is unable to cure such breach in a timely manner, SONIC may terminate the rights of the so-affected Person or entity under this Agreement whereby this Agreement is terminated as to only such Person or entity while remaining fully effective as to all other Persons and entities remaining as Licensee on this Agreement.  This Person or entity removed as Licensee shall remain jointly and severally obligated with the Persons and entities remaining as Licensee for any and all obligations and liabilities of Licensee which occurred or accrued through the date of removal of said Person or entity.

22.  BUSINESS ENTITY LICENSEES

22.01.          Corporate Licensee .

If the Licensee is a corporation, the Licensee shall comply with the following provisions:

(a)            Purpose .  The certificate of incorporation of the Licensee, if incorporated after August 31, 1994, shall provide that the purpose of the corporation shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants.

(b)            Transfer Restrictions .  The certificate of incorporation of the Licensee shall provide that the Licensee shall not issue any additional capital stock of the Licensee and that no stockholder may transfer, assign or pledge any issued capital stock of the Licensee without the prior, written consent of SONIC, and each stock certificate issued to evidence the capital stock of the Licensee shall contain a legend disclosing the foregoing restriction.  SONIC shall not withhold its consent to the issuance of additional capital stock or a transfer, assignment or pledge without a reasonable basis.  In giving its consent, SONIC shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the capital stock execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement.
45


(c)            Stockholder Guaranty .  Each stockholder of the Licensee shall execute the Guaranty and Restriction Agreement attached as Attachment I to this Agreement.

(d)            Documents .  Prior to SONIC’s execution of this Agreement, the Licensee shall deliver to SONIC photocopies of its certificate of incorporation and issued stock certificates reflecting compliance with the provisions of this Section 22.01.

22.02.          Partnership Licensee .

If the Licensee is a partnership, the Licensee shall comply with the following provisions:

(a)            Purpose .  The partnership agreement and certificate of limited partnership (if applicable) of the Licensee, if formed after August 31, 1994, shall provide that the purpose of the partnership shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants.

(b)            Transfer Restrictions .  The partnership agreement and certificate of limited partnership (if applicable) of the Licensee shall provide that the Licensee shall not issue any additional partnership interests in the Licensee and that no partner may transfer, assign or pledge a partnership interest in the Licensee without the prior, written consent of SONIC.  SONIC shall not withhold its consent to the issuance of additional partnership interests or a transfer, assignment or pledge without a reasonable basis.  In giving its consent, SONIC shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the partnership interest execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement.

(c)            Partner Guaranty .  Each partner of the Licensee shall execute the Guaranty and Restriction Agreement appearing as Attachment I to this Agreement.

(d)            Documents .  Prior to SONIC’s execution of this Agreement, the Licensee shall deliver to SONIC photocopies of its partnership agreement and certificate of limited partnership (if applicable) reflecting compliance with the provisions of this Section 22.02.

22.03.           Limited Liability Company Licensee .

If the Licensee is a limited liability company, the Licensee shall comply with the following provisions:

(a)            Purpose .  The articles of organization and operating agreement of the Licensee, if organized after August 31, 1994, shall provide that the purpose of the limited liability company shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants.
46


(b)            Transfer Restrictions .  The articles of organization and operating agreement of the Licensee shall provide that the Licensee shall not issue any additional membership interests in the Licensee and that no member may transfer, assign or pledge any membership interests in the Licensee without the prior, written consent of SONIC.  SONIC shall not withhold its consent to the issuance of additional membership interests or a transfer, assignment or pledge without a reasonable basis.  In giving its consent, SONIC shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the membership interest execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement.

(c)            Member Guaranty .  Each member of the Licensee shall execute the Guaranty and Restriction Agreement appearing as Attachment I to this Agreement.

(d)            Documents .  Prior to SONIC’s execution of this Agreement, the Licensee shall deliver to SONIC photocopies of its articles of organization and operating agreement reflecting compliance with the provisions of this Section 22.03.

 22.04.         Other Entity Licensee .

If the Licensee is any other form of business entity, the Licensee shall deliver to SONIC photocopies of its organizational documents containing provisions substantially similar to those required by Sections 22.01 through 22.03.

22.05.           Employee Stock Purchase Plans .

The Licensee shall have the right to transfer up to 49% of its outstanding capital stock or other equity interests to an employee stock purchase plan as long as one individual who qualifies as a licensee of SONIC continues to own and Control, directly or indirectly, at least 51% of the Licensee’s outstanding capital stock or other equity interests.

23.   APPLICABLE LAWS .

The terms and provisions of this Agreement shall be interpreted in accordance with and governed by the laws of the State of Oklahoma, provided that if the laws of the State of Oklahoma would not permit full enforcement of Section 16 of this Agreement, then the laws of the state in which the Sonic Restaurant is located or Licensee is domiciled shall apply to the extent that any or all of such laws more fully permit enforcement of Section 16 of this Agreement.  Notwithstanding the foregoing, the franchise laws or regulations of the state in which the Sonic Restaurant is located, in effect on the original date of this Agreement, shall apply to this Agreement.  Licensee agrees that jurisdiction over Licensee and venue exist and are proper within the same federal judicial district where the corporate headquarters of SONIC are located and within any and all other courts, whether federal, state, or local, located within that district.  Licensee waives any and all defenses and objections, and Licensee agrees not to assert any defense or objection to jurisdiction over Licensee and to venue as described hereinabove regarding any action, proceeding or litigation instituted by SONIC against Licensee.  SONIC and Licensee agree that any and all breaches of this Agreement, including breaches occurring after termination, cancellation, or expiration of this Agreement, shall be deemed to have occurred where the corporate headquarters of SONIC are located.
47


24.  ACKNOWLEDGEMENT .

Licensee acknowledges that:

24.01.           Initial Term

The term of this Agreement is for a single 20-year term with no promise or representation as to the renewal of this Agreement or the grant of a new license except as provided herein.

24.02.           Consultation with Counsel

Licensee hereby represents that Licensee has received a copy of this Agreement and has had an opportunity to consult with Licensee’s attorney with respect thereto at least 10 days prior to Licensee’s execution hereof.  Licensee further represents that Licensee has had this Agreement in hand for review at least five business days prior to Licensee’s execution hereof.

24.03.           Profitability

No representation has been made by SONIC as to the future profitability of the Sonic Restaurant.

24.04.           Licensee’s Investigation

Prior to the execution of this Agreement, Licensee has had ample opportunity to contact existing licensees of SONIC and to investigate all representations made by SONIC relating to the Sonic System.  The Licensee has conducted an independent investigation of the business contemplated by this Agreement and recognizes that it involves substantial business risks making the success of the venture largely dependent on the business abilities of the Licensee.  SONIC disclaims and the Licensee has not received from SONIC or its Affiliates any express or implied warranty or guaranty from regarding the potential volume, profits or success of the business venture contemplated by this Agreement.  The Licensee has not relied on any express or implied warranty or guaranty from SONIC or its Affiliates regarding the potential volume, profits or success of the business venture contemplated by this Agreement.

24.05.          Contrary Representations .

The Licensee knows of no representations by SONIC or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement.  The Licensee has not relied on any representations from SONIC or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement or the disclosures set forth in the Franchise Offering Circular delivered to the Licensee in connection with the issuance of this Agreement.
48


24.06.           Variances to Other Licensees .

The Licensee understands that other developers and licensees may operate under different forms of agreements and, consequently, that SONIC’s rights and obligations with regard to its various licensees may differ materially in certain circumstances.

24.07.           Complete Agreement

This agreement supersedes any and all other agreements or representations respecting the Sonic Restaurant and contains all the terms, conditions and obligations of the parties with respect to the grant of this Agreement.

25.    INPUT AND ADVICE FROM LICENSEES .

In connection with the implementation of or significant changes in the programs or policies referred to in Sections 6.04, 6.05(c), 6.06, 8, and 11.01(f) of this Agreement, SONIC shall solicit input and advice from a group of licensees gathered together for such purpose (whether established ongoing for such purpose or gathered on an ad hoc basis from time-to-time).  SONIC further shall use its best efforts to ensure that such groups are balanced in terms of geographic base, size of operating group, and period of tenure within the Sonic system.  Notwithstanding the foregoing, this Section 25 shall not have any effect unless the license agreements in effect for at least one-third of all Sonic drive-in restaurants contain this provision or a substantially similar provision.

26.    INJUNCTIVE RELIEF .

The Licensee acknowledges that SONIC’s remedy at law for any breach of any of the Licensee’s covenants under this Agreement (other than involving only the payment of money) would not constitute an adequate remedy at law and, therefore, SONIC shall have the right to obtain temporary and permanent injunctive relief in any proceeding brought to enforce any of those provisions, without the necessity of proof of actual damages.  However, nothing in this Section 26 shall prevent SONIC from pursuing separately or concurrently one or more of any other remedies available at law, subject to the provisions of Section 14.04 of this Agreement.

27.    GENERAL RELEASE AND COVENANT NOT TO SUE .

The Licensee hereby releases Sonic Corp., its subsidiaries, and the officers, directors, employees and agents of Sonic Corp. and its subsidiaries from any and all claims and causes of action, known or unknown, which may exist in favor of the Licensee as of the date of this Agreement.  In addition, the Licensee covenants that the Licensee shall not file or pursue any legal action or complaint against any of the foregoing entities or Persons with regard to any of the foregoing claims or causes of action released pursuant to this Section 27.  SONIC hereby releases the Licensee and its officers, directors, employees and agents from any and all claims and causes of action, known or unknown, which may exist in favor of SONIC as of the date of this Agreement, except for any claims for (a) unpaid moneys due SONIC or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of SONIC’s legal rights regarding the Proprietary Marks.  In addition, SONIC covenants that SONIC shall not file or pursue any legal action or complaint against any of the foregoing entities or Persons with regard to any of the claims or causes of action released by SONIC pursuant to this Section 27.
49


Executed on the dates set forth below, to have effect as of ______________, 200___.

The original expiration date of the license agreement converted to this Number 5.5 License Agreement was ________________, ______.


SONIC:                                                                                                   Sonic Industries LLC

By: _________________________________
      (Vice) President
Date: _______________________, 200__

Licensee:                                                                                               ____________________________________

Date:_______________________, 200__

____________________________________
 
Date:_______________________, 200__


 
49


 
 
 
 
 
 

 
Schedule I


Guaranty and Restriction Agreement

 
 
 
 
 
 
 

 



GUARANTY AND RESTRICTION AGREEMENT

The undersigned (jointly and severally or individually, the “Guarantor”), Sonic Industries LLC (“SONIC”), and       (the “Licensee”) enter into this Guaranty and Restriction Agreement (this “Guaranty”) as of            , 200__.

W I T N E S S E T H :

Whereas, SONIC is entering into a license agreement (the “License Agreement”) dated the same date as this Agreement with the Licensee for the Sonic drive-in located at      ,      ,             (the “Drive-in”); and

Whereas, as a condition to entering into the License Agreement, SONIC has asked the Guarantor to provide a personal guaranty of all obligations of the Licensee Agreement; and

Whereas, SONIC has also asked the Guarantor and the Licensee to agree to a restriction on the transfer of interests in the Licensee; and

Whereas SONIC, the Guarantor, and the Licensee are willing to enter into those agreements based upon the terms and conditions of this Agreement.

Now, therefore, in consideration of the mutual covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties agree as follows:

1.            Personal Guaranty of Payments .  The Guarantor hereby guarantees the prompt and full payment of all obligations under the License Agreement including:

(a)           all royalties due SONIC pursuant to the License Agreement,

(b)           all brand contribution fees to the Sonic Brand Fund pursuant to the License Agreement,

(c)           all contributions to approved advertising cooperatives pursuant to the License Agreement, and

(d)           any other obligations owing to SONIC or its Affiliates (as defined in the License Agreement) relating to the Drive-in, including any sign lease agreement.

2.            Nature of Guaranty .  This guaranty shall constitute an absolute, unconditional, irrevocable, and continuing guaranty.  SONIC shall not have any obligation to take any action against any other person or entity for collection of any payments prior to making any demand for payment or bringing any action against the Guarantor.


3.            Permitted Actions .  From time to time, SONIC shall have the right to take, permit, or suffer to occur any “Permitted Action,” as defined below, without modifying, reducing, waiving, releasing, impairing or otherwise affecting the obligations of the Guarantor under this Agreement, without giving notice to the Guarantor or obtaining the Guarantor’s consent, without the necessity of any reservations of rights against the Guarantor, and without liability on the part of SONIC.  As used in this Section 3, the phrase “Permitted Action” shall mean (a) an agreed extension of time for payment of any sum due under the License Agreement, (b) an agreed change in the manner or place of payment of any sums due under the License Agreement, (c) any waiver by SONIC of any defaults under the provisions of the License Agreement, (d) any delay or failure by SONIC to exercise any right or remedy SONIC may have under the License Agreement, (e) the granting by SONIC of any leniencies, waivers, extensions, and indulgences under the License Agreement, and (f) any agreed amendments to the License Agreement.

4.            Waiver of Notice of Acceptance .  The Guarantor acknowledges and waives notice of SONIC’s acceptance of the Guarantor’s guaranty pursuant to the terms of this Agreement.

5.            Restrictions on Transfer .  The Licensee shall not issue any additional shares of capital stock without the prior, written consent of SONIC.  The Guarantor shall not transfer, assign, or pledge any of its shares of capital stock in the Licensee to any person without the prior, written consent of SONIC.

6.            Disputes .  Any dispute between the parties concerning this Agreement will be resolved in accordance with the mediation and arbitration provisions contained in the License Agreement.

7.            Attorneys’ Fees, Costs and Expenses .  In any action brought by SONIC to enforce the obligations of the Guarantor, SONIC shall also have the right to collect its reasonable attorneys’ fees, court costs, and expenses incurred in the action.

8.            Headings .  The headings used in this Agreement appear strictly for the parties’ convenience in identifying the provisions of this Agreement and shall not affect the construction or interpretation of the provisions of this Agreement.

9.            Binding Effect .  This Agreement binds and inures to the benefit of the parties and their respective successors, legal representatives, heirs, and permitted assigns.

10.          Waiver .  The failure of a party to insist in any one or more instances on the performance of any term or condition of this Agreement shall not operate as a waiver of any future performance of that term or condition.

11.          Governing Law .  Notwithstanding the place where the parties execute this Agreement, the internal laws of Oklahoma shall govern the construction of the terms and the application of the provisions of this Agreement.
 
12.          Amendments .  No amendments to this Agreement shall become effective or binding on the parties, unless agreed to in writing by all of the parties to be bound by the amendment.


13.            Time .  Time constitutes an essential part of each and every part of this Agreement.

14.            Notice .  Except as otherwise provided in this Agreement, when this Agreement makes provision for notice or concurrence of any kind, the sending party shall deliver or address the notice to the other party by certified mail, telecopy, or nationally-recognized overnight delivery service to the addresses shown on exhibit “A” to this Agreement.

All notices pursuant to the provisions of this Agreement shall run from the date that the other party receives the notice or three business days after the party places the notice in the United States mail.  Each party may change the party’s address by giving written notice to the other parties.

15.            Release and Covenant Not To Sue .  The Guarantor and the Licensee, and each of them, hereby release all claims and causes of action which the Guarantor or the Licensee, or both of them, may have against Sonic Corp., its subsidiaries, and the stockholders, directors, officers, employees, and agents of Sonic Corp. and its subsidiaries.  The Guarantor and the Licensee, and each of them, further covenant not to sue any of the foregoing persons or entities on account of any of the foregoing claims or causes of action.

Executed and delivered as of the day and year first set forth above.

SONIC:                                                                                                                  Sonic Industries LLC

By: _________________________________
                                                                                                                        (Vice) President


Guarantor:                                                                                                              ____________________________________
     

____________________________________
     

Licensee:                                                                
   By: ________________________________
      Its:      

This Guaranty and Restriction Agreement signature page is for the following:
Sonic Drive-In # _______

EXHIBIT “A”

Notice addresses are as follows:


SONIC:                                                                                  300 Johnny Bench Drive
Oklahoma City, OK 73104
Attention:  General Counsel
(405) 225-5973 Fax

Guarantors:                                                                           
     
     
(___) ___-____ Fax

     
     
     
(___) ___-____ Fax


Licensee:                                                                      
 
(___) ___-____Fax


 
 
SONIC INDUSTRIES LLC

NUMBER 7 LICENSE AGREEMENT






BY AND BETWEEN SONIC INDUSTRIES LLC, Licensor and


________________________, Licensee



Sonic Drive-In of ____________________, ______________________

located at _____________________________

_________________________, ______________________.





 





Dated:  ___________, _______.







Store No. _________
CIF No. __________





 
TABLE OF CONTENTS
 
1.DEFINITIONS.
 
2
 
1.01.
Affiliate.
2
 
1.02.
Control.
2
 
1.03.
DMA.
2
 
1.04.
Gross Sales.
2
 
1.05.
License.
3
 
1.06.
MSA.
3
  1.07. Non-traditional Locations. 3
 
1.08.
Person.
3
 
1.09.
Proprietary Marks.
3
 
1.10.
Protected Area.
4
 
1.11.
Sonic Restaurant.
4
 
1.12.
Sonic System.
4
2.  LICENSE GRANT.  
4
 
2.01.
Location.
4
 
2.02.
Trade Radius.
4
 
2.03.
Licensee.
6
 
2.04.
Use of Sonic’s Marks.
6
 
2.05.
Site Selection.
6
 
2.06.
Relocation.
6
  2.07. Rights Reserved to Sonic
3.  TERM.  
7
 
3.01.
Initial Term.                                                                                                                                                                                                                                                                              
7
 
3.02.
Opening of Restaurant.
7
 
3.03.
Option.
8
4.  DUTIES OF LICENSOR.  
8
 
4.01.
Plans.
9
 
4.02.
Operations Manual.
9
 
4.03.
Marketing Assistance.
9
 
4.04.
Communication.
9
 
4.05.
Evaluation Program.
9
5.  FEES.
 
 
9
 
5.01.
License Fee.
9
 
5.02.
Royalty Fees.
10
 
5.03.
Brand Fee.
10
 
5.04.
Transfer Fee.
10
 
5.05.
Late Charges.
11
  5.06 Taxes  11
 

 
6.  DUTIES OF LICENSEE.  
12
 
6.01.
Sonic Restaurant Site.
12
 
6.02.
Construction.                                                                                                                                                                                                                                                                                                                 
13
 
6.03.
Equipment and Sign.
14
 
6.04.
Training.
14
 
6.05.
Compliance with Entire System.
15
 
6.06.
Approved Suppliers and Advertising Agencies.
18
 
6.07.
Best Efforts.
19
 
6.08.
Interference with Employment Relations of Others.
19
 
6.09.
SONIC’s Standards.
19
 
6.10.
Majority Interest Owner.
19
  6.11. Electronic Communication and Use of Internet 19
7.  PROPRIETARY MARKS.  
20
 
7.01.
SONIC’s Representations.
20
 
7.02.
Use of Marks.
20
 
7.03.
Licensee’s Understanding.
21
  7.04. Other Intellectual Property 21
8.  MANUAL.
 
 
22
9.  CONFIDENTIAL INFORMATION.  
22
 
9.01.
SONIC Proprietary and Confidential Information.
22
 
9.02.
Licensee’s Use of Proprietary and Confidential Information.
22
 
9.03.
Licensee’s Use of Sonic Operations Manual.
23
  9.04. No Information to the Public 23
10.  ACCOUNTING AND RECORDS.  
24
 
10.01.
Due Date.
24
 
10.02.
Record Retention.
24
 
10.03.
Charitable Contributions and Discounts.
24
 
10.04.
Annual Reports.
24
 
10.05.
Audit by SONIC.
24
 
10.06.
Third –Party Audit.
25
 
10.07.
Licensee’s Failure to Timely Deliver Financial Records.
25
 
10.08.
Financial Disclosure.
25
  10.09. Accounting Services 26
  10.10. Application of Payments 26
11.  ADVERTISING AND BRAND EXPENDITURES.  
26
 
11.01.
Standard Program.
26
 
11.02.
Publicity.
29
1 2.  INSURANCE.
 
 
30
 

 
12.01.
Insurance Amounts.
30
 
12.02.
SONIC as Additional Insured.
30
 
12.03.
General Conditions.
31
13.  TRANSFER OF INTEREST.  
31
 
13.01.
Assignment.
31
 
13.02.
Death or Permanent Incapacity of Licensee.
31
 
13.03.
Assignment to Licensee’s Corporation.
32
 
13.04.
Other Assignment.
33
 
13.05.
SONIC’s Right of First Refusal.
34
 
13.06.
Consent to Assignments.
35
14.  DEFAULT AND TERMINATION.  
35
 
14.01.
Optional Termination.
35
 
14.02.
Period to Cure.                                                                                                                                                                                                                     
36
 
14.03.
Resolution of Disputes.
37
 
(a)
Negotiation.
38
 
(b)
Mediation.
38
 
(c)
Arbitration.
38
 
(d)
Excluded Controversies.
38
 
(e)
Attorneys’ Fees and Costs.
39
15.  OBLIGATIONS UPON TERMINATION.  
39
 
15.01.
Effect of Termination, Cancellation or Expiration of this Agreement.
39
 
15.02.
SONIC’s Option to Purchase.
40
 
15.03.
SONIC’s Obligation to Purchase.
41
 
15.04.
Fair Market Value Determination.
41
 
16.  COVENANTS.
 
 
41
 
16.01.
Restrictions on Licensee.
41
 
16.02.
Covenants by Others.
43
17.  INDEPENDENT CONTRACTOR & INDEMNIFICATION.  
43
 
17.01.
Licensee not an Agent of SONIC; Employment Matters      
43  
 
17.02.
Cost of Enforcement.
44 
 
17.03.
Indemnification.
44 
1 8.  EFFECT OF WAIVERS.     44 
19.  NOTICES.     45 
  19.01.
Delivery
45 
  19.02.
Failure to Accept.
45 
  19.03. 
Licensee’s Principal.
45 
 

 
20.  ENTIRE AGREEMENT.
 
45
 
20.01.
No Oral Agreements.
45
 
20.02.
Scope and Modification of License.
45
21.  CONSTRUCTION AND SEVERABILITY.  
45
 
21.01.
Interpretation.
46
 
21.02.
Scope of Protected Area.
46
 
21.03.
Invalidity.
46
 
21.04.
Binding Effect.
46
 
21.05.
Survival.
46
 
21.06.
Liability of Multiple Licensees.
46
22.  BUSINESS ENTITY LICENSEES  
47
 
22.01.
Corporate, Partnership, and Limited Liabilty Companies Licensees.
47
 
22.02.
Other Entity Licensee.
47
 
22.03.
Employee Stock Purchase Plans.
47
 
22.04.
Good Standing
48
23.  APPLICABLE LAWS, WAIVER OF JURY TRIAL, LIMITATIONS  
48
24.  ACKNOWLEDGEMENT.  
48
 
24.01.
Initial Term.
48
 
24.02.
Consultation with Counsel.
49
 
24.03.
Profitability.
49
 
24.04.
Licensee’s Investigation.
49
 
24.05.
Contrary Representations.
49
 
24.06.
Variances to Other Licensees.
49
 
24.07.
Complete Agreement.
49
25.   INPUT AND ADVICE FROM LICENSEES.  
50
26.   INJUNCTIVE RELIEF.  
50
27.   GENERAL RELEASE AND COVENANT NOT TO SUE.  
50
 
SCHEDULE I – GUARANTY AND RESTRICTION AGREEMENT

Store No._________
CIF No. _______
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (this “Agreement”) made this ___day of ______, ____, by and between Licensor, SONIC INDUSTRIES LLC, a Delaware limited liability company (“Sonic”), and_________________________ (“Principal”)_________________________(all of whom shall be jointly referred to herein as the “Licensee”).
RECITALS
Sonic is the developer and owner of the right to license the distinctive and proprietary drive-in, food service system under which food and beverages are sold to the public from drive-in restaurants and Non-traditional Locations (as defined in Section 1.07) operated under the trade name and federally registered trademark and service mark “Sonic”.  The Sonic System so developed now includes, among other things, the following elements, all or some of which may be deleted, changed, improved, or further developed by Sonic from time to time

A.  Methods and procedures for the preparation and serving of food and beverage products.
 
B.  Confidential recipes for food products and distinctive service accessories (including, but not limited to, uniforms, menus, packages, containers, and additional paper or plastic items). 
 
C.  Plans and specifications for distinctive standardized premises featuring characteristic exterior style, colors, and design, interior furnishings, equipment layout, exterior signage, and marketing techniques and materials.
 
D.  A uniform method of operating which is described in the Sonic Operations Manual .
 
E.  The Proprietary Marks as defined in Section 1.09.
 
F.  Such trade secrets as have been and may from time to time be developed, which are owned by Sonic, and which are disclosed to its licensees in confidence in connection with the construction and operation of a Sonic drive-in restaurant.

G.  Such proprietary payment and other business methods, including (without limitation) the pay-at-your-stall payment system (“PAYS”), which have been and may from time to time be developed for use in the Sonic System.

Licensee wishes to obtain a license from Sonic to operate a Sonic drive-in restaurant pursuant to the Sonic System and to be afforded the assistance provided by Sonic in connection therewith, and understands and accepts the terms, conditions, and covenants set forth herein as those which are reasonably necessary to maintain Sonic’s high and uniform standards of quality and service designed to protect the goodwill and enhance the public image of the Proprietary Marks and the Sonic System, and recognizes the necessity of operating the licensed Sonic drive-in restaurant in faithful compliance therewith, and with Sonic’s standards and specifications.
 
1


1.   DEFINITIONS .                                           

Unless the context of their use in this Agreement requires otherwise, the following words and phrases shall have the following meanings when used in initially-capitalized form in this Agreement.

1.01.       Affiliate .

   The word “Affiliate” shall mean (a) any stockholder, director, or officer of a specified Person (if the specified Person is a corporation), (b) any partner of a specified Person (if the specified Person is a partnership), (c) any member of a specified Person (if the specified Person is a limited liability company), (d) any employee of a specified Person, and (e) any Person which directly or indirectly through one or more intermediaries Controls the specified Person, the specified Person Controls, or shares a common Control with the specified Person.

1.02.       Control .

               The word “Control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person or entity, whether through the ownership of voting securities, by contract, or otherwise.

1.03.       DMA .

The term “DMA” shall mean a Designated Market Area as defined by A.C. Nielsen Company from time to time.

1.04.       Gross Sales

               The phrase “Gross Sales” shall mean all revenues from all business conducted upon or from the Sonic Restaurant, whether evidenced by check, cash, credit, charge account, debit card, stored-value card, exchange, or otherwise, and shall include (without limitation) the amounts received from the sale of goods, wares, and merchandise, including sales of food, beverages, and tangible property of every kind and nature, promotional or otherwise (excluding restaurant equipment), and for services performed from or at the Sonic Restaurant, whether the Licensee fills the orders from the Sonic Restaurant or elsewhere.  Each charge or sale via credit, debit card, stored-value card, or other payment means shall constitute a sale for the full price in the month during which the charge or sale occurs, regardless of the time when the Licensee receives payment (in whole or in part) for the charge or sale.  The phrase “Gross Sales” shall not include (a) sales of merchandise for which the Licensee makes a cash refund, if previously included in Gross Sales; (b) the price of merchandise returned by customers for exchange, if the Licensee previously included the sales price of the merchandise returned by the customer in Gross Sales and includes the sales price of merchandise delivered to the customer in exchange in Gross Sales; (c) the amount of any sales tax imposed by any governmental authority directly on sales and collected from customers, if the Licensee adds the amount of the tax to the sales price or absorbs the amount of the sales tax in the sales price and the Licensee actually pays the tax to the governmental authority; (d) amounts not received for menu items because of discounts or coupons, if properly documented; and (e) amounts received from the sale of Sonic-approved stored-value cards.  The phrase “Gross Sales” also shall not include any proceeds received by the Licensee pursuant to an assignment made in accordance with the provisions of Section 13.
 
2


1.05.       License .

The word “License” shall mean the rights granted the Licensee pursuant to Section 2 of this Agreement.

1.06.       MSA .

The term “MSA” shall mean a Metropolitan Statistical Area or a Micropolitan Statistical Area, as applicable, as defined by the United States Census Bureau from time to time.

                1.07.       Non-traditional Locations .    
  
The phrase “Non-traditional Locations” shall mean permanent or temporary food service facilities operating under one or more of the Proprietary Marks at locations featuring facilities other than free-standing buildings with canopies devoted solely to the operation of a Sonic drive-in restaurant and accessible to the general public by automobile from public thoroughfares.  Non-traditional Locations shall include (without limitation) (a) military bases and other governmental facilities; (b) universities and schools; (c) airports and other transportation facilities; (d) stadiums, arenas and other sports and entertainment venues; (e) amusement and theme parks; (f) cafeterias and food courts in shopping centers, shopping malls, office buildings, and industrial buildings; (g) hotels and convention centers; (h) hospitals and nursing facilities; (i) museums, zoos and other public facilities; and (j) highway travel plazas, convenience stores, and gasoline filling stations.
 
1.08.       Person .

The word “Person” shall mean any individual or business entity, including (without limitation) a corporation, joint venture, general partnership, limited partnership, limited liability company, or trust.
 
                1.09.       Proprietary Marks .             
                              
               The phrase “Proprietary Marks” shall mean the distinctive and characteristic trade names, trademarks, service marks, and trade dress which Sonic designates in the Sonic Operations Manual or otherwise in writing or through usage from time to time as prescribed for use with the Sonic System and as may from time to time be developed, including (without limitation) the terms “Sonic,” “America’s Drive-In,” “Route 44,” “Wacky Pack,” “Fountain Favorites,” “Frozen Favorites,” “It’s Sonic Good,” “SuperSonic,” “Your Morning Drink Stop!,” “Ultimate Drink Stop,” and “My Sonic;” signs; emblems; menu housings; designs; color schemes; standardized premises featuring characteristic exterior style, canopies, colors, and design (including angled parking stalls equipped with menu housings, speakers, and tray supports); interior furnishings; and equipment layout.
 
3

 

1.10.       Protected Area .

The phrase “Protected Area” shall mean the area defined by Section 2.02 of this Agreement.

1.11.       Sonic Restaurant .

The phrase “Sonic Restaurant” shall mean the Sonic drive-in restaurant licensed by this Agreement and may alternatively be reffered to herein as the "Restaurant."

1.12.       Sonic System .

The phrase “Sonic System” shall mean the unique, proprietary and confidential information of SONIC, including (without limitation) the Sonic Operations Manual and consisting of (a) methods and procedures for the preparation of food and beverage products; (b) confidential recipes for food products; (c) distinctive service and accessories; (d) plans and specifications for interior and exterior signs, designs, layouts and color schemes (whether copyrighted or not); (e) methods, techniques, formats, systems, specifications, procedures, information, trade secrets, sales and marketing programs; (f) methods of business operations and management; (g) knowledge and experience regarding the operation and franchising of Sonic drive-in restaurants ; (h) payment methods, including (without limitation) PAYS; and (i) such further elements as set forth in the Recitals.
4


2.   LICENSE GRANT .

SONIC grants to Licensee for the following stated term the right, license and privilege:
 
2.01.       Location .

(a)           To adopt and use the Sonic System at the Sonic Restaurant located at __________________________, ______________, _______________.

(b)           To have the exclusive rights to adopt and use the Sonic System for a Sonic drive-in Restaurant to be constructed within the current boundaries of the town or city of __________________, ________________, for a period of six months from the date hereof, with the obligation of selecting and having such site approved within such six month period and completing Section 2.01(a), above, within such six month period.

2.02.       Trade Radius .

Subject to the provisions of Sections 2.02(c) and 2.02(d), below, SONIC shall not own or operate a Sonic drive-in restaurant and shall not license any other Person to own or operate a Sonic drive-in restaurant (other than a Sonic drive-in restaurant licensed prior to the date of this Agreement) within the Protected Area, which is the area determined as of the date of this Agreement by the following provisions:

 
(a)
(i)
An area defined by a radius extending one and one-half miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of 75,000 or more.

 
(ii)
An area defined by a radius extending two miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of less than 75,000 but more than 25,000.

 
(iii)
An area defined by a radius extending three miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of 25,000 or less.

 
(iv)
An area defined by a radius extending three miles from the front door of the Sonic Restaurant if located outside a city, town or MSA.

(b)           The Protected Area shall not extend into: (i) the contractually-granted protected radius of any Sonic drive-in restaurant in existence as of the date of this Agreement (“Previously Protected Radius”) and (ii) the protected area of any developer under an area development agreement with Sonic in existence as of the date of this Agreement (“Previously Protected Development Area”).  Consequently, any Previously Protected Radius and any Previously Protected Development Area shall be excepted from the Protected Area.  Sonic shall determine the population of an MSA  from time to time after the date of this Agreement according to the latest published federal census (or other data selected by Sonic) and may reduce the Protected Area accordingly upon notice to the Licensee.  If more than one subpart of Section 2.02(a) applies, then only the subpart with the smallest area shall apply.
(c)           Sonic shall not own, operate, or license any other Person to own or operate a Non-traditional Location (other than a Non-traditional Location owned, operated, or licensed prior to the date of this Agreement) within the Protected Area without the Licensee’s prior written consent.  Simultaneously with the request for that written consent, Sonic shall offer the Licensee a right of first refusal to develop the Non-traditional Location.  The Licensee must notify Sonic in writing of its decision regarding the right of first refusal to license and operate the Non-traditional Location within 30 days after Sonic notifies the Licensee of Sonic’s request for the Licensee’s written consent to own, operate, and/or license the Non-traditional Location.  If the Licensee chooses to exercise its right of first refusal, the Licensee must sign Sonic’s then-current form of license agreement for a Non-traditional Location for the applicable jurisdiction within 30 days after the Licensee notifies Sonic of its decision.  The Licensee then must open the Non-traditional Location within the time period specified in the license agreement (if specified) or within 12 months after the date of the license agreement (if not specified).  If the Licensee does not execute that agreement within the foregoing 30-day period or does not exercise its right of first refusal within the foregoing 30-day period, Sonic shall have the right to proceed with the ownership, operation, and/or licensing of the Non-traditional Location as disclosed to the Licensee only if the Licensee has given its written consent to Sonic.  If the Licensee elects, in its sole and absolute discretion, not to give its written consent, Sonic shall not own, operate, or license any other Person to own or operate the Non-traditional Location, except that Sonic may own, operate, or license any other Person to own or operate the Non-traditional Location without Licensee’s consent, subject to Licensee’s right of first refusal described herein, if the Non-Traditional Location is in (i) an airport or other transportation facility; (ii) a stadium, arena, or other sports and entertainment venue; or (iii) a military base or other governmental facility.

(d)           Sonic has and hereby further reserves the right, in its sole discretion, to acquire the assets or controlling ownership of an existing restaurant within the Protected Area. However, prior to converting an acquired restaurant to a Sonic drive-in restaurant or a Non-traditional Location within the Protected Area, Sonic shall offer the Licensee a right of first refusal to acquire the restaurant at a price equal to Sonic’s cost of acquiring the restaurant.  If the restaurant represents a part of an acquisition of multiple restaurants, Sonic shall make a reasonable allocation of its cost to acquire the restaurant.  The Licensee must notify Sonic of its decision regarding the right of first refusal within 30 days after Sonic gives the Licensee written notice of its intention to convert the restaurant to a Sonic drive-in restaurant or Non-traditional Location.  If the Licensee chooses to exercise its right of first refusal, the Licensee must sign Sonic’s then-current form of license agreement for a Sonic drive-in restaurant or Non-traditional Location, and pay the required license fee, as applicable, within 20 days after the Licensee notifies Sonic of its decision.  In the event the Licensee fails to convert the restaurant to a Sonic drive-in restaurant or Non-traditional Location pursuant to the terms of the applicable license agreement, Sonic shall have the right to repurchase the restaurant from the Licensee at the same purchase price.  If the Licensee does not exercise its right of first refusal, Sonic shall have the right to own, operate, and/or license other Persons to own or operate the restaurant or Sonic may sell or otherwise dispose of the restaurant to any person or entity under any terms or conditions Sonic deems appropriate, provided in no case will the restaurant be operated as a Sonic drive-in restaurant or a Non-traditional Location without the consent of Licensee, except as may be allowed pursuant to Section 2.02(c).

                2.03.       Licensee .   
                             
                Licensee shall advertise to the public as a licensee of Sonic.
 
                2.04.       Use of Sonic’s Marks .
 
                Licensee shall adopt and use the Proprietary Marks, but only in connection with the sale from the Sonic Restaurant of those food and beverage products which have been designated in the Sonic menu as specified in the Sonic Operations Manual .
                          
2.05.       Site Selection .       
         In the event the Licensee receives this License pursuant to Section 2.01(b), above, the selection of a site by Licensee shall be subject to the approval of Sonic in accordance with the standard site approval procedures required by this Agreement and the standard practices of Sonic.  In the event a site for the Sonic Restaurant has not been approved by Sonic before the expiration of the six-month period provided for by Section 2.01(b), above, then this Agreement shall expire and be of no further force or effect.  In such case, Sonic will immediately refund to Licensee the license fee less the sum of $15,000, which shall be fully earned by Sonic upon execution and delivery of this Agreement.
 
2.06.       Relocation .                       
 
         If the Licensee relocates the Sonic Restaurant during the term of this Agreement (which relocation must be within the Protected Area) with the written consent of Sonic (which consent Sonic shall not withhold unreasonably), this Agreement shall continue to apply to the Sonic Restaurant in accordance with the terms contained in this Agreement, except that Sonic and the Licensee shall enter into an amendment to this Agreement to change the address of the Sonic Restaurant accordingly.  Upon such relocation, the Protected Area shall be shifted based on the new location according to Section 2.02 and less and except (i) the contractually-granted protected radius of any Sonic drive-in restaurant in existence prior to the relocation and (ii) the protected area of any developer under an area development agreement with Sonic in existence prior to the relocation.
5

 
2.07.       Rights Reserved to Sonic .

Except as expressly limited by this Agreement, Sonic retains all rights with respect to the Sonic System, the Proprietary Marks, the sale of similar or dissimilar products and services, and any other activities Sonic deems appropriate whenever and wherever it desires.  Specifically, but without limitation, Sonic reserves the following rights:
 
 
(a)     The right to establish and operate, and to grant to others the right to establish and operate, similar businesses or any other businesses offering similar or dissimilar products and services through similar or dissimilar channels of distribution, at any locations inside or outside the Protected Area under trademarks or service marks other than the Proprietary Marks and on any terms and conditions Sonic deems appropriate;
 
                (b)    The right to provide, offer, and sell, and to grant others the right to provide, offer, and sell, goods and services that are identical or similar to and/or competitive with those provided at the Sonic Restaurant, whether identified by the Proprietary Marks or other trademarks or service marks, through dissimilar distribution channels (including, without limitation, the Internet or similar electronic media) both inside and outside the Protected Area and on any terms and conditions Sonic deems appropriate;

(c)    The right to establish and operate, and to grant to others the right to establish and operate, businesses offering dissimilar products and services, both inside and outside the Protected Area, under the Proprietary Marks and on any terms and conditions Sonic deems appropriate;

(d)    The right to operate, and to grant others the right to operate, Sonic drive-in restaurants or Non-traditional Locations anywhere outside the Protected Area under any terms and conditions Sonic deems appropriate regardless of the proximity to the Sonic Restaurant;

(e)    The right to be acquired (whether through acquisition of assets, ownership interests, or otherwise, regardless of the form of transaction) by a business providing products and services similar to those provided at the Sonic Restaurant, or by another business, even if such business operates, franchises, and/or licenses competitive businesses in the Protected Area.  
 
3.   TERM .      
 
                3.01.       Initial Term .                                
 
                Unless sooner terminated as hereafter provided, the term of this Agreement, including the License, shall end 20 years from the effective date of this Agreement as set forth on the cover page to this Agreement.
 
                3.02.       Opening of Restaurant
6

 
                Licensee expressly acknowledges and agrees that a pre-condition to opening the Sonic Restaurant shall be Sonic’s written authorization to open, which authorization shall be given only

7


upon Licensee’s completing, to Sonic’s satisfaction, (i) construction of the Sonic Restaurant, (ii) preparation of the Sonic Restaurant for commencement of operations, and (iii) training as required by Section 6.04 of this Agreement.
 
                3.03.       Option .  
 
                At the end of the initial term, if Licensee desires, Licensee may renew the rights granted under this Agreement, including the License to adopt and use the Sonic System at the Sonic Restaurant, for an additional 10-year term, provided that prior to the expiration of the initial term:
 
(a)               Licensee gives Sonic written notice of Licensee’s election to renew not less than six months nor more than 12 months prior to the end of the initial term.
 
(b)              Licensee is not, when notice is given, in material default of any provision of this Agreement or any amendment hereof or successor agreement hereto or in material default of any other agreement between Licensee and Sonic or Sonic’s Affiliates involving any other license agreement and has substantially complied with the terms and conditions of this Agreement and all other such agreements, during the term thereof.
 
         (c)               All monetary obligations owed by Licensee to Sonic or Sonic’s Affiliates from any source whatsoever (whether under this Agreement or otherwise) have been satisfied prior to renewal.
 
         (d)             The Licensee executes a license agreement containing the same terms and conditions as this Agreement, except that the license agreement shall provide for a term of 10 years and shall contain the then-current royalty rate and the then-current advertising and brand expenditure requirements; provided, however, that in lieu of an initial license fee, a renewal fee shall be paid to Sonic in the amount of:  (i) $4,500, or (ii) 20% of the then-current initial license fee, whichever is greater.  However, the renewal fee shall not exceed $9,000 as adjusted for inflation on January 1 of each year in accordance with the consumer price index and using December of 2006 as the base amount.
 
         (e)              Licensee performs such remodeling, repairs, replacements, and redecorations as Sonic may reasonably require to cause the restaurant equipment and fixtures to conform to the plans and specifications being used for new or remodeled Sonic drive-in restaurants on the renewal date.
 
         (f)               Licensee executes a general release, in a form satisfactory to Sonic, of any and all claims the Licensee may have against Sonic and its Affiliates, including (without limitation) all claims arising under any federal, state, or local law, rule, or ordinance.
 
(g)               Licensee principal and/or manager at their expense attend and satisfactorily complete such retraining program as Sonic may require at its sole discretion. (h)Licensee meets the remodeling requirements set forth in Section 6.02(d) herein.

4.   DUTIES OF SONIC .
 
                Sonic agrees to regularly advise and consult with Licensee in connection with the operation of the Sonic Restaurant and to provide the following to Licensee:
8

 
                4.01.       Plans .  
 
                Standard Sonic Plans and Specifications for a free standing building, equipment layout, and signs (see Section 6.03), together with advice and consultation.  Any modifications for non­standard buildings, whether required by local zoning or building laws or otherwise, must be approved in writing by Sonic and are to be paid by Licensee.
 
                4.02.       Operations Manual
 
                The Sonic Operations Manual containing the standards, specifications, procedures, and methods for operating a Sonic drive-in restaurant, one copy to which Licensee will be given access for the term of this Agreement.
 
                4.03.       Marketing Assistance.
 
               Certain marketing materials and such merchandising, marketing, and advertising research data and advice as may be developed from time to time by Sonic and deemed to be helpful in the operation of a Sonic drive-in restaurant.
 
                4.04.       Communication .  
 
               Certain management development and motivational seminars and periodic newsletters which communicate to Licensee available advertising materials and new developments, techniques, and improvements in areas of restaurant equipment, management, food preparation, and service which are pertinent to the operation of a restaurant using the Sonic System.
 
                4.05.       Evaluation Program
 
                A field evaluation of the Restaurant will be conducted for the mutual benefit of both Sonic and Licensee to promote uniform standards of operation and quality control.
 
5.   FEES .
 
                5.01.       License Fee.
 
               The Licensee acknowledges that:  (a) the initial grant of the License constitutes the sole consideration for the payment of a license fee of $45,000 paid by Licensee to Sonic concurrently with the execution hereof; and (b) the fee has been earned by Sonic (except where the construction of the Restaurant has not been completed within one year from the date of this Agreement as discussed in Section 6.02(a) and except as provided hereafter in this Section 5.01).  Sonic reserves the right, in case construction of the Restaurant should be abandoned, the lease assigned for a purpose other than the operation of the Sonic Restaurant, or other interest in the premises be relinquished for a purpose other than the operation of the Sonic Restaurant, to terminate this Agreement, including the License, upon written notice, after which Sonic will immediately refund to Licensee the license fee less the sum of $15,000, which shall be fully earned by Sonic upon execution and delivery of this Agreement.  Licensee shall have the right, if Licensee does not consummate a lease or purchase a site for the Restaurant within one year from the date of this Agreement, to terminate this Agreement, including the License, upon written notice, after which Sonic will immediately refund to Licensee the license fee less the sum of $15,000, which shall be fully earned by Sonic upon execution and delivery of this Agreement.
9

 
 
5.02.       Royalty Fees .                                
 
                On or before the 10th day of each calendar month, the Licensee shall pay a royalty fee determined by the following scale based on Gross Sales for the calendar month preceding the date of such payment:
 
 
           Monthly Gross Sales
   But Not
     Royalty
 
          Greater Than
   More Than
    Rate
       
 
$         0.00
$  5,000.00
2.00%
 
$  5,000.00
$10,000.00
3.00%
 
$10,000.00
$15,000.00
3.50%
 
$15,000.00
$20,000.00
4.00%
 
$20,000.00
$25,000.00
4.50%
 
$25,000.00
N/A
5.00%

The calculation of Gross Sales and the corresponding royalty fees shall take place on a cumulative basis.  For example, the following formula results in the calculation of the royalty fee on $50,000 of Gross Sales:  Royalty Fee = ($5,000 x .02) + ($5,000 x .03) + ($5,000 x .035) + ($5,000 x .04) + ($5,000 x .045) + ($25,000 x .05).
 
The payment of royalty fees, as well as the payment of any other obligations incurred under the terms of this Agreement, shall be made via automated clearing house (ACH) or other electronic means approved by Sonic.
 
         5.03.       Brand Fee .  

    (a)               On or before the 10th day of each calendar month throughout the term of this Agreement, Licensee shall pay to the Sonic Brand Fund, which is administered by Sonic, a brand  contribution fee in an amount equal to .90% of the Gross Sales of the Sonic Restaurant during the calendar month next preceding the date of such payment.
 
(b)              The amount due to Sonic by Licensee pursuant to Section 5.03(a), above, shall be in addition to and separate from that which Licensee is obligated to contribute pursuant to Sections 11.01(a) and 11.01(c) of this Agreement.
 
5.04.       Transfer Fee

(a)               A transfer fee in the amount of $1,000 shall be paid by Licensee in the event of a transfer or assignment of this Agreement (resulting in a change in Control of the Agreement) to a licensee then-currently qualified as a licensee, excluding assignments under Sections 13.02 and 13.03. 
 
(b)              A transfer fee in the amount of $3,000 shall be paid by Licensee in the event of a transfer or assignment of this Agreement (resulting in a change in Control of this License) to a new licensee not then-currently qualified as a licensee, excluding assignments under Sections 13.02 and 13.03.

10




                5.05.       Late Payments .  
 
                In the event any payments required by Sections 5.02, 5.03, or 5.04, above, are not paid on or before the date on which they are due, a late charge in an amount equal to 1.75% per month shall be levied against such amounts due and shall be owing to Sonic by the Licensee from the date on which such obligations were due until any such obligations are paid in full.  In the event any payments required by Sections 5.02, 5.03, or 5.04, above, are not paid on or before the date on which they are due three or more times during any 12-month period, in addition to all other rights of Sonic contained in this Agreement or otherwise, (a) Sonic may require the Licensee to submit a statement of Gross Sales in the form prescribed by Sonic and at a frequency prescribed by Sonic, such as weekly; and (b) Sonic may require the Licensee to pay obligations incurred under the terms of this Agreement more frequently than once a month, such as weekly.  In the event the interest rate set out in this Section 5.05 exceeds that amount permitted by Oklahoma law, then the maximum interest rate permitted by Oklahoma law shall be charged.  Sonic’s acceptance of any partial or late payment does not affect Sonic’s right to terminate this Agreement pursuant to the terms of this Agreement.  Further, Licensee acknowledges that this Section 5.05 is not an agreement to accept any partial payments or payments after they are due or Sonic’s commitment to extend credit to, or otherwise finance the operation of, the Sonic Restaurant.
 
5.06.       Taxes .                      
 
               (a)               Licensee shall pay when due all taxes levied or assessed on Licensee and the Sonic Restaurant including, without limitation, unemployment, sales, or gross receipts taxes, and all accounts or other indebtedness of any kind incurred by Licensee in conducting the business of the Sonic Restaurant.

(b)              In the time and manner prescribed by Sonic, Licensee shall also pay an amount equal to any sales tax or gross receipts tax, but not including any net income tax upon Sonic, imposed on Sonic or its Affiliates with respect to any payments from Licensee to Sonic required under this Agreement, unless the tax is credited against a net income tax otherwise payable by Sonic.

(c)              (i)           In the event of a dispute with a taxing authority as to (a) Licensee’s liability for taxes or (b) Sonic’s or its Affiliate’s liability for any taxes upon which Licensee is required under this Section 5.06 to make payment to Sonic, Licensee may contest the validity or the amount of the tax or indebtedness in accordance with the law and regulations of the taxing authority.  Sonic shall provide Licensee with all information, cooperation, and assistance that Licensee may reasonably request in connection with any dispute as to Licensee’s, Sonic’s, or Sonic’s Affiliate’s liability for taxes.  Licensee shall not permit a tax sale, seizure, levy, or similar writ or warrant by a creditor to occur against the Sonic Restaurant or any of its assets.

   (ii)           In the event a state taxing authority makes a refund to Sonic or its Affiliate of taxes paid for which Sonic previously received payment from Licensee under this Section 5.06, Sonic shall pay to Licensee the amount of the taxes refunded by the state taxing authority to Sonic or its Affiliate which equals the amount Licensee previously paid to Sonic under this Section 5.06.
11


(d)              All notices received by Licensee from a state taxing authority regarding the alleged, potential, or actual tax liability of Sonic or its Affiliates shall be given to Sonic within 15 calendar days of receipt by Licensee.  Sonic and Licensee agree to consult in good faith to determine the nature of any action to be taken in connection with the notice or any demands contained therein.
 
6.   DUTIES OF LICENSEE .                                                                
 
                6.01.             Sonic Restaurant Site
 
                (a)         The site at which Licensee shall operate the Sonic Restaurant is more fully described in Section 2.01(a).  During the term of this Agreement, the site shall be used exclusively for the purpose of operating a licensed Sonic drive-in restaurant.
 
               (b)         In the event the Sonic Restaurant premises suffers some physical casualty, the minimum acceptable quality and appearance for the restored restaurant will be that which existed just prior to the casualty, unless the Sonic Restaurant was below minimum acceptable standards for Sonic at the time of casualty in which event the Sonic Restaurant will be restored to a condition which meets the minimum acceptable standard according to Sonic.  However, Licensee agrees to make all reasonable effort to have the restored Sonic Restaurant reflect the then-current image, design, and specifications of Sonic drive-in restaurants.  If the Sonic Restaurant is substantially destroyed by fire or other casualty, Licensee may, with the written consent of Sonic, elect to terminate this Agreement in lieu of Licensee reconstructing the restaurant, provided that for a period of 18 months after said election, Licensee shall not enter into, become landlord of, or loan money to any restaurant business within a three-mile radius of the Sonic Restaurant premises which is similar in nature to or competitive with a Sonic drive-in restaurant or considered a quick-service restaurant establishment. 
 
                6.02.       Construction and Opening
 
               (a)         Licensee agrees to complete the construction of the Sonic Restaurant and open the Sonic Restaurant to the public within one year from the effective date of this Agreement.  If the Sonic Restaurant is not constructed and opened to the public before the expiration of the one-year  period, then Sonic may terminate this Agreement, making it of no further force or effect. In such case, Sonic will immediately refund to Licensee the license fee less the sum of $15,000, which shall be fully earned by Sonic upon execution and delivery of this Agreement.  Unless Licensee is remodeling an existing building, Licensee shall construct the Sonic Restaurant in accordance with the site plan approved by Sonic for such site and with Sonic’s standard construction plans and specifications (“Sonic Plans and Specifications”) and layout subject, however, to any alterations thereto that may be required by any applicable law, regulation, or ordinance.  If alterations of any kind are required to be made to the site plan, as approved by Sonic, or to the Sonic Plans and Specifications or layouts for any reason, such alterations must be approved by Sonic in writing before any work is begun on the Sonic Restaurant.  The Licensee shall submit the final site layout and construction plans for the Sonic Restaurant to Sonic for its written approval.  Any costs, including engineering and architectural fees, incurred in obtaining approvals by the appropriate governmen­tal authorities of the construction plans, specifications, and layouts shall be paid by Licensee.  Prior to opening, Licensee shall submit to Sonic, at no cost to Sonic, a record set of drawings showing all approved changes to the plans and specifications.
12

 
               (b)        If Licensee is remodeling the existing Restaurant, Sonic shall have the right to inspect and approve all plans and specifications prior to the commencement of any work.  The Licensee shall submit the final remodeling plans and specifications for the Sonic Restaurant to Sonic for its written approval.  Nothing in this section shall be construed as an endorsement or guarantee of the conformity of such plans to applicable local, state, or federal building or safety codes, or a guarantee that construction will be done in conformity with such approved plans.  In any event, Licensee shall obtain written approval of such plans or written notice of Sonic’s waiver of the rights reserved hereunder prior to the commencement of construction. 
 
               (c)         Licensee shall not deviate from the approved plans and specifications in any manner in the construction or remodeling of the restaurant without the prior written approval of Sonic.  If at any time Sonic determines (prior to opening date) that Licensee has not constructed or remodeled the Sonic Restaurant in accordance with the plans and specifications approved by Sonic, Sonic shall, in addition to any other remedies, have the right to obtain an injunction from a court of competent authority against the continued construction and opening of the Sonic Restaurant, and Licensee hereby consents to any such injunction.
 
(d)              Sonic may require the Licensee to undertake extensive remodeling and renovation and substantial modifications to existing buildings necessary for the Licensee’s restaurant to conform with Sonic’s then-existing system image.  Sonic may exercise the foregoing right at any time during the term of this Agreement, but may not require (1) the remodeling of the restaurant more than once every seven years or (2) the remodeling of a restaurant built within the preceding three years, unless the required remodeling will not exceed 15% of the original cost of the building, equipment, and land improvements (as adjusted for increases in the consumer price index after the construction date of the restaurant).  Notwithstanding the foregoing, Sonic shall have the right to require the Licensee to modify or replace the large Sonic sign for the restaurant at any time during the term of this Agreement.  If Sonic exercises its right to require the Licensee to undertake extensive remodeling or renovation or substantial modification within five years of the end of the term of this Agreement, the Licensee may exercise any right to renew the term of this Agreement at that point in time in accordance with the applicable provisions of this Agreement, which renewal then shall take effect as of the expiration of the then-current term of this Agreement.
 
                6.03.       Equipment and Sign
 
               (a)         Licensee shall install in and about the Sonic Restaurant such equipment, fixtures, furnishings, and other personal property, and shall upgrade or purchase additional equipment, fixtures, furnishings, and other personal property, as are required and which strictly conform to the appearance, uniform standards, and specifications of Sonic existing from time to time, which shall be communicated to Licensee in the Sonic Operations Manual or otherwise in writing.  Equipment not required by Sonic shall not be installed without Sonic’s prior written consent, except that Licensee may, without Sonic’s prior written consent, install security-related equipment that does not interfere with the operation or trade dress of the Sonic Restaurant.
 
               (b)        In order to provide maximum exposure of the Sonic name and marks, Licensee shall prominently display and maintain at Licensee’s own expense one Sonic drive-in sign (“Sign”) which complies with the specifications required by Sonic from time to time and in such location as Sonic may approve.  Licensee shall not display any other sign or advertising at the Sonic Restaurant without Sonic’s prior written approval.
13

 
                (c)              Licensee may lease the required Sign from Sonic or may acquire or lease the Sign from any other source approved by Sonic.  Licensee agrees to require in any lease agreement with Sonic or other suppliers a clause giving Sonic the right to remove the Sign from the Sonic Restaurant upon termination of this Agreement. 
 
                (d)              Licensee hereby agrees that it shall obtain from the landlord of the property at which the Sonic Restaurant is located a landlord’s waiver releasing all claims against any equipment or sign which belongs to Sonic and all claims to fixtures and furnishings that constitute Proprietary Marks of Sonic.
 
                (e)               If Licensee is or becomes a lessee of the Sonic Restaurant premises, Licensee shall provide Sonic with a true and correct, complete copy of any such lease and obtain Sonic’s written approval of the lease terms prior to executing the lease.  Licensee shall have included in the lease provisions, in form satisfactory to Sonic, expressly permitting both the Licensee and Sonic to take all actions and make all alterations referred to under Section 15.01.  Any such lease shall also require the lessor thereunder to give Sonic reasonable notice of any contemplated termination and a reasonable time in which to take and make the above actions and alterations and provide that the Licensee has the unrestricted right to assign such lease to Sonic.
 
                6.04.            Training .
 
               (a)          Licensee acknowledges the importance of the quality of business operations among all restaurants in the Sonic System and agrees that it will not allow any of its licensed establishments to be opened or operated without having at least one individual working full time at the Sonic Restaurant who has completed the Stage Career Development Program or other Sonic-designated training program.  If the trained individual ceases to work full time at the Sonic Restaurant for whatever reason, the Licensee shall promptly replace the individual with a person who has completed the Stage Career Development Program or other Sonic-designated training program.  Licensee agrees that each individual who participates in the Stage Career Development Program or other Sonic-designated training program for the Sonic Restaurant will, at the request of Sonic, sign a confidentiality agreement in a form prescribed by Sonic agreeing to maintain as confidential certain information learned and received during the program.
 
               (b)         Licensee shall pay all traveling expenses, living expenses, and any other personal expenses for themselves and managers while enrolled in the training program.  As part of the initial license fee paid pursuant to Section 5.01 herein, Licensee shall have the right to have one principal and one manager of the Sonic Restaurant attend the Stage Career Development Program or other Sonic-designated training program for no cost other than those set out in the preceding sentence.  Any additional parties attending the Stage Career Development Program or other Sonic-designated training program shall bear the cost, including any fees and tuition due for such training program.
 
               (c)         Upon opening the Sonic Restaurant, all management personnel shall be certified in ServSafe or in another comparable, nationally recognized food safety training and certification program approved by Sonic, the cost of which shall be borne by Licensee.  Management personnel subsequently employed by Licensee at the Sonic Restaurant shall have 120 days from the beginning date of such employment to successfully complete such training.  Licensee shall pay all traveling expenses, living expenses, and any other personal expenses for such persons while participating in the training.  Management personnel includes any person who has shift responsibility or employee oversight at the Sonic Restaurant and also includes the operating principal of the Sonic Restaurant.  
14

 
                6.05.       Compliance with Entire System .
 
               (a)         Licensee acknowledges that every component of the Sonic System is important to Sonic and to the operation of the Sonic Restaurant as a Sonic drive-in restaurant, including a designated menu of food and beverage products; uniformity of food specifications, preparation methods, quality, and appearance; and uniformity of facilities and service.
 
               (b)         Sonic shall have the right to inspect the Sonic Restaurant at all reasonable times to ensure that Licensee’s operation thereof is in compliance with the standards and policies of the Sonic System.  This right to inspect includes the right of Sonic or a third party on behalf of Sonic to conduct food safety audits and operational assessments.  In the event that any inspection, including a food safety audit or an operational assessment, reveals any deficiency or unsatisfactory condition with respect to any aspect of the Sonic Restaurant operation, Licensee shall, within 72 hours of Licensee’s receipt of notice of such condition or such other time as Sonic in its sole discretion may provide, correct or repair such deficiency or unsatisfactory condition if it is correctable or repairable within such time period, and, if not, shall within such time commence such correction or repair and thereafter diligently pursue same to completion.  The preceding sentence notwithstanding, the Licensee shall take immediate action to correct or repair any deficiency or unsatisfactory condition which poses a risk to public health or safety.  In the event Licensee fails to comply with the foregoing obligations to correct and repair, Sonic, upon 24 hours’ notice to Licensee, shall have the right (but no obligation), without being guilty of trespass or tort, to forthwith make or cause to be made such corrections or repairs, and the expense thereof, including board, wages, lodging, and transportation of Sonic personnel, if utilized, shall be paid by Licensee upon billing by Sonic.  The foregoing shall be in addition to any other right or remedies Sonic may have.
 
               (c)          Licensee shall comply with the entire Sonic System as described herein and in the Sonic Operations Manual , including but not limited to the following:
 
   (i)      Operate the Sonic Restaurant in a clean, wholesome manner in compliance with standards of quality, food safety, service, cleanliness, and appearance as prescribed by governmental authorities and by Sonic; comply with all business policies, practices, and procedures imposed by Sonic; and maintain the building, equipment, and parking area in a good, clean, wholesome condition and repair, well lighted, and in compliance with designated standards as may be prescribed from time to time by Sonic.
 
                   (ii)      Purchase and install kitchen fixtures, lighting, payment systems, and equipment, and office equipment and signs in accordance with the equipment specifications and layout designated by Sonic.
 
                   (iii)    Without the prior written consent of Sonic, make no (a) building design conversion or (b) alterations, conversions, or additions to the building or parking area.
 
                   (iv)          Make repairs or replacements required because of damage, wear, and tear or in order to maintain the Sonic Restaurant building, fixtures, and parking area in good condition and in conformity with blueprints and plans.
15

                    (v)         Maintain the parking stalls, as required in the standard Sonic Plans and Specifications, for the exclusive use of Sonic Restaurant customers.
 
                   (vi)         Operate the Sonic Restaurant everyday of the year (except Easter, Thanksgiving, and Christmas), and at least 15 hours per day or such other hours, including specific opening and closing times, as may from time to time be reasonably prescribed by Sonic (except when the Sonic Restaurant is untenantable as a result of fire or other casualty), maintain sufficient supplies of food and paper products, and employ adequate personnel so as to operate the Sonic Restaurant at its maximum capacity and efficiency.
 
                   (vii)        Cause all employees of Licensee, while working in the Sonic Restaurant, to:  (a) wear uniforms of such color, design, and other specifications as Sonic may designate from time to time, (b) present a neat and clean appearance, and (c) render competent and courteous service to Sonic Restaurant customers.
 
                   (viii)       Serve all menu items which Sonic may deem appropriate and which are included in the menu approved by Sonic at the time to take full advantage of the potential market and achieve standardization in the Sonic System, serve no items which are not set forth in the Sonic Operations Manual and which are not otherwise authorized and approved in writing by Sonic, and display and offer only the menu approved by Sonic at the time.
 
                   (ix)         In the dispensing and sale of food products: (a) use only containers, cartons, bags, napkins, and other paper goods and packaging bearing the approved trademarks and which meet the Sonic System specifications and quality standards, (b) use only those flavorings, garnishments, and food and beverage ingredients, manufacturers, and brands which meet the Sonic System specifications and quality standards, which Sonic may designate from time to time, and (c) employ only those methods of food handling, preparation, and serving which Sonic may designate from time to time.
 
                   (x)           Make prompt payment in accordance with the terms of invoices rendered to Licensee including, but not limited to, invoices for the purchase of fixtures, equipment, and food and paper supplies.
 
                   (xi)          At Licensee’s expense, comply with all federal, state, and local laws, ordinances, and regulations affecting the operation of the Sonic Restaurant, including all laws, ordinances, or regulations relating to terrorist activities.
 
                   (xii)         Install no electronic games or other games of chance at the Sonic Restaurant without the express prior written consent of Sonic.
 
                   (xiii)       Furnish Sonic with current home addresses and phone numbers of Licensee and Licensee’s owners and manager; furnish Sonic with current information regarding the legal and equity ownership and Control of the operation of the Sonic Restaurant; and, upon Sonic’s reasonable request, provide updates of financial information, personal financial statements, and credit information.
16

 
                   (xiv)       Notify Sonic’s Communications Department or, if not available, the most senior executive officer of Sonic as soon as possible and, in any event, within 12 hours after the occurrence at the Sonic Restaurant of any event which could have an adverse impact on the Sonic Restaurant and/or the Sonic System, including (without limitation) the death or serious bodily injury of any employee or customer for any reason or the risk of infection by a contagious disease.
 
   (xv)        Only provide a Sonic-approved toy premium that is appropriate for the age of the child; make a Sonic-approved all-age toy premium available upon customer request; and, except in the case of an all-age toy premium provided as appropriate, only offer the Sonic-approved toy premium corresponding to the Sonic-designated promotion.

   (xvi)       Accept Sonic-designated debit and credit cards, Sonic-approved stored-value cards, and any other Sonic-designated payment means.

   (xvii)      Participate in system-wide initiatives, including technology initiatives such as the PartnerNet technology initiative and other initiatives as may be designated by Sonic from time to time.

   (xviii)     Deal with Persons supplying goods and services to the Sonic Restaurant in a respectful and responsive manner such that the reputation and goodwill of Sonic, its licensees, and the Sonic System are not tarnished in the business community or with consumers; ensure that all Persons that provide goods or services to the Sonic Restaurant during construction and operation are timely and fully paid for such goods and services, except only to the extent that any of the goods and services are non-conforming, damaged, defective, or missing; and, in the event that a dispute arises as to quality or quantity of goods or services furnished to the Sonic Restaurant, timely communicate with and respond to the supplier in a good faith effort to resolve the dispute.  Licensee cannot avoid the obligations contained in this Section 6.05(c) (xviii) by contracting for or obtaining the goods or services indirectly, such as through an intermediary.

   (xix)       Except as to bottled water and paper products and except as allowed by any policy contained in the Sonic Operations Manual , do not sell or serve food and beverage products outside of the Sonic Restaurant premises and do not donate food and beverage products to a third party except upon the prior written consent of Sonic.

   (xx)         Do not sell Sonic coupons, and only sell Sonic-related merchandise on the Internet or by other means upon the prior written consent of Sonic.

   (xxi)        Participate in Sonic-approved marketing, advertising, promotional, and brand enhancement programs.
17


    (xxii)      In the event Sonic sets a maximum price for any product, do not charge a price in excess of such maximum price for the product; however, Licensee may charge a price lower than the maximum price.

    (xxiii)     Sell the Sonic-approved stored-value card or other Sonic-designated pre-paid payment means.

    (xiv)      Utilize at the Sonic Restaurant a Sonic-approved point-of-sale system that at all times has a non-alterable grand total function so that each item entered in such register and each day’s totals may not be altered once entered.

(d)              Sonic shall have the right to establish new or to modify existing operating procedures, policies, practices, requirements, and guidelines, which shall be effective upon notice from Sonic unless Sonic specifies otherwise.  Such new or modified operating procedures, policies, practices, requirements, and guidelines may require Licensee to incur additional expense.
 
6.06.             Approved Suppliers and Advertising Agencies .
 
(a)               Sonic may require the Licensee (i) to purchase food, beverages, signs, and equipment which meet the specifications established by Sonic; (ii) to purchase such items only from Sonic-designated suppliers (which designated suppliers may include Sonic or its Affiliates); and (iii) to retain and utilize exclusively the marketing and advertising services of the Sonic-approved advertising agency of record.  In addition, the Licensee immediately shall use the Licensee’s vote or votes in all advertising cooperatives in which the Licensee participates to support the use of the advertising agency of record for the Sonic drive-in restaurant chain.
 
(b)              Sonic may require the Licensee to support the use of and to use the products and programs of the beverage syrup supplier approved by Sonic and used by a majority of all Sonic drive-in restaurants, to the exclusion of any other supplier of beverage syrup.
 
(c)               Sonic may require the Licensee to comply with the foregoing provisions not only for the Sonic Restaurant, but also (to the extent the Licensee exercises Control) for all other Sonic drive-in restaurants for which the Licensee serves as a licensee.  
 
(d)               Sonic hereby explicitly retains the exclusive right to consider, review, and approve any and all suppliers that may hold, sell, or distribute Sonic-labeled goods or products.
 
(e)               Licensee agrees that its suppliers may provide to Sonic information regarding Licensee’s past due amounts.
 
(f)               The terms of this Section 6.06 shall continue in effect for as long as the Licensee serves as a licensee for a Sonic drive-in restaurant and shall survive the expiration or termination of this Agreement.
 
(g)              If at least 95% of all Sonic drive-in restaurants are in compliance with Sections 6.06(a) and 6.06(b), Sonic periodically shall submit the approved advertising agency or beverage syrup supplier to competitive bid or review, but shall not be obligated to do so more often than once every three years.
18

 
                6.07.             Best Efforts

Licensee shall diligently and fully exploit his rights in this Agreement by personally devoting his best efforts and, in case more than one individual has executed this Agreement as the Licensee, at least one individual Licensee shall devote his full time and best efforts to the operation of the Sonic Restaurant.  Licensee shall avoid any activities which, in Sonic’s sole judgment, would be detrimental to or interfere with the business of the Sonic Restaurant, the Sonic System, or Sonic.

6.08.             Interference with Employment Relations of Others

During the term of this Agreement, except upon the prior written consent of Sonic, Licensee shall not employ or seek to employ any person who is at the time or was at any time during the prior six months employed by Sonic or any of its subsidiaries.  In addition, during the term of this Agreement, except upon the prior written consent of Licensee, Sonic agrees not to employ or seek to employ any person who is at the time or was at any time during the prior six months employed by Licensee in a management level position.

6.09.             Sonic’s Standards

Licensee shall operate the Sonic Restaurant specified in this Agreement in conformity with the Sonic System and the obligations set forth in this Agreement and shall strictly adhere to Sonic’s standards and policies as they exist now and as they may be from time to time modified.

6.10.             Majority Interest Owner .

Licensee represents, warrants, and agrees that Licensee actually owns the majority interest in the legal and equity ownership and Control of the operation of the Sonic Restaurant, and that Licensee shall maintain such interest during the term of this Agreement except only as otherwise permitted pursuant to the terms and conditions of this Agreement.  Licensee shall furnish Sonic with such evidence as Sonic may request from time to time for the purpose of assuring Sonic that Licensee’s interest remains as represented herein.

6.11.            Electronic Communication and Use of Internet .

(a)               At Sonic’s option, Sonic may post the Sonic Operations Manual (pursuant to Sonic’s obligation to provide Licensee with access to the Sonic Operations Manual , as set forth in Section 8) and other communications on a restricted Intranet or other website to which Licensee will have access.  If Sonic does so, Licensee must periodically monitor the site for any updates to the Sonic Operations Manual or other standards, specifications, and procedures.  Any passwords or other digital identification necessary to access the Sonic Operations Manual and other information on such a site will be deemed to be part of the Confidential Information (defined in Section 9.01).  Further, Licensee agrees that Licensee will establish the channels of communication with Sonic and Licensee’s customers as required by Sonic from time to time, including e-mail, Internet, and other electronic forms of communication, and that Licensee will acquire and maintain any computer or other components necessary for the transmission of such communications.
19


(b)              Licensee will not establish or operate a website for the Sonic Restaurant or for Licensee’s organization that owns and operates the Sonic Restaurant or other Sonic restaurants under license agreements with Sonic.
 
7.   PROPRIETARY MARKS .

7.01.            Sonic’s Representations .

Sonic represents with respect to the Proprietary Marks that Sonic will use and permit Licensee and other licensees to use the Proprietary Marks only in accordance with the Sonic System and the standards and specifications attendant thereto which underlie the goodwill associated with and symbolized by the Proprietary Marks.

7.02.            Use of Marks .

With respect to Licensee’s licensed use of the Proprietary Marks pursuant to this Agreement, Licensee agrees that:

(a)               Licensee shall use only the Proprietary Marks designated by Sonic and shall use them only in the manner authorized and permitted by Sonic.

(b)              Licensee shall use the Proprietary Marks only for the operation of the Sonic Restaurant.

(c)               During the term of this Agreement and any renewal hereof, Licensee shall identify itself as the owner of the Sonic Restaurant in conjunction with any use of the Proprietary Marks, including, but not limited to, invoices, order forms, receipts, and contracts, as well as at conspicuous locations on the premises of the Sonic Restaurant.  The identification shall be in the form which specifies Licensee’s name, followed by the term “Licensed Proprietor”, or such other identification as shall be approved by Sonic.

(d)              Licensee’s rights to use the Proprietary Marks are limited to such uses as are authorized under this Agreement, and any unauthorized use thereof shall constitute an infringement of Sonic’s rights.

(e)              Licensee shall not use the Proprietary Marks to incur any obligation or indebtedness on behalf of Sonic.

(f)               Licensee shall not use the Proprietary Marks as part of its corporate or other legal name.

(g)              Licensee shall comply with Sonic’s instructions in filing and maintaining the requisite trade name or fictitious name registrations, and shall execute any documents deemed necessary by Sonic or its counsel to obtain protection for the Proprietary Marks or to maintain their continued validity and enforceability.

(h)              In the event that litigation involving the Proprietary Marks is instituted or threatened against Licensee, Licensee shall promptly notify Sonic and shall cooperate fully in defending or settling such litigation.
20


7.03.             Licensee’s Understanding

Licensee expressly understands and acknowledges that:

(a)               As between the parties hereto, Sonic owns the right and interest in and to the Proprietary Marks and the goodwill associated with and symbolized by them, and any and all use thereof by Licensee inures to the benefit of Sonic.

(b)               The Proprietary Marks are valid and serve to identify the Sonic System and those who are licensed under the Sonic System.

(c)               Licensee shall not directly or indirectly contest the validity or the ownership of the Proprietary Marks.

(d)              Licensee’s use of the Proprietary Marks pursuant to this Agreement does not give Licensee any ownership interest or other interest in or to the Proprietary Marks, except the nonexclusive license granted herein.

(e)               Any and all goodwill arising from Licensee’s use of the Proprietary Marks in its licensed operations under the Sonic System shall inure solely and exclusively to Sonic’s benefit, and upon expiration or termination of this Agreement and the License herein granted, no monetary amount shall be assigned as attributable to any goodwill associated with Licensee’s use of the Sonic System or the Proprietary Marks.

(f)                The right and license of the Proprietary Marks granted hereunder to Licensee is nonexclusive except as provided in Section 2.01 of this Agreement, and Sonic thus has and retains the right among others:

    (i)           To grant other licenses for the Proprietary Marks, in addition to those licenses already granted to existing licensees.

    (ii)           To use the Proprietary Marks in connection with selling products and services.

    (iii)           To develop and establish other systems for the same or similar Proprietary Marks, or any other Proprietary Marks, and grant licenses or franchises thereto without providing any rights therein to Licensee.

(g)           Sonic reserves the right to substitute different Proprietary Marks for use in identifying the Sonic System and the businesses operating thereunder if Sonic’s currently owned Proprietary Marks no longer can be used.

7.04.             Other Intellectual Property .

If Licensee develops any trademark, service mark, trade dress, copyright, patent, or other intellectual property for use in promoting or operating the Sonic Restaurant or promoting the Sonic System, such intellectual property will be deemed the property of Sonic or its Affiliate, at Sonic’s election, without charge or the payment of any royalty, and Licensee shall take action as necessary to convey such rights to Sonic.
21


8.   MANUAL .

Sonic shall provide Licensee access to, for use at the Sonic Restaurant, the Sonic Operations Manual prepared by Sonic for use by licensees of Sonic drive-in restaurants similar to the Sonic Restaurant to be operated by Licensee.  Licensee recognizes that the Sonic Operations Manual contains detailed information relating to operation of the Sonic Restaurant including: (a) food formulas and specifications for designated food and beverage products; (b) methods of inventory control; (c) bookkeeping and accounting procedures; (d) business practices and policies; (e) required equipment; and (f) other management and advertising policies.  Licensee agrees to promptly adopt and use exclusively the formulas, methods, and policies contained in the Sonic Operations Manual , now and as they may be modified by Sonic from time to time, and to return said manual to Sonic at the expiration or earlier termination of this Agreement. 

9.   CONFIDENTIAL INFORMATION

9.01.            Sonic Proprietary and Confidential Information .

Sonic possesses certain unique, proprietary, and confidential information, consisting of methods and procedures for preparation of food and beverage products, confidential recipes for food products, distinctive service and accessories, plans and specifications for interior and exterior signs, designs, layouts, and color schemes, and methods, techniques, formats, systems, specifications, procedures, business information, trade secrets, sales and marketing programs and information, methods of business operations and management, and knowledge of and experience in the operation and franchising of Sonic drive-in restaurants and the Sonic System (collectively, the “Confidential Information”).  Sonic will disclose the Confidential Information to Licensee in furnishing Licensee the Sonic Plans and Specifications for a Sonic drive-in restaurant, the training program, and the Sonic Operations Manual , and in providing guidance and assistance to Licensee during the term of this Agreement.  The Sonic Operations Manual , as modified by Sonic from time to time, and the policies contained therein, are incorporated in this Agreement by reference. Licensee acknowledges that Confidential Information will be disclosed by Sonic through various means, including orally, in writing, and electronically, such as on a restricted Intranet or other website.

9.02.            Licensee’s Use of Proprietary and Confidential Information .

Licensee acknowledges and agrees that Licensee shall not acquire any interest in the Confidential Information, other than the right to utilize it in the development and operation of the Sonic Restaurant (and other Sonic drive-in restaurants under license agreements with Sonic) during the term of this Agreement, and that the use or duplication of the Confidential Information in any other business would constitute an unfair method of competition.  Licensee acknowledges and agrees that the Confidential Information is proprietary to Sonic, may constitute trade secrets of Sonic, and is disclosed to Licensee solely on the condition that Licensee agrees, and Licensee does hereby agree, that Licensee:

   (i)  shall not use the Confidential Information in any other business or capacity, or for the benefit of any other Person or entity;
22


   (ii) shall maintain the absolute confidentiality of the Confidential Information, and shall not disclose or divulge the Confidential Information to any unauthorized Person or entity, during and after the term of the Agreement;

   (iii) shall not make unauthorized copies of any portion of the Confidential Information disclosed in printed, audio, or video form (except in connection with instruction of employees in the operation of the Sonic Restaurant); and

   (iv) shall adopt and implement all procedures prescribed from time to time by Sonic to prevent unauthorized use or disclosure of the Confidential Information, including, without limitation, restrictions on disclosure thereof to employees of the Sonic Restaurant and the use of nondisclosure and non-competition clauses in employment agreements with employees (including all owners, shareholders, members, officers, and partners of Licensee) who have access to the Confidential Information.

9.03.             Licensee’s Use of Sonic Operations Manual .

Licensee may not at any time, in any manner, directly or indirectly, and whether or not intentionally, copy any part of the Sonic Operations Manual , permit any part of it to be copied, disclose any part of it except to employees or others having a need to know its contents for purposes of operating the Sonic Restaurant, or permit its removal from the Sonic Restaurant without prior written consent from Sonic.  Notwithstanding anything to the contrary contained in this Agreement and provided Licensee shall have obtained Sonic’s prior written consent, the restrictions on Licensee’s disclosure and use of the Confidential Information shall not apply to the following:

(a)               information, processes, or techniques which are or become generally known in the food service industry, other than through disclosure (whether deliberate or inadvertent) by Licensee; and

(b)              disclosure of the Confidential Information in judicial or administrative proceedings to the extent that Licensee is legally compelled to disclose such information, provided Licensee shall have used its best efforts, and shall have afforded Sonic the opportunity, to obtain an appropriate protective order or other assurance satisfactory to Sonic of confidential treatment for the information required to be so disclosed.

9.04.             No Information to the Public .

Licensee acknowledges that Sonic’s parent company, Sonic Corp., is a public company, and that Sonic Corp. makes certain information regarding the performance of the Sonic System available to the public, including investors and financial analysts, in the normal course of business. Licensee further acknowledges that Licensee’s own disclosure of certain information to the public could interfere with the business of Sonic.  Licensee agrees that it will not provide to the public, or to any investor, financial analyst, or person that influences investments, any information that might indicate the performance of the Sonic System, the Sonic restaurant chain, or any aspect thereof, including sales information, except that Licensee may provide information to attorneys, accountants, financial planners, and other professionals as required in the course of Licensee’s personal business or the operation of the Sonic Restaurant.
23


10.   ACCOUNTING AND RECORDS .

10.01.           Due Date .

On or before the 10th day of each month, Licensee shall submit to Sonic a complete profit and loss statement in a form prescribed by Sonic and such statistical reports in such form as Sonic shall reasonably require from time to time, for the previous month immediately ended, or for such other time period as may be designated by Sonic.  Such profit and loss statements and other statistical and financial reports required by this Agreement shall be submitted by electronic means as specified by Sonic.

10.02.          Record Retention .

Licensee shall keep and preserve full and complete records of the Sonic Restaurant business for at least three years in a manner and form satisfactory to Sonic and shall also deliver such additional financial, operating, and other information and reports as Sonic may reasonably request on the forms and in the manner prescribed by Sonic; provided, however, that Licensee shall maintain, at a minimum, those books and records required to be kept by the Internal Revenue Service under the Internal Revenue Code for purposes of its regulation of Licensee’s business and make the same books available to Sonic.

10.03.           Charitable Contributions and Discounts .

In meeting the requirements set forth in Sections 10.01 and 10.02 above, Licensee shall keep records substantiating and enter as a line item on its financial statements amounts representing the valuation for goods (whether food, paper, or otherwise) which constitute charitable contributions to third parties from the same goods out of the Sonic Restaurant.  Likewise, the Licensee shall maintain records and enter on its financial statements (particularly a line item on its profit and loss statement) information representing the value or amount of sales represented by coupons traded with and discounts granted by the Licensee at the Sonic Restaurant.

10.04.          Annual Reports .

Licensee further agrees to submit, within 90 days following the close of each fiscal year of the Sonic Restaurant’s operation, a profit and loss statement covering operations during such fiscal year and the balance sheet taken as of the close of such fiscal year.

10.05.           Audit by Sonic .

Sonic shall have the right to inspect and audit Licensee’s accounts, books, records, and tax returns at all times during and after the term of this Agreement.  If such inspection discloses that Gross Sales actually exceeded or, pursuant to generally accepted audit methodologies, should have exceeded the amount reported by Licensee, Licensee shall immediately pay Sonic:  (i) the additional royalty fee, brand fee, and advertising expenditures; (ii) interest on all unpaid amounts (from the original due date) at a rate equal to that provided by Section 5.05 herein; and (iii) a 10% surcharge on all unpaid amounts.  If such inspection discloses that Gross Sales actually exceeded or, pursuant to generally accepted audit methodologies, should have exceeded the amount reported by Licensee as Licensee’s Gross Sales by an amount equal to 3% or more of the Gross Sales originally reported to Sonic, Licensee shall bear the cost of such inspection and audit at rates and fees customarily charged by Sonic for such auditing and inspecting services and duties.  Unpaid brand fees, including interest and surcharges collected by Sonic pursuant to this section, shall be used in accordance with the expenditures authorized by Section 5.03; nevertheless, Sonic may, on a case by case basis, at Sonic’s sole discretion, use such collected amounts in accordance with the expenditures authorized by Section 11.01.  Sonic shall have the right to bring an action in its own name to collect unpaid brand and advertising expenditures required by Section 11 herein.
24


10.06.          Third-Party Audit .

If Sonic has reason to believe that the Licensee may not have reported all of its Gross Sales, Sonic may require the Licensee to have its profit and loss statement and balance sheet certified by an independent public accountant.  Licensee shall at his expense cause a Certified Public Accountant to consult with Sonic concerning such statement and balance sheet.  The original of each such reports required by this Section 10.06 shall be mailed to Sonic’s business office at the address designated in Section 19 below.

10.07.           Licensee’s Failure to Timely Deliver Financial Records .

If Licensee fails to timely provide Sonic with complete profit and loss statements, accounts, books, records, and tax returns pertaining to the Sonic Restaurant business, or fails to fully cooperate with Sonic’s audit of the Sonic Restaurant business, Sonic shall have the right to estimate Licensee’s Gross Sales for the Sonic Restaurant using information available on the Sonic Restaurant or other Sonic drive-in restaurants.  Licensee agrees to accept Sonic’s estimates as conclusively correct until Licensee fully complies with Sonic’s accounting and disclosure requirements under this Agreement.  However, if the Licensee’s subsequent accounting and disclosures reveal that Licensee under-reported Gross Sales or underpaid fees due under this Agreement, Sonic may recover all deficiencies and may litigate claims of fraud even though Sonic may have already obtained a judgment using Sonic’s estimates.  Furthermore, nothing in this Agreement or any judgment using estimates shall prevent or hinder Sonic’s further efforts and rights to obtain the accounting and disclosures which Licensee is required to give to Sonic under this Agreement.  Without regard to whether Licensee fails to timely provide records to Sonic or fails to fully cooperate with Sonic in the audit of the Sonic Restaurant, Sonic may make estimates during the audit process or for other purposes as allowed by generally accepted accounting principles or audit methodologies.

10.08.                       Financial Disclosure .

Sonic shall have the right to assemble and disseminate to third parties financial and other information regarding the Licensee and other licensees of Sonic to the extent required by law or to the extent necessary or appropriate to further the interests of the Sonic System as a whole.  Sonic shall have the right to disclose the business name, address, and telephone number of the Licensee as they appear in Sonic’s records to any Person making inquiry as to the ownership of the Sonic Restaurant.  Sonic shall not disclose specific financial information regarding the Licensee or the Sonic Restaurant to any Person without (a) the Licensee’s prior, written consent or (b) being directed to disclose the information pursuant to the order of a court or other governmental agency.

25


10.09.           Accounting Services .

        In the event that Licensee is late three or more times during any 12-month period in paying any fee or obligation required by this Agreement, including the royalty fees set forth in Section 5.02 and the brand and advertising expenditures set forth in Sections 5.03 and 11, Sonic shall have the right to require Licensee to use Sonic’s accounting services for the term of this Agreement and any renewal, for which cost Licensee shall reimburse Sonic.  This requirement is in addition to all other rights Sonic may have under the terms of this Agreement and otherwise.

10.10.         Application of Payments .

Despite any payment designation by Licensee, Sonic may apply any payments received from Licensee pursuant to this Agreement to the oldest debt or in accordance with any payment application process prescribed by Sonic.

11.   ADVERTISING AND BRAND EXPENDITURES

11.01.           Standard Programs

                Recognizing the value of advertising and the importance of the standardization of advertising and brand programs to the furtherance of the goodwill and public image of the System, the parties agree as follows:

(a)               In the event the Sonic Restaurant lies within a DMA for which a Sonic-approved advertising cooperative has been formed, Licensee (i) shall join such advertising cooperative or such other advertising cooperative as may be designated by Sonic; (ii) shall abide by, follow, support, and promote the financial accounting requirements established by Sonic from time to time for advertising cooperatives, including complying with the format of financial reporting required by Sonic, acknowledging Sonic’s right to audit the advertising cooperative, cooperating fully with Sonic in the event of any such audit, and using either the cooperative accounting services of Sonic or another Sonic-approved accounting service; (iii) shall support the adoption of only those bylaws approved by Sonic for the advertising cooperative; and (iv) shall not purchase media outside of the advertising cooperative.  Licensee shall contribute to such advertising cooperative an amount required by such advertising cooperative on a schedule required by such advertising cooperative, provided that such contributions shall occur no less often than each calendar month and shall be of an amount not less than 3.25% of Licensee’s Gross Sales from the Sonic Restaurant during each partial or full calendar month.  If the DMA has, in Sonic’s sole discretion, been designated a “developing market,” Licensee shall instead contribute to the advertising cooperative not less than 5% of Licensee’s Gross Sales from the Sonic Restaurant during each partial or full calendar month; however, at any time Sonic may alternatively designate other uses for any portion of such developing market contribution if Sonic determines, in its sole discretion, that there is less need for advertising and a greater need for another use.

(b)              In the event there exists no Sonic-approved advertising cooperative in the DMA in which the Sonic Restaurant is located, Licensee shall promptly form an advertising cooperative for the DMA and further comply with the requirements set forth in Sections 11.01(a) and 11.01(c) and other provisions of this Agreement applicable to and related to advertising cooperatives.
26


(c)               Sonic or its designee shall maintain and administer a marketing fund for the Sonic System titled the System Marketing Fund (the “SMF”) as follows:

    (i)           The SMF shall be administered by Sonic, and funds paid to the SMF shall be deposited in a separate bank account denoted as the System Marketing Fund. 

   (ii)          The advertising cooperative of which Licensee is a member shall pay to the SMF a sum equal to 2% of Licensee’s Gross Sales (or higher as may be prescribed by Sonic) from the contribution paid by Licensee to the advertising cooperative.

   (iii)          Sonic shall direct all marketing programs with sole discretion over the creative concepts, materials, and media used in such programs.  The Licensee acknowledges that Sonic and its designees undertake no obligation in administering the SMF to make expenditures for Licensee which are equivalent or proportionate to Licensee’s contribution.

   (iv)          The SMF is intended to complement local marketing efforts by promoting the message of the Sonic brand to an expanded audience.  The SMF and all earnings thereof shall be used primarily to purchase national broadcast, print, interactive, and other media, sponsorships, and brand enhancement opportunities.  The SMF and its earnings shall not inure to the benefit of Sonic.

   (v)          The SMF is not an asset of Sonic, and an independent certified public accountant designated by Sonic shall review the operation of the SMF annually, and the report shall be made available to Licensee upon request.  Notwithstanding the foregoing, the body approved and designated by the Sonic as the body to consult with regarding the Sonic’s maintenance and administration of the SMF (such as the Franchise Advisory Council Executive Committee or its successor) may designate the independent public accountant to conduct the required review of the operation of the SMF if requested in writing at least 30 but not more than 60 days prior to the end of each fiscal year.

   (vi)         Although Sonic intends the SMF to be of perpetual duration, Sonic maintains the right to terminate the SMF.  The SMF shall not be terminated, however, until all monies in the SMF have been expended for marketing and promotional purposes as aforesaid.

   (vii)        On at least a quarterly basis, Sonic shall consult with the body approved and designated by Sonic (such as the Franchise Advisory Council Executive Committee or its successor) regarding Sonic’s maintenance and administration of the SMF and shall report to that body on the SMF’s operation.

(d)              For purposes of determining the amount which the Licensee is required to contribute pursuant to Sections 11.01(a) and 5.03, above, for each calendar month which is the subject of review, the parties hereto agree that the preceding calendar month shall be used in determining the Gross Sales of the Sonic Restaurant to determine the contributions or expenditures required hereunder.  For example, to determine the contributions or expenditures required for February, the parties hereto agree that they will look to the preceding January’s sales in order to determine the Gross Sales to determine the amount which must be contributed or expended by the Licensee under these Sections 11.01(a) and 5.03.  In the event the amounts required by Sections 11.01(a) and 5.03 are not paid in a timely fashion, Licensee shall pay Sonic in accordance with Section 10.05.
27


(e)               All advertising by Licensee in any medium which utilizes the Proprietary Marks or refers in any way to the Sonic Restaurant shall be conducted in a dignified manner and shall conform to such standards and requirements as Sonic may specify from time to time in writing.  Licensee shall submit to Sonic (in accordance with the notice provisions contained herein), for Sonic’s prior approval (except with respect to prices to be charged unless the terms of Section 6.05(c)(xxii) apply), samples of all advertising and promotional plans and materials that Licensee desires to use that use the Proprietary Marks or refer to the Sonic Restaurant and that have not been prepared or previously approved by Sonic.  If written disapproval thereof is not received by Licensee within 15 days from the date of receipt by Sonic of such materials, Sonic shall be deemed to have given the required approval.  Upon notice from Sonic, Licensee shall discontinue and/or remove any objectionable advertising material, whether or not same was previously approved by Sonic.  If said materials are not discontinued and/or removed within five days after notice, Sonic or its authorized agents, may, at any time, enter upon Licensee’s premises, or elsewhere, and remove any objectionable signs or advertising media and may keep or destroy such signs or other media without paying therefore, and without being guilty of trespass or other tort. 

(f)               Sonic may offer from time to time to provide, upon terms subject to the discretion of Sonic, approved local advertising and promotional plans and materials, including, without limitation, newspaper display space and distributed promotional materials.

(g)              Sonic or its designee shall maintain and administer a fund for the Sonic System titled the Sonic Brand Fund (the “SBF”) (formerly known as the Sonic Advertising Fund) as follows:

   (i)            As provided in Section 5.03 hereof, Licensee shall pay a brand contribution fee to the SBF, which shall be deposited in a separate bank account denoted as the Sonic Brand Fund. 

   (ii)           Sonic shall direct all brand programs with sole discretion over the concepts, materials, guidelines, and media used in such programs.  The SBF is intended to enhance the Sonic System and maximize general public recognition and acceptance of the Proprietary Marks for the benefit of the System, and the Licensee acknowledges that Sonic and its designees undertake no obligation in administering the SBF to make expenditures for Licensee which are equivalent or proportionate to Licensee’s contribution, and nothing in this Section 11.01 shall contravene the intent in Section 11.01(g)(iv).

   (iii)          The SBF and all earnings thereof shall be used exclusively to meet any and all costs of maintaining, administering, directing, and preparing advertising and other promotional programs (including, without limitation, the cost of preparing and conducting television, radio, magazine, and newspaper advertising campaigns and other public relations activities; employing advertising agencies to assist therein; and providing promotional brochures and other marketing materials to licensees in the Sonic System) as well as any other purpose that promotes, enhances, or protects the Sonic System including, but not limited to, food safety programs, customer feedback programs, and Sonic Games.  All sums paid by licensees to the SBF shall be maintained in a separate account from the other funds of Sonic.  The SBF shall pay Sonic monthly an amount equal to 15% of the SBF’s receipts during the preceding month, but not to exceed Sonic’s actual administrative costs and overhead, if any, as Sonic may incur in activities reasonably related to the administration or direction of the SBF for the licensees and the Sonic System, including without limitation, conducting market research, preparing marketing, advertising, and other materials, and collecting and accounting for assessments for the SBF.  The SBF and its earnings shall not inure to the benefit of Sonic.
28


   (iv)         All materials produced by the SBF shall be made available to all licensees on a regular basis at less than full production cost but including the cost of distribution.  This Section 11.01(g)(iv) shall not preclude Sonic from offering other materials not produced by the SBF upon terms subject to the discretion of Sonic.  (See Section 11.01(f).)

   (v)          The SBF is not an asset of Sonic, and an independent certified public accountant designated by Sonic shall review the operation of the SBF annually, and the report shall be made available to Licensee upon request.  Notwithstanding the foregoing, the body approved and designated by Sonic as the body to consult with regarding Sonic’s maintenance and administration of the SBF (such as the Franchise Advisory Council Executive Committee or its successor) may designate the independent public accountant to conduct the required review of the operation of the SBF, if requested in writing at least 30 but not more than 60 days prior to the end of each fiscal year.

   (vi)         Although Sonic intends the SBF to be of perpetual duration, Sonic maintains the right to terminate the SBF.  Such SBF shall not be terminated, however, until all monies in the SBF have been expended for purposes as aforesaid.

   (vii)        On at least a quarterly basis, Sonic shall consult with the body approved and designated by Sonic (such as the Franchise Advisory Council Executive Committee or its successor) regarding Sonic’s maintenance and administration of the SBF and shall report to that body on the SBF’s operation.

(h)              Coupons created or developed by or for Licensee for use in promoting the Sonic Restaurant are subject to the provisions of Section 11.01(e).  Additionally, such coupons shall conspicuously state (i) the location(s) where the coupons will be accepted and (ii) an expiration date.  Licensee shall use its best efforts to ensure that coupons created or developed for the Sonic Restaurant or its market are not distributed outside the area of the Sonic Restaurant or its market.

11.02.           Publicity

                Sonic shall have the right to photograph the Sonic Restaurant’s exterior and/or interior, and the various foods served, and to use any such photographs in any of its publicity or advertising, and Licensee shall cooperate in securing such photographs and consent of Persons pictured.

29



12.  INSURANCE .

12.01.           Insurance Amounts .

                Prior to opening or taking possession of the Sonic Restaurant, the Licensee shall acquire and thereafter maintain insurance from insurance companies acceptable to Sonic.  The Licensee shall determine the appropriate limits of liability insurance and shall also have the right to specify other forms of insurance, but Sonic shall require the following minimum amounts and policy forms of insurance:

(a)               The Licensee shall maintain statutory worker’s compensation insurance and employer’s liability insurance having a minimum limit of liability of the greater of $500,000 or the minimum amount otherwise required by applicable state law.  Sonic shall accept participation in the Texas Sonic Employers Trade Association (“TSETA”) or in the non-subscriber program for Sonic drive-in restaurants located in Texas as long as Texas law does not require statutory worker’s compensation insurance.

(b)              The Licensee shall maintain commercial general liability insurance, including bodily injury, property damage, products, personal, and advertising injury coverage, on an occurrence policy form having a minimum per occurrence and general aggregate limits of at least $1,000,000 per location.

(c)               The Licensee shall maintain non-owned automobile liability insurance having a minimum limit of $1,000,000.  The automobile policy also shall provide coverage for owned automobiles if owned or leased in the name of the Licensee.

(d)               The Licensee shall maintain excess (umbrella) liability insurance having a minimum limit of $1,000,000 per occurrence / general aggregate per location.

(e)               The Licensee shall maintain business income interruption insurance with an endorsement providing for reimbursement for a minimum of 12 months to Sonic, any Sonic-administered fund, and the advertising cooperative of which the Licensee is a member, as applicable, for payments due under Sections 5.02, 5.03, and 11.01 stemming from an event causing closure of the Sonic Restaurant for 48 hours or more.

(f)                Sonic shall have the right to require the Licensee to increase the insurance specified above by giving the Licensee 60 days’ written notice in accordance with the notice provisions of this Agreement, and the Licensee shall comply no later than the first policy renewal date after that 60-day period.

12.02.           Sonic as Additional Insured .

The Licensee shall name Sonic and Sonic’s subsidiaries and Affiliates as additional insureds and loss payees under the insurance policies specified in Sections 12.01(b), 12.01(c), 12.01(d), and 12.01(e), above, and under any insurance policy (including any employment practices liability insurance policy) that provides coverage for an event that could result in a lawsuit in which Sonic is named a defendant.  The Licensee’s policies shall constitute primary policies of insurance with regard to other insurance, shall contain a waiver of subrogation provision in favor of Sonic as it relates to the operation of the Sonic Restaurant, and shall provide for at least 30 days’ written notice to Sonic prior to their cancellation or amendment.
30


12.03.           General Conditions .

Prior to opening or taking possession of the Sonic Restaurant and within 10 days of any request by Sonic, the Licensee shall furnish Sonic with certificates of insurance evidencing that the Licensee has obtained the required insurance in the form and amounts as specified above.  In addition, the Licensee shall deliver evidence of the continuation of the required insurance policies at least 30 days prior to the expiration dates of each existing insurance policy.  If the Licensee at any time fails to acquire and maintain the required insurance coverage, Sonic shall have the right, at the Licensee’s expense, to acquire and administer the required minimum insurance coverage on behalf of the Licensee.  However, Sonic shall not have any obligation to assume the premium expense, and nothing in this Agreement shall constitute a guaranty by Sonic against any losses sustained by the Licensee.  Sonic may relieve itself of all duties with respect to the administration of any required insurance policies by giving 10 days’ written notice to the Licensee.

13.  TRANSFER OF INTEREST .

13.01.           Assignment

The rights and duties created by this Agreement are personal to Licensee, and Sonic has granted the License in reliance on the collective character, skill, aptitude, and business and financial capacity of Licensee and Licensee’s principals.  Accordingly, except as may be otherwise permitted by this Section 13, neither Licensee nor any Person or entity with an interest in Licensee shall directly or indirectly, through one or more intermediaries, without Sonic’s prior written consent, sell, assign, transfer, convey, give away, pledge, mortgage, or otherwise encumber any direct or indirect interest in the Agreement; any interest in Licensee, if Licensee is a partnership, joint venture, closely held corporation, limited liability company, or other business entity; or any interest which, together with other related previous simultaneous or proposed transfers, constitutes a transfer of Control of Licensee where Licensee is registered under the Securities Exchange Act of 1934 or which is a trust.  Any such purported assignment occurring by operation of law or without Sonic’s prior written consent and pursuant to the terms of this Section 13, shall constitute a default of this Agreement by Licensee, and such purported assignment shall be null and void. 

13.02.           Death or Permanent Incapacity of Licensee

Upon the death or permanent incapacity of Licensee, the interest of Licensee in the Agreement may be assigned either pursuant to the terms of Section 13.04 herein or to one or more of the following Persons:  Licensee’s spouse, heirs, or nearest relatives by blood or marriage, subject to the following conditions:  (1) If, in the sole discretion of Sonic, such persons shall be capable of conducting the Sonic Restaurant business in accordance with the terms and conditions of the Agreement, and (2) if such persons shall also execute an agreement by which they personally assume full and unconditional liability for and agree to perform all the terms and conditions of the Agreement to the same extent as the original Licensee.  In the event that Licensee’s heirs do not obtain the consent of Sonic as assignees of the Agreement, the personal representative of Licensee shall have the greater of 120 days or the completion of the probate of the Licensee’s estate to dispose of Licensee’s interest hereunder, which disposition shall be subject to all the terms and conditions for assignments under Section 13.04.  Licensee’s personal representative shall cooperate with Sonic to provide, in a timely manner, such documents as may be requested by Sonic, including without limitation Licensee’s death certificate and estate documents, to assist Sonic to determine or confirm Licensee’s assignees.
31


13.03.           Assignment to Licensee’s Corporation or Other Business Entity

Sonic may, upon Licensee’s compliance with the following requirements, consent to an assignment of the Agreement to a corporation whose shares are owned and Controlled by Licensee or to another business entity, such as a limited liability company, whose interests are owned and Controlled by Licensee.  Such written materials shall be supplied to Sonic within 15 days after the request by Sonic.

(a)               Licensee’s corporation or other business entity shall be newly organized, and its charter or equivalent organizational document shall provide that its activities are confined exclusively to operating the Sonic Restaurant.

(b)              Licensee and Licensee’s corporation or other business entity shall maintain stop transfer instructions against the transfer on Licensee’s corporation’s or other business entity’s records of any securities or interests with any voting rights subject to the restrictions of Section 13 hereof, and shall issue no securities upon the face of which the following printed legend does not legibly and conspicuously appear. 

The transfer of this stock is subject to terms and conditions of one or more license agreements with Sonic Industries LLC.  Reference is made to said license agreement(s) and the restrictive provisions of the Articles and By-Laws of this corporation.  By agreeing to receive these securities, the transferee hereby agrees to be bound by the terms of such agreements, articles, and by-laws.

(c)               At any time upon Sonic’s request, Licensee and Licensee’s corporation or other business entity shall furnish Sonic with a list of all shareholders, partners, or members, as applicable, having an interest in Licensee’s corporation or other business entity, the percentage interest of such shareholder, partner, or member, and a list of all officers and directors or managers  in such form as Sonic may require. 

(d)              The name of Licensee’s corporation or other business entity shall not include any of the Proprietary Marks granted by the Agreement.  Licensee and Licensee’s corporation or other business entity shall not use any mark nor any name deceptively similar thereto in a public or private offering of its securities or other interest, except to reflect Licensee’s corporation’s or other business entity’s license relationship with Sonic.  Any prospectus or registration Licensee or Licensee’s corporation would propose to use in such a public or private offering shall be submitted to Sonic within a reasonable time prior to the effective date thereof for the purpose of permitting Sonic to verify compliance with this requirement by Licensee and Licensee’s corporation. 

(e)               Articles of Incorporation, By-Laws, and all other documents governing Licensee’s corporation or other business entity shall be forwarded to Sonic for approval.  Such documents shall recite that the issuance and transfer of any interest in Licensee’s corporation or other business entity are restricted by the terms of Section 13 of this Agreement.
32


(f)               Each shareholder, partner, or member, as applicable, of the Licensee’s corporation or other business entity shall personally guarantee performance under this Agreement and shall be personally bound by the terms thereof. 

(g)              Any breach of this Agreement by Licensee’s corporation or other business entity shall be deemed a breach of this Agreement by each shareholder, partner, or member, as applicable, of Licensee’s corporation or other business entity and each shareholder, partner, or member, as applicable, shall be personally and fully liable and obligated by any and all such breaches.

(h)              Licensee and Licensee’s corporation or other business entity shall submit to Sonic, prior to any assignment hereunder, a shareholders, partners, or members agreement, as applicable, executed by the Board of Directors or managers, as applicable, and ratified by all shareholders, partners, or members, which states that, except as may be permitted by Section 13 of this Agreement, no shares of stock or other interest in Licensee’s corporation or other business entity shall be issued, transferred, or assigned to any Person or entity without Sonic’s prior written consent. 

(i)               Each and every shareholder, partner, or member of Licensee’s corporation or other business entity or any party owning a security issued by, or owning any legal or equitable interest in Licensee’s corporation or other business entity or in any security convertible to a legal or equitable interest in Licensee’s corporation or other business entity shall meet those same standards of approval as an individual licensee shall be required to meet prior to being included as a licensee on a standard license agreement with Sonic.

13.04.           Other Assignment

(a)               In addition to any assignments or contingent assignments contemplated by the terms of Sections 13.02 and 13.03, Licensee shall not sell, transfer, or assign the Agreement to any Person or Persons (including to another Licensee under this Agreement where more than one Person has executed this Agreement) without Sonic’s prior written consent.  Such consent shall not be unreasonably withheld.

(b)              In determining whether to grant or to withhold such consent, the following requirements must be met by Licensee:

   (i)           All of Licensee’s accrued monetary obligations shall have been satisfied whether due under this Agreement or otherwise.

   (ii)          Sonic and the Licensee execute a general release of each other, in a form satisfactory to Sonic, of any and all claims the Licensee may have against Sonic and its Affiliates, including (without limitation) all claims arising under any federal, state, or local law, rule, or ordinance, but excluding (as to Sonic) any claims against the Licensee for (a) unpaid moneys due Sonic, its Affiliates, or Sonic-approved advertising cooperatives, (b) the violation of the legal rights of Sonic or its Affiliates regarding the Proprietary Marks, (c) the violation of any of the covenants contained in Section 16.01 of this Agreement, (d) the violation of any duty under this Agreement to insure, defend, or indemnify Sonic or its Affiliates or to hold Sonic or its Affiliates harmless, and (e) the violation of any other agreement with Sonic or its Affiliates.  Sonic may waive the requirements of this Section 13.04(b)(ii) at Sonic’s election.

   (iii)         Licensee shall not be in material breach of this Agreement or any other agreement between Sonic and Licensee. 
33


    (iv)       Assignee (or the assignee’s management, as the case may be) shall at Sonic’s sole discretion enroll in and successfully complete such training programs as Sonic shall at that time designate according to Section 6.04 hereof.

    (v)        Sonic shall consider of each prospective transferee, by way of illustration, the following:  (a) work experience and aptitude, (b) financial background, (c) character, (d) ability to personally devote full time and best efforts to managing the Sonic Restaurant, (e) residence in the locality of the Sonic Restaurant, (f) equity interest in the Sonic Restaurant, (g) conflicting interests, and (h) such other criteria and conditions as Sonic shall apply in the case of an application for a new license to operate a Sonic drive-in restaurant.  Sonic’s consent shall also be conditioned upon such transferee’s execution of an agreement by which transferee personally assumes full and unconditional liability for and agrees to perform from the date of such transfer all obligations, covenants, and agreements contained in this Agreement to the same extent as if transferee had been an original party to the Agreement.  At Sonic’s election, Sonic may alternatively allow such transferee to sign the then-current form of license agreement for Sonic drive-in restaurants subject to all terms, conditions, obligations, and covenants contained in that form of license agreement, including the full term of that license agreement.

(c)               Following License’s sale, assignment, or transfer of this Agreement, Licensee shall remain subject to Section 16.01 of this Agreement.

13.05.           Sonic’s Right of First Refusal

(a)               If Licensee or any Person or entity with an interest in Licensee has received and desires to accept any bona fide offer to purchase all or any part of Licensee’s interest in this Agreement or in Licensee and the transfer of such interest would: (1) result in a change of Control of Licensee of this Agreement or (2) constitute a transfer of interest held by a Controlling Person of Licensee or of the Agreement, Licensee or such Person shall notify Sonic in writing of each such offer, with such notice including the name and address of the proposed purchaser, the amount and terms of the proposed purchase price, a copy of the proposed purchase contract (signed by the parties, but expressly subject to Sonic’s right of first refusal), and all other terms and conditions of such offer.  Sonic shall have the right and option, exercisable within 20 days after Sonic’s receipt of such written notification, to send written notice to Licensee or such Person or entity that Sonic or its designee intends to purchase the interest which is proposed to be transferred on the same terms and conditions offered by the third party, provided that Sonic has the right to substitute cash for any consideration offered by the third party.  Any material change in the terms of an offer prior to closing shall cause it to be deemed a new offer, subject to the same right of first refusal by Sonic or its designee as in the initial offer; provided, however, that such new offer shall not affect Sonic’s right and option, within 20 days of notice to Sonic of the initial offer, to provide notice of its intent to purchase the interest on the terms and conditions in the initial offer.  Sonic’s failure to exercise its option shall not constitute a waiver of any other provision of this Agreement, including any of the requirements of this Section 13 with respect to the proposed transfer.  Silence on the part of Sonic shall constitute rejection.  If the proposed sale includes assets of Licensee not related to the operation of a licensed Sonic drive-in restaurant, Sonic may purchase not only the assets related to the operation of a licensed Sonic drive-in restaurant, but may also purchase the other assets.  An equitable purchase price shall be allocated to each asset included in the proposed sale.  In any purchase by Sonic pursuant to this Section 13(a), Sonic shall have the right to require the seller to make customary representations and warranties.
34


(b)              The election by Sonic not to exercise its right of first refusal as to any offer shall not affect its right of first refusal as to any subsequent offer. 

(c)               Any sale or attempted sale effected without first giving Sonic the right of first refusal described above shall be void and of no force and effect. 

(d)              If Sonic does not accept the offer to purchase the Sonic Restaurant, Licensee may conclude the sale to the purchaser who made the offer so long as the terms and conditions of such sale are identical to those originally offered to Sonic; provided, however, that Sonic’s approval of the assignee be first obtained, which consent shall not be unreasonably withheld upon compliance with the conditions on assignment imposed by this Agreement.

(e)               The provisions of this Section 13.05 shall not apply to any proposed transfers to members of the Licensee’s immediate family.  For the purposes of this Section 13.05, a member of the Licensee’s immediate family shall mean the Licensee’s spouse, children (by birth or adoption), and stepchildren.  In addition, the provisions of this Section 13.05 shall not apply to any proposed transfers to a Person who already owns an interest (directly or indirectly) in this Agreement as long as the transfer will not result in a change in Control of the Licensee or the Agreement.

13.06.          Consent to Assignments

With regard to any transfer, assignment, or pledge of any interest in this Agreement or in the Licensee pursuant to the foregoing provisions of this Section 13, Sonic shall not withhold its consent unreasonably as long as the proposed transfer, assignment, or pledge otherwise complies with the other requirements set forth in this Section 13.

14.  DEFAULT AND TERMINATION .

14.01.           Optional Termination

Licensee shall be deemed to be in breach of this Agreement and Sonic may, at its option, terminate this Agreement and all rights granted herein at any time during the term hereof without affording Licensee any opportunity to cure the breach, effective immediately upon Licensee’s receipt of a notice of termination, upon the occurrence of any of the following events:
 
(a)               Licensee shall become insolvent. 

(b)              Licensee, either personally, through an equity owner, or through Licensee’s attorney, shall give oral or written notice to Sonic of Licensee’s intent to file a voluntary petition under any bankruptcy law. 
35


(c)               A final judgment aggregating in excess of $5,000 against the Sonic Restaurant or property connected with the Sonic Restaurant which remains unpaid for thirty days.

(d)              Suit to foreclose any lien against any assets of the Sonic Restaurant is instituted against Licensee and (i) is not dismissed within 30 days, (ii) such lien is not contested and challenged through the applicable administrative agencies or courts, or (iii) a bond is not posted (if such remedy is available) to delay any such foreclosure and guarantee performance. 

(e)               The assets of the Sonic Restaurant are sold after being levied thereupon by sheriff, marshal, or a constable. 

(f)                Transfer of this Agreement, in whole or in part, is effected in any manner inconsistent with Section 13 hereof. 

(g)               The assets, property, or interests of Licensee are blocked under any law, ordinance, or regulation relating to terrorist activities or Licensee is otherwise in violation of any such law, ordinance, or regulation.

(h)               If Licensee ceases to operate the Sonic Restaurant or otherwise abandons the Sonic Restaurant (other than closure permitted pursuant to Section 6.05(c)(vi) herein) or forfeits the legal right to do or transact business at the location licensed herein.

(i)                If Licensee is convicted of a felony, a crime involving moral turpitude, or any other crime or offense that is reasonably likely, in the sole opinion of Sonic, to adversely affect the Sonic System, the Proprietary Marks, the goodwill associated therewith, or Sonic’s rights therein.

(j)                If Licensee misuses or makes any unauthorized use of any of the Proprietary Marks or any other identifying characteristic of the Sonic System or otherwise materially impairs the goodwill associated therewith or Sonic’s rights therein, and the Licensee will not or cannot cure the default within 30 days.

(k)               If Licensee improperly discloses trade secrets or confidential information, and the Licensee will not or cannot cure the default within 30 days.

(l)                If continued operation of the Sonic Restaurant might endanger public health or safety.  In such case, whether or not Sonic elects to terminate this Agreement, Sonic may immediately close the Sonic Restaurant unless and until the situation is, in Sonic’s judgment, satisfactorily resolved.

(m)              If Licensee knowingly or through gross negligence maintains false books or records or knowingly or through gross negligence submits any false report to Sonic. 

(n)              If Licensee is in default of this Agreement three or more times in any given 12-month period, whether or not such default is cured.

14.02.          Period to Cure

Except as provided in Section 14.01, Licensee shall have 30 days after receipt from Sonic of a written notice of breach of this Agreement or such notice period as is required by the law of the state where the Sonic Restaurant is located, within which to remedy any breach hereunder.  However, this period to cure will not be available to Licensee, and Sonic will not be required to delay termination of this Agreement, where the breach involved is one which Licensee cannot cure within the prescribed cure period or is one which is impossible to cure.  Licensee shall be in breach hereunder for any failure to comply with any of the terms of this Agreement or to carry out the terms of this Agreement.  Such breach shall include, but shall not be limited to, the occurrence of any of the following illustrative events:
36


(a)               If the Licensee or Persons Controlling, Controlled by, or under common Control with Licensee fail to pay any past due amounts owed to Sonic, whether for the Sonic Restaurant or otherwise.

(b)              If Licensee fails to promptly pay, or repeatedly delays the prompt payment of, undisputed invoices from Licensee’s suppliers or in the remittance of rent and property tax as required in Licensee’s lease.

(c)               If Licensee fails to maintain and operate the Sonic Restaurant in a good, clean, and wholesome manner or otherwise is not in compliance with the standards prescribed by the Sonic System.  In such case, whether or not Sonic elects to terminate this Agreement, Sonic may immediately close the Sonic Restaurant unless and until the failure or noncompliance is cured.

(d)              If Licensee attempts to assign or transfer any interest in this Agreement in violation of Section 13 herein.

(e)               If Licensee denies Sonic the right to inspect the Sonic Restaurant at reasonable times, which includes the right to photograph the interior and exterior of the Sonic Restaurant in its entirety.

(f)               If Licensee breaches any other requirement set forth in this Agreement.

(g)              If Licensee, upon the destruction of the Sonic Restaurant, fails to rebuild the licensed premises and resume operation within a reasonable time (cessation of the business from a licensed premises shall not constitute default of this Agreement if caused by condemnation, expiration of a location lease pursuant to its terms at execution, or when failure to rebuild following destruction of the licensed premises is prohibited by law or the location lease). 

(h)              If Licensee’s conduct or the operation of the Sonic Restaurant by Licensee, in Sonic’s judgment, damages or threatens to damage the goodwill of the Sonic System or the Sonic brand.  In such case, whether or not Sonic elects to terminate this Agreement, Sonic may immediately close the Sonic Restaurant unless and until the situation, in Sonic’s judgment, is satisfactorily resolved.

(i)                If Licensee fails to correct any deficiency or unsatisfactory condition within the time period required by Section 6.05(b).

14.03.           Resolution of Disputes .

The following provisions shall apply to any controversy between the Licensee and Sonic (including an Affiliate of Sonic) and relating (a) to this Agreement (including any claim that any part of this Agreement is invalid, illegal, or otherwise void or voidable and any claim that a controversy is not subject to arbitration), (b) to the parties’ business activities conducted as a result of this Agreement, or (c) the parties’ relationship or business dealings with one another generally, including all disputes and litigation pending or in existence as of the date of this Agreement.
37


(a)               Negotiation .  The parties first shall use their best efforts to discuss and negotiate a resolution of the controversy.

(b)              Mediation .   If the efforts to negotiate a resolution do not succeed, the parties shall submit the controversy to mediation in Oklahoma City, Oklahoma, by a mediation firm agreeable to the parties or by the American Arbitration Association, if the parties cannot agree.

(c)                Arbitration.   If the efforts to negotiate and mediate a resolution do not succeed, the parties shall resolve the controversy by final and binding arbitration in accordance with the Rules for Commercial Arbitration (the “Rules”) of the American Arbitration Association in effect at the time of the execution of this Agreement and pursuant to the following additional provisions:

   (i)           Applicable Law .  The Federal Arbitration Act (the “Federal Act”), as supplemented by the Oklahoma Arbitration Act (to the extent not inconsistent with the Federal Act), shall apply to the arbitration.

   (ii)          Selection of Arbitrator .  The parties shall select one arbitrator within 10 days after the filing of a demand and submission in accordance with the Rules.

   (iii)         Location of Arbitration .  The arbitration shall take place in Oklahoma City, Oklahoma, and the arbitrator shall issue any award at the place of arbitration.  The arbitrator may conduct hearings and meetings at any other place agreeable to the parties or, upon the motion of a party, determined by the arbitrator as necessary to obtain significant testimony or evidence.

   (iv)         Scope of Proceeding .  The parties shall conduct any arbitration proceeding and resolve any controversy on an individual basis only and not on a class-wide, multiple-party, or similar basis.

   (v)         Enforcement of Award .  The prevailing party shall have the right to enter the award of the arbitrator in any court having jurisdiction over one or more of the parties or their assets.  The parties specifically waive any right they may have to apply to any court for relief from the provisions of this Agreement or from any decision of the arbitrator made prior to the award.  The award of the arbitrator shall not have any precedential or collateral estoppel effect on any other controversy involving Sonic or its Affiliates.

(d)              Excluded Controversies.   At the election of Sonic or its Affiliate, the provisions of this Section 14.03 shall not apply to any controversies relating to any fee due Sonic or its Affiliate; any promissory note payments due Sonic or its Affiliate; or any trade payables due Sonic or its Affiliate as a result of the purchase of equipment, goods, or supplies.  At the election of Sonic or its Affiliate, the provisions of this Section 14.03 also shall not apply to any controversies relating to the use and protection of the Proprietary Marks or the Sonic System, including (without limitation) Sonic’s right to apply to any court of competent jurisdiction for appropriate injunctive relief for the infringement of the Proprietary Marks or the Sonic System.
38


(e)               Attorneys’ Fees and Costs .  the prevailing party to the arbitration shall have the right to an award of its reasonable attorneys’ fees and costs incurred after the filing of the demand and submission, including a portion of the direct costs of any in-house legal staff reasonably allocable to the time devoted to the arbitration.

15.  OBLIGATIONS UPON TERMINATION .

15.01.           Effect of Termination, Cancellation, or Expiration of this Agreement .

Except as otherwise authorized pursuant to the terms of any other license agreement between Sonic and the Licensee, the Licensee shall comply with the following provisions after the expiration or termination of this Agreement and the License:

(a)               Licensee, upon any termination, cancellation, or expiration of this Agreement, shall promptly pay to Sonic and Sonic’s subsidiaries any and all sums owed to them.  In the event of termination for any breach by Licensee, such sums shall include all damages, costs, and expenses, including reasonable attorneys’ fees, incurred by Sonic as a result of the breach, which obligation shall give rise to and remain, until paid in full, a lien in favor of Sonic against any and all of the assets of the Sonic Restaurant owned by Licensee at the time of default.

(b)               Upon termination, cancellation, or expiration hereof for any reason, the License and all Licensee’s rights hereunder shall terminate. Licensee shall not thereafter use or adopt any trade secrets disclosed to Licensee hereunder or any paper goods, emblems, signs, displays, menu housings, or other property on which Sonic’s name or Proprietary Marks are imprinted or otherwise form a part thereof or any confusing simulations thereof.  Licensee shall not otherwise use or duplicate the Sonic System or any portion thereof or assist others to do so. Licensee shall remove from the premises all signs, emblems, and displays identifying it as associated with Sonic or the Sonic System or which constitute or display any Proprietary Mark and shall also remove from the premises all menu housings and PAYS or other Sonic proprietary equipment.  Licensee shall cease to use and shall return to Sonic all copies of the Sonic Operations Manual , instructions, or materials delivered to Licensee hereunder.

(c)               Upon termination, cancellation, or expiration of this Agreement, unless otherwise directed in writing by Sonic, Licensee shall change the exterior and interior design and the decor of said premises, including, but not limited to, changing the color scheme, and shall make or cause to be made such changes in signs, buildings, and structures (excluding major structural changes) as Sonic shall reasonably direct so as to effectively distinguish the same from its former appearance and from any other Sonic drive-in restaurant unit, and if Licensee fails or refuses to comply herewith, then Sonic shall have the right to enter upon the premises where said business is being conducted without being guilty of trespass or any other tort for the purpose of making or causing to be made such changes required by Sections 15.01(b) or 15.01(c) at the expense of Licensee, which expense Licensee agrees to pay on demand.

(d)               Upon termination, cancellation, or expiration of this Agreement, in the event Licensee is the owner of the Sign, Sonic shall have an irrevocable option to purchase the Sign for its fair market value.  In any event, Licensee shall not thereafter use any sign or panels displaying Sonic’s name or Proprietary Marks or which primarily display the colors used in any other such sign at any other Sonic drive-in restaurant unit (see Section 15.04 for determining fair market value).  Any agent, servant, or employee of Sonic may remove the Sign or any objectionable signs or advertising from the Sonic Restaurant without being guilty of trespass or other tort, and Licensee shall be liable for Sonic’s costs plus attorneys’ fees for any interference therewith.
39


(e)               Upon termination, cancellation, or expiration of this Agreement, Licensee shall cease to hold Licensee out in any way as a licensee of Sonic or to do anything which would indicate any relationship between Licensee and Sonic.

(f)               Notwithstanding the provisions contained in this Section 15.01, Licensee shall be solely responsible for the cost of any removals or changes required by this Section 15.01.  Licensee hereby releases Sonic and its agents, servants, and employees from and agrees to indemnify, defend, and hold harmless Sonic and its agents, servants, and employees against any cost, damage, liability, or expense (including attorneys’ fees) arising out of or resulting from Licensee granting Sonic and its agents, servants, and employees access to the premises, including without limitation any cost, damage, liability, or expense arising out of the removal of any sign, equipment, fixture, personal property, or other property from the premises or modification of the premises pursuant to this Agreement.

(g)              The covenants set forth in this Section 15.01 shall survive the termination, cancellation, or expiration of this Agreement.

(h)              All rights, claims, and indebtedness which may accrue to Sonic prior to termination, cancellation, or expiration of this Agreement shall survive termination, cancellation, or expiration and be enforceable by Sonic.

(i)                Licensee shall complete all modifications required by this Section 15.01 within 30 days after this Agreement has been terminated or canceled or has expired.  Licensee and Sonic agree that Sonic’s damages resulting from a breach of this Section 15.01 are difficult to estimate or determine accurately.  In the event of such breach by Licensee of the provisions of this Section 15.01, Licensee, in addition to any and all other remedies available to Sonic herein and elsewhere, will pay Sonic double the royalty, brand, and advertising fees prescribed in this Agreement until Licensee satisfactorily de-identifies the restaurant premises in the manner prescribed by this Section.  This payment shall constitute liquidated damages and shall not be construed as a penalty since such payment has been agreed to by Licensee and Sonic as reasonably representative of the actual damage sustained by Sonic in the event of such a breach.  The liquidated damages shall start on the 31st day after this Agreement has been terminated or canceled or has expired.  These liquidated damages shall not constitute either a waiver of Licensee’s obligation to de-identify or a license to use the Proprietary Marks or the Sonic System.  These remedies will be in addition to any other remedies Sonic may have hereunder or under federal or state law.

15.02.           Sonic’s Option to Purchase

(a)               Upon termination, cancellation, or expiration hereof, Sonic shall have the right and option to purchase all or any patented, special, or unique Sonic restaurant equipment, menu housings, signs, menus, and supplies of Licensee at their fair market value (see Section 15.04 for determining fair market value).  Such right or option of Sonic shall be exercised as provided in Section 15.02(b).  If Sonic elects to exercise any option to purchase herein provided, it shall have the right to set off all amounts due from Licensee to Sonic and one-half of the cost of any appraisals against any payment therefore.
40


(b)               In the case of termination by expiration, Sonic shall exercise Sonic’s option contained in this Section 15.02 by giving Licensee written notice at least 30 days prior to expiration.  In the case of termination for any other reason, Sonic shall exercise its option by giving Licensee written notice within 30 days after termination.

(c)               Sonic’s option hereunder is without prejudice to Sonic’s rights under any security agreement held by Sonic or with respect to which Sonic may have a guarantor’s or surety’s subrogation interest.  If Sonic exercises this option, Sonic may pay any debt which Licensee owes to Sonic and shall remit any balance of the purchase price to Licensee.  There shall be no allowance for goodwill.

15.03.           Sonic’s Obligation to Purchase

(a)               Upon termination, cancellation, or expiration of this Agreement, if Licensee desires to sell Licensee’s unbroken inventory packages of approved imprinted items and supplies with Proprietary Marks to Sonic, excluding all food items, Sonic shall have the obligation to repurchase such items at Licensee’s cost.

(b)              If Licensee desires to sell such items to Sonic, Licensee shall, not later than 10 days after termination, cancellation, or expiration of this Agreement, give Sonic 10 days written notice of Licensee’s election and, at the expiration of the 10 days notice period, deliver such items at Licensee’s expense with an itemized inventory to the nearest Sonic drive-in restaurant designated by Sonic. Sonic agrees to pay Licensee or credit Licensee’s account within seven days after said delivery.

15.04.                       Fair Market Value Determination

If the parties cannot agree on the fair market value of any item subject to an option to purchase in this Agreement within a reasonable time, one appraiser shall be designated by Sonic, one appraiser shall be designated by Licensee, and the two appraisers shall designate an independent appraiser, and the valuation of such third appraiser alone shall be binding.  Sonic and the Licensee each shall pay one-half of the cost of any appraisals required pursuant to this Section 15.04.

16.  COVENANTS .

16.01.          Restrictions on Licensee .

Licensee agrees and covenants as follows:

(a)               During the term of this Agreement, Licensee shall not directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, limited liability companies, partnerships, trusts, unincorporated associations, joint ventures, or other business entities) in, (iii) loan money to, or (iv) become landlord of any restaurant business which has a menu similar to that of a Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by Sonic drive-in restaurants) or which has an appearance similar to that of a Sonic drive-in restaurant (such as color pattern, use of canopies, use of speakers and menu housings for ordering food, or other items that are customarily used by a Sonic drive-in restaurant).
41


(b)              Licensee shall not, for a period of 18 months after termination of this Agreement for any reason, directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, limited liability companies, partnerships, trusts, unincorporated associations, joint ventures, or other business entities) in, (iii) loan money to, or (iv) become a landlord of any restaurant business which has a menu similar to that of a Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by Sonic drive-in restaurants) or which has an appearance similar to that of a Sonic drive-in restaurant (such as color pattern, use of canopies, use of speakers and menu housings for ordering food, or other items that are customarily used by a Sonic drive-in restaurant), and which (i) is within a three-mile radius of the Sonic Restaurant formerly licensed by this Agreement, (ii) is within a 20-mile radius of any Sonic drive-in restaurant in operation or under construction, or (iii) is located within the MSA of the Sonic Restaurant.

(c)               Licensee shall not appropriate, use, or duplicate the Sonic System, or any portion thereof, for use at any other restaurant business.

(d)              During the term of this Agreement, Licensee shall (i) use Licensee’s best efforts to promote the business of the Sonic Restaurant, (ii) devote Licensee’s full time, energies, and attention to the operation and management of the Sonic Restaurant, and (iii) not engage in any other business or activity that might detract from, interfere with, or be detrimental to the Sonic System or Licensee’s full and timely performance under this Agreement (except the ownership and operation of other Sonic drive-in restaurants under license agreements with Sonic).

(e)               During the term of this Agreement, Licensee shall not perform or provide services as a director, officer, employee, agent, representative, or consultant or in any other capacity for any other restaurant business which has a menu or appearance similar to that of a Sonic drive-in restaurant.

(f)               During the term of this Agreement, Licensee shall not directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest in, (iii) loan money to, or (iv) become landlord of any operation which has granted or is granting franchises or licenses (except for those granted by Sonic) to others to operate any other restaurant business which has a menu or appearance similar to that of a Sonic drive-in restaurant.

(g)               Sections 16.01(a), 16.01(b), and 16.01(f)  shall not apply to ownership by Licensee of less than 2% beneficial interest in the outstanding equity securities of any corporation which is registered under the Securities Exchange Act of 1934; however, this Section 16.01(g) shall apply to all shareholders, partners, or members of Licensee (in the event Licensee is a corporation, partnership, limited liability company, or other business entity) and all members of Licensee’s and their immediate families, and all Persons or entities guaranteeing this Agreement.

(h)               The parties agree that each of the foregoing covenants shall be construed as independent of any covenant or provision of this Agreement.  If all or any portion of a covenant in this Section 16 is held unreasonable or unenforceable by an arbitrator, court, or agency having valid jurisdiction in an unappealed final decision to which Sonic is a party, Licensee expressly agrees to be bound by any lesser covenant subsumed with the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this Section 16.
42


(i)                Licensee understands and acknowledges that Sonic shall have the right, in Sonic’s sole discretion, to reduce the scope of any covenant set forth in Sections 16.01(a), 16.01(b), and 16.01(f), or any portion thereof, without Licensee’s consent effective immediately upon receipt by Licensee of written notice thereof, and Licensee agrees that it shall comply forthwith with any covenant as so modified, which shall be fully enforceable notwithstanding the provisions of Section 16.01(k).

(j)                Licensee expressly agrees that the existence of any claims Licensee may have against Sonic, whether or not arising from this Agreement, shall not constitute a defense to the enforcement by Sonic of the covenants in this Section 16.

(k)               Licensee acknowledges that Licensee’s violation of the terms of this Section 16 would result in irreparable injury to Sonic for which no adequate remedy at law is available, and Licensee accordingly consents to the ex parte issuance of restraining orders, temporary and permanent injunctions, and cease and desist orders prohibiting any conduct by Licensee in violation of the terms of this Section 16.

16.02.           Covenants by Others

At the time of execution of this Agreement, Licensee shall obtain covenants similar in substance to those set forth in this Section 16 (including covenants applicable upon the termination of a Person’s relationship with Licensee) from all officers, directors, and holders of a direct or indirect beneficial ownership interest in Licensee.  With respect to each Person who becomes associated with Licensee in one of the capacities enumerated above subsequent to execution of this Agreement, Licensee shall require and obtain such covenants.  In no event shall any Person enumerated be granted access to any confidential aspect of the Sonic System or the Sonic Restaurant prior to execution of such a covenant.  All covenants required by this Section 16.02 shall include, without limitation, specific identification of Sonic as a third-party beneficiary of such covenants with the independent right to enforce them.  Failure by Licensee to obtain execution of a covenant required by this Section 16.02 shall constitute a breach of this Agreement.   Licensee shall furnish to Sonic executed copies of such covenants within 10 days of such request by Sonic.

17.  INDEPENDENT CONTRACTOR & INDEMNIFICATION .

17.01.          Licensee not an Agent of Sonic; Employment Matters

It is understood and agreed that this Agreement does not create a fiduciary relationship between Sonic and Licensee, and that nothing herein contained shall constitute Licensee as the agent, legal representative, partner, joint venturer, or employee of Sonic. Licensee is, and shall remain, an independent contractor responsible for all obligations and liabilities of, and for all loss or damage to, the Sonic Restaurant and its business, including any personal property, equipment, fixtures, or real property connected therewith and for all claims or demands based on damage or destruction of property or based on injury, illness, or death of any person or persons, directly or indirectly, resulting from the operation of the Sonic Restaurant.  Licensee’s responsibility for the Sonic Restaurant and its business shall include responsibility for all of the employment matters (including employment decisions) of the Sonic Restaurant and for compliance with federal, state, and local laws and regulations relating to such employment matters.  Sonic will refer all complaints related to employment matters of the Sonic Restaurant to Licensee for resolution, and the indemnification and hold harmless provisions of Section 17.03 shall apply to all employment matters of the Sonic Restaurant.
43


17.02.           Cost of Enforcement

If Sonic or Sonic’s Affiliates become involved in any action at law or in equity or in any proceeding opposing Licensee to secure, enforce, protect, or defend Sonic’s or Sonic’s Affiliates’ rights and remedies under this Agreement, in addition to any judgment entered in their favor, Sonic or Sonic’s Affiliates, as applicable, shall be entitled to demand of and (in the event Sonic or Sonic’s Affiliates, as applicable, prevail in such actions or proceedings) recover from Licensee the reasonable costs, expenses, and attorneys’ fees incurred by Sonic or Sonic's Affiliates.  If, in such applicable final judgment Sonic does not prevail, Licensee shall be entitled to recover from Sonic in any such action or proceeding the reasonable costs, expenses, and attorneys’ fees incurred by Licensee. Licensee’s responsibility for the Sonic Restaurant and its business shall include responsibility for all of the employment matters (including employment decisions) of the Sonic Restaurant and for compliance with federal, state, and local laws and regulations relating to such employment matters.  Sonic will refer all complaints related to employment matters of the Sonic Restaurant to Licensee for resolution, and the indemnification and hold harmless provisions of Section 17.03 shall apply to employment matters of the Sonic Restaurant.

17.03.          Indemnification

If Sonic or Sonic’s Affiliates shall be subject to any claim, demand, or penalty or become a party to any suit or other judicial or administrative proceeding by reason of any claimed act or omission by Licensee or Licensee’s employees or agents, or by reason of any act occurring on the Sonic Restaurant premises, or by reason of any act or omission with respect to the business or operation of the Sonic Restaurant, Licensee shall indemnify and hold Sonic and Sonic’s Affiliates harmless against all judgments, settlements, penalties, and expenses, including attorneys’ fees, court costs, and other expenses of litigation or administrative proceeding, incurred by or imposed on Sonic or Sonic’s Affiliates in connection with the investigation or defense relating to such claim or litigation or administrative proceeding and, at the election of Sonic, Licensee shall also defend Sonic and Sonic’s Affiliates.  The Licensee shall not have any obligation to indemnify, defend, or hold harmless Sonic or any other Person pursuant to the provisions of this Section 17.03 to extent the obligation arises predominantly as a proximate result of Sonic’s act or failure to act when under a duty to act.

18.  EFFECT OF WAIVERS .

No waiver by Sonic of any breach or series of breaches of this Agreement shall constitute a waiver of any subsequent breach or waiver of the terms of this Agreement.
44

19.  NOTICES

19.01.          Delivery .

Any notice required hereunder, if not specified, shall be in writing and shall be delivered by (i) personal service, (ii) by overnight, receipted delivery service, (iii) by United States certified or registered mail, with postage prepaid, addressed to Licensee at the Sonic Restaurant or at such other address of Licensee then appearing on the records of Sonic or to Sonic addressed to the attention of Sonic’s General Counsel at 300 Johnny Bench Drive, Oklahoma City, Oklahoma 73104, or at the subsequent address of Sonic’s corporate headquarters.  Either party, by a similar written notice, may change the address to which notices shall be sent. Notice shall be deemed effective on the date of delivery, if delivery is by personal service or overnight delivery, or three business days after the party places the notice in the United States mail, if delivery is by certified or registered mail.

19.02.           Failure to Accept .

If Sonic is unable to give actual notice of any breach or termination of this Agreement because Licensee has failed to provide Sonic with a current address, because Licensee fails to accept or pick up this mailed notice, or due to any reason which is not the fault of Sonic, then such notice shall be deemed as given when Sonic sends such notice by overnight receipted delivery service or registered or certified mail, postage prepaid.

19.03.           Licensee’s Principal .

Licensee has designated on the first page of this Agreement a Principal to serve as the party receiving primary notice on behalf of the Licensee.  Each Licensee hereby agrees that Sonic may send its notices and communications under this Agreement to the Principal provided for herein, that Sonic may use the Principal as its primary contact for purposes of communications and notices permitted or required hereunder, and that all communications and notices given by Sonic to the Principal will be just as effective on each Licensee as though the same had been given to each Licensee.

20.  ENTIRE AGREEMENT .

20.01.           No Oral Agreements

This Agreement and all addenda, appendices, and amendments hereto constitute the entire agreement between the parties and supersede all prior and contemporaneous, oral or written agreements or understandings of the parties. 

20.02.           Scope and Modification of Agreement

No interpretation, change, termination, or waiver of any of the provisions hereof shall be binding upon Sonic unless in writing signed by an officer of Sonic.  No modification, waiver, termination, rescission, discharge, or cancellation of this Agreement shall affect the right of any party hereto to enforce any claim or right hereunder, whether or not liquidated, which occurred prior to the date of such modification, waiver, termination, rescission, discharge, or cancellation.

21.  CONSTRUCTION AND SEVERABILITY .
45


21.01.          Interpretation

The recitals shall be considered a part of this Agreement.  Section and Subsection captions are used only for convenience and are in no way to be construed as part of this Agreement or as a limitation of the scope of the particular Sections, Subsections, Paragraphs, and Subparagraphs to which they refer.  Words of any gender used in this Agreement shall include any other gender, and words in the singular shall include the plural where the context requires.

21.02.           Scope of Protected Area .

Neither party to this Agreement intends to expand the scope of any covenants or commitments contained in Section 2 beyond the terms and provisions expressly stated in Section 2, and the parties to this Agreement agree that no Person, court, or arbitrator may interpret any of the foregoing covenants or commitments in Section 2 in that manner.

21.03.          Invalidity

If any part of this Agreement for any reason shall be declared invalid, such decision shall not affect the validity of any remaining portion, which shall remain in full force and effect.  In the event any material provision of this Agreement shall be stricken or declared invalid, Sonic reserves the right to terminate this Agreement.

21.04.           Binding Effect

This Agreement shall be binding upon the parties, and their heirs, executors, personal representatives, successors, and assigns.

21.05.          Survival

Any provisions of this Agreement which impose an obligation after termination or expiration of this Agreement shall survive the termination or expiration of this Agreement and be binding on the parties.

21.06.           Liability of Multiple Licensees

If Licensee consists of more than one Person or entity, each such Person and entity, and each proprietor, partner, member, and shareholder of each such entity, shall be jointly and severally liable for any and all of Licensee’s obligations and prohibitions under this Agreement.  Consequently, if and when a Person or entity as Licensee is in breach of this Agreement and fails or is unable to cure such breach in a timely manner, Sonic may terminate the rights of the so-affected Person or entity under this Agreement whereby this Agreement is terminated as to only such Person or entity while remaining fully effective as to all other Persons and entities remaining as Licensee on this Agreement.  This Person or entity removed as Licensee shall remain jointly and severally obligated with the Persons and entities remaining as Licensee for any and all obligations and liabilities of Licensee which occurred or accrued through the date of removal of said Person or entity.
 
46


22.  BUSINESS ENTITY LICENSEES

22.01.          Corporate, Partnership, and Limited Liability Company Licensees .

If the Licensee is a corporation, partnership, or limited liability company, the Licensee shall comply with the following provisions:

(a)               Purpose .  The certificate of incorporation and bylaws, partnership agreement and certificate of limited partnership (if applicable), or articles of organization and operating agreement of the Licensee (collectively, “Organizational Documents”), as applicable, shall provide that the purpose of the business entity shall consist only in the development, ownership, operation, and maintenance of Sonic drive-in restaurants.

(b)               Transfer Restrictions .  The Organizational Documents of the Licensee shall provide that the Licensee shall not issue any additional capital stock or interest of the Licensee and that no stockholder, partner, or member, as applicable, may transfer, assign, or pledge any issued capital stock or interest of the Licensee without the prior, written consent of Sonic, and each stock certificate, if applicable, issued to evidence the capital stock of the Licensee shall contain a legend disclosing the foregoing restriction.  Sonic shall not withhold its consent to the issuance of additional capital stock or interest or a transfer, assignment, or pledge without a reasonable basis.  In giving its consent, Sonic shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the capital stock or interest execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Schedule I to this Agreement.

(c)               Stockholder/Partner/Member Guaranty .  Each stockholder, partner, or member of the Licensee, as applicable, shall execute the Guaranty and Restriction Agreement attached as Schedule I to this Agreement.

(d)               Documents .  Prior to Sonic’s execution of this Agreement, the Licensee shall deliver to Sonic copies of its Organizational Documents and issued stock certificates, as applicable, reflecting compliance with the provisions of this Section 22.01.

22.02.           Other Entity Licensee .

If the Licensee is any other form of business entity, the Licensee shall deliver to Sonic  copies of its organizational documents containing provisions substantially similar to those required by Section 22.01.

22.03.           Employee Stock Purchase Plans .

The Licensee shall have the right to transfer up to 49% of its outstanding capital stock or other equity interests to an employee stock purchase plan as long as one individual who qualifies as a licensee of Sonic for the Sonic Restaurant continues to own and Control, directly or indirectly, at least 51% of the Licensee’s outstanding capital stock or other equity interests.

47

 
22.04.          Good Standing .

If the Licensee is a business entity, Licensee shall remain an active entity in good standing in its state of formation.

23.   APPLICABLE LAWS; WAIVER OF JURY TRIAL; LIMITATIONS .

The terms and provisions of this Agreement shall be interpreted in accordance with and governed by the laws of the State of Oklahoma, provided that if the laws of the State of Oklahoma would not permit full enforcement of Section 16 of this Agreement, then the laws of the state in which the Sonic Restaurant is located or Licensee is domiciled shall apply to the extent that any or all of such laws more fully permit enforcement of Section 16 of this Agreement.  Except as provided in Section 14.03, Licensee agrees that jurisdiction over Licensee exists and is proper within the county where the corporate headquarters of Sonic are located and within any and all other courts, whether federal, state, or local, located within that county, and venue for any matter, claim, or cause of action relating to (a) this Agreement or any other agreement between Licensee and Sonic or Sonic’s Affiliates, (b) the parties’ business activities conducted as a result of this Agreement, or (c) the parties’ relationship or business dealings with one another generally, including all disputes and litigation pending or in existence as of the date of this Agreement, shall only exist and is only proper within the same county where the corporate headquarters of Sonic are located and within any and all other courts, whether federal, state, or local, located within that county.  Licensee waives any and all defenses and objections, and Licensee agrees not to assert any defense or objection, to jurisdiction over Licensee and to venue as described hereinabove regarding any action, proceeding, or litigation instituted by Sonic against Licensee.  Sonic and Licensee agree that any and all breaches of this Agreement, including breaches occurring after termination, cancellation, or expiration of this Agreement, shall be deemed to have occurred where the corporate headquarters of Sonic are located.   SONIC AND LICENSEE WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY.   SONIC AND LICENSEE ALSO WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO OR CLAIM OF PUNITIVE OR EXEMPLARY DAMAGES AGAINST THE OTHER AND AGREE THAT, IN THE EVENT OF A DISPUTE BETWEEN THEM, EACH SHALL BE LIMITED TO THE RECOVERY OF ANY ACTUAL DAMAGES SUSTAINED BY IT .  EXCEPT FOR CLAIMS ARISING FROM LICENSEE’S NON-PAYMENT OR UNDERPAYMENT OF AMOUNTS LICENSEE OWES SONIC, ANY AND ALL CLAIMS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR SONIC’S RELATIONSHIP WITH LICENSEE WILL BE BARRED UNLESS A JUDICIAL OR ARBITRATION PROCEEDING IS COMMENCED WITHIN ONE YEAR FROM THE DATE ON WHICH THE PARTY ASSERTING THE CLAIM KNEW OR SHOULD HAVE KNOWN OF THE FACTS GIVING RISE TO THE CLAIMS.

24.  ACKNOWLEDGEMENT .

Licensee acknowledges that:

24.01.           Initial Term

The term of this Agreement is for a single 20-year term with no promise or representation as to the renewal of this Agreement or the grant of a new license except as provided herein.
48


24.02.          Consultation with Counsel

Licensee hereby represents that Licensee has received a copy of this Agreement and has had an opportunity to consult with Licensee’s attorney with respect thereto at least 10 days prior to Licensee’s execution hereof.  Licensee further represents that Licensee has had this Agreement in hand for review at least five business days prior to Licensee’s execution hereof.

24.03.          Profitability

No representation has been made by Sonic as to the future profitability of the Sonic Restaurant.

24.04.           Licensee’s Investigation

Prior to the execution of this Agreement, Licensee has had ample opportunity to contact existing licensees of Sonic and to investigate all representations made by Sonic relating to the Sonic System.  The Licensee has conducted an independent investigation of the business contemplated by this Agreement and recognizes that it involves substantial business risks making the success of the venture largely dependent on the business abilities of the Licensee.  Sonic disclaims and the Licensee has not received from Sonic or its Affiliates any express or implied warranty or guaranty regarding the potential volume, profits, or success of the business venture contemplated by this Agreement.  The Licensee has not relied on any express or implied warranty or guaranty from Sonic or its Affiliates regarding the potential volume, profits, or success of the business venture contemplated by this Agreement.

24.05.          Contrary Representations .

The Licensee knows of no representations by Sonic or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement.  The Licensee has not relied on any representations from Sonic or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement or the disclosures set forth in the Franchise Offering Circular delivered to the Licensee in connection with the issuance of this Agreement.

24.06.           Variances to Other Licensees .

The Licensee understands that other developers and licensees may operate under different forms of agreements and, consequently, that Sonic’s rights and obligations with regard to its various licensees may differ materially in certain circumstances.

24.07.           Complete Agreement

This Agreement supersedes any and all other agreements or representations respecting the Sonic Restaurant and contains all the terms, conditions, and obligations of the parties with respect to the grant of this Agreement.

49



25.    INPUT AND ADVICE FROM LICENSEES .

In connection with the implementation of or significant changes in the programs or policies referred to in Sections 6.04, 6.05(c), 6.06, 8, 11.01(c), and 11.01(g) of this Agreement, Sonic shall solicit input and advice from a group of licensees gathered together for such purpose (whether established ongoing for such purpose or gathered on an ad hoc basis from time to time).  Sonic further shall use its best efforts to ensure that such groups are balanced in terms of geographic base, size of operating group, and period of tenure within the Sonic System.  Notwithstanding the foregoing, this Section 25 shall not have any effect unless the license agreements in effect for at least one-third of all Sonic drive-in restaurants contain this provision or a substantially similar provision.

26.    INJUNCTIVE RELIEF .

The Licensee acknowledges that Sonic’s remedy at law for any breach of (a) any of the Licensee’s covenants under this Agreement (other than those involving only the payment of money), including the covenants contained in Section 16 of this Agreement; and (b) Sections 14.01(l), 14.02(c), 14.03(h), 15.01(b), 15.01(c), 15.01(d), and 15.01(e) of this Agreement, would not constitute an adequate remedy at law and, therefore, Sonic shall have the right to obtain temporary and permanent injunctive relief in any proceeding brought to enforce any of those provisions, without the necessity of proof of actual damages.  Licensee acknowledges and expressly agrees that Sonic shall not be required to post any bond or other form of security in connection with any request for the issuance of injunctive relief, and Licensee expressly and unconditionally waives any requirement for the provision of security.  Licensee also agrees that injunctive relief sought by Sonic and ordered by any court of competent jurisdiction shall be given full force and effect in any other jurisdiction, including the jurisdiction in which the Sonic Restaurant is located, and that Licensee will not oppose the enforcement of such relief.  Nothing in this Section 26 shall prevent Sonic from pursuing separately or concurrently one or more of any other remedies available at law, subject to the provisions of Section 14.03 of this Agreement.

27.    GENERAL RELEASE AND COVENANT NOT TO SUE .

THE LICENSEE HEREBY RELEASES SONIC, SONIC CORP., AND THEIR SUBSIDIARIES AND AFFILIATES, AND THE OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS OF SONIC, SONIC CORP., AND THEIR SUBSIDIARIES AND AFFILIATES, FROM ANY AND ALL CLAIMS AND CAUSES OF ACTION, KNOWN OR UNKNOWN, WHICH MAY EXIST IN FAVOR OF THE LICENSEE AS OF THE DATE OF THIS AGREEMENT.  IN ADDITION, THE LICENSEE COVENANTS THAT THE LICENSEE SHALL NOT FILE OR PURSUE ANY LEGAL ACTION OR COMPLAINT AGAINST ANY OF THE FOREGOING ENTITIES OR PERSONS WITH REGARD TO ANY OF THE FOREGOING CLAIMS OR CAUSES OF ACTION RELEASED PURSUANT TO THIS SECTION 27.

Executed on the dates set forth below, to have effect as of ______________, _____.

 
Licensor:                                                                                                                                                                                                 Sonic Industries LLC
 
                                                                                                                                                                                                                 By: _________________________________
50

                                                                                                               (Vice) President
                                                                                                                                                                                             Date: ___________________, _____

Licensee:                                                                                                                                                                                                ____________________________________
 
                                                                                                                                                                                                                                                                                                                                     Date:______________________,__________
 
                                                                                                                                                                                                                                                                                                                                     _____________________________________
                                                                                                                           
                                                                                                                                                                                                                                                                                                                                     Date:_______________________, _____

51


Schedule I


Guaranty and Restriction Agreement



GUARANTY AND RESTRICTION AGREEMENT

The undersigned (jointly and severally or individually, the “Guarantor”), Sonic Industries LLC (“Sonic”), and       (the “Licensee”) enter into this Guaranty and Restriction Agreement (this “Guaranty”) as of            , _____.

W I T N E S S E T H :

Whereas, Sonic is entering into a license agreement (the “License Agreement”) dated the same date as this Guaranty with the Licensee for the Sonic drive-in located at      ,      ,             (the “Drive-in”); and

Whereas, as a condition to entering into the License Agreement, Sonic has asked the
Guarantor to provide a personal guaranty of all obligations of the Licensee Agreement; and

Whereas, Sonic has also asked the Guarantor and the Licensee to agree to a restriction on the transfer of interests in the Licensee; and

Whereas Sonic, the Guarantor, and the Licensee are willing to enter into those agreements based upon the terms and conditions of this Guaranty.

Now, therefore, in consideration of the mutual covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties agree as follows:

1.            Personal Guaranty of Payments .  The Guarantor hereby guarantees the prompt and full payment and performance of all obligations under the License Agreement including:
 
(a)           all royalties due Sonic pursuant to the License Agreement,

(b)           all brand contribution fees to the Sonic Brand Fund pursuant to the License Agreement,

(c)           all contributions to approved advertising cooperatives pursuant to the License Agreement, and

(d)           any other obligations owing to Sonic or its Affiliates (as defined in the License Agreement) relating to the Drive-in, including any sign lease agreement.

2.            Nature of Guaranty .  This guaranty shall constitute an absolute, unconditional, irrevocable, and continuing guaranty.  Sonic shall not have any obligation to take any action against any other person or entity for collection of any payments prior to making any demand for payment or bringing any action against the Guarantor.

3.            Permitted Actions .  From time to time, Sonic shall have the right to take, permit, or suffer to occur any “Permitted Action,” as defined below, without modifying, reducing, waiving, releasing, impairing, or otherwise affecting the obligations of the Guarantor under this Guaranty, without giving notice to the Guarantor or obtaining the Guarantor’s consent, without the necessity of any reservations of rights against the Guarantor, and without liability on the part of Sonic.  As used in this Section 3, the phrase “Permitted Action” shall mean (a) an agreed extension of time for payment of any sum due under the License Agreement, (b) an agreed change in the manner or place of payment of any sums due under the License Agreement, (c) any waiver by Sonic of any defaults under the provisions of the License Agreement, (d) any delay or failure by Sonic to exercise any right or remedy Sonic may have under the License Agreement, (e) the granting by Sonic of any leniencies, waivers, extensions, and indulgences under the License Agreement, and (f) any agreed amendments to the License Agreement.


4.            Waiver of Notices .  The Guarantor acknowledges and waives notice of Sonic’s acceptance of the Guarantor’s guaranty pursuant to the terms of this Agreement.  The Guarantor also waives any requirement that Sonic notify the Guarantor of any demands or enforcement actions by Sonic against the Licensee.

5.            Restrictions on Transfer .  The Licensee shall not issue any additional shares of capital stock or other interest without the prior, written consent of Sonic.  The Guarantor shall not transfer, assign, or pledge any of its shares of capital stock or other interest in the Licensee to any person without the prior, written consent of Sonic.

6.            Disputes .  Any dispute between the parties concerning this Guaranty will be resolved in accordance with the arbitration provisions contained in the License Agreement.

7.            Attorneys’ Fees, Costs, and Expenses .  In any action brought by Sonic to enforce the obligations of the Guarantor, Sonic shall also have the right to collect its reasonable attorneys’ fees, court costs, and expenses incurred in the action.

8.            Headings .  The headings used in this Guaranty appear strictly for the parties’ convenience in identifying the provisions of this Guaranty and shall not affect the construction or interpretation of the provisions of this Guaranty.

9.            Binding Effect .  This Guaranty binds and inures to the benefit of the parties and their respective successors, legal representatives, heirs, and permitted assigns.

10.          Waiver .  The failure of a party to insist in any one or more instances on the performance of any term or condition of this Guaranty shall not operate as a waiver of any future performance of that term or condition.

11.          Governing Law .  Notwithstanding the place where the parties execute this Guaranty, the internal laws of Oklahoma shall govern the construction of the terms and the application of the provisions of this Guaranty.

12.          Amendments .  No amendments to this Guaranty shall become effective or binding on the parties unless agreed to in writing by all of the parties to be bound by the amendment.

13.          Time .  Time constitutes an essential part of each and every part of this Guaranty.


14.          Notice .  Except as otherwise provided in this Guaranty, when this Guaranty makes provision for notice or concurrence of any kind, the sending party shall deliver or address the notice to the other party by certified mail, telecopy, or nationally-recognized overnight delivery service to the addresses shown on Exhibit “A” to this Guaranty.

All notices pursuant to the provisions of this Guaranty shall run from the date that the other party receives the notice or three business days after the party places the notice in the United States mail.  Each party may change the party’s address by giving written notice to the other parties.

15.           Release and Covenant Not To Sue .   THE GUARANTOR AND THE LICENSEE, AND EACH OF THEM, HEREBY RELEASE ALL CLAIMS AND CAUSES OF ACTION WHICH THE GUARANTOR OR THE LICENSEE, OR BOTH OF THEM, MAY HAVE AGAINST SONIC, SONIC CORP., AND THEIR SUBSIDIARIES AND AFFILIATES, AND THE STOCKHOLDERS, DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS OF SONIC, SONIC CORP., AND THEIR SUBSIDIARIES AND AFFILIATES.  THE GUARANTOR AND THE LICENSEE, AND EACH OF THEM, FURTHER COVENANT NOT TO SUE ANY OF THE FOREGOING PERSONS OR ENTITIES ON ACCOUNT OF ANY OF THE FOREGOING CLAIMS OR CAUSES OF ACTION.

Executed and delivered as of the day and year first set forth above.

Sonic:                                                                                                                                                                                                                                                                                                                              Sonic Industries LLC.

                                                                                                                                                                                                         By: _________________________________
                                                                                                                                                                                                                                                                                                                                (Vice) President


Guarantor:                                                                                                                                                                                                                                                                                                                      ____________________________________
     

                                                                                                                                                                                                                                         ____________________________________
     

                                                                                                                                                                                                                                         ____________________________________
     

Licensee:                                                                

                                                                                                                                                                                                                                         By: ________________________________
                                                                                                                                                                                                                                                Its:      




































This Guaranty and Restriction Agreement signature page is for the following:
Sonic Drive-In #      
     
     ,            
 
 
 
 
 
 
 
 
 

 
      
         Form0614       
      
        
      
    


EXHIBIT “A”

Notice addresses are as follows:

Sonic:                                                                                     300 Johnny Bench Drive
Oklahoma City, OK 73104
Attention:  General Counsel
(405) 225-5973 Fax

Guarantors:                                                                         
     
     
(___) ___-____ Fax

     
     
     
(___) ___-____ Fax


Licensee:                                                                      
 
(___) ___-____Fax





 

SONIC INDUSTRIES LLC

NUMBER 7 NON-TRADITIONAL LICENSE AGREEMENT






BY AND BETWEEN

SONIC INDUSTRIES LLC, Licensor, and


, Licensee


Non-Traditional Sonic Location



,





 





Effective as of  , .






CIF No.



NUMBER 7 NON-TRADITIONAL LICENSE AGREEMENT
(CIF ____)

SONIC INDUSTRIES LLC (“Sonic”) and the individuals listed below (jointly and severally, the “Licensee”) enter into this Number 7 Non-Traditional License Agreement (the “Agreement”) as of the _____ day of _________, 200__.

 (“Principal”)





RECITALS

Sonic is the developer and owner of the right to license the distinctive and proprietary food service system under which food and beverages are sold to the public from drive-in restaurants and other facilities operated under the trade name and federally registered trademark and service mark “Sonic.”  The Sonic System so developed now includes, among other things, the following elements, all or some of which may be deleted, changed, improved, or further developed by Sonic from time to time:

A.  Methods and procedures for the preparation and serving of food and beverage products.

B.  Confidential recipes for food products and distinctive service accessories (including, but not limited to, uniforms, menus, packages, containers, and additional paper or plastic items). 

C.  Plans and specifications for distinctive standardized premises featuring characteristic exterior style, colors, and design, interior furnishings, equipment layout, exterior signage, and marketing techniques and materials.

D.  A uniform method of operating which is described in the Sonic Operations Manual .

E.  The Proprietary Marks as defined in Section 1.09.

F.  Such trade secrets as have been and may from time to time be developed, which are owned by Sonic, and which are disclosed to its licensees in confidence in connection with the construction and operation of a Sonic drive-in restaurant or non-traditional Sonic restaurant.

G.  Such proprietary payment and other business methods, including (without limitation) the pay-at-your-stall payment system (“PAYS”), which have been and may from time to time be developed for use in the Sonic System.

Licensee wishes to obtain a license from Sonic to operate a non-traditional Sonic restaurant pursuant to the Sonic System and to be afforded the assistance provided by Sonic in connection therewith, and understands and accepts the terms, conditions, and covenants set forth herein as those which are reasonably necessary to maintain Sonic’s high and uniform standards of quality and service designed to protect the goodwill and enhance the public image of the Proprietary Marks and the Sonic System, and recognizes the necessity of operating the licensed Non-Traditional Sonic in faithful compliance therewith, and with Sonic’s standards and specifications.


1.   DEFINITIONS .

Unless the context of their use in this Agreement requires otherwise, the following words and phrases shall have the following meanings when used in initially-capitalized form in this Agreement.

1.01.                       Affiliate .

The word “Affiliate” shall mean (a) any stockholder, director, or officer of a specified Person (if the specified Person is a corporation), (b) any partner of a specified Person (if the specified Person is a partnership), (c) any member of a specified Person (if the specified Person is a limited liability company), (d) any employee of a specified Person, and (e) any Person which directly or indirectly through one or more intermediaries Controls the specified Person, the specified Person Controls, or shares a common Control with the specified Person.

1.02.                       Control .

The word “Control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person or entity, whether through the ownership of voting securities, by contract, or otherwise.

1.03.                       DMA .

The term “DMA” shall mean a Designated Market Area as defined by A.C. Nielsen Company from time to time.

1.04            Facility .

The word “Facility” shall mean the building or structure in which a non-traditional Sonic restaurant may operate, including (without limitation) military bases and other governmental facilities; universities and schools; airports and other transportation facilities; stadiums, arenas and other sports and entertainment venues; amusement and theme parks; cafeterias and food courts in shopping centers, shopping malls, office buildings, hospitals and industrial facilities; museums, zoos and other public facilities, and highway travel plazas, convenience stores, and gasoline filling stations.

1.05.                       Gross Sales .

The phrase “Gross Sales” shall mean all revenues from all business conducted upon or from the Non-Traditional Sonic, whether evidenced by check, cash, credit, charge account, debit card, stored-value card, exchange, or otherwise, and shall include (without limitation) the amounts received from the sale of goods, wares, and merchandise, including sales of food, beverages, and tangible property of every kind and nature, promotional or otherwise
2

 
 (excluding restaurant equipment), and for services performed from or at the Non-Traditional Sonic, whether the Licensee fills the orders from the Non-Traditional Sonic or elsewhere.  Each charge or sale via credit, debit card, stored-value card, or other payment means shall constitute a sale for the full price in the month during which the charge or sale occurs, regardless of the time when the Licensee receives payment (in whole or in part) for the charge or sale.  The phrase “Gross Sales” shall not include (a) sales of merchandise for which the Licensee makes a cash refund, if previously included in Gross Sales; (b) the price of merchandise returned by customers for exchange, if the Licensee previously included the sales price of the merchandise returned by the customer in Gross Sales and includes the sales price of merchandise delivered to the customer in exchange in Gross Sales; (c) the amount of any sales tax imposed by any governmental authority directly on sales and collected from customers, if the Licensee adds the amount of the tax to the sales price or absorbs the amount of the sales tax in the sales price and the Licensee actually pays the tax to the governmental authority; (d) amounts not received for menu items because of discounts or coupons, if properly documented; and (e) amounts received from the sale of Sonic-approved stored-value cards.  The phrase “Gross Sales” also shall not include any proceeds received by the Licensee pursuant to an assignment made in accordance with the provisions of Section 13.

1.06.                       License .

The word “License” shall mean the rights granted the Licensee pursuant to Section 2 of this Agreement.

1.07.                       Non-Traditional Sonic .

The phrase “non-traditional Sonic restaurant” shall mean any location licensed to use the Sonic System other than a free-standing building with canopies devoted, in whole or in part, to the operation of a Sonic drive-in restaurant and accessible to the general public by automobile from public thoroughfares.  The phrase “Non-Traditional Sonic” shall mean the non-traditional Sonic restaurant licensed by this Agreement.

1.08.                       Person .

The word “Person” shall mean any individual or business entity, including (without limitation) a corporation, joint venture, general partnership, limited partnership, limited liability company, or trust.

1.09.                       Proprietary Marks .

The phrase “Proprietary Marks” shall mean the distinctive and characteristic trade names, trademarks, service marks, logotypes and trade dress which Sonic designates in the Sonic Operations Manual or otherwise in writing or through usage from time to time as prescribed for use with the Sonic System and as may from time to time be developed, including (without limitation) the terms “Sonic,” “America’s Drive-In,” “Route 44,” “Wacky Pack,” “Fountain Favorites,” “Frozen Favorites,” “It’s Sonic Good,” “SuperSonic,” “Your Morning Drink Stop!,” “Ultimate Drink Stop,” and “My Sonic;” signs; emblems; menu housings and/or table ordering stations; designs; color schemes; standardized premises featuring characteristic exterior style, canopies, colors, and design (including angled parking stalls equipped with menu housings, speakers, and tray supports); interior furnishings; and equipment layout.
3


1.10.                       Sonic System .

The phrase “Sonic System” shall mean the Proprietary Marks, proprietary and confidential information, methods, specifications, and trade secrets of Sonic, including (without limitation) the Sonic Operations Manual and consisting of (a) methods and procedures for the preparation of food and beverage products; (b) confidential recipes for food products; (c) distinctive service and accessories; (d) plans and specifications for interior and exterior signs, designs, layouts, and color schemes (whether copyrighted or not); (e) methods, techniques, formats, systems, specifications, procedures, information, trade secrets, and sales and marketing programs; (f) methods of business operations and management; (g) knowledge and experience regarding the operation and franchising of Sonic drive-in restaurants and non-traditional Sonic restaurants; (h) payment methods, including (without limitation) PAYS; and (i) such further elements as set forth in the Recitals.

2.   LICENSE GRANT .

Sonic grants to Licensee for the following stated term the right, license, and privilege:

2.01.                      (a)           To adopt and use the Sonic System at the Non-Traditional Sonic located within the located at    (the “Facility”).

(b)           To have the exclusive rights to adopt and use the Sonic System for a non-traditional Sonic restaurant to be constructed within a Facility within the current boundaries of the town or city of , , for a period of six months from the date hereof, with the obligation of selecting and having such site approved within such six-month period and completing Section 2.01(a), above, within such six-month period.

2.02.                       Sonic shall not own or operate a non-traditional Sonic restaurant and shall not franchise any other Person to own or operate a non-traditional Sonic restaurant within the Facility identified in Section 2.01.


2.03.                      To advertise to the public as a licensee of Sonic.

2.04.                      To adopt and use, but only in connection with the sale from the Non-Traditional Sonic of those food and beverage products which have been designated in the Sonic menu as specified in an attachment to this Agreement or in any future operations manual designed for non-traditional Sonic restaurants, the Proprietary Marks which Sonic shall designate from time to time to be part of the Sonic System.

2.05.                       Site Selection .

4

In the event the Licensee receives this License pursuant to Section 2.01(b), above, the selection of a site by Licensee shall be subject to the approval of Sonic in accordance with the standard site approval procedures required by this Agreement and the standard practices of Sonic.  In the event a site for the Non-Traditional Sonic has not been approved by Sonic before the expiration of the six-month period provided for by Section 2.01(b), above, then this Agreement shall expire and be of no further force or effect.  In such case, Sonic will immediately refund to Licensee the license fee less one-third of the license fee, which shall be fully earned by Sonic upon execution and delivery of this Agreement.

2.06.                       Relocation .

If the Licensee relocates the Non-Traditional Sonic during the term of this Agreement with the written consent of Sonic (which consent Sonic shall not withhold unreasonably), this Agreement shall continue to apply to the Non-Traditional Sonic in accordance with the terms contained in this Agreement, except that Sonic and the Licensee shall enter into an amendment to this Agreement to change the address of the Non-Traditional Sonic accordingly.

2.07.                       Rights Reserved to Sonic .

Except as expressly limited by this Agreement, Sonic retains all rights with respect to the Sonic System, the Proprietary Marks, the sale of similar or dissimilar products and services, and any other activities Sonic deems appropriate whenever and wherever it desires.  Specifically, but without limitation, Sonic reserves the following rights:

(a)    The right to establish and operate, and to grant to others the right to establish and operate, similar businesses or any other businesses offering similar or dissimilar products and services through similar or dissimilar channels of distribution, at any locations inside or outside the Facility identified in Section 2.01 under trademarks or service marks other than the Proprietary Marks and on any terms and conditions Sonic deems appropriate;

(b)    The right to provide, offer, and sell, and to grant others the right to provide, offer, and sell, goods and services that are identical or similar to and/or competitive with those provided at the Non-Traditional Sonic, whether identified by the Proprietary Marks or other trademarks or service marks, through dissimilar distribution channels (including, without limitation, the Internet or similar electronic media) both inside and outside the Facility identified in Section 2.01 and on any terms and conditions Sonic deems appropriate;

(c)    The right to establish and operate, and to grant to others the right to establish and operate, businesses offering dissimilar products and services, both inside and outside the Facility identified in Section 2.01, under the Proprietary Marks and on any terms and conditions Sonic deems appropriate;

(d)    The right to operate, and to grant others the right to operate, Sonic drive-in restaurants or non-traditional Sonic restaurants anywhere outside the Facility identified in Section 2.01 under any terms and conditions Sonic deems appropriate regardless of the proximity to the Non-Traditional Sonic;
5


(e)    The right to be acquired (whether through acquisition of assets, ownership interests, or otherwise, regardless of the form of transaction) by a business providing products and services similar to those provided at the Non-Traditional Sonic, or by another business, even if such business operates, franchises, and/or licenses competitive businesses in the Facility identified in Section 2.01.
  
3.   TERM .

3.01.                       Initial Term .

Unless sooner terminated as hereafter provided, the term of this Agreement, including the License, shall end ___ years from the effective date of this Agreement as set forth on the cover page to this Agreement.

3.02.                       Opening of Restaurant .

Licensee expressly acknowledges and agrees that a pre-condition to opening the Non-Traditional Sonic shall be Sonic’s written authorization to open, which authorization shall be given only upon Licensee’s completing, to Sonic’s satisfaction, (i) construction of the Non-Traditional Sonic, (ii) preparation of the Non-Traditional Sonic for commencement of operations, and (iii) training as required by Section 6.04 of this Agreement.

3.03.                       Option .

At the end of the initial term, if Licensee desires, Licensee may renew the rights granted under this Agreement, including the License to adopt and use the Sonic System at the Non-Traditional Sonic, for one additional ______-year term, provided that prior to the expiration of the initial term:

(a)           Licensee gives Sonic written notice of Licensee’s election to renew not less than six months nor more than 12 months prior to the end of the initial term.

(b)           Licensee is not, when notice is given, in material default of any provision of this Agreement or any amendment hereof or successor agreement hereto or in material default of any other agreement between Licensee and Sonic or Sonic’s Affiliates involving any other license agreement and has substantially complied with the terms and conditions of this Agreement and all other such agreements, during the term thereof.

(c)           All monetary obligations owed by Licensee to Sonic or Sonic’s Affiliates from any source whatsoever (whether under this Agreement or otherwise) have been satisfied prior to renewal.

(d)           The Licensee executes a license agreement containing the same terms and conditions as this Agreement, except that the license agreement shall provide for a term of up to _____ years and shall contain the then-current royalty rate and the then-current advertising and brand expenditure requirements for non-traditional Sonic restaurants; provided, however, that in lieu of an initial license fee, a renewal fee shall be paid to Sonic in the amount of 20% of the then-current initial license fee for a non-traditional license agreement.
6


(e)           Licensee performs such remodeling, repairs, replacements, and redecorations as Sonic may reasonably require to cause the restaurant equipment and fixtures to conform to the plans and specifications being used for new or remodeled non-traditional Sonic restaurants on the renewal date.

(f)           Licensee executes a general release, in a form satisfactory to Sonic, of any and all claims the Licensee may have against Sonic and its Affiliates, including (without limitation) all claims arising under any federal, state, or local law, rule, or ordinance.

(g)           The Principal and/or manager at Licensee’s expense attend and satisfactorily complete such retraining program as Sonic may require at its sole discretion. 

(h)           Licensee meets the remodeling requirements set forth in Section 6.02(d) herein.

4.   DUTIES OF SONIC .

Sonic agrees to regularly advise and consult with Licensee in connection with the operation of the Non-Traditional Sonic and to provide the following to Licensee:

4.01.                       Site Selection Services .

Sonic shall provide the Licensee with Sonic’s experience in the selection of Sonic restaurant sites through the use of the forms, criteria, and materials that Sonic makes available to new licensees from time to time, as well as the benefit of its review and evaluation of any proposed sites selected by the Licensee.

4.02.                       Plans and Specifications .

If and when developed, Sonic shall provide the Licensee with its standard construction plans, specifications, and layouts for the structure, equipment, décor, and signs for a non-traditional Sonic restaurant which Sonic makes available to new licensees from time to time. Sonic shall review the Licensee’s site plan and final construction plans and specifications for conformity to Sonic’s then-current construction standards and specifications, if any.

4.03.                       Operations Manual

The Sonic Operations Manual containing the standards, specifications, procedures, and methods for operating a traditional Sonic drive-in restaurant, one copy to which Licensee will be given access for the term of this Agreement.  If and when Sonic develops a separate operations manual for non-traditional Sonic restaurants, Sonic will give Licensee access to the manual for the term of this Agreement.
7


4.04.                       Training .

Sonic shall provide the Licensee with initial training in the standards, methods, procedures, and techniques of operating a non-traditional Sonic restaurant.  Sonic shall provide that training to the Licensee (if the Licensee is an individual) or to one principal of the Licensee selected by Sonic (if the Licensee is a corporation, partnership, limited liability company, other entity, or group of individuals).  Sonic shall provide that training at the times and places designated by Sonic from time to time for its training program.

4.05.                       Marketing Assistance .

Sonic shall provide the Licensee with marketing materials and merchandising, marketing and advertising research data, and advice as may be developed from time to time by Sonic and deemed to be helpful in the operation of a non-traditional Sonic restaurant.

4.06.                       Communication .

Sonic shall provide the Licensee with management development and motivational seminars and periodic newsletters which communicate to Licensee available advertising materials and new developments, techniques, and improvements in areas of restaurant equipment, management, food preparation, and service which are pertinent to the operation of a restaurant using the Sonic System.

4.07.                       Evaluation Program .

Sonic will conduct periodic field evaluations of the Non-Traditional Sonic for the mutual benefit of both Sonic and Licensee to promote uniform standards of operation and quality control.

4.08.                       Advice .

Sonic shall provide the Licensee with periodic individual or group advice, consultation, and assistance by personal visit, by telephone, or by newsletters or bulletins that Sonic makes available to new licensees from time to time.

4.09.                       Written Materials .

Sonic shall provide the Licensee with bulletins, brochures, and reports that Sonic publishes from time to time regarding its plans, policies, research, developments, and activities.

4.10.                       Other .

Sonic shall provide the Licensee with other resources and assistance that Sonic may develop and make available to its new licensees from time to time.

5.   FEES .

8

5.01.                       License Fee

The Licensee acknowledges that:  (a) the initial grant of the License constitutes the sole consideration for the payment of a license fee of $________ paid by the Licensee to Sonic concurrently with the execution hereof; and (b) the fee has been earned by Sonic (except where the construction of the Non-Traditional Sonic has not been completed within one year from the date of this Agreement as discussed in Section 6.02(a) and except as provided hereafter in this Section 5.01).  Sonic reserves the right, in case construction of the Non-Traditional Sonic should be abandoned, the lease assigned for a purpose other than the operation of the Non-Traditional Sonic, or other interest in the premises be relinquished for a purpose other than the operation of the Non-Traditional Sonic, to terminate this Agreement, including the License, upon written notice, after which Sonic will immediately refund to Licensee the license fee less one-third of the license fee, which shall be fully earned by Sonic upon execution and delivery of this Agreement.  Licensee shall have the right, if Licensee does not consummate a lease or purchase a site for the Non-Traditional Sonic within one year from the date of this Agreement, to terminate this Agreement, including the License, upon written notice, after which Sonic will immediately refund to Licensee the license fee less one-third of the license fee, which shall be fully earned by Sonic upon execution and delivery of this Agreement.

5.02.                       Royalty Fees .

On or before the 10th day of each calendar month, the Licensee shall pay a royalty fee determined by the following scale based on Gross Sales for the calendar month preceding the date of such payment:

Monthly Gross Sales
But Not
Royalty
Greater Than
More Than
Rate
     
$         0.00
$  5,000.00
2.00%
$  5,000.00
$10,000.00
3.00%
$10,000.00
$15,000.00
3.50%
$15,000.00
$20,000.00
4.00%
$20,000.00
$25,000.00
4.50%
$25,000.00
N/A
5.00%

The calculation of Gross Sales and the corresponding royalty fees shall take place on a cumulative basis.  For example, the following formula results in the calculation of the royalty fee on $50,000 of Gross Sales:  Royalty Fee = ($5,000 x .02) + ($5,000 x .03) + ($5,000 x .035) + ($5,000 x .04) + ($5,000 x .045) + ($25,000 x .05).

The payment of royalty fees, as well as the payment of any other obligations incurred under the terms of this Agreement, shall be made via automated clearing house (ACH) or other electronic means approved by Sonic.

5.03.                       Brand Fee .
9


(a)           On or before the 10th day of each calendar month throughout the term of this Agreement, Licensee shall pay to the Sonic Brand Fund, which is administered by Sonic, a brand  contribution fee in an amount equal to .90% of the Gross Sales of the Non-Traditional Sonic during the calendar month next preceding the date of such payment.

(b)           The amount due to Sonic by Licensee pursuant to Section 5.03(a), above, shall be in addition to and separate from that which Licensee is obligated to contribute pursuant to Sections 11.01(a) and 11.01(c) of this Agreement.

5.04.                       Transfer Fee

(a)           A transfer fee in the amount of $1,000 shall be paid by Licensee in the event of a transfer or assignment of this Agreement (resulting in a change in Control of the Agreement) to a licensee then-currently qualified as a licensee, excluding assignments under Sections 13.02 and 13.03. 

(b)           A transfer fee in the amount of $3,000 shall be paid by Licensee in the event of a transfer or assignment of this Agreement (resulting in a change in Control of this License) to a new licensee not then-currently qualified as a licensee, excluding assignments under Sections 13.02 and 13.03.

5.05.                       Late Payments .

In the event any payments required by Sections 5.02, 5.03, or 5.04, above, are not paid on or before the date on which they are due, a late charge in an amount equal to 1.75% per month shall be levied against such amounts due and shall be owing to Sonic by the Licensee from the date on which such obligations were due until any such obligations are paid in full.  In the event any payments required by Sections 5.02, 5.03, or 5.04, above, are not paid on or before the date on which they are due three or more times during any 12-month period, in addition to all other rights of Sonic contained in this Agreement or otherwise, (a) Sonic may require the Licensee to submit a statement of Gross Sales in the form prescribed by Sonic and at a frequency prescribed by Sonic, such as weekly; and (b) Sonic may require the Licensee to pay obligations incurred under the terms of this Agreement more frequently than once a month, such as weekly.  In the event the interest rate set out in this Section 5.05 exceeds that amount permitted by Oklahoma law, then the maximum interest rate permitted by Oklahoma law shall be charged.  Sonic’s acceptance of any partial or late payment does not affect Sonic’s right to terminate this Agreement pursuant to the terms of this Agreement.  Further, Licensee acknowledges that this Section 5.05 is not an agreement to accept any partial payments or payments after they are due or Sonic’s commitment to extend credit to, or otherwise finance the operation of, the Non-Traditional Sonic.

5.06.                       Taxes .

(a)           Licensee shall pay when due all taxes levied or assessed on Licensee and the Non-Traditional Sonic including, without limitation, unemployment, sales, or gross receipts taxes, and all accounts or other indebtedness of any kind incurred by Licensee in conducting the business of the Non-Traditional Sonic.
10


(b)           In the time and manner prescribed by Sonic, Licensee shall also pay an amount equal to any sales tax or gross receipts tax, but not including any net income tax upon Sonic, imposed on Sonic or its Affiliates with respect to any payments from Licensee to Sonic required under this Agreement, unless the tax is credited against a net income tax otherwise payable by Sonic.


(c)

(i)           In the event of a dispute with a taxing authority as to (a) Licensee’s liability for taxes or (b) Sonic’s or its Affiliate’s liability for any taxes upon which Licensee is required under this Section 5.06 to make payment to Sonic, Licensee may contest the validity or the amount of the tax or indebtedness in accordance with the law and regulations of the taxing authority.  Sonic shall provide Licensee with all information, cooperation, and assistance that Licensee may reasonably request in connection with any dispute as to Licensee’s, Sonic’s, or Sonic’s Affiliate’s liability for taxes.  Licensee shall not permit a tax sale, seizure, levy, or similar writ or warrant by a creditor to occur against the Non-Traditional Sonic or any of its assets.

(ii)           In the event a state taxing authority makes a refund to Sonic or its Affiliate of taxes paid for which Sonic previously received payment from Licensee under this Section 5.06, Sonic shall pay to Licensee the amount of the taxes refunded by the state taxing authority to Sonic or its Affiliate which equals the amount Licensee previously paid to Sonic under this Section 5.06.

(d)           All notices received by Licensee from a state taxing authority regarding the alleged, potential, or actual tax liability of Sonic or its Affiliates shall be given to Sonic within 15 calendar days of receipt by Licensee.  Sonic and Licensee agree to consult in good faith to determine the nature of any action to be taken in connection with the notice or any demands contained therein.

6.   DUTIES OF LICENSEE .

6.01.                       Non-Traditional Sonic Site

(a)           The Licensee shall submit for evaluation by Sonic the information Sonic reasonably may require from time to time to evaluate a proposed site for the Non-Traditional Sonic.  Sonic shall review the submitted information, shall conduct any investigation of the proposed site Sonic deems necessary or appropriate to evaluate the site, and shall accept or reject the site.  Sonic shall have the right to request any supplemental information it reasonably deems necessary or appropriate to evaluate the proposed site.

(b)           Within 30 days after the Licensee’s submission of all initial and supplemental information requested by Sonic regarding the proposed site, Sonic shall give the Licensee written notice of its acceptance or rejection of the site.  If Sonic accepts the site, the written notice shall set forth any remaining conditions to that acceptance.  If Sonic rejects the site, the written notice shall set forth the primary reasons for the rejection.  If Sonic does not give the
11

Licensee written notice of its rejection of the site within 30 days after the Licensee’s submission of all initial and supplemental information requested by Sonic regarding the site, the Licensee may deem Sonic as having approved the site.  The Licensee acknowledges that no officer, employee, or agent of Sonic has any authority to approve any proposed site except in writing and in accordance with the provisions of this Section 6.  Any other representations, written or oral, shall have no effect.

(c)           The Licensee shall have sole responsibility for determining the location of the Non-Traditional Sonic and all aspects of the site selection, negotiation, and development process, including (without limitation) the investigation and compliance with all applicable zoning, licensing, leasing, and other requirements.  Neither Sonic nor any of its Affiliates shall have any responsibility, obligation, or liability in connection with Sonic’s efforts, assistance, and/or advice in the selection and securing of a location for the Licensee’s use, nor shall Sonic have any liability for any consequences of the Licensee’s choice of a site or any aspect of the site selection, negotiation, and development process.   THE LICENSEE ACKNOWLEDGES THAT SONIC’S APPROVAL OF A SITE DOES NOT CONSTITUTE ANY REPRESENTATION, WARRANTY, OR GUARANTY BY SONIC THAT THE SITE WILL CONSTITUTE A SUCCESSFUL LOCATION FOR THE NON-TRADITIONAL SONIC, AND THE LICENSEE WAIVES AND RELEASES SONIC AND ITS AFFILIATES FROM ANY CLAIMS IN THAT REGARD.   The Licensee confirms that, in the absence of its agreement as set forth above, Sonic would not become involved in any way in the site selection, negotiation, or development process.

(d)           In the event the Non-Traditional Sonic premises suffers some physical casualty, the minimum acceptable quality and appearance for the restored location will be that which existed just prior to the casualty, unless the Non-Traditional Sonic was below minimum acceptable standards for Sonic at the time of casualty, in which event the Non-Traditional Sonic will be restored to a condition which meets the minimum acceptable standard according to Sonic.  However, Licensee agrees to make all reasonable effort to have the restored Non-Traditional Sonic reflect the then-current image, design, and specifications of non-traditional Sonic restaurants.  If the Non-Traditional Sonic is substantially destroyed by fire or other casualty, Licensee may, with the written consent of Sonic, elect to terminate this Agreement in lieu of Licensee reconstructing the restaurant, provided that for a period of 18 months after said election, Licensee shall not enter into, become landlord of, or loan money to any restaurant business within a three-mile radius of the Non-Traditional Sonic premises which is similar in nature to or competitive with a Sonic drive-in restaurant or non-traditional Sonic restaurant or which is considered a quick-service restaurant establishment. 

6.02.                       Construction and Opening

(a)           Licensee agrees to complete the construction of the Non-Traditional Sonic and open the Non-Traditional Sonic to the public within one year from the effective date of this Agreement.  If the Non-Traditional Sonic is not constructed and opened to the public before the expiration of the one-year  period, then Sonic may terminate this Agreement, making it of no further force or effect. In such case, Sonic will immediately refund to Licensee the license fee less one-third of the license fee, which shall be fully earned by Sonic upon execution and delivery of this Agreement.  Unless Licensee is remodeling an existing location, Licensee shall construct the Non-Traditional Sonic
12

 
 in accordance with the site plan approved by Sonic for such site and with Sonic’s standard construction plans and specifications (“Sonic Plans and Specifications”), if any, subject, however, to any alterations thereto that may be required by any applicable law, regulation, or ordinance.  If alterations of any kind are required to be made to the site plan, as approved by Sonic, or to the Sonic Plans and Specifications, if any, for any reason, such alterations must be approved by Sonic in writing before any work is begun on the Non-Traditional Sonic.  The Licensee shall submit the final site layout and construction plans for the Non-Traditional Sonic to Sonic for its written approval.  Any costs, including engineering and architectural fees, incurred in obtaining approvals by the appropriate governmen­tal authorities of the construction plans, specifications, and layouts shall be paid by Licensee.  Prior to opening, Licensee shall submit to Sonic, at no cost to Sonic, a record set of drawings showing all approved changes to the plans and specifications.

(b)           If Licensee is remodeling an existing location, Sonic shall have the right to inspect and approve all plans and specifications prior to the commencement of any work.  The Licensee shall submit the final remodeling plans and specifications for the Non-Traditional Sonic to Sonic for its written approval.  Nothing in this section shall be construed as an endorsement or guarantee of the conformity of such plans to applicable local, state, or federal building or safety codes, or a guarantee that construction will be done in conformity with such approved plans.  In any event, Licensee shall obtain written approval of such plans or written notice of Sonic’s waiver of the rights reserved hereunder prior to the commencement of construction. 

(c)           Licensee shall not deviate from the approved plans and specifications in any manner in the construction or remodeling of the restaurant without the prior written approval of Sonic.  If at any time Sonic determines (prior to opening date) that Licensee has not constructed or remodeled the Non-Traditional Sonic in accordance with the plans and specifications approved by Sonic, Sonic shall, in addition to any other remedies, have the right to obtain an injunction from a court of competent authority against the continued construction and opening of the Non-Traditional Sonic, and Licensee hereby consents to any such injunction.

(d)           Sonic may require the Licensee to undertake extensive remodeling and renovation and substantial modifications to its existing improvements necessary for the Licensee’s restaurant to conform with Sonic’s then-existing system image.  Sonic may exercise the foregoing right at any time during the term of this Agreement, but may not require (1) the remodeling of the Non-Traditional Sonic more than once every five years or (2) the remodeling of the Non-Traditional Sonic built within the preceding three years, unless the required remodeling will not exceed 15% of the original cost of the improvements and equipment (as adjusted for increases in the consumer price index after the construction date of the Non-Traditional Sonic).  If Sonic exercises its right to require the Licensee to undertake extensive remodeling or renovation or substantial modification within two years of the end of the term of this Agreement, the Licensee may exercise any right to renew the term of this Agreement at that point in time in accordance with the applicable provisions of this Agreement, which renewal then shall take effect as of the expiration of the then-current term of this Agreement.

6.03.                       Equipment and Signage
13


(a)           Licensee shall install in and about the Non-Traditional Sonic such equipment, fixtures, furnishings, and other personal property, and shall upgrade or purchase additional equipment, fixtures, furnishings, and other personal property, as are required and which strictly conform to the appearance, uniform standards, and specifications of Sonic existing from time to time, which shall be communicated to Licensee in writing.  Equipment not required by Sonic shall not be installed without Sonic’s prior written consent, except that Licensee may, without Sonic’s prior written consent, install security-related equipment that does not interfere with the operation or trade dress of the Non-Traditional Sonic.

(b)           In order to provide maximum exposure of the Sonic name and marks, Licensee shall prominently display and maintain at Licensee’s own expense signage which complies with the specifications required by Sonic from time to time and in such location as Sonic may approve.  Licensee shall not display any other sign or advertising at the Non-Traditional Sonic without Sonic’s prior written approval.

(c)           Licensee may lease the required signage from Sonic or may acquire or lease the signage from any other source approved by Sonic.  Licensee agrees to require in any lease agreement with Sonic or other suppliers a clause giving Sonic the right to remove the signage from the Non-Traditional Sonic upon termination of this Agreement. 

(d)           Licensee hereby agrees that it shall obtain from the landlord of the property at which the Non-Traditional Sonic is located a landlord’s waiver releasing all claims against any equipment or sign which belongs to Sonic and all claims to fixtures and furnishings that constitute Proprietary Marks of Sonic.

(e)           If Licensee is or becomes a lessee of the Non-Traditional Sonic premises, Licensee shall provide Sonic with a true and correct, complete copy of any such lease and obtain Sonic’s written approval of the lease terms prior to executing the lease.  Licensee shall have included in the lease provisions, in form satisfactory to Sonic, expressly permitting both the Licensee and Sonic to take all actions and make all alterations referred to under Section 15.01.  Any such lease shall also require the lessor thereunder to give Sonic reasonable notice of any contemplated termination and a reasonable time in which to take and make the above actions and alterations and provide that the Licensee has the unrestricted right to assign such lease to Sonic.

6.04.                       Training .

(a)           Licensee acknowledges the importance of the quality of business operations among all restaurants in the Sonic System and agrees that it will not allow any of its licensed establishments to be opened or operated without having at least one individual working full time at the Non-Traditional Sonic who has completed the Stage Career Development Program or other Sonic-designated training program.  If the trained individual ceases to work full time at the Non-Traditional Sonic for whatever reason, the Licensee shall promptly replace the individual with a person who has completed the Stage Career Development Program or other Sonic-designated training program.  Licensee agrees that each individual who participates in the Stage Career Development Program or other Sonic-designated training program for the Non-Traditional Sonic will, at the request of Sonic, sign a confidentiality agreement in a form prescribed by Sonic agreeing to maintain as confidential certain information learned and received during the program.
14


(b)           Licensee shall pay all traveling expenses, living expenses, and any other personal expenses for themselves and managers while enrolled in the training program.  As part of the initial license fee paid pursuant to Section 5.01 herein, Licensee shall have the right to have one principal and one manager of the Non-Traditional Sonic attend the Stage Career Development Program or other Sonic-designated training program for no cost other than those set out in the preceding sentence.  Any additional parties attending the Stage Career Development Program or other Sonic-designated training program shall bear the cost, including any fees and tuition due for such training program.

(c)           Upon opening the Non-Traditional Sonic, all management personnel shall be certified in ServSafe or in another comparable, nationally recognized food safety training and certification program approved by Sonic, the cost of which shall be borne by Licensee.  Management personnel subsequently employed by Licensee at the Non-Traditional Sonic shall have 120 days from the beginning date of such employment to successfully complete such training.  Licensee shall pay all traveling expenses, living expenses, and any other personal expenses for such persons while participating in the training.  Management personnel includes any person who has shift responsibility or employee oversight at the Non-Traditional Sonic and also includes the operating principal of the Non-Traditional Sonic.

6.05.                       Compliance with Entire System .

(a)           Licensee acknowledges that every component of the Sonic System is important to Sonic and to the operation of the Non-Traditional Sonic as a non-traditional Sonic restaurant, including a designated menu of food and beverage products; uniformity of food specifications, preparation methods, quality, and appearance; and uniformity of facilities and service.

(b)           Sonic shall have the right to inspect the Non-Traditional Sonic at all reasonable times to ensure that Licensee’s operation thereof is in compliance with the standards and policies of the Sonic System.  This right to inspect includes the right of Sonic or a third party on behalf of Sonic to conduct food safety audits and operational assessments.  In the event that any inspection, including a food safety audit or an operational assessment, reveals any deficiency or unsatisfactory condition with respect to any aspect of the Non-Traditional Sonic operation, Licensee shall, within 72 hours of Licensee’s receipt of notice of such condition or such other time as Sonic in its sole discretion may provide, correct or repair such deficiency or unsatisfactory condition if it is correctable or repairable within such time period, and, if not, shall within such time commence such correction or repair and thereafter diligently pursue same to completion.  The preceding sentence notwithstanding, the Licensee shall take immediate action to correct or repair any deficiency or unsatisfactory condition which poses a risk to public health or safety.  In the event Licensee fails to comply with the foregoing obligations to correct and repair, Sonic, upon 24 hours’ notice to Licensee, shall have the right (but no obligation), without being guilty of trespass or tort, to forthwith make or cause to be made such corrections or repairs, and the expense thereof, including board, wages, lodging, and transportation of Sonic personnel, if utilized, shall be paid by Licensee upon billing by Sonic.  The foregoing shall be in addition to any other right or remedies Sonic may have.
15


(c)           Licensee shall comply with the entire Sonic System as described herein and in the Sonic Operations Manual for a traditional Sonic drive-in restaurant, except to the extent that Licensee cannot comply as a practical matter because of the physical layout or structure of the Non-Traditional Sonic.  That compliance shall include (without limitation) the following:

(i)           Operate the Non-Traditional Sonic in a clean, wholesome manner in compliance with standards of quality, food safety, service, cleanliness, and appearance as prescribed by governmental authorities and by Sonic; comply with all business policies, practices, and procedures imposed by Sonic; and maintain the building, equipment, and parking area in a good, clean, wholesome condition and repair, well lighted, and in compliance with designated standards as may be prescribed from time to time by Sonic.

(ii)           Purchase and install kitchen fixtures, lighting, payment systems, and equipment, and office equipment and signs in accordance with the equipment specifications and layout designated by Sonic.

(iii)           Without the prior written consent of Sonic, make no (a) building design conversion or (b) alterations, conversions, or additions to the location.

(iv)           Make repairs or replacements required because of damage, wear, and tear or in order to maintain the Non-Traditional Sonic in good condition and in conformity with blueprints and plans.

(v)           Operate the Non-Traditional Sonic everyday of the year (except Easter, Thanksgiving, and Christmas), and at least 15 hours per day or such other hours, including specific opening and closing times, as may from time to time be reasonably prescribed by Sonic (except when the Non-Traditional Sonic is untenantable as a result of fire or other casualty), maintain sufficient supplies of food and paper products, and employ adequate personnel so as to operate the Non-Traditional Sonic at its maximum capacity and efficiency.

(vi)           Cause all employees of Licensee, while working in the Non-Traditional Sonic, to:  (a) wear uniforms of such color, design, and other specifications as Sonic may designate from time to time, (b) present a neat and clean appearance, and (c) render competent and courteous service to Non-Traditional Sonic customers.

(vii)           Serve all menu items which Sonic may deem appropriate and which are included in the menu approved by Sonic at the time to take full advantage of the potential market and achieve standardization in the Sonic System; serve no items which are not set forth in the Sonic Operations Manual and which are not otherwise authorized and approved in writing by Sonic; and display and offer only the menu approved by Sonic at the time.
16


(viii)                      In the dispensing and sale of food products: (a) use only containers, cartons, bags, napkins, and other paper goods and packaging bearing the approved trademarks and which meet the Sonic System specifications and quality standards, (b) use only those flavorings, garnishments, and food and beverage ingredients, manufacturers, and brands which meet the Sonic System specifications and quality standards, which Sonic may designate from time to time, and (c) employ only those methods of food handling, preparation, and serving which Sonic may designate from time to time.

(ix)           Make prompt payment in accordance with the terms of invoices rendered to Licensee including, but not limited to, invoices for the purchase of fixtures, equipment, and food and paper supplies.

(x)           At Licensee’s expense, comply with all federal, state, and local laws, ordinances, and regulations affecting the operation of the Non-Traditional Sonic, including all laws, ordinances, or regulations relating to terrorist activities.

(xi)           Install no electronic games or other games of chance at the Non-Traditional Sonic without the express prior written consent of Sonic.

(xii)           Furnish Sonic with current home addresses and phone numbers of Licensee and Licensee’s owners and manager; furnish Sonic with current information regarding the legal and equity ownership and Control of the operation of the Non-Traditional Sonic; and, upon Sonic’s reasonable request, provide updates of financial information, personal financial statements, and credit information.

(xiii)         Notify Sonic’s Communications Department or, if not available, the most senior executive officer of Sonic as soon as possible and, in any event, within 12 hours after the occurrence at the Non-Traditional Sonic of any event which could have an adverse impact on the Non-Traditional Sonic and/or the Sonic System, including (without limitation) the death or serious bodily injury of any employee or customer for any reason or the risk of infection by a contagious disease.

(xiv)         Only provide a Sonic-approved toy premium that is appropriate for the age of the child; make a Sonic-approved all-age toy premium available upon customer request; and, except in the case of an all-age toy premium provided as appropriate, only offer the Sonic-approved toy premium corresponding to the Sonic-designated promotion.

(xv)           Accept Sonic-designated debit and credit cards, Sonic-approved stored-value cards, and any other Sonic-designated payment means.
17


(xvi)          Participate in system-wide initiatives, including technology initiatives such as the PartnerNet technology initiative and other initiatives as may be designated by Sonic from time to time.

(xvii)         Deal with Persons supplying goods and services to the Non-Traditional Sonic in a respectful and responsive manner such that the reputation and goodwill of Sonic, its licensees, and the Sonic System are not tarnished in the business community or with consumers; ensure that all Persons that provide goods or services to the Non-Traditional Sonic during construction and operation are timely and fully paid for such goods and services, except only to the extent that any of the goods and services are non-conforming, damaged, defective, or missing; and, in the event that a dispute arises as to quality or quantity of goods or services furnished to the Non-Traditional Sonic, timely communicate with and respond to the supplier in a good faith effort to resolve the dispute.  Licensee cannot avoid the obligations contained in this Section 6.05(c)(xvii) by contracting for or obtaining the goods or services indirectly, such as through an intermediary.

(xviii)    Except as to bottled water and paper products and except as allowed by any policy contained in the Sonic Operations Manual , do not sell or serve food and beverage products outside of the Non-Traditional Sonic premises and do not donate food and beverage products to a third party except upon the prior written consent of Sonic.

(xix)     Do not sell Sonic coupons, and only sell Sonic-related merchandise on the Internet or by other means upon the prior written consent of Sonic.

(xx)      Participate in Sonic-approved marketing, advertising, promotional, and brand enhancement programs.

(xxi)     In the event Sonic sets a maximum price for any product, do not charge a price in excess of such maximum price for the product; however, Licensee may charge a price lower than the maximum price.

(xxii)     Sell the Sonic-approved stored-value card or other Sonic-designated pre-paid payment means.

(xxiii)           Utilize at the Non-Traditional Sonic a Sonic-approved point-of-sale system that at all times has a non-alterable grand total function so that each item entered in such register and each day’s totals may not be altered once entered.

(d)           Sonic shall have the right to establish new or to modify existing operating procedures, policies, practices, requirements, and guidelines, which shall be effective upon notice from Sonic unless Sonic specifies otherwise.  Such new or modified operating procedures, policies, practices, requirements, and guidelines may require Licensee to incur additional expense.

6.06.                       Approved Suppliers and Advertising Agencies .
18

                (a)           Sonic may require the Licensee (i) to purchase food, beverages, signs, and equipment which meet the specifications established by Sonic; (ii) to purchase such items only from Sonic-designated suppliers (which designated suppliers may include Sonic or its Affiliates); and (iii) to retain and utilize exclusively the marketing and advertising services of the Sonic-approved advertising agency of record.  In addition, the Licensee immediately shall use the Licensee’s vote or votes in all advertising cooperatives in which the Licensee participates to support the use of the advertising agency of record for the Sonic restaurant chain.

                (b)           Sonic may require the Licensee to support the use of and to use the products and programs of the beverage syrup supplier approved by Sonic and used by a majority of all Sonic drive-in restaurants and non-traditional Sonic restaurants, to the exclusion of any other supplier of beverage syrup.
 
                (c)           Sonic may require the Licensee to comply with the foregoing provisions not only for the Non-Traditional Sonic, but also (to the extent the Licensee exercises Control) for all other Sonic drive-in restaurants and non-traditional Sonic restaurants for which the Licensee serves as a licensee.
 
                (d)           Sonic hereby explicitly retains the exclusive right to consider, review, and approve any and all suppliers that may hold, sell, or distribute Sonic-labeled goods or products.

(e)           Licensee agrees that its suppliers may provide to Sonic information regarding Licensee’s past due amounts.

(f)           The terms of this Section 6.06 shall continue in effect for as long as the Licensee serves as a licensee for a Sonic drive-in restaurant or non-traditional Sonic restaurant and shall survive the expiration or termination of this Agreement.

(g)           If at least 95% of all Sonic drive-in restaurants and non-traditional Sonic restaurants are in compliance with Sections 6.06(a) and 6.06(b), Sonic periodically shall submit the approved advertising agency or beverage syrup supplier to competitive bid or review, but shall not be obligated to do so more often than once every three years.

6.07.                       Best Efforts

Licensee shall diligently and fully exploit his rights in this Agreement by personally devoting his best efforts and, in case more than one individual has executed this Agreement as the Licensee, at least one individual Licensee shall devote his full time and best efforts to the operation of the Non-Traditional Sonic.  Licensee shall avoid any activities which, in Sonic’s sole judgment, would be detrimental to or interfere with the business of the Non-Traditional Sonic, the Sonic System, or Sonic.

6.08.                       Interference with Employment Relations of Others
19


During the term of this Agreement, except upon the prior written consent of Sonic, Licensee shall not employ or seek to employ any person who is at the time or was at any time during the prior six months employed by Sonic or any of its subsidiaries.  In addition, during the term of this Agreement, except upon the prior written consent of Licensee, Sonic agrees not to employ or seek to employ any person who is at the time or was at any time during the prior six months employed by Licensee in a management level position.

6.09.                       Sonic’s Standards

Licensee shall operate the Non-Traditional Sonic specified in this Agreement in conformity with the Sonic System and the obligations set forth in this Agreement and shall strictly adhere to Sonic’s standards and policies as they exist now and as they may be from time to time modified.

6.10.                       Majority Interest Owner .

Licensee represents, warrants, and agrees that Licensee actually owns the majority interest in the legal and equity ownership and Control of the operation of the Non-Traditional Sonic, and that Licensee shall maintain such interest during the term of this Agreement except only as otherwise permitted pursuant to the terms and conditions of this Agreement.  Licensee shall furnish Sonic with such evidence as Sonic may request from time to time for the purpose of assuring Sonic that Licensee’s interest remains as represented herein.

6.11.                       Electronic Communication and Use of Internet .

(a)           At Sonic’s option, Sonic may post the Sonic Operations Manual (pursuant to Sonic’s obligation to provide Licensee with access to the Sonic Operations Manual , as set forth in Section 8) and other communications on a restricted Intranet or other website to which Licensee will have access.  If Sonic does so, Licensee must periodically monitor the site for any updates to the Sonic Operations Manual or other standards, specifications, and procedures.  Any passwords or other digital identification necessary to access the Sonic Operations Manual and other information on such a site will be deemed to be part of the Confidential Information (defined in Section 9.01).  Further, Licensee agrees that Licensee will establish the channels of communication with Sonic and Licensee’s customers as required by Sonic from time to time, including e-mail, Internet, and other electronic forms of communication, and that Licensee will acquire and maintain any computer or other components necessary for the transmission of such communications.

(b)           Licensee will not establish or operate a website for the Non-Traditional Sonic or for Licensee’s organization that owns and operates the Non-Traditional Sonic or other Sonic restaurants under license agreements with Sonic.
20


7.   PROPRIETARY MARKS .

7.01.                       Sonic’s Representations .

Sonic represents with respect to the Proprietary Marks that Sonic will use and permit Licensee and other licensees to use the Proprietary Marks only in accordance with the Sonic System and the standards and specifications attendant thereto which underlie the goodwill associated with and symbolized by the Proprietary Marks.

7.02.                       Use of Marks .

With respect to Licensee’s licensed use of the Proprietary Marks pursuant to this Agreement, Licensee agrees that:

(a)           Licensee shall use only the Proprietary Marks designated by Sonic and shall use them only in the manner authorized and permitted by Sonic.

(b)           Licensee shall use the Proprietary Marks only for the operation of the Non-Traditional Sonic.

(c)           During the term of this Agreement and any renewal hereof, Licensee shall identify itself as the owner of the Non-Traditional Sonic in conjunction with any use of the Proprietary Marks, including, but not limited to, invoices, order forms, receipts, and contracts, as well as at conspicuous locations on the premises of the Non-Traditional Sonic.  The identification shall be in the form which specifies Licensee’s name, followed by the term “Licensed Proprietor”, or such other identification as shall be approved by Sonic.

(d)           Licensee’s rights to use the Proprietary Marks are limited to such uses as are authorized under this Agreement, and any unauthorized use thereof shall constitute an infringement of Sonic’s rights.

(e)           Licensee shall not use the Proprietary Marks to incur any obligation or indebtedness on behalf of Sonic.

(f)           Licensee shall not use the Proprietary Marks as part of its corporate or other legal name.

(g)           Licensee shall comply with Sonic’s instructions in filing and maintaining the requisite trade name or fictitious name registrations, and shall execute any documents deemed necessary by Sonic or its counsel to obtain protection for the Proprietary Marks or to maintain their continued validity and enforceability.

(h)           In the event that litigation involving the Proprietary Marks is instituted or threatened against Licensee, Licensee shall promptly notify Sonic and shall cooperate fully in defending or settling such litigation.
21


7.03.                       Licensee’s Understanding

Licensee expressly understands and acknowledges that:

(a)           As between the parties hereto, Sonic owns the right and interest in and to the Proprietary Marks and the goodwill associated with and symbolized by them, and any and all use thereof by Licensee inures to the benefit of Sonic.

(b)           The Proprietary Marks are valid and serve to identify the Sonic System and those who are licensed under the Sonic System.

(c)           Licensee shall not directly or indirectly contest the validity or the ownership of the Proprietary Marks.

(d)           Licensee’s use of the Proprietary Marks pursuant to this Agreement does not give Licensee any ownership interest or other interest in or to the Proprietary Marks, except the nonexclusive license granted herein.

(e)           Any and all goodwill arising from Licensee’s use of the Proprietary Marks in its licensed operations under the Sonic System shall inure solely and exclusively to Sonic’s benefit, and upon expiration or termination of this Agreement and the License herein granted, no monetary amount shall be assigned as attributable to any goodwill associated with Licensee’s use of the Sonic System or the Proprietary Marks.

(f)           The right and license of the Proprietary Marks granted hereunder to Licensee is nonexclusive except as provided in Section 2.01 of this Agreement, and Sonic thus has and retains the right among others:

(i)           To grant other licenses for the Proprietary Marks, in addition to those licenses already granted to existing licensees.

(ii)           To use the Proprietary Marks in connection with selling products and services.

(iii)           To develop and establish other systems for the same or similar Proprietary Marks, or any other Proprietary Marks, and grant licenses or franchises thereto without providing any rights therein to Licensee.

(g)           Sonic reserves the right to substitute different Proprietary Marks for use in identifying the Sonic System and the businesses operating thereunder if Sonic’s currently owned Proprietary Marks no longer can be used.

7.04.                       Other Intellectual Property .

If Licensee develops any trademark, service mark, trade dress, copyright, patent, or other intellectual property for use in promoting or operating the Non-Traditional Sonic or promoting the Sonic System, such intellectual
22

 
property will be deemed the property of Sonic or its Affiliate, at Sonic’s election, without charge or the payment of any royalty, and Licensee shall take action as necessary to convey such rights to Sonic.

8.   MANUAL .

Sonic shall provide Licensee access to, for use at the Non-Traditional Sonic, the Sonic Operations Manual prepared by Sonic for use by licensees of traditional Sonic drive-in restaurants.  Licensee recognizes that the Sonic Operations Manual contains detailed information relating to operation of Sonic restaurants including: (a) food formulas and specifications for designated food and beverage products; (b) methods of inventory control; (c) bookkeeping and accounting procedures; (d) business practices and policies; (e) required equipment; and (f) other management and advertising policies.  Licensee agrees to promptly adopt and use exclusively the formulas, methods, and policies contained in the Sonic Operations Manual , now and as they may be modified by Sonic from time to time, except to the extent Licensee cannot comply as a practical matter because of the physical layout or structure of the Non-Traditional Sonic.  Licensee shall return the manual to Sonic at the expiration or earlier termination of this Agreement. 

9.   CONFIDENTIAL INFORMATION

9.01.                       Sonic Proprietary and Confidential Information .

Sonic possesses certain unique, proprietary, and confidential information, consisting of methods and procedures for preparation of food and beverage products, confidential recipes for food products, distinctive service and accessories, plans and specifications for interior and exterior signs, designs, layouts, and color schemes, and methods, techniques, formats, systems, specifications, procedures, business information, trade secrets, sales and marketing programs and information, methods of business operations and management, and knowledge of and experience in the operation and franchising of Sonic restaurants and the Sonic System (collectively, the “Confidential Information”).  Sonic will disclose the Confidential Information to Licensee in furnishing Licensee the Sonic Plans and Specifications for a non-traditional Sonic restaurant, the training program, and the Sonic Operations Manual , and in providing guidance and assistance to Licensee during the term of this Agreement.  The Sonic Operations Manual , as modified by Sonic from time to time, and the policies contained therein, are incorporated in this Agreement by reference. Licensee acknowledges that Confidential Information will be disclosed by Sonic through various means, including orally, in writing, and electronically, such as on a restricted Intranet or other website.

9.02.                       Licensee’s Use of Proprietary and Confidential Information .

Licensee acknowledges and agrees that Licensee shall not acquire any interest in the Confidential Information, other than the right to utilize it in the development and operation of the Non-Traditional Sonic (and other Sonic drive-in restaurants and non-traditional Sonic restaurants under license agreements with Sonic) during the term of this Agreement, and that the use or duplication of the Confidential Information in any other business would constitute an unfair method of competition.  Licensee acknowledges and agrees that the Confidential Information is proprietary to Sonic, may constitute trade secrets of Sonic, and is disclosed to Licensee solely on the condition that Licensee agrees, and Licensee does hereby agree, that Licensee:
23


(i)  shall not use the Confidential Information in any other business or capacity, or for the benefit of any other Person or entity;

(ii) shall maintain the absolute confidentiality of the Confidential Information, and shall not disclose or divulge the Confidential Information to any unauthorized Person or entity, during and after the term of the Agreement;

(iii) shall not make unauthorized copies of any portion of the Confidential Information disclosed in printed, audio, or video form (except in connection with instruction of employees in the operation of the Non-Traditional Sonic); and

(iv) shall adopt and implement all procedures prescribed from time to time by Sonic to prevent unauthorized use or disclosure of the Confidential Information, including, without limitation, restrictions on disclosure thereof to employees of the Non-Traditional Sonic and the use of nondisclosure and non-competition clauses in employment agreements with employees (including all owners, shareholders, members, officers, and partners of Licensee) who have access to the Confidential Information.

9.03.                       Licensee’s Use of Sonic Operations Manual .

Licensee may not at any time, in any manner, directly or indirectly, and whether or not intentionally, copy any part of the Sonic Operations Manual , permit any part of it to be copied, disclose any part of it except to employees or others having a need to know its contents for purposes of operating the Non-Traditional Sonic, or permit its removal from the Non-Traditional Sonic without prior written consent from Sonic.  Notwithstanding anything to the contrary contained in this Agreement and provided Licensee shall have obtained Sonic’s prior written consent, the restrictions on Licensee’s disclosure and use of the Confidential Information shall not apply to the following:

(a)           information, processes, or techniques which are or become generally known in the food service industry, other than through disclosure (whether deliberate or inadvertent) by Licensee; and

(b)           disclosure of the Confidential Information in judicial or administrative proceedings to the extent that Licensee is legally compelled to disclose such information, provided Licensee shall have used its best efforts, and shall have afforded Sonic the opportunity, to obtain an appropriate protective order or other assurance satisfactory to Sonic of confidential treatment for the information required to be so disclosed.

9.04.                       No Information to the Public .

Licensee acknowledges that Sonic’s parent company, Sonic Corp., is a public company, and that Sonic Corp. makes certain information regarding the performance of the Sonic System available to the public, including investors and financial analysts, in the normal course of business. Licensee further acknowledges that Licensee’s own disclosure of certain information to the public could interfere with the business of Sonic.  Licensee agrees that it will not provide to the public, or to any investor, financial analyst, or person that influences investments, any information that might indicate the performance of the Sonic System, the Sonic restaurant chain, or any aspect thereof, including sales information, except that Licensee may provide information to attorneys, accountants, financial planners, and other professionals as required in the course of Licensee’s personal business or the operation of the Non-Traditional Sonic.
24


10.   ACCOUNTING AND RECORDS .

10.01.                       Due Date .

On or before the 10th day of each month, Licensee shall submit to Sonic a complete profit and loss statement in a form prescribed by Sonic and such statistical reports in such form as Sonic shall reasonably require from time to time, for the previous month immediately ended, or for such other time period as may be designated by Sonic.  Such profit and loss statements and other statistical and financial reports required by this Agreement shall be submitted by electronic means as specified by Sonic.

10.02.                       Record Retention .

Licensee shall keep and preserve full and complete records of the Non-Traditional Sonic business for at least three years in a manner and form satisfactory to Sonic and shall also deliver such additional financial, operating, and other information and reports as Sonic may reasonably request on the forms and in the manner prescribed by Sonic; provided, however, that Licensee shall maintain, at a minimum, those books and records required to be kept by the Internal Revenue Service under the Internal Revenue Code for purposes of its regulation of Licensee’s business and make the same books available to Sonic.

10.03.                       Charitable Contributions and Discounts .

In meeting the requirements set forth in Sections 10.01 and 10.02 above, Licensee shall keep records substantiating and enter as a line item on its financial statements amounts representing the valuation for goods (whether food, paper, or otherwise) which constitute charitable contributions to third parties from the same goods out of the Non-Traditional Sonic.  Likewise, the Licensee shall maintain records and enter on its financial statements (particularly a line item on its profit and loss statement) information representing the value or amount of sales represented by coupons traded with and discounts granted by the Licensee at the Non-Traditional Sonic.

10.04.                       Annual Reports .
25


Licensee further agrees to submit, within 90 days following the close of each fiscal year of the Non-Traditional Sonic’s operation, a profit and loss statement covering operations during such fiscal year and the balance sheet taken as of the close of such fiscal year.

10.05.                       Audit by Sonic .

Sonic shall have the right to inspect and audit Licensee’s accounts, books, records, and tax returns at all times during and after the term of this Agreement.  If such inspection discloses that Gross Sales actually exceeded or, pursuant to generally accepted audit methodologies, should have exceeded the amount reported by Licensee, Licensee shall immediately pay Sonic:  (i) the additional royalty fee, brand fee, and advertising expenditures; (ii) interest on all unpaid amounts (from the original due date) at a rate equal to that provided by Section 5.05 herein; and (iii) a 10% surcharge on all unpaid amounts.  If such inspection discloses that Gross Sales actually exceeded or, pursuant to generally accepted audit methodologies, should have exceeded the amount reported by Licensee as Licensee’s Gross Sales by an amount equal to 3% or more of the Gross Sales originally reported to Sonic, Licensee shall bear the cost of such inspection and audit at rates and fees customarily charged by Sonic for such auditing and inspecting services and duties.  Unpaid brand fees, including interest and surcharges collected by Sonic pursuant to this section, shall be used in accordance with the expenditures authorized by Section 5.03; nevertheless, Sonic may, on a case by case basis, at Sonic’s sole discretion, use such collected amounts in accordance with the expenditures authorized by Section 11.01.  Sonic shall have the right to bring an action in its own name to collect unpaid brand and advertising expenditures required by Section 11 herein.

10.06.                       Third –Party Audit .

If Sonic has reason to believe that the Licensee may not have reported all of its Gross Sales, Sonic may require the Licensee to have its profit and loss statement and balance sheet certified by an independent public accountant.  Licensee shall at his expense cause a Certified Public Accountant to consult with Sonic concerning such statement and balance sheet.  The original of each such reports required by this Section 10.06 shall be mailed to Sonic’s business office at the address designated in Section 19 below.

10.07.                       Licensee’s Failure to Timely Deliver Financial Records .

If Licensee fails to timely provide Sonic with complete profit and loss statements, accounts, books, records, and tax returns pertaining to the Non-Traditional Sonic business, or fails to fully cooperate with Sonic’s audit of the Non-Traditional Sonic business, Sonic shall have the right to estimate Licensee’s Gross Sales for the Non-Traditional Sonic using information available on the Non-Traditional Sonic or other Sonic drive-in restaurants and non-traditional Sonic restaurants.  Licensee agrees to accept Sonic’s estimates as conclusively correct until Licensee fully complies with Sonic’s accounting and disclosure requirements under this Agreement.  However, if the Licensee’s subsequent accounting and disclosures reveal that Licensee under-reported Gross Sales or underpaid fees due under this Agreement, Sonic may recover all deficiencies and may litigate claims of fraud even though Sonic may have already obtained a judgment using Sonic’s estimates.  Furthermore, nothing in this Agreement or any judgment using estimates shall prevent or hinder Sonic’s further efforts and rights to obtain the accounting and disclosures which
26

 
 Licensee is required to give to Sonic under this Agreement.  Without regard to whether Licensee fails to timely provide records to Sonic or fails to fully cooperate with Sonic in the audit of the Non-Traditional Sonic, Sonic may make estimates during the audit process or for other purposes as allowed by generally accepted accounting principles or audit methodologies.

10.08.                       Financial Disclosure .

Sonic shall have the right to assemble and disseminate to third parties financial and other information regarding the Licensee and other licensees of Sonic to the extent required by law or to the extent necessary or appropriate to further the interests of the Sonic System as a whole.  Sonic shall have the right to disclose the business name, address, and telephone number of the Licensee as they appear in Sonic’s records to any Person making inquiry as to the ownership of the Non-Traditional Sonic.  Sonic shall not disclose specific financial information regarding the Licensee or the Non-Traditional Sonic to any Person without (a) the Licensee’s prior, written consent or (b) being directed to disclose the information pursuant to the order of a court or other governmental agency.

10.09.                       Accounting Services .

 In the event that Licensee is late three or more times during any 12-month period in paying any fee or obligation required by this Agreement, including the royalty fees set forth in Section 5.02 and the brand and advertising expenditures set forth in Sections 5.03 and 11, Sonic shall have the right to require Licensee to use Sonic’s accounting services for the term of this Agreement and any renewal, for which cost Licensee shall reimburse Sonic.  This requirement is in addition to all other rights Sonic may have under the terms of this Agreement and otherwise.

10.10.   Application of Payments .

Despite any payment designation by Licensee, Sonic may apply any payments received from Licensee pursuant to this Agreement to the oldest debt or in accordance with any payment application process prescribed by Sonic.

11.   ADVERTISING AND BRAND EXPENDITURES

11.01.                       Standard Programs

Recognizing the value of advertising and the importance of the standardization of advertising and brand programs to the furtherance of the goodwill and public image of the System, the parties agree as follows:

(a)           In the event the Non-Traditional Sonic lies within a DMA for which a Sonic-approved advertising cooperative has been formed, Licensee (i) shall join such advertising cooperative or such other advertising cooperative as may be designated by Sonic; (ii) shall abide by, follow, support, and promote the financial accounting requirements established by Sonic from time to time for advertising cooperatives, including complying with the format of financial reporting required by Sonic, acknowledging Sonic’s right to audit the advertising cooperative, cooperating fully with Sonic in the event of any such audit, and using either the cooperative accounting services of
27

 
 Sonic or another Sonic-approved accounting service; (iii) shall support the adoption of only those bylaws approved by Sonic for the advertising cooperative; and (iv) shall not purchase media outside of the advertising cooperative.  Licensee shall contribute to such advertising cooperative an amount required by such advertising cooperative on a schedule required by such advertising cooperative, provided that such contributions shall occur no less often than each calendar month and shall be of an amount not less than 3.25% of Licensee’s Gross Sales from the Non-Traditional Sonic during each partial or full calendar month.  If the DMA has, in Sonic’s sole discretion, been designated a “developing market,” Licensee shall instead contribute to the advertising cooperative not less than 5% of Licensee’s Gross Sales from the Non-Traditional Sonic during each partial or full calendar month; however, at any time Sonic may alternatively designate other uses for any portion of such developing market contribution if Sonic determines, in its sole discretion, that there is less need for advertising and a greater need for another use.

(b)           In the event there exists no Sonic-approved advertising cooperative in the DMA in which the Non-Traditional Sonic is located, Licensee shall promptly form an advertising cooperative for the DMA and further comply with the requirements set forth in Sections 11.01(a) and 11.01(c) and other provisions of this Agreement applicable to and related to advertising cooperatives.

(c)           Sonic or its designee shall maintain and administer a marketing fund for the Sonic System titled the System Marketing Fund (the “SMF”) as follows:

(i)           The SMF shall be administered by Sonic, and funds paid to the SMF shall be deposited in a separate bank account denoted as the System Marketing Fund. 

(ii)           The advertising cooperative of which Licensee is a member shall pay to the SMF a sum equal to 2% of Licensee’s Gross Sales (or higher as may be prescribed by Sonic) from the contribution paid by Licensee to the advertising cooperative.

(iii)           Sonic shall direct all marketing programs with sole discretion over the creative concepts, materials, and media used in such programs.  The Licensee acknowledges that Sonic and its designees undertake no obligation in administering the SMF to make expenditures for Licensee which are equivalent or proportionate to Licensee’s contribution.

(iv)           The SMF is intended to complement local marketing efforts by promoting the message of the Sonic brand to an expanded audience.  The SMF and all earnings thereof shall be used primarily to purchase national broadcast, print, interactive, and other media, sponsorships, and brand enhancement opportunities.  The SMF and its earnings shall not inure to the benefit of Sonic.

(v)           The SMF is not an asset of Sonic, and an independent certified public accountant designated by Sonic shall review the operation of the SMF annually, and the report shall be made available to Licensee
28

 
upon request.  Notwithstanding the foregoing, the body approved and designated by the Sonic as the body to consult with regarding the Sonic’s maintenance and administration of the SMF (such as the Franchise Advisory Council Executive Committee or its successor) may designate the independent public accountant to conduct the required review of the operation of the SMF if requested in writing at least 30 but not more than 60 days prior to the end of each fiscal year.

(vi)           Although Sonic intends the SMF to be of perpetual duration, Sonic maintains the right to terminate the SMF.  The SMF shall not be terminated, however, until all monies in the SMF have been expended for marketing and promotional purposes as aforesaid.

(vii)           On at least a quarterly basis, Sonic shall consult with the body approved and designated by Sonic (such as the Franchise Advisory Council Executive Committee or its successor) regarding Sonic’s maintenance and administration of the SMF and shall report to that body on the SMF’s operation.

(d)           For purposes of determining the amount which the Licensee is required to contribute pursuant to Sections 11.01(a) and 5.03, above, for each calendar month which is the subject of review, the parties hereto agree that the preceding calendar month shall be used in determining the Gross Sales of the Non-Traditional Sonic to determine the contributions or expenditures required hereunder.  For example, to determine the contributions or expenditures required for February, the parties hereto agree that they will look to the preceding January’s sales in order to determine the Gross Sales to determine the amount which must be contributed or expended by the Licensee under these Sections 11.01(a) and 5.03.  In the event the amounts required by Sections 11.01(a) and 5.03 are not paid in a timely fashion, Licensee shall pay Sonic in accordance with Section 10.05.

(e)           All advertising by Licensee in any medium which utilizes the Proprietary Marks or refers in any way to the Non-Traditional Sonic shall be conducted in a dignified manner and shall conform to such standards and requirements as Sonic may specify from time to time in writing.  Licensee shall submit to Sonic (in accordance with the notice provisions contained herein), for Sonic’s prior approval (except with respect to prices to be charged unless the terms of Section 6.05(c)(xxi) apply), samples of all advertising and promotional plans and materials that Licensee desires to use that use the Proprietary Marks or refer to the Non-Traditional Sonic and that have not been prepared or previously approved by Sonic.  If written disapproval thereof is not received by Licensee within 15 days from the date of receipt by Sonic of such materials, Sonic shall be deemed to have given the required approval.  Upon notice from Sonic, Licensee shall discontinue and/or remove any objectionable advertising material, whether or not same was previously approved by Sonic.  If said materials are not discontinued and/or removed within five days after notice, Sonic or its authorized agents, may, at any time, enter upon Licensee’s premises, or elsewhere, and remove any objectionable signs or advertising media and may keep or destroy such signs or other media without paying therefore, and without being guilty of trespass or other tort. 
29


(f)           Sonic may offer from time to time to provide, upon terms subject to the discretion of Sonic, approved local advertising and promotional plans and materials, including, without limitation, newspaper display space and distributed promotional materials.

(g)           Sonic or its designee shall maintain and administer a fund for the Sonic System titled the Sonic Brand Fund (the “SBF”) (formerly known as the Sonic Advertising Fund) as follows:

(i)           As provided in Section 5.03 hereof, Licensee shall pay a brand contribution fee to the SBF, which shall be deposited in a separate bank account denoted as the Sonic Brand Fund. 

(ii)           Sonic shall direct all brand programs with sole discretion over the concepts, materials, guidelines, and media used in such programs.  The SBF is intended to enhance the Sonic System and maximize general public recognition and acceptance of the Proprietary Marks for the benefit of the Sonic System, and the Licensee acknowledges that Sonic and its designees undertake no obligation in administering the SBF to make expenditures for Licensee which are equivalent or proportionate to Licensee’s contribution, and nothing in this Section 11.01 shall contravene the intent in Section 11.01(g)(iv).

(iii)           The SBF and all earnings thereof shall be used exclusively to meet any and all costs of maintaining, administering, directing, and preparing advertising and other promotional programs (including, without limitation, the cost of preparing and conducting television, radio, magazine, and newspaper advertising campaigns and other public relations activities; employing advertising agencies to assist therein; and providing promotional brochures and other marketing materials to licensees in the Sonic System) as well as any other purpose that promotes, enhances, or protects the Sonic System including, but not limited to, food safety programs, customer feedback programs, and Sonic Games.  All sums paid by licensees to the SBF shall be maintained in a separate account from the other funds of Sonic.  The SBF shall pay Sonic monthly an amount equal to 15% of the SBF’s receipts during the preceding month, but not to exceed Sonic’s actual administrative costs and overhead, if any, as Sonic may incur in activities reasonably related to the administration or direction of the SBF for the licensees and the Sonic System, including without limitation, conducting market research, preparing marketing, advertising, and other materials, and collecting and accounting for assessments for the SBF.  The SBF and its earnings shall not inure to the benefit of Sonic.

(iv)           All materials produced by the SBF shall be made available to all licensees on a regular basis at less than full production cost but including the cost of distribution.  This Section 11.01(g)(iv) shall not preclude Sonic from offering other materials not produced by the SBF upon terms subject to the discretion of Sonic.  (See Section 11.01(f).)
30


(v)           The SBF is not an asset of Sonic, and an independent certified public accountant designated by Sonic shall review the operation of the SBF annually, and the report shall be made available to Licensee upon request.  Notwithstanding the foregoing, the body approved and designated by Sonic as the body to consult with regarding Sonic’s maintenance and administration of the SBF (such as the Franchise Advisory Council Executive Committee or its successor) may designate the independent public accountant to conduct the required review of the operation of the SBF, if requested in writing at least 30 but not more than 60 days prior to the end of each fiscal year.

(vi)           Although Sonic intends the SBF to be of perpetual duration, Sonic maintains the right to terminate the SBF.  Such SBF shall not be terminated, however, until all monies in the SBF have been expended for purposes as aforesaid.

(vii)           On at least a quarterly basis, Sonic shall consult with the body approved and designated by Sonic (such as the Franchise Advisory Council Executive Committee or its successor) regarding Sonic’s maintenance and administration of the SBF and shall report to that body on the SBF’s operation.

(h)           Coupons created or developed by or for Licensee for use in promoting the Non-Traditional Sonic are subject to the provisions of Section 11.01(e).  Additionally, such coupons shall conspicuously state (i) the location(s) where the coupons will be accepted and (ii) an expiration date.  Licensee shall use its best efforts to ensure that coupons created or developed for the Non-Traditional Sonic or its market are not distributed outside the area of the Non-Traditional Sonic or its market.

11.02.                       Publicity

Sonic shall have the right to photograph the Non-Traditional Sonic’s exterior and/or interior, and the various foods served, and to use any such photographs in any of its publicity or advertising, and Licensee shall cooperate in securing such photographs and consent of Persons pictured.

12.  INSURANCE .

12.01.                       Insurance Amounts .

Prior to opening or taking possession of the Non-Traditional Sonic, the Licensee shall acquire and thereafter maintain insurance from insurance companies acceptable to Sonic.  The Licensee shall determine the appropriate limits of liability insurance and shall also have the right to specify other forms of insurance, but Sonic shall require the following minimum amounts and policy forms of insurance:

(a)           The Licensee shall maintain statutory worker’s compensation insurance and employer’s liability insurance having a minimum limit of liability of the greater of $500,000 or the minimum amount otherwise required by applicable state law.  Sonic shall accept participation in the Texas Sonic Employers Trade Association (“TSETA”) or in the non-subscriber program for Sonic drive-in restaurants and non-traditional Sonic restaurants located in Texas
31

 
 as long as Texas law does not require statutory worker’s compensation insurance.

(b)           The Licensee shall maintain commercial general liability insurance, including bodily injury, property damage, products, personal, and advertising injury coverage, on an occurrence policy form having a minimum per occurrence and general aggregate limits of at least $1,000,000 per location.

(c)           The Licensee shall maintain non-owned automobile liability insurance having a minimum limit of $1,000,000.  The automobile policy also shall provide coverage for owned automobiles if owned or leased in the name of the Licensee.

(d)           The Licensee shall maintain excess (umbrella) liability insurance having a minimum limit of $1,000,000 per occurrence / general aggregate per location.

(e)           The Licensee shall maintain business income interruption insurance with an endorsement providing for reimbursement for a minimum of 12 months to Sonic, any Sonic-administered fund, and the advertising cooperative of which the Licensee is a member, as applicable, for payments due under Sections 5.02, 5.03, and 11.01 stemming from an event causing closure of the Non-Traditional Sonic for 48 hours or more.

(f)           Sonic shall have the right to require the Licensee to increase the insurance specified above by giving the Licensee 60 days’ written notice in accordance with the notice provisions of this Agreement, and the Licensee shall comply no later than the first policy renewal date after that 60-day period.

12.02.                       Sonic as Additional Insured .

The Licensee shall name Sonic and Sonic’s subsidiaries and Affiliates as additional insureds and loss payees under the insurance policies specified in Sections 12.01(b), 12.01(c), 12.01(d), and 12.01(e), above, and under any insurance policy (including any employment practices liability insurance policy) that provides coverage for an event that could result in a lawsuit in which Sonic is named a defendant.  The Licensee’s policies shall constitute primary policies of insurance with regard to other insurance, shall contain a waiver of subrogation provision in favor of Sonic as it relates to the operation of the Non-Traditional Sonic, and shall provide for at least 30 days’ written notice to Sonic prior to their cancellation or amendment.

12.03.                       General Conditions .

Prior to opening or taking possession of the Non-Traditional Sonic and within 10 days of any request by Sonic, the Licensee shall furnish Sonic with certificates of insurance evidencing that the Licensee has obtained the required insurance in the form and amounts as specified above.  In addition, the Licensee shall deliver evidence of the continuation of the required insurance policies at least 30 days prior to the expiration dates of each existing insurance policy.  If the Licensee at any time fails to acquire and maintain the required insurance coverage, Sonic shall have the right, at the Licensee’s expense, to acquire and administer the required minimum insurance coverage on
32

 
behalf of the Licensee.  However, Sonic shall not have any obligation to assume the premium expense, and nothing in this Agreement shall constitute a guaranty by Sonic against any losses sustained by the Licensee.  Sonic may relieve itself of all duties with respect to the administration of any required insurance policies by giving 10 days’ written notice to the Licensee.

13.  TRANSFER OF INTEREST .

13.01.                       Assignment

The rights and duties created by this Agreement are personal to Licensee, and Sonic has granted the License in reliance on the collective character, skill, aptitude, and business and financial capacity of Licensee and Licensee’s principals.  Accordingly, except as may be otherwise permitted by this Section 13, neither Licensee nor any Person or entity with an interest in Licensee shall directly or indirectly, through one or more intermediaries, without Sonic’s prior written consent, sell, assign, transfer, convey, give away, pledge, mortgage, or otherwise encumber any direct or indirect interest in the Agreement; any interest in Licensee, if Licensee is a partnership, joint venture, closely held corporation, limited liability company, or other business entity; or any interest which, together with other related previous simultaneous or proposed transfers, constitutes a transfer of Control of Licensee where Licensee is registered under the Securities Exchange Act of 1934 or which is a trust.  Any such purported assignment occurring by operation of law or without Sonic’s prior written consent and pursuant to the terms of this Section 13, shall constitute a default of this Agreement by Licensee, and such purported assignment shall be null and void. 

13.02.                       Death or Permanent Incapacity of Licensee

Upon the death or permanent incapacity of Licensee, the interest of Licensee in the Agreement may be assigned either pursuant to the terms of Section 13.04 herein or to one or more of the following Persons:  Licensee’s spouse, heirs, or nearest relatives by blood or marriage, subject to the following conditions:  (1) If, in the sole discretion of Sonic, such persons shall be capable of conducting the Non-Traditional Sonic business in accordance with the terms and conditions of the Agreement, and (2) if such persons shall also execute an agreement by which they personally assume full and unconditional liability for and agree to perform all the terms and conditions of the Agreement to the same extent as the original Licensee.  In the event that Licensee’s heirs do not obtain the consent of Sonic as assignees of the Agreement, the personal representative of Licensee shall have the greater of 120 days or the completion of the probate of the Licensee’s estate to dispose of Licensee’s interest hereunder, which disposition shall be subject to all the terms and conditions for assignments under Section 13.04.  Licensee’s personal representative shall cooperate with Sonic to provide, in a timely manner, such documents as may be requested by Sonic, including without limitation Licensee’s death certificate and estate documents, to assist Sonic to determine or confirm Licensee’s assignees.

13.03.                       Assignment to Licensee’s Corporation or Other Business Entity

Sonic may, upon Licensee’s compliance with the following requirements, consent to an assignment of the Agreement to a corporation whose shares are owned and Controlled by Licensee or to another business entity, such as a limited liability company, whose interests are owned and Controlled by Licensee.  Such written materials shall be supplied to Sonic within 15 days after the request by Sonic.
33


(a)           Licensee’s corporation or other business entity shall be newly organized, and its charter or equivalent organizational document shall provide that its activities are confined exclusively to operating Sonic drive-in restaurants and/or non-traditional Sonic restaurants.

(b)           Licensee and Licensee’s corporation or other business entity shall maintain stop transfer instructions against the transfer on Licensee’s corporation’s or other business entity’s records of any securities or interests with any voting rights subject to the restrictions of Section 13 hereof, and shall issue no securities upon the face of which the following printed legend does not legibly and conspicuously appear. 

The transfer of this stock is subject to terms and conditions of one or more license agreements with Sonic Industries LLC.  Reference is made to said license agreement(s) and the restrictive provisions of the Articles and By-Laws of this corporation.  By agreeing to receive these securities, the transferee hereby agrees to be bound by the terms of such agreements, articles, and by-laws.

(c)           At any time upon Sonic’s request, Licensee and Licensee’s corporation or other business entity shall furnish Sonic with a list of all shareholders, partners, or members, as applicable, having an interest in Licensee’s corporation or other business entity, the percentage interest of such shareholder, partner, or member, and a list of all officers and directors or managers  in such form as Sonic may require. 

(d)           The name of Licensee’s corporation or other business entity shall not include any of the Proprietary Marks granted by the Agreement.  Licensee and Licensee’s corporation or other business entity shall not use any mark nor any name deceptively similar thereto in a public or private offering of its securities or other interest, except to reflect Licensee’s corporation’s or other business entity’s license relationship with Sonic.  Any prospectus or registration Licensee or Licensee’s corporation would propose to use in such a public or private offering shall be submitted to Sonic within a reasonable time prior to the effective date thereof for the purpose of permitting Sonic to verify compliance with this requirement by Licensee and Licensee’s corporation. 

(e)           Articles of Incorporation, By-Laws, and all other documents governing Licensee’s corporation or other business entity shall be forwarded to Sonic for approval.  Such documents shall recite that the issuance and transfer of any interest in Licensee’s corporation or other business entity are restricted by the terms of Section 13 of this Agreement.

(f)           Each shareholder, partner, or member, as applicable, of the Licensee’s corporation or other business entity shall personally guarantee performance under this Agreement and shall be personally bound by the terms thereof. 

(g)           Any breach of this Agreement by Licensee’s corporation or other business entity shall be deemed a breach of this Agreement by each shareholder, partner, or member, as applicable, of Licensee’s corporation or other business entity and each shareholder, partner, or member, as applicable, shall be personally and fully liable and obligated by any and all such breaches.
34


(h)           Licensee and Licensee’s corporation or other business entity shall submit to Sonic, prior to any assignment hereunder, a shareholders, partners, or members agreement, as applicable, executed by the Board of Directors or managers, as applicable, and ratified by all shareholders, partners, or members, which states that, except as may be permitted by Section 13 of this Agreement, no shares of stock or other interest in Licensee’s corporation or other business entity shall be issued, transferred, or assigned to any Person or entity without Sonic’s prior written consent. 

(i)           Each and every shareholder, partner, or member of Licensee’s corporation or other business entity or any party owning a security issued by, or owning any legal or equitable interest in Licensee’s corporation or other business entity or in any security convertible to a legal or equitable interest in Licensee’s corporation or other business entity shall meet those same standards of approval as an individual licensee shall be required to meet prior to being included as a licensee on a standard license agreement with Sonic.

13.04.                       Other Assignment

(a)           In addition to any assignments or contingent assignments contemplated by the terms of Sections 13.02 and 13.03, Licensee shall not sell, transfer, or assign the Agreement to any Person or Persons (including to another Licensee under this Agreement where more than one Person has executed this Agreement) without Sonic’s prior written consent.  Such consent shall not be unreasonably withheld.

(b)           In determining whether to grant or to withhold such consent, the following requirements must be met by Licensee:

(i)           All of Licensee’s accrued monetary obligations shall have been satisfied whether due under this Agreement or otherwise.

(ii)           Sonic and the Licensee execute a general release of each other, in a form satisfactory to Sonic, of any and all claims the Licensee may have against Sonic and its Affiliates, including (without limitation) all claims arising under any federal, state, or local law, rule, or ordinance, but excluding (as to Sonic) any claims against the Licensee for (a) unpaid moneys due Sonic, its Affiliates, or Sonic-approved advertising cooperatives, (b) the violation of the legal rights of Sonic or its Affiliates regarding the Proprietary Marks, (c) the violation of any of the covenants contained in Section 16.01 of this Agreement, (d) the violation of any duty under this Agreement to insure, defend, or indemnify Sonic or its Affiliates or to hold Sonic or its Affiliates harmless, and (e) the violation of any other agreement with Sonic or its Affiliates.  Sonic may waive the requirements of this Section 13.04(b)(ii) at Sonic’s election.
35


(iii)           Licensee shall not be in material breach of this Agreement or any other agreement between Sonic and Licensee. 

(iv)           Assignee (or the assignee’s management, as the case may be) shall at Sonic’s sole discretion enroll in and successfully complete such training programs as Sonic shall at that time designate according to Section 6.04 hereof.

(v)           Sonic shall consider of each prospective transferee, by way of illustration, the following:  (a) work experience and aptitude, (b) financial background, (c) character, (d) ability to personally devote full time and best efforts to managing the Non-Traditional Sonic, (e) residence in the locality of the Non-Traditional Sonic, (f) equity interest in the Non-Traditional Sonic, (g) conflicting interests, and (h) such other criteria and conditions as Sonic shall apply in the case of an application for a new license to operate a non-traditional Sonic restaurant.  Sonic’s consent shall also be conditioned upon such transferee’s execution of an agreement by which transferee personally assumes full and unconditional liability for and agrees to perform from the date of such transfer all obligations, covenants, and agreements contained in this Agreement to the same extent as if transferee had been an original party to the Agreement.  At Sonic’s election, Sonic may alternatively allow such transferee to sign the then-current form of license agreement for non-traditional Sonic restaurants subject to all terms, conditions, obligations, and covenants contained in that form of license agreement, including the full term of that license agreement.

(c)           Following License’s sale, assignment, or transfer of this Agreement, Licensee shall remain subject to Section 16.01 of this Agreement.

13.05.                       Sonic’s Right of First Refusal

(a)           If Licensee or any Person or entity with an interest in Licensee has received and desires to accept any bona fide offer to purchase all or any part of Licensee’s interest in this Agreement or in Licensee and the transfer of such interest would: (1) result in a change of Control of Licensee of this Agreement or (2) constitute a transfer of interest held by a Controlling Person of Licensee or of the Agreement, Licensee or such Person shall notify Sonic in writing of each such offer, with such notice including the name and address of the proposed purchaser, the amount and terms of the proposed purchase price, a copy of the proposed purchase contract (signed by the parties, but expressly subject to Sonic’s right of first refusal), and all other terms and conditions of such offer.  Sonic shall have the right and option, exercisable within 20 days after Sonic’s receipt of such written notification, to send written notice to Licensee or such Person or entity that Sonic or its designee intends to purchase the interest which is proposed to be transferred on the same terms and conditions offered by the third party, provided that Sonic has the right to substitute cash for any consideration offered by the third party.  Any material change in the terms of an offer prior to closing shall cause it to be deemed a new offer, subject to the same right of first refusal by Sonic or its designee as in the initial offer; provided, however, that such new offer shall not affect Sonic’s right and option, within 20 days of notice to Sonic of the initial offer, to provide notice of its intent to purchase the interest on the terms and conditions in the initial offer.  Sonic’s failure to exercise its option shall not constitute a waiver of any other provision of this Agreement, including any of the requirements of this Section 13 with respect to the proposed transfer. 
36

 
 Silence on the part of Sonic shall constitute rejection.  If the proposed sale includes assets of Licensee not related to the operation of the Non-Traditional Sonic, Sonic may purchase not only the assets related to the operation of the Non-Traditional Sonic, but may also purchase the other assets.  An equitable purchase price shall be allocated to each asset included in the proposed sale.  In any purchase by Sonic pursuant to this Section 13(a), Sonic shall have the right to require the seller to make customary representations and warranties.

(b)           The election by Sonic not to exercise its right of first refusal as to any offer shall not affect its right of first refusal as to any subsequent offer. 

(c)           Any sale or attempted sale effected without first giving Sonic the right of first refusal described above shall be void and of no force and effect. 

(d)           If Sonic does not accept the offer to purchase the Non-Traditional Sonic, Licensee may conclude the sale to the purchaser who made the offer so long as the terms and conditions of such sale are identical to those originally offered to Sonic; provided, however, that Sonic’s approval of the assignee be first obtained, which consent shall not be unreasonably withheld upon compliance with the conditions on assignment imposed by this Agreement.

(e)           The provisions of this Section 13.05 shall not apply to any proposed transfers to members of the Licensee’s immediate family.  For the purposes of this Section 13.05, a member of the Licensee’s immediate family shall mean the Licensee’s spouse, children (by birth or adoption), and stepchildren.  In addition, the provisions of this Section 13.05 shall not apply to any proposed transfers to a Person who already owns an interest (directly or indirectly) in this Agreement as long as the transfer will not result in a change in Control of the Licensee or the Agreement.

13.06.                       Consent to Assignments

With regard to any transfer, assignment, or pledge of any interest in this Agreement or in the Licensee pursuant to the foregoing provisions of this Section 13, Sonic shall not withhold its consent unreasonably as long as the proposed transfer, assignment, or pledge otherwise complies with the other requirements set forth in this Section 13.

14.  DEFAULT AND TERMINATION .

14.01.                       Optional Termination

Licensee shall be deemed to be in breach of this Agreement and Sonic may, at its option, terminate this Agreement and all rights granted herein at any time during the term hereof without affording Licensee any opportunity to cure the breach, effective immediately upon Licensee’s receipt of a notice of termination, upon the occurrence of any of the following events:
 
(a)           Licensee shall become insolvent. 
37


(b)           Licensee, either personally, through an equity owner, or through Licensee’s attorney, shall give oral or written notice to Sonic of Licensee’s intent to file a voluntary petition under any bankruptcy law. 

(c)           A final judgment aggregating in excess of $5,000 against the Non-Traditional Sonic or property connected with the Non-Traditional Sonic which remains unpaid for thirty days.

(d)           Suit to foreclose any lien against any assets of the Non-Traditional Sonic is instituted against Licensee and (i) is not dismissed within 30 days, (ii) such lien is not contested and challenged through the applicable administrative agencies or courts, or (iii) a bond is not posted (if such remedy is available) to delay any such foreclosure and guarantee performance. 

(e)           The assets of the Non-Traditional Sonic are sold after being levied thereupon by sheriff, marshal, or a constable. 

(f)           Transfer of this Agreement, in whole or in part, is effected in any manner inconsistent with Section 13 hereof. 

(g)           The assets, property, or interests of Licensee are blocked under any law, ordinance, or regulation relating to terrorist activities or Licensee is otherwise in violation of any such law, ordinance, or regulation.

(h)           If Licensee ceases to operate the Non-Traditional Sonic or otherwise abandons the Non-Traditional Sonic (other than closure permitted pursuant to Section 6.05(c)(v) herein) or forfeits the legal right to do or transact business at the location licensed herein.  However, a default under this Agreement shall not occur and the Licensee shall have the right to terminate this Agreement upon written notice to Sonic after the Licensee loses its lease or other legal right to conduct business at the location of the Non-Traditional Sonic if and only if the loss of the Licensee’s lease or legal right to conduct business did not result from the Licensee’s breach of its obligations or failure to exercise any contractual or legal rights available to it.

(i)           If Licensee is convicted of a felony, a crime involving moral turpitude, or any other crime or offense that is reasonably likely, in the sole opinion of Sonic, to adversely affect the Sonic System, the Proprietary Marks, the goodwill associated therewith, or Sonic’s rights therein.

(j)           If Licensee misuses or makes any unauthorized use of any of the Proprietary Marks or any other identifying characteristic of the Sonic System or otherwise materially impairs the goodwill associated therewith or Sonic’s rights therein, and the Licensee will not or cannot cure the default within 30 days.

(k)           If Licensee improperly discloses trade secrets or confidential information, and the Licensee will not or cannot cure the default within 30 days.

(l)           If continued operation of the Non-Traditional Sonic might endanger public health or safety.  In such case, whether or not Sonic elects to terminate this Agreement, Sonic may immediately close the Non-Traditional Sonic unless and until the situation is, in Sonic’s judgment, satisfactorily resolved.
38


(m)           If Licensee knowingly or through gross negligence maintains false books or records or knowingly or through gross negligence submits any false report to Sonic. 

(n)           If Licensee is in default of this Agreement three or more times in any given 12-month period, whether or not such default is cured.

14.02.                       Period to Cure

Except as provided in Section 14.01, Licensee shall have 30 days after receipt from Sonic of a written notice of breach of this Agreement or such notice period as is required by the law of the state where the Non-Traditional Sonic is located, within which to remedy any breach hereunder.  However, this period to cure will not be available to Licensee, and Sonic will not be required to delay termination of this Agreement, where the breach involved is one which Licensee cannot cure within the prescribed cure period or is one which is impossible to cure.  Licensee shall be in breach hereunder for any failure to comply with any of the terms of this Agreement or to carry out the terms of this Agreement.  Such breach shall include, but shall not be limited to, the occurrence of any of the following illustrative events:

(a)           If the Licensee or Persons Controlling, Controlled by, or under common Control with Licensee fail to pay any past due amounts owed to Sonic, whether for the Non-Traditional Sonic or otherwise.

(b)           If Licensee fails to promptly pay, or repeatedly delays the prompt payment of, undisputed invoices from Licensee’s suppliers or in the remittance of rent and property tax as required in Licensee’s lease.

(c)           If Licensee fails to maintain and operate the Non-Traditional Sonic in a good, clean, and wholesome manner or otherwise is not in compliance with the standards prescribed by the Sonic System.  In such case, whether or not Sonic elects to terminate this Agreement, Sonic may immediately close the Non-Traditional Sonic unless and until the failure or noncompliance is cured.

(d)           If Licensee attempts to assign or transfer any interest in this Agreement in violation of Section 13 herein.

(e)           If Licensee denies Sonic the right to inspect the Non-Traditional Sonic at reasonable times, which includes the right to photograph the interior and exterior of the Non-Traditional Sonic in its entirety.

(f)           If Licensee breaches any other requirement set forth in this Agreement.

(g)           If Licensee, upon the destruction of the Non-Traditional Sonic, fails to rebuild the licensed premises and resume operation within a reasonable time (cessation of the business from a licensed premises shall not constitute default of this Agreement if caused by condemnation, expiration of a location lease pursuant to its terms at execution, or when failure to rebuild following destruction of the licensed premises is prohibited by law or the location lease). 
39


(h)           If Licensee’s conduct or the operation of the Non-Traditional Sonic by Licensee, in Sonic’s judgment, damages or threatens to damage the goodwill of the Sonic System or the Sonic brand.  In such case, whether or not Sonic elects to terminate this Agreement, Sonic may immediately close the Non-Traditional Sonic unless and until the situation, in Sonic’s judgment, is satisfactorily resolved.

(i)           If Licensee fails to correct any deficiency or unsatisfactory condition within the time period required by Section 6.05(b).

14.03.                       Resolution of Disputes .

The following provisions shall apply to any controversy between the Licensee and Sonic (including an Affiliate of Sonic) and relating (a) to this Agreement (including any claim that any part of this Agreement is invalid, illegal, or otherwise void or voidable and any claim that a controversy is not subject to arbitration), (b) to the parties’ business activities conducted as a result of this Agreement, or (c) the parties’ relationship or business dealings with one another generally, including all disputes and litigation pending or in existence as of the date of this Agreement.

(a)            Negotiation .

The parties first shall use their best efforts to discuss and negotiate a resolution of the controversy.

(b)            Mediation .

If the efforts to negotiate a resolution do not succeed, the parties shall submit the controversy to mediation in Oklahoma City, Oklahoma, by a mediation firm agreeable to the parties or by the American Arbitration Association, if the parties cannot agree.

(c)            Arbitration .

If the efforts to negotiate and mediate a resolution do not succeed, the parties shall resolve the controversy by final and binding arbitration in accordance with the Rules for Commercial Arbitration (the “Rules”) of the American Arbitration Association in effect at the time of the execution of this Agreement and pursuant to the following additional provisions:

(i)            Applicable Law .  The Federal Arbitration Act (the “Federal Act”), as supplemented by the Oklahoma Arbitration Act (to the extent not inconsistent with the Federal Act), shall apply to the arbitration.

(ii)            Selection of Arbitrator .  The parties shall select one arbitrator within 10 days after the filing of a demand and submission in accordance with the Rules.
40


(iii)            Location of Arbitration .  The arbitration shall take place in Oklahoma City, Oklahoma, and the arbitrator shall issue any award at the place of arbitration.  The arbitrator may conduct hearings and meetings at any other place agreeable to the parties or, upon the motion of a party, determined by the arbitrator as necessary to obtain significant testimony or evidence.

(iv)            Scope of Proceeding .  The parties shall conduct any arbitration proceeding and resolve any controversy on an individual basis only and not on a class-wide, multiple-party, or similar basis.

(v)            Enforcement of Award .  The prevailing party shall have the right to enter the award of the arbitrator in any court having jurisdiction over one or more of the parties or their assets.  The parties specifically waive any right they may have to apply to any court for relief from the provisions of this Agreement or from any decision of the arbitrator made prior to the award.  The award of the arbitrator shall not have any precedential or collateral estoppel effect on any other controversy involving Sonic or its Affiliates.

(d)            Excluded Controversies .

At the election of Sonic or its Affiliate, the provisions of this Section 14.03 shall not apply to any controversies relating to any fee due Sonic or its Affiliate; any promissory note payments due Sonic or its Affiliate; or any trade payables due Sonic or its Affiliate as a result of the purchase of equipment, goods, or supplies.  At the election of Sonic or its Affiliate, the provisions of this Section 14.03 also shall not apply to any controversies relating to the use and protection of the Proprietary Marks or the Sonic System, including (without limitation) Sonic’s right to apply to any court of competent jurisdiction for appropriate injunctive relief for the infringement of the Proprietary Marks or the Sonic System.

(e)            Attorneys’ Fees and Costs .

The prevailing party to the arbitration shall have the right to an award of its reasonable attorneys’ fees and costs incurred after the filing of the demand and submission, including a portion of the direct costs of any in-house legal staff reasonably allocable to the time devoted to the arbitration.

15.  OBLIGATIONS UPON TERMINATION .

15.01.                       Effect of Termination, Cancellation, or Expiration of this Agreement .

Except as otherwise authorized pursuant to the terms of any other license agreement between Sonic and the Licensee, the Licensee shall comply with the following provisions after the expiration or termination of this Agreement and the License:

(a)           Licensee, upon any termination, cancellation, or expiration of this Agreement, shall promptly pay to Sonic and Sonic’s subsidiaries any and all sums owed to them.  In the event of termination for any breach by Licensee, such sums shall include all damages, costs, and expenses, including reasonable attorneys’ fees, incurred by Sonic as a result of the breach, which obligation shall give rise to and remain, until paid in full, a lien in favor of
41

 
Sonic against any and all of the assets of the Non-Traditional Sonic owned by Licensee at the time of default.

(b)           Upon termination, cancellation, or expiration hereof for any reason, the License and all Licensee’s rights hereunder shall terminate. Licensee shall not thereafter use or adopt any trade secrets disclosed to Licensee hereunder or any paper goods, emblems, signs, displays, menu housings, table ordering stations, or other property on which Sonic’s name or Proprietary Marks are imprinted or otherwise form a part thereof or any confusing simulations thereof.  Licensee shall not otherwise use or duplicate the Sonic System or any portion thereof or assist others to do so. Licensee shall remove from the premises all signs, emblems, and displays identifying it as associated with Sonic or the Sonic System or which constitute or display any Proprietary Mark and shall also remove from the premises all menu housings and PAYS or other Sonic proprietary equipment.  Licensee shall cease to use and shall return to Sonic all copies of the Sonic Operations Manual , instructions, or materials delivered to Licensee hereunder.

(c)           Upon termination, cancellation, or expiration of this Agreement, unless otherwise directed in writing by Sonic, Licensee shall change the exterior and interior design and the decor of said premises, including, but not limited to, changing the color scheme, and shall make or cause to be made such changes in signs and structures (excluding major structural changes) as Sonic shall reasonably direct so as to effectively distinguish the same from its former appearance and from any other non-traditional Sonic restaurant or Sonic drive-in restaurant, and if Licensee fails or refuses to comply herewith, then Sonic shall have the right to enter upon the premises where said business is being conducted without being guilty of trespass or any other tort for the purpose of making or causing to be made such changes required by Sections 15.01(b) or 15.01(c) at the expense of Licensee, which expense Licensee agrees to pay on demand.

(d)           Upon termination, cancellation, or expiration of this Agreement, in the event Licensee is the owner of any signage containing or incorporating any of the Proprietary Marks, Sonic shall have an irrevocable option to purchase the signage for its fair market value.  In any event, Licensee shall not thereafter use any signage displaying Sonic’s name or Proprietary Marks or which primarily display the colors used in any other such sign at any other non-traditional Sonic restaurant or Sonic drive-in restaurant (see Section 15.04 for determining fair market value).  Any agent, servant, or employee of Sonic may remove the signage or any objectionable signs or advertising from the Non-Traditional Sonic without being guilty of trespass or other tort, and Licensee shall be liable for Sonic’s costs plus attorneys’ fees for any interference therewith.

(e)           Upon termination, cancellation, or expiration of this Agreement, Licensee shall cease to hold Licensee out in any way as a licensee of Sonic or to do anything which would indicate any relationship between Licensee and Sonic.

(f)           Notwithstanding the provisions contained in this Section 15.01, Licensee shall be solely responsible for the cost of any removals or changes required by this Section 15.01.  Licensee hereby releases Sonic and its agents, servants, and employees from and agrees to indemnify, defend, and hold harmless Sonic and its agents, servants, and employees against any cost, damage, liability, or expense (including attorneys’ fees) arising out of or
42

 
 resulting from Licensee granting Sonic and its agents, servants, and employees access to the premises, including without limitation any cost, damage, liability, or expense arising out of the removal of any sign, equipment, fixture, personal property, or other property from the premises or modification of the premises pursuant to this Agreement.

(g)           The covenants set forth in this Section 15.01 shall survive the termination, cancellation, or expiration of this Agreement.

(h)           All rights, claims, and indebtedness which may accrue to Sonic prior to termination, cancellation, or expiration of this Agreement shall survive termination, cancellation, or expiration and be enforceable by Sonic.

(i)           Licensee shall complete all modifications required by this Section 15.01 within 30 days after this Agreement has been terminated or canceled or has expired.  Licensee and Sonic agree that Sonic’s damages resulting from a breach of this Section 15.01 are difficult to estimate or determine accurately.  In the event of such breach by Licensee of the provisions of this Section 15.01, Licensee, in addition to any and all other remedies available to Sonic herein and elsewhere, will pay Sonic double the royalty, brand, and advertising fees prescribed in this Agreement until Licensee satisfactorily de-identifies the restaurant premises in the manner prescribed by this Section.  This payment shall constitute liquidated damages and shall not be construed as a penalty since such payment has been agreed to by Licensee and Sonic as reasonably representative of the actual damage sustained by Sonic in the event of such a breach.  The liquidated damages shall start on the 31st day after this Agreement has been terminated or canceled or has expired.  These liquidated damages shall not constitute either a waiver of Licensee’s obligation to de-identify or a license to use the Proprietary Marks or the Sonic System.  These remedies will be in addition to any other remedies Sonic may have hereunder or under federal or state law.

15.02.                       Sonic’s Option to Purchase

(a)           Upon termination, cancellation, or expiration hereof, Sonic shall have the right and option to purchase all or any patented, special, or unique non-traditional Sonic restaurant equipment, menu housings, table order stations, signs, menus, and supplies of Licensee at their fair market value (see Section 15.04 for determining fair market value).  Such right or option of Sonic shall be exercised as provided in Section 15.02(b).  If Sonic elects to exercise any option to purchase herein provided, it shall have the right to set off all amounts due from Licensee to Sonic and one-half of the cost of any appraisals against any payment therefor.

(b)           In the case of termination by expiration, Sonic shall exercise Sonic’s option contained in this Section 15.02 by giving Licensee written notice at least 30 days prior to expiration.  In the case of termination for any other reason, Sonic shall exercise its option by giving Licensee written notice within 30 days after termination.

(c)           Sonic’s option hereunder is without prejudice to Sonic’s rights under any security agreement held by Sonic or with respect to which Sonic may have a guarantor’s or surety’s subrogation interest.  If Sonic exercises this option, Sonic may pay any debt which Licensee owes to Sonic and shall remit any balance of the purchase price to Licensee.  There shall be no allowance for goodwill.
43


15.03.                       Sonic’s Obligation to Purchase

(a)           Upon termination, cancellation, or expiration of this Agreement, if Licensee desires to sell Licensee’s unbroken inventory packages of approved imprinted items and supplies with Proprietary Marks to Sonic, excluding all food items, Sonic shall have the obligation to repurchase such items at Licensee’s cost.

(b)           If Licensee desires to sell such items to Sonic, Licensee shall, not later than 10 days after termination, cancellation, or expiration of this Agreement, give Sonic 10 days written notice of Licensee’s election and, at the expiration of the 10 days notice period, deliver such items at Licensee’s expense with an itemized inventory to the nearest Sonic drive-in restaurant or non-traditional Sonic restaurant designated by Sonic. Sonic agrees to pay Licensee or credit Licensee’s account within seven days after said delivery.

15.04.                       Fair Market Value Determination

If the parties cannot agree on the fair market value of any item subject to an option to purchase in this Agreement within a reasonable time, one appraiser shall be designated by Sonic, one appraiser shall be designated by Licensee, and the two appraisers shall designate an independent appraiser, and the valuation of such third appraiser alone shall be binding.  Sonic and the Licensee each shall pay one-half of the cost of any appraisals required pursuant to this Section 15.04.

16.  COVENANTS .

16.01.                       Restrictions on Licensee

Licensee agrees and covenants as follows:

(a)           During the term of this Agreement, Licensee shall not directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, limited liability companies, partnerships, trusts, unincorporated associations, joint ventures, or other business entities) in, (iii) loan money to, or (iv) become landlord of any restaurant business which has a menu similar to that of a non-traditional Sonic restaurant or Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by non-traditional Sonic restaurants or Sonic drive-in restaurants) or which has an appearance similar to that of a non-traditional Sonic restaurant or Sonic drive-in restaurant (such as the color pattern or other items that are customarily used by a non-traditional Sonic restaurant or Sonic drive-in restaurant).

(b)           Licensee shall not, for a period of 18 months after termination of this Agreement for any reason, directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, limited liability companies, partnerships, trusts, unincorporated associations, joint ventures, or other business entities) in, (iii) loan money to, or (iv) become a landlord of any restaurant business
44

 
which has a menu similar to that of a non-traditional Sonic restaurant or Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by non-traditional Sonic restaurants or Sonic drive-in restaurants) or which has an appearance similar to that of a non-traditional Sonic restaurant or Sonic drive-in restaurant (such as the color pattern or other items that are customarily used by a non-traditional Sonic restaurant or Sonic drive-in restaurant), and which (i) is within a three-mile radius of the Non-Traditional Sonic formerly licensed by this Agreement, (ii) is within a 20-mile radius of any non-traditional Sonic restaurant or Sonic drive-in restaurant in operation or under construction, or (iii) is located within the MSA of the Non-Traditional Sonic.

(c)           Licensee shall not appropriate, use, or duplicate the Sonic System, or any portion thereof, for use at any other restaurant business.

(d)           During the term of this Agreement, Licensee shall (i) use Licensee’s best efforts to promote the business of the Non-Traditional Sonic and (ii) not engage in any other business or activity that might detract from, interfere with, or be detrimental to the Sonic System or Licensee’s full and timely performance under this Agreement.

(h)           The parties agree that each of the foregoing covenants shall be construed as independent of any covenant or provision of this Agreement.  If all or any portion of a covenant in this Section 16 is held unreasonable or unenforceable by an arbitrator, court, or agency having valid jurisdiction in an unappealed final decision to which Sonic is a party, Licensee expressly agrees to be bound by any lesser covenant subsumed with the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this Section 16.

(j)           Licensee expressly agrees that the existence of any claims Licensee may have against Sonic, whether or not arising from this Agreement, shall not constitute a defense to the enforcement by Sonic of the covenants in this Section 16.

(k)           Licensee acknowledges that Licensee’s violation of the terms of this Section 16 would result in irreparable injury to Sonic for which no adequate remedy at law is available, and Licensee accordingly consents to the ex parte issuance of restraining orders, temporary and permanent injunctions, and cease and desist orders prohibiting any conduct by Licensee in violation of the terms of this Section 16.

16.02.                       Covenants by Others

At the time of execution of this Agreement, Licensee shall obtain covenants similar in substance to those set forth in this Section 16 (including covenants applicable upon the termination of a Person’s relationship with
 
45

Licensee) from all officers, directors, and holders of a direct or indirect beneficial ownership interest in Licensee.  With respect to each Person who becomes associated with Licensee in one of the capacities enumerated above subsequent to execution of this Agreement, Licensee shall require and obtain such covenants.  In no event shall any Person enumerated be granted access to any confidential aspect of the Sonic System or the Non-Traditional Sonic prior to execution of such a covenant.  All covenants required by this Section 16.02 shall include, without limitation, specific identification of Sonic as a third-party beneficiary of such covenants with the independent right to enforce them.  Failure by Licensee to obtain execution of a covenant required by this Section 16.02 shall constitute a breach of this Agreement.   Licensee shall furnish to Sonic executed copies of such covenants within 10 days of such request by Sonic.

17.  INDEPENDENT CONTRACTOR & INDEMNIFICATION .

17.01.                       Licensee not an Agent of Sonic; Employment Matters

It is understood and agreed that this Agreement does not create a fiduciary relationship between Sonic and Licensee, and that nothing herein contained shall constitute Licensee as the agent, legal representative, partner, joint venturer, or employee of Sonic. Licensee is, and shall remain, an independent contractor responsible for all obligations and liabilities of, and for all loss or damage to, the Non-Traditional Sonic and its business, including any personal property, equipment, fixtures, or real property connected therewith and for all claims or demands based on damage or destruction of property or based on injury, illness, or death of any person or persons, directly or indirectly, resulting from the operation of the Non-Traditional Sonic. Licensee’s responsibility for the Non-Traditional Sonic and its business shall include responsibility for all of the employment matters (including employment decisions) of the Non-Traditional Sonic and for compliance with federal, state, and local laws and regulations relating to such employment matters.  Sonic will refer all complaints related to employment matters of the Non-Traditional Sonic to Licensee for resolution, and the indemnification and hold harmless provisions of Section 17.03 shall apply to all employment matters of the Non-Traditional Sonic.

17.02.                       Cost of Enforcement

If Sonic or Sonic’s Affiliates become involved in any action at law or in equity or in any proceeding opposing Licensee to secure, enforce, protect, or defend Sonic’s or Sonic’s Affiliates’ rights and remedies under this Agreement, in addition to any judgment entered in their favor, Sonic or Sonic’s Affiliates, as applicable, shall be entitled to demand of and (in the event Sonic or Sonic’s Affiliates, as applicable, prevail in such actions or proceedings) recover from Licensee the reasonable costs, expenses, and attorneys’ fees incurred by Sonic or Sonic's Affiliates.  If, in such applicable final judgment Sonic does not prevail, Licensee shall be entitled to recover from Sonic in any such action or proceeding the reasonable costs, expenses, and attorneys’ fees incurred by Licensee.

17.03.                       Indemnification

If Sonic or Sonic’s Affiliates shall be subject to any claim, demand, or penalty or become a party to any suit or other judicial or administrative proceeding by reason of any claimed act or omission by Licensee or Licensee’s employees or agents, or by reason of any act occurring at the Non-Traditional Sonic, or by reason of any act or omission with respect to the business or operation of the Non-Traditional Sonic, Licensee shall indemnify and hold Sonic and Sonic’s Affiliates harmless against all judgments, settlements, penalties, and expenses, including attorneys’ fees, court costs, and other expenses of litigation or administrative proceeding, incurred by or imposed on Sonic or Sonic’s Affiliates in connection with the investigation or defense relating to such claim or litigation or administrative proceeding and, at the election of Sonic, Licensee shall also defend Sonic and Sonic’s Affiliates.  The Licensee shall
46

 
 not have any obligation to indemnify, defend, or hold harmless Sonic or any other Person pursuant to the provisions of this Section 17.03 to extent the obligation arises predominantly as a proximate result of Sonic’s act or failure to act when under a duty to act.

18.  EFFECT OF WAIVERS .

No waiver by Sonic of any breach or series of breaches of this Agreement shall constitute a waiver of any subsequent breach or waiver of the terms of this Agreement.

19.  NOTICES

19.01.                       Delivery .

Any notice required hereunder, if not specified, shall be in writing and shall be delivered by (i) personal service, (ii) by overnight, receipted delivery service, (iii) by United States certified or registered mail, with postage prepaid, addressed to Licensee at the Non-Traditional Sonic or at such other address of Licensee then appearing on the records of Sonic or to Sonic addressed to the attention of Sonic’s General Counsel at 300 Johnny Bench Drive, Oklahoma City, Oklahoma 73104, or at the subsequent address of Sonic’s corporate headquarters.  Either party, by a similar written notice, may change the address to which notices shall be sent. Notice shall be deemed effective on the date of delivery, if delivery is by personal service or overnight delivery, or three business days after the party places the notice in the United States mail, if delivery is by certified or registered mail.

19.02.                       Failure to Accept .

If Sonic is unable to give actual notice of any breach or termination of this Agreement because Licensee has failed to provide Sonic with a current address, because Licensee fails to accept or pick up this mailed notice, or due to any reason which is not the fault of Sonic, then such notice shall be deemed as given when Sonic sends such notice by overnight receipted delivery service or registered or certified mail, postage prepaid.

19.03.                       Licensee’s Principal .

Licensee has designated on the first page of this Agreement a Principal to serve as the party receiving primary notice on behalf of the Licensee.  Each Licensee hereby agrees that Sonic may send its notices and communications under this Agreement to the Principal provided for herein, that Sonic may use the Principal as its primary contact for purposes of communications and notices permitted or required hereunder, and that all communications and notices given by Sonic to the Principal will be just as effective on each Licensee as though the same had been given to each Licensee.
47


20.  ENTIRE AGREEMENT .

20.01.                       No Oral Agreements

This Agreement and all addenda, appendices, and amendments hereto constitute the entire agreement between the parties and supersede all prior and contemporaneous, oral or written agreements or understandings of the parties. 

20.02.                       Scope and Modification of Agreement

No interpretation, change, termination, or waiver of any of the provisions hereof shall be binding upon Sonic unless in writing signed by an officer of Sonic.  No modification, waiver, termination, rescission, discharge, or cancellation of this Agreement shall affect the right of any party hereto to enforce any claim or right hereunder, whether or not liquidated, which occurred prior to the date of such modification, waiver, termination, rescission, discharge, or cancellation.

21.  CONSTRUCTION AND SEVERABILITY .

21.01.                       Interpretation

The recitals shall be considered a part of this Agreement.  Section and subsection captions are used only for convenience and are in no way to be construed as part of this Agreement or as a limitation of the scope of the particular sections, subsections, paragraphs, and subparagraphs to which they refer.  Words of any gender used in this Agreement shall include any other gender, and words in the singular shall include the plural where the context requires.

21.02.                       Invalidity

If any part of this Agreement for any reason shall be declared invalid, such decision shall not affect the validity of any remaining portion, which shall remain in full force and effect.  In the event any material provision of this Agreement shall be stricken or declared invalid, Sonic reserves the right to terminate this Agreement.

21.03.                       Binding Effect

This Agreement shall be binding upon the parties, and their heirs, executors, personal representatives, successors, and assigns.

21.04.                       Survival

Any provisions of this Agreement which impose an obligation after termination or expiration of this Agreement shall survive the termination or expiration of this Agreement and be binding on the parties.
48


21.05.                       Liability of Multiple Licensees

If Licensee consists of more than one Person or entity, each such Person and entity, and each proprietor, partner, member, and shareholder of each such entity, shall be jointly and severally liable for any and all of Licensee’s obligations and prohibitions under this Agreement.  Consequently, if and when a Person or entity as Licensee is in breach of this Agreement and fails or is unable to cure such breach in a timely manner, Sonic may terminate the rights of the so-affected Person or entity under this Agreement whereby this Agreement is terminated as to only such Person or entity while remaining fully effective as to all other Persons and entities remaining as Licensee on this Agreement.  This Person or entity removed as Licensee shall remain jointly and severally obligated with the Persons and entities remaining as Licensee for any and all obligations and liabilities of Licensee which occurred or accrued through the date of removal of said Person or entity.

22.  BUSINESS ENTITY LICENSEES

22.01.                       Corporate, Partnership, and Limited Liability Company Licensees .

If the Licensee is a corporation, partnership, or limited liability company, the Licensee shall comply with the following provisions:

(a)            Purpose .  The certificate of incorporation and bylaws, partnership agreement and certificate of limited partnership (if applicable), or articles of organization and operating agreement of the Licensee (collectively, “Organizational Documents”), as applicable, shall provide that the purpose of the business entity shall consist only in the development, ownership, operation, and maintenance of Sonic drive-in restaurants and/or non-traditional Sonic restaurants.

(b)            Transfer Restrictions .  The Organizational Documents of the Licensee shall provide that the Licensee shall not issue any additional capital stock or interest of the Licensee and that no stockholder, partner, or member, as applicable, may transfer, assign, or pledge any issued capital stock or interest of the Licensee without the prior, written consent of Sonic, and each stock certificate, if applicable, issued to evidence the capital stock of the Licensee shall contain a legend disclosing the foregoing restriction.  Sonic shall not withhold its consent to the issuance of additional capital stock or interest or a transfer, assignment, or pledge without a reasonable basis.  In giving its consent, Sonic shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the capital stock or interest execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Schedule I to this Agreement.

(c)            Stockholder/Partner/Member Guaranty .  Each stockholder, partner, or member of the Licensee, as applicable, shall execute the Guaranty and Restriction Agreement attached as Schedule I to this Agreement.

(d)            Documents .  Prior to Sonic’s execution of this Agreement, the Licensee shall deliver to Sonic copies of its Organizational Documents and issued stock certificates, as applicable, reflecting compliance with the provisions of this Section 22.01.
49


22.02.                       Other Entity Licensee .

If the Licensee is any other form of business entity, the Licensee shall deliver to Sonic  copies of its organizational documents containing provisions substantially similar to those required by Section 22.01.

22.03.                       Employee Stock Purchase Plans .

The Licensee shall have the right to transfer up to 49% of its outstanding capital stock or other equity interests to an employee stock purchase plan as long as one individual who qualifies as a licensee of Sonic for the Non-Traditional Sonic continues to own and Control, directly or indirectly, at least 51% of the Licensee’s outstanding capital stock or other equity interests.

22.04.   Good Standing .

If the Licensee is a business entity, Licensee shall remain an active entity in good standing in its state of formation.

23.   APPLICABLE LAWS; WAIVER OF JURY TRIAL; LIMITATIONS .

The terms and provisions of this Agreement shall be interpreted in accordance with and governed by the laws of the State of Oklahoma, provided that if the laws of the State of Oklahoma would not permit full enforcement of Section 16 of this Agreement, then the laws of the state in which the Non-Traditional Sonic is located or Licensee is domiciled shall apply to the extent that any or all of such laws more fully permit enforcement of Section 16 of this Agreement.  Except as provided in Section 14.03, Licensee agrees that jurisdiction over Licensee exists and is proper within the county where the corporate headquarters of Sonic are located and within any and all other courts, whether federal, state, or local, located within that county, and venue for any matter, claim, or cause of action relating to (a) this Agreement or any other agreement between Licensee and Sonic or Sonic’s Affiliates, (b) the parties’ business activities conducted as a result of this Agreement, or (c) the parties’ relationship or business dealings with one another generally, including all disputes and litigation pending or in existence as of the date of this Agreement, shall only exist and is only proper within the same county where the corporate headquarters of Sonic are located and within any and all other courts, whether federal, state, or local, located within that county.  Licensee waives any and all defenses and objections, and Licensee agrees not to assert any defense or objection, to jurisdiction over Licensee and to venue as described hereinabove regarding any action, proceeding, or litigation instituted by Sonic against Licensee.  Sonic and Licensee agree that any and all breaches of this Agreement, including breaches occurring after termination, cancellation, or expiration of this Agreement, shall be deemed to have occurred where the corporate headquarters of Sonic are located.   SONIC AND LICENSEE WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY.  SONIC AND LICENSEE ALSO WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO OR CLAIM OF PUNITIVE OR EXEMPLARY DAMAGES AGAINST THE OTHER AND AGREE THAT, IN THE EVENT OF A DISPUTE BETWEEN THEM, EACH SHALL BE LIMITED TO THE
50

 
 RECOVERY OF ANY ACTUAL DAMAGES SUSTAINED BY IT .  EXCEPT FOR CLAIMS ARISING FROM LICENSEE’S NON-PAYMENT OR UNDERPAYMENT OF AMOUNTS LICENSEE OWES SONIC, ANY AND ALL CLAIMS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR SONIC’S RELATIONSHIP WITH LICENSEE WILL BE BARRED UNLESS A JUDICIAL OR ARBITRATION PROCEEDING IS COMMENCED WITHIN ONE YEAR FROM THE DATE ON WHICH THE PARTY ASSERTING THE CLAIM KNEW OR SHOULD HAVE KNOWN OF THE FACTS GIVING RISE TO THE CLAIMS.

24.  ACKNOWLEDGEMENT .

Licensee acknowledges that:

24.01.                       Consultation with Counsel

Licensee hereby represents that Licensee has received a copy of this Agreement and has had an opportunity to consult with Licensee’s attorney with respect thereto at least 10 days prior to Licensee’s execution hereof.  Licensee further represents that Licensee has had this Agreement in hand for review at least five business days prior to Licensee’s execution hereof.

24.02.                       Profitability

No representation has been made by Sonic as to the future profitability of the Non-Traditional Sonic.

24.03.                       Licensee’s Investigation

Prior to the execution of this Agreement, Licensee has had ample opportunity to contact existing licensees of Sonic and to investigate all representations made by Sonic relating to the Sonic System.  The Licensee has conducted an independent investigation of the business contemplated by this Agreement and recognizes that it involves substantial business risks making the success of the venture largely dependent on the business abilities of the Licensee.  Sonic disclaims and the Licensee has not received from Sonic or its Affiliates any express or implied warranty or guaranty regarding the potential volume, profits, or success of the business venture contemplated by this Agreement.  The Licensee has not relied on any express or implied warranty or guaranty from Sonic or its Affiliates regarding the potential volume, profits, or success of the business venture contemplated by this Agreement.

24.04.                       Contrary Representations .

The Licensee knows of no representations by Sonic or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement.  The Licensee has not relied on any representations from Sonic or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement or the disclosures set forth in the Franchise Offering Circular delivered to the Licensee in connection with the issuance of this Agreement.
51


24.05.                       Variances to Other Licensees .

The Licensee understands that other developers and licensees may operate under different forms of agreements and, consequently, that Sonic’s rights and obligations with regard to its various licensees may differ materially in certain circumstances.

24.06.                       Complete Agreement

This Agreement supersedes any and all other agreements or representations respecting the Non-Traditional Sonic and contains all the terms, conditions, and obligations of the parties with respect to the subject matter of this Agreement.

25.    INPUT AND ADVICE FROM LICENSEES .

In connection with the implementation of or significant changes in the programs or policies referred to in Sections 6.04, 6.05(c), 6.06, 8, 11.01(c), and 11.01(g) of this Agreement, Sonic shall solicit input and advice from a group of licensees gathered together for such purpose (whether established ongoing for such purpose or gathered on an ad hoc basis from time to time).  Sonic further shall use its best efforts to ensure that such groups are balanced in terms of geographic base, size of operating group, and period of tenure within the Sonic System.  Notwithstanding the foregoing, this Section 25 shall not have any effect unless the license agreements in effect for at least one-third of all Sonic drive-in restaurants and non-traditional Sonic restaurants contain this provision or a substantially similar provision.

26.    INJUNCTIVE RELIEF .

The Licensee acknowledges that Sonic’s remedy at law for any breach of (a) any of the Licensee’s covenants under this Agreement (other than those involving only the payment of money), including the covenants contained in Section 16 of this Agreement; and (b) Sections 14.01(l), 14.02(c), 14.03(h), 15.01(b), 15.01(c), 15.01(d), and 15.01(e) of this Agreement, would not constitute an adequate remedy at law and, therefore, Sonic shall have the right to obtain temporary and permanent injunctive relief in any proceeding brought to enforce any of those provisions, without the necessity of proof of actual damages.  Licensee acknowledges and expressly agrees that Sonic shall not be required to post any bond or other form of security in connection with any request for the issuance of injunctive relief, and Licensee expressly and unconditionally waives any requirement for the provision of security.  Licensee also agrees that injunctive relief sought by Sonic and ordered by any court of competent jurisdiction shall be given full force and effect in any other jurisdiction, including the jurisdiction in which the Non-Traditional Sonic is located, and that Licensee will not oppose the enforcement of such relief.  Nothing in this Section 26 shall prevent Sonic from pursuing separately or concurrently one or more of any other remedies available at law, subject to the provisions of Section 14.03 of this Agreement.

27.    GENERAL RELEASE AND COVENANT NOT TO SUE .

THE LICENSEE HEREBY RELEASES SONIC, SONIC CORP., AND THEIR SUBSIDIARIES AND AFFILIATES, AND THE OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS OF SONIC, SONIC CORP., AND THEIR
52

 
SUBSIDIARIES AND AFFILIATES, FROM ANY AND ALL CLAIMS AND CAUSES OF ACTION, KNOWN OR UNKNOWN, WHICH MAY EXIST IN FAVOR OF THE LICENSEE AS OF THE DATE OF THIS AGREEMENT.  IN ADDITION, THE LICENSEE COVENANTS THAT THE LICENSEE SHALL NOT FILE OR PURSUE ANY LEGAL ACTION OR COMPLAINT AGAINST ANY OF THE FOREGOING ENTITIES OR PERSONS WITH REGARD TO ANY OF THE FOREGOING CLAIMS OR CAUSES OF ACTION RELEASED PURSUANT TO THIS SECTION 27.




Executed on the dates set forth below, to have effect as of ,  200.

Sonic:                                                                           Sonic Industries LLC

By: _________________________________
      (Vice) President
                                                                                               Date: _______________________, 2007

Licensee:                                                                                              ____________________________________

Date: __________________________, 2007

____________________________________

Date:___________________________, 2007
53

 
 
 
 
 
Schedule I


Guaranty and Restriction Agreement
 
 
 
 

 
 
GUARANTY AND RESTRICTION AGREEMENT

The undersigned (jointly and severally or individually, the “Guarantor”), Sonic Industries LLC (“Sonic”), and  (the “Licensee”) enter into this Guaranty and Restriction Agreement (this “Guaranty”) as of  , 200.

W I T N E S S E T H :

Whereas, Sonic is entering into a license agreement (the “License Agreement”) dated the same date as this Guaranty with the Licensee for the non-traditional Sonic restaurant located at , ,   (the “Non-Traditional Sonic”); and

Whereas, as a condition to entering into the License Agreement, Sonic has asked the
Guarantor to provide a personal guaranty of all obligations of the Licensee Agreement; and

Whereas, Sonic has also asked the Guarantor and the Licensee to agree to a restriction on the transfer of interests in the Licensee; and

Whereas Sonic, the Guarantor, and the Licensee are willing to enter into those agreements based upon the terms and conditions of this Guaranty.

Now, therefore, in consideration of the mutual covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties agree as follows:

1.            Personal Guaranty of Payments .  The Guarantor hereby guarantees the prompt and full payment and performance of all obligations under the License Agreement including:

(a)           all royalties due Sonic pursuant to the License Agreement,

(b)           all brand contribution fees to the Sonic Brand Fund pursuant to the License Agreement,

(c)           all contributions to approved advertising cooperatives pursuant to the License Agreement, and

(d)           any other obligations owing to Sonic or its Affiliates (as defined in the License Agreement) relating to the Non-Traditional Sonic, including any sign lease agreement.

2.            Nature of Guaranty .  This guaranty shall constitute an absolute, unconditional, irrevocable, and continuing guaranty.  Sonic shall not have any obligation to take any action against any other person or entity for collection of any payments prior to making any demand for payment or bringing any action against the Guarantor.


3.            Permitted Actions .  From time to time, Sonic shall have the right to take, permit, or suffer to occur any “Permitted Action,” as defined below, without modifying, reducing, waiving, releasing, impairing, or otherwise affecting the obligations of the Guarantor under this Guaranty, without giving notice to the Guarantor or obtaining the Guarantor’s consent, without the necessity of any reservations of rights against the Guarantor, and without liability on the part of Sonic.  As used in this Section 3, the phrase “Permitted Action” shall mean (a) an agreed extension of time for payment of any sum due under the License Agreement, (b) an agreed change in the manner or place of payment of any sums due under the License Agreement, (c) any waiver by Sonic of any defaults under the provisions of the License Agreement, (d) any delay or failure by Sonic to exercise any right or remedy Sonic may have under the License Agreement, (e) the granting by Sonic of any leniencies, waivers, extensions, and indulgences under the License Agreement, and (f) any agreed amendments to the License Agreement.

4.            Waiver of Notices .  The Guarantor acknowledges and waives notice of Sonic’s acceptance of the Guarantor’s guaranty pursuant to the terms of this Agreement.  The Guarantor also waives any requirement that Sonic notify the Guarantor of any demands or enforcement actions by Sonic against the Licensee.

5.            Restrictions on Transfer .  The Licensee shall not issue any additional shares of capital stock or other interest without the prior, written consent of Sonic.  The Guarantor shall not transfer, assign, or pledge any of its shares of capital stock or other interest in the Licensee to any person without the prior, written consent of Sonic.

6.            Disputes .  Any dispute between the parties concerning this Guaranty will be resolved in accordance with the arbitration provisions contained in the License Agreement.

7.            Attorneys’ Fees, Costs, and Expenses .  In any action brought by Sonic to enforce the obligations of the Guarantor, Sonic shall also have the right to collect its reasonable attorneys’ fees, court costs, and expenses incurred in the action.

8.            Headings .  The headings used in this Guaranty appear strictly for the parties’ convenience in identifying the provisions of this Guaranty and shall not affect the construction or interpretation of the provisions of this Guaranty.

9.            Binding Effect .  This Guaranty binds and inures to the benefit of the parties and their respective successors, legal representatives, heirs, and permitted assigns.

10.            Waiver .  The failure of a party to insist in any one or more instances on the performance of any term or condition of this Guaranty shall not operate as a waiver of any future performance of that term or condition.


11.            Governing Law .  Notwithstanding the place where the parties execute this Guaranty, the internal laws of Oklahoma shall govern the construction of the terms and the application of the provisions of this Guaranty.

12.            Amendments .  No amendments to this Guaranty shall become effective or binding on the parties unless agreed to in writing by all of the parties to be bound by the amendment.

13.            Time .  Time constitutes an essential part of each and every part of this Guaranty.

14.            Notice .  Except as otherwise provided in this Guaranty, when this Guaranty makes provision for notice or concurrence of any kind, the sending party shall deliver or address the notice to the other party by certified mail, telecopy, or nationally-recognized overnight delivery service to the addresses shown on Exhibit “A” to this Guaranty.

All notices pursuant to the provisions of this Guaranty shall run from the date that the other party receives the notice or three business days after the party places the notice in the United States mail.  Each party may change the party’s address by giving written notice to the other parties.

15.             Release and Covenant Not To Sue .   THE GUARANTOR AND THE LICENSEE, AND EACH OF THEM, HEREBY RELEASE ALL CLAIMS AND CAUSES OF ACTION WHICH THE GUARANTOR OR THE LICENSEE, OR BOTH OF THEM, MAY HAVE AGAINST SONIC, SONIC CORP., AND THEIR SUBSIDIARIES AND AFFILIATES, AND THE STOCKHOLDERS, DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS OF SONIC, SONIC CORP., AND THEIR SUBSIDIARIES AND AFFILIATES.  THE GUARANTOR AND THE LICENSEE, AND EACH OF THEM, FURTHER COVENANT NOT TO SUE ANY OF THE FOREGOING PERSONS OR ENTITIES ON ACCOUNT OF ANY OF THE FOREGOING CLAIMS OR CAUSES OF ACTION.

Executed and delivered as of the day and year first set forth above.






{Signatures on the following page}










 



Sonic:                                                                           Sonic Industries LLC.

By: _________________________________
                                                                                                       (Vice) President


Guarantor:                                                                                                   ____________________________________


                      ____________________________________
                                                            

                      ____________________________________



Licensee:

                By: ________________________________
                Its:
















This Guaranty and Restriction Agreement signature page is for the following:
Non-Traditional Sonic #

,



EXHIBIT “A”

Notice addresses are as follows:

Sonic:                                                                                     300 Johnny Bench Drive
Oklahoma City, OK 73104
(405) 225-5973 Fax

Guarantors:


(___) ___-____ Fax




(___) ___-____ Fax


Licensee:
 


DEVELOPMENT AGREEMENT

Sonic Industries LLC (“Sonic”), a Delaware limited liability company, and __________________ (the “Developer”), a ____________ ___________________, enter into this Development Agreement (this “Agreement”) as of the ____ day of __________, 2007.

W I T N E S S E T H :

Whereas, Sonic is developing a food service system (“Sonic System”) under which food is sold to the public from drive-in restaurants operated under the name “Sonic Drive-In”; and

Whereas, Developer desires to obtain the right to select proposed sites on which to construct Sonic drive-ins, to submit the same to Sonic for its acceptance and, upon the acceptance of each proposed site by Sonic, to enter into a License Agreement with Sonic to construct, own and operate a Sonic drive-in upon such site (hereinafter “Developmental Rights”) upon the terms and conditions set forth herein.

Now, therefore, in consideration of the foregoing and of the covenants herein contained, the parties, intending to be legally bound, hereby agree as follows:

1.            AREA EXCLUSIVITY AND CONSTRUCTION SCHEDULE

(a)           Subject to the terms and conditions of this Agreement, Sonic hereby grants to the Developer through ___________________, 20__, the exclusive Developmental Rights for the cities of ___________, __________ (in accordance with their boundaries as of the date of this Agreement), all as generally shown on Exhibit A to this Agreement, less and except any protected radius previously granted by Sonic or its Affiliates and currently in effect within that area as it now exists or later increases or decreases through the operation or renewal of the terms of the applicable license agreement (the “Franchised Area”).  Sonic has and shall have the absolute right to approve the location of a Sonic drive-in restaurant in an area contiguous to the Franchised Area even though the protected radius of that drive-in restaurant would extend into the Franchised Area.

(b)           Developer agrees to develop and to put In Operation at least ________ Sonic drive-in restaurants within the Franchised Area in accordance with the following development and performance schedule (the “Performance Schedule”):

Number of
In Operation
Restaurants
On or Before
   
__
____________, 200_
__
____________, 200_
__
____________, 200_
   

(c)           For purposes of this Agreement, a restaurant shall be deemed to be “In Operation” once a License Agreement (as hereinafter set forth) has been executed by Developer and Sonic, and the restaurant has opened to the public.  At the Developer’s written election, a Sonic drive-in restaurant or Non-traditional Location (as defined in Section 8(d)(iii) below) placed In Operation by someone other than the Developer pursuant to the provisions of Section 8(d) may count or not count as a restaurant placed In Operation for the purpose of the Performance Schedule.  If the Developer elects to have an acquired restaurant or Non-traditional Location count towards the Performance
1

 
 Schedule, it may result in the earlier expiration of the Developer’s exclusive Developmental Rights under this Agreement.

2.             TERM.   The term of this Agreement and all Developmental Rights granted hereunder shall expire on the date the last of the Sonic drive-in restaurants to be constructed pursuant to the Performance Schedule set forth in Section 1 hereof is opened for business, unless sooner terminated in accordance with the terms of this Agreement.

3.             RENEWAL.                                 This Agreement shall not be subject to renewal.

4.             TIMELY PERFORMANCE .  Developer hereby acknowledges that its timely development of the Sonic drive-in restaurants in the Franchised Area in accordance with the Performance Schedule is of material importance to Sonic and Developer, and agrees, as a condition of the continuance of the rights granted hereunder, to develop and construct Sonic drive-in restaurants within the Franchised Area in accordance with the Performance Schedule, to operate such restaurants pursuant to the terms of the License Agreements and to maintain all such restaurants in operation continuously.

5.             CONSIDERATION FOR EXCLUSIVE RIGHTS .  As consideration for this Agreement, Developer has paid, and Sonic has accepted the sum of $__________ concurrently with the execution of this Development Agreement. This consideration for exclusive rights shall be credited to the required fee for each License Agreement signed per restaurant to be placed In Operation in accordance with the Performance Schedule.  Such credit shall be:

(i)           in the amount of $10,000 for each License Agreement signed;

(ii)           credited against the total franchise fee to be paid to Sonic; and

(iii)           credited at the time the License Agreement for each restaurant is signed by Developer and Sonic.

If the Developer elects to have a Sonic drive-in restaurant or Non-traditional Location opened by someone other than the Developer pursuant to Section 8(d) count towards the Performance Schedule, Sonic shall refund $10,000 to the Developer for each restaurant or Non-traditional Location placed In Operation.

Except as set forth above, the fee required by this Section 5 is nonrefundable.
2


6.            SITE SELECTION

(a)           Developer agrees to submit for evaluation by Sonic pursuant to Sonic’s site selection criteria, the information ordinarily required for each proposed site for a Sonic drive-in restaurant.  Sonic may review the site, conduct such other investigation of the proposed site it determines is necessary to properly evaluate the site, and, in Sonic’s sole discretion, either accept or reject the site by written notice to Developer.  Site acceptance shall be contingent upon, among other things, execution by Developer and Sonic of the License Agreement for said site as provided in Section 7 hereof.  In the event Sonic does not accept or reject a site submitted in writing by Developer within 30 days of receipt of such written notice, such site shall be deemed to be approved by Sonic.

(b)           Developer acknowledges that no officer, employee or agent of Sonic has any authority to approve or accept any proposed site except in writing and in accordance with Section 6(a) above, and any other representations, whether oral or written, shall be of no effect; Developer further acknowledges that Sonic’s acceptance of said site does not constitute any representation, warranty or guarantee by Sonic that said site will be a successful location for a Sonic drive-in restaurant.

(c)           Sonic reserves the right to revoke any site approval after the Completion Date (as defined in Section 7(b) below) if a restaurant is not under construction at the site in accordance with a fully executed License Agreement for said site.

7.            CONSTRUCTION AND ISSUANCE OF LICENSE AGREEMENT

(a)           Upon receipt of Sonic’s written acceptance of a proposed site as set forth in Section 6 hereof, Developer shall promptly take the necessary steps to acquire the site (by purchase, option to purchase, lease or sublease) and to otherwise obtain the rights to construct, maintain and operate a Sonic drive-in restaurant on the site.

(b)           Within 10 days of Sonic’s receipt of notice by Developer that Developer is ready to begin construction at the accepted site, Sonic shall execute and forward to Developer the License Agreement for said site if one has not been previously executed.  It is specifically agreed by Developer and Sonic that no License Agreement shall be effective until the same is executed by Sonic and Developer and a license fee is paid by Developer, and that Developer shall not begin construction work at the accepted site until Sonic has received the License Agreement executed by Developer and the license fee paid by Developer.  Developer shall, however, execute a License Agreement for an approved site on the earlier of (i) six months following approval of the site by Sonic, or (ii) the date construction is to begin (with the earlier of such dates referred to above as the “Completion Date”).

(c)           Within 30 days after the receipt of a License Agreement from Sonic for the accepted site, Developer shall execute said License Agreement in accordance with Sonic’s instructions and return the same along with the applicable license fee to Sonic.  The License Agreements for all drive-ins under the Performance Schedule shall be in the form attached hereto as Exhibit B.  In the event that Sonic does not receive the properly executed License
3

 
 Agreement, with the appropriate number of copies, within said 30-day period, Sonic’s acceptance of the site as provided in Section 6 hereof shall be void and Developer shall have no rights with respect to said site.

(d)           Upon receipt by Sonic of the executed License Agreement for said site, Developer shall commence construction of the Sonic drive-in restaurant at the site in accordance with the plans and specifications provided by Sonic and the terms of the License Agreement and this Agreement.

8.             LIMITATION OF AGREEMENT .  Developer acknowledges and agrees that:

(a)           This Agreement includes only the right to select sites for the construction of Sonic drive-in restaurants and to submit the same to Sonic for its approval in accordance with the terms of this Agreement.  This Agreement does not include the grant of a license by Sonic to Developer of any rights to use the Proprietary Marks, the Sonic System, or to open or operate any Sonic drive-in restaurants within the Franchised Area.  Developer shall obtain the license to use such additional rights at each Sonic drive-in restaurant upon the execution of each License Agreement by both Developer and Sonic and only in accordance with the terms of each License Agreement.

(b)           The Developmental Rights granted hereunder are personal to Developer and cannot be sold, assigned, transferred or encumbered, in whole or in part, except as set forth in Section 14 hereof.

(c)           The Developer shall have no right to use in its name the name “Sonic” or any other names or Proprietary Marks used by Sonic.

(d)           Except as provided in Section 1 hereof, the Developmental Rights granted hereunder are nonexclusive, and Sonic retains the right, in its sole discretion:

(i)  To acquire the assets or controlling ownership of an existing restaurant within the Franchised Area.  However, prior to converting an acquired restaurant to a Sonic drive-in restaurant or a Non-traditional Location, as defined below, within the Franchised Area, Sonic shall offer the Developer a right of first refusal to acquire the restaurant at a price equal to Sonic’s cost of acquiring the restaurant.  If the restaurant represents a part of an acquisition of multiple restaurants, Sonic shall make a reasonable allocation of its cost to acquire the restaurant.  The Developer must inform Sonic of its decision regarding the right of first refusal within 30 days after Sonic gives the Developer written notice of its intention to convert the restaurant to a Sonic drive-in restaurant or Non-traditional Location.  If the Developer chooses to exercise its right of first refusal, the Developer must execute Sonic’s then current form of license agreement for a Sonic drive-in restaurant or Non-traditional Location and pay the required license fee, as applicable, within 20 days after the Developer notifies Sonic of its decision.  The Developer thereafter shall convert the restaurant to a Sonic drive-in restaurant or Non-traditional Location pursuant to the terms of the applicable license agreement or Sonic shall have the right to repurchase the restaurant from the Developer at the same purchase price.  If the Developer does not exercise its right of first refusal, Sonic shall have the right, in its sole discretion, to own, operate and/or license other persons to operate the restaurant in any manner which it deems appropriate, including (without limitation) as a Sonic drive-in restaurant or Non-traditional Location.
4


(ii)  To develop, use and franchise the rights to any trade names, trademarks, service marks, trade symbols, emblems, signs, slogans, insignia or copyrights not designated by Sonic as Proprietary Marks, for use with similar or different franchise systems for the sale of the same, similar or different products or services other than in connection with the Sonic System at any location, on such terms and conditions as Sonic may deem advisable and without granting Developer any rights therein.

(iii)  To own and/or operate and to license any other person to own and/or operate Non-traditional Locations within the Franchised Area.  The phrase “Non-traditional Locations” shall mean food service facilities operating under one or more of the Proprietary Marks at locations featuring facilities other than free-standing buildings with canopies devoted solely to the operation of a Sonic drive-in restaurant and accessible to the general public by automobile from public thoroughfares.  Non-traditional Locations include (without limitation) (a) military bases and other governmental facilities; (b) universities and schools; (c) airports and other transportation facilities; (d) stadiums, arenas and other sports and entertainment venues; (e) amusement and theme parks; (f) cafeterias and food courts in shopping centers, shopping malls, office buildings, and industrial buildings; (g) hotels and convention centers; (h) hospitals and nursing facilities; and (i) museums, zoos and other public facilities.  The phrase “Proprietary Marks” shall mean the distinctive and characteristic trade names, trademarks, service marks, and trade dress which Sonic designates in writing or through usage from time to time as prescribed for use with the Sonic system, including (without limitation) the terms “Sonic,” “Happy Eating,” and “America’s Favorite Drive-In”; signs; emblems; menu housings; designs; color schemes; standardized premises featuring characteristic exterior style, canopies, colors and design (including angled parking stalls equipped with menu housings, speakers and tray supports); interior furnishings; and equipment layout.  If the Developer is in compliance with this Agreement and Sonic elects to own, operate or license a Non-traditional Location within the Franchised Area, the Developer shall have a right of first refusal to license and operate the Non-traditional Location.  The Developer must notify Sonic in writing of its decision to license and operate the Non-traditional Location within 30 days after Sonic notifies the Developer of Sonic’s intention to own, operate and/or license the Non-traditional Location.  If the Developer chooses to exercise its right of first refusal, the Developer must enter into Sonic’s then current form of license agreement for a Non-traditional Location for the applicable jurisdiction and pay the required license fee within 30 days after the Developer notifies Sonic of its decision.  The Developer then must open the Non-traditional Location within the time period specified in the license agreement (if specified) or within 12 months after the date of the license agreement (if not specified).  If the Developer does not execute that agreement within the foregoing 30-day period or does not exercise its right of first refusal within the foregoing 30-day period, Sonic shall have the right to proceed with the ownership, operation and/or licensing of the Non-traditional Location as disclosed to the Developer.  If the owner or operator of a location proposed for a Non-traditional Location requires that it serve as the operator of the Non-traditional Location (such as a university, sports arenas, hotels, or other type of location listed above), Sonic shall have the right to proceed with the licensing of the Non-traditional Location to that owner or operator without first offering the Developer the right of first refusal provided for in this section.
5


(e)           Developer acknowledges that in the event that the Franchised Area is located in a Designated Market Area (“DMA”) that Sonic has identified as a “Developing Market” that Developer will be required to execute a Developing Market Advertising Addendum in the form attached hereto as Exhibit C to each of the License Agreements entered into for the Sonic drive-ins developed pursuant to this Agreement.  The Developing Market Advertising Addendum acknowledges that the Franchised Area is located in a Developing Market and that the provisions of Section 11.01(a) of the License Agreement relating to Developing Markets shall apply.  Such provisions require that the Developer contribute the amount required by the local advertising cooperative or 5%, which ever is higher, of the “gross sales” of its drive-in (as defined in the License Agreement) to the local advertising cooperative; however, at any time Sonic may alternatively designate other uses for any portion of such Developing Market contribution if Sonic determines, in its sole discretion, that there is less need for advertising and a greater need for another use.

(f)           Developer acknowledges that in the event that the Sonic drive-in restaurants to be placed In Operation pursuant to the terms of this Agreement represent the first three drive-ins to be developed by the Developer, that Developer will be required to execute a Special Training Addendum in the form attached hereto as Exhibit D to the License Agreements entered into for the first three drive-ins placed In Operation pursuant to this Agreement.  The Special Training Addendum requires that the Developer accept and pay the expenses of the Sonic A-Team, a special training team, in connection with the opening of Developer’s first three Sonic drive-in restaurants.

(g)           Because complete and detailed uniformity under many varying conditions may not be possible or practical, Sonic specifically reserves the right and privilege, at its sole discretion and as it may deem in the best interests of all concerned in any specific instance, to vary any standards for any Developer based upon the peculiarities of a particular site or circumstance, density of population, business potential, population of trade area, existing business practices or any other condition which Sonic deems to be of importance to the successful operation of such Developer’s business.  Developer shall not be heard to complain on account of any variation from standard specifications and practices granted to any franchise owner and shall not be entitled to require Sonic to grant Developer a like or similar variation hereunder.

(h)           Developer has sole responsibility for the performance of all obligations arising out of the operation of its business pursuant to this Agreement, including, but not limited to, the payment when due of any and all taxes levied or assessed by reason of such operation.

(i)           In all public records, in its relationship with other persons, and in any offering circular, prospectus or similar document, Developer shall indicate clearly the independent ownership of Developer’s business and that the operations of said business are separate and distinct from the operation of Sonic’s business.

(j)           Developer agrees to indemnify and hold harmless Sonic from any liability or damage Sonic may incur, including reasonable attorney fees, as a result of claims, demands, costs or judgments of any kind or nature by anyone whomsoever arising out of or otherwise connected with this Agreement, the Developmental Rights, the acquisition of any restaurant site or ownership, maintenance or operation of any Sonic drive-in restaurant by Developer.
6


(k)           Developer agrees to reside within the DMA of each restaurant placed In Operation pursuant to this Agreement for as long as the Developer remains the licensee on the license agreement for a restaurant placed In Operation.  If Developer consists of more than one person or is an entity, the restaurant’s operational manager shall be a substantial equity owner in Developer and shall reside within the DMA of each restaurant placed In Operation as long as the Developer remains the licensee on the license agreement for the restaurants placed In Operation.

9.             SERVICES BY SONIC .  Sonic shall, at its expense, make available to Developer the following:

(a)           The benefit of Sonic’s experience in the selection of Sonic drive-in restaurant sites through the use of Sonic’s Site Acceptance Form, site selection criteria and any related materials which Sonic may make available to new licensees from time to time, and such review thereof as Sonic may undertake as part of its evaluation of Developer’s request for site approvals.

(b)           Such standard construction plans, specifications and layouts for the structure, equipment, decor and signs identified with Sonic drive-in restaurants as Sonic makes available to all new licensees from time to time.

(c)           Review of Developer’s site plan and final construction plans and specifications for conformity to the construction standards and specifications of the Sonic System, upon Sonic’s receipt of Developer’s written request for approval thereof.

(d)           Initial training in the Sonic System, including standards, methods, procedures and techniques will be provided for two persons per license agreement, who may be the Developer (if he is an individual); a person who has an interest in Developer (if Developer is a group of individuals, a corporation, a partnership or an unincorporated association or a similar entity), if requested to do so by Sonic; or a person who is actively involved in the management or operation of the business of Developer or the operation of any Sonic drive-in restaurant placed or to be placed In Operation under this Agreement.  Such training shall be at such time and places as Sonic may designate for its training program, in its discretion, and shall be subject to the terms of each License Agreement.

(e)           Such periodic continuing individual or group advice, consultation and assistance, rendered by personal visit or telephone, or by newsletters or bulletins made available from time to time to all Developer’s of Sonic, as Sonic may deem necessary or appropriate.

(f)           Such bulletins, brochures and reports as may from time to time be published by Sonic regarding its plans, policies, research, developments and activities.

(g)           Such other resources and assistance as may hereafter be developed and offered by Sonic to its licensees.
7


10.             USE OF APPROVED SUPPLIERS, TRADE DRESS AND METHODS OF OPERATION .   The Developer immediately shall support the use and shall use the products and programs of the beverage syrup supplier approved by Sonic and used by a majority of all Sonic drive-in restaurants, to the exclusion of any other supplier of beverage syrup.  In addition, the Developer immediately shall use the Developer’s vote or votes in all advertising cooperatives in which the Developer participates to support the use of the advertising agency of record for the Sonic drive-in restaurant chain.  The Developer shall comply with the foregoing provisions not only for all Sonic drive-in restaurants licensed pursuant to the terms of the License Agreements issued under this Agreement but also (to the extent the Developer has the ability) for all other Sonic drive-in restaurants for which the Developer serves as a licensee.  With regard to any existing Sonic drive-in restaurants, the Developer shall use the Developer’s best efforts to accomplish the foregoing, including (in the event of any contracts in place prior to August 1, 1995) negotiating in good faith and assisting and supporting the agency of record or new supplier with the assumption, purchase or mutual termination of the contract.

The Developer shall use all reasonable and appropriate efforts to abide by, follow, support and promote the approved trade dress, menu, point-of-sale system, procedures for the preparation and service of food and beverage products, marketing and purchasing programs, and methods of operation for Sonic drive-in restaurants as specified by Sonic from time to time in the Sonic Operations Manual or otherwise.  The approved trade dress shall include (without limitation) the existing signs, logotypes and trade dress of Sonic drive-in restaurants, as well as any modifications to the signs, logotypes and trade dress of the Developer’s restaurants by way of the required modification, renovation or retrofit of those restaurants.

The terms of this Section 10 shall continue in effect during the term of this Agreement and any license agreement between the Developer and Sonic, and shall survive the expiration or termination of this Agreement.

11.            DEFAULT;  TERMINATION

(a)           The occurrence of any of the following events shall constitute a default under this Agreement:

(i)           If Developer shall, in any respect, fail to meet the Performance Schedule, unless such failure is due to extraordinary events beyond the control of the Developer (such as acts of God, war and the like, but exclusive of matters involving the financial wherewithal of the Developer). 

(ii)           If Developer shall use the Sonic System or Proprietary Marks, or any other names, marks, systems, insignia, symbols or rights which are the property of Sonic except pursuant to, and in accordance with, a valid and effective License Agreement. 

(iii)           If Developer, or persons controlling, controlled by or under common control with Developer, shall have any interest, direct or indirect, in the ownership or operation of any quick or fast-service restaurant engaged in the sale of hamburgers or chili and related products within the Franchised Area or in any restaurant which looks like, copies or imitates Sonic drive-in restaurants or operates in a manner tending to have such effect other than in accordance with Section 16 of any License Agreement.
8


(iv)           If Developer shall fail to remit to Sonic any payments pursuant to this Agreement when the same are due.

(v)           If Developer shall begin work upon any Sonic drive-in restaurant at any site unless all the conditions set forth in Section 7 hereof have been met.

(vi)           If Developer shall purport to effect any assignment other than in accordance with Section 14 hereof.

(vii)           Except as provided in Section 14(a) hereof, if Developer attempts to sell, assign, transfer or encumber this Agreement.

(viii)                      If Developer makes, or has made, any misrepresentation to Sonic in connection with obtaining this Development Agreement, any site approval hereunder, or any License Agreement.

(ix)           If Developer fails to obtain Sonic’s prior written approval or consent as expressly required by this Agreement.

(x)           If Developer defaults in the performance of any other obligation under this Agreement.

(xi)           If Developer defaults in the performance of any obligation under any License Agreement with Sonic or its Affiliates, regardless of whether or not said License Agreement is terminated as a result of such default.

(xii)           If Developer, or any person controlling, controlled by or under common control with Developer, shall become insolvent by reason of inability to pay its debts as they mature; or if a receiver, permanent or temporary, of the business, assets or property of Developer or any such person, or any part thereof, is appointed by a court of competent authority; or if Developer or any such person requests the appointment of a receiver or makes a general assignment for the benefit of creditors or if a final judgment against Developer or any such person in the amount of $15,000 or more remains unsatisfied of record for 30 days or longer following the exhaustion of all appeals; or if the bank accounts, property or receivables of Developer or any such person are attached and such attachment proceedings are not dismissed within a 30-day period; or if execution is levied against the business or property of Developer or any such person or suit to foreclose any lien (excluding mechanic’s and materialman’s liens) or mortgage against any of the Sonic drive-in restaurants, the premises thereof or equipment thereon is instituted and not dismissed within 30 days.

(xiii)                      If Developer, or any person controlling, controlled by, or under common control with Developer, shall be convicted under any law providing for criminal penalties (excluding misdemeanors).
9


(b)           Upon occurrence of any of the events set forth in Section 11(a), Sonic may, without prejudice to any other rights or remedies contained in this Agreement or provided by law or equity, terminate this Agreement.  Such termination shall be effective 30 days after written notice (or such other notice as may be required by applicable state law) is given by Sonic to Developer of any of the events set forth in Subparagraphs (i) through (xi) of Section 11(a) if such defaults are not cured within such period.  Termination shall be effective immediately and without notice, however, upon occurrence of any of the events specified in Subparagraphs (xii) and (xiii) of Section 11(a), except where prohibited by state law.

(c)           Upon termination of this Agreement for any reason, or upon expiration of the term hereof, Developer agrees as follows:

(i)           To cease immediately any attempts to select or develop sites on which to construct Sonic drive-in restaurants, and

(ii)           To cease immediately to hold itself out in any way as a Developer of Sonic or to do anything which would indicate any relationship between it and Sonic except to the extent permitted pursuant to Section 11(d).

(d)           Termination of this Agreement shall not affect the rights of Developer to operate Sonic drive-in restaurants in accordance with the terms of any License Agreement with Sonic until and unless such License Agreements, or any of them, are terminated in accordance with their terms.

If any of the provisions of this contract governing termination or nonrenewal are inconsistent with Oklahoma law, then the laws of the State of ______________ shall apply.

12.             RESOLUTION OF DISPUTES .  The following provisions shall apply to any controversy between the Developer and Sonic (including an Affiliate of Sonic) and relating (a) to this Agreement (including any claim that any part of this Agreement is invalid, illegal or otherwise void or voidable), (b) to the parties’ business activities conducted as a result of this Agreement, or (c) the parties’ relationship or business dealings with one another generally, including all disputes and litigation pending or in existence as of the date of this Agreement.

(a)            Negotiation .  The parties first shall use their best efforts to discuss and negotiate a resolution of the controversy.

(b)            Mediation .  If the efforts to negotiate a resolution do not succeed, the parties shall submit the controversy to mediation in Oklahoma City, Oklahoma, by a mediation firm agreeable to the parties or by the American Arbitration Association, if the parties cannot agree.

(c)            Arbitration .  If the efforts to negotiate and mediate a resolution do not succeed, the parties shall resolve the controversy by final and binding arbitration in accordance with the Rules for Commercial Arbitration (the “Rules”) of the American Arbitration Association in effect at the time of the execution of this Agreement and pursuant to the following additional provisions:
10


(i)            Applicable Law .  The Federal Arbitration Act (the “Federal Act”), as supplemented by the Oklahoma Arbitration Act (to the extent not inconsistent with the Federal Act), shall apply to the arbitration.

(ii)            Selection of Arbitrator .  The parties shall select arbitrator within 10 days after the filing of a demand and submission in accordance with the Rules.  If the parties fail to agree on the arbitrator within that 10-day period or fail to agree to an extension of that period, the arbitration shall take place before an arbitrator selected in accordance the Rules.

(iii)            Location of Arbitration .  The arbitration shall take place in Oklahoma City, Oklahoma, and the arbitrator shall issue any award at the place of arbitration.  The arbitrator may conduct hearings and meetings at any other place agreeable to the parties or, upon the motion of a party, determined by the arbitrator as necessary to obtain significant testimony or evidence.

(iv)            Scope of Proceeding .  The parties shall conduct any arbitration proceeding and resolve any controversy on an individual basis only and not on a class-wide, multiple-party, or similar basis.

(v)            Enforcement of Award .  The prevailing party shall have the right to enter the award of the arbitrator in any court having jurisdiction over one or more of the parties or their assets.  The parties specifically waive any right they may have to apply to any court for relief from the provisions of this Agreement or from any decision of the arbitrator made prior to the award.  The award of the arbitrator shall not have any precedential or collateral estoppel effect on any other controversy involving Sonic or its Affiliates.

(d)            Excluded Controversies .  At the election of Sonic or its Affiliate, the provisions of this Section 12 shall not apply to any controversies relating to any fee due Sonic or its Affiliate; any promissory note payments due Sonic or its Affiliate; or any trade payables due Sonic or its Affiliate as a result of the purchase of equipment, goods or supplies.  At the election of Sonic or its Affiliate, the provisions of this Section 12 also shall not apply to any controversies relating to the use and protection of the Proprietary Marks or the Sonic System, including (without limitation) Sonic’s right to apply to any court of competent jurisdiction for appropriate injunctive relief for the infringement of the Proprietary Marks or the Sonic System.

(e)            Attorneys’ Fees and Costs .  The prevailing party to the arbitration shall have the right to an award of its reasonable attorneys’ fees and costs incurred after the filing of the demand and submission, including a portion of the direct costs of any in-house legal staff reasonably allocable to the time devoted to the arbitration.

13.             DEVELOPER’S REPRESENTATIONS.   Developer hereby represents and warrants to Sonic that the changes to this Agreement and the License Agreement (if any) from those terms originally offered to Developer occurred at the request of Developer and upon negotiation by Developer and Sonic.

Developer hereby represents to Sonic that Developer is entering into this Agreement with the intention of complying with the terms and conditions and not for the purpose of resale of the Development Rights hereunder.  Therefore, Developer agrees that any attempt to assign this Agreement in whole or in part other than in accordance with Section 14 shall be deemed an event of default hereunder.
11


14.            ASSIGNMENT, CONDITIONS AND LIMITATIONS.

(a)           Developer shall neither sell, assign, transfer nor encumber this Agreement, the Developmental Rights, or any other interest hereunder, nor suffer or permit any such assignment, transfer or encumbrance to occur by operation of law or otherwise, without the prior written consent of Franchisor.

(b)           In the event of the death, disability or permanent incapacity of Developer, Sonic shall not unreasonably withhold its consent to the transfer of all of the interest of Developer to his spouse, heirs or relatives, by blood or marriage, whether such transfer is made by will or by operation of law, provided that the requirements of subsection (d) hereof have been met.  In the event that Developer’s heirs do not obtain the consent of Sonic as prescribed herein, the personal representative of Developer shall have a reasonable time to dispose of Developer’s interest hereunder, which disposition shall be subject to all the terms and conditions for transfers under this Agreement.

(c)           Sonic shall not unreasonably withhold its consent to a transfer of this Agreement to a business entity that Developer owns and controls provided that the requirements of subsection (d) hereof have been met.

(d)           Sonic may, in its sole discretion, require any or all of the following requirements to be met as a condition of its approval of any transfer:

(i)           At least 30 days prior to any such proposed assignment, conveyance or transfer, Developer or Developer’s representative shall give written notice to Sonic of such proposed assignment, conveyance or transfer, setting forth the name of the person to whom the rights or obligations are to be granted, information related to the business background and creditworthiness of the assignee or transferee, and any other information which Sonic may ordinarily require to approve a franchisee.

(ii)           Developer hereby represents and agrees that to the extent his assignee or transferee does not perform in accordance with this Agreement, Developer shall perform and insure that the obligations hereunder are accomplished.

(iii)           Developer agrees that Sonic may determine to its satisfaction that any franchise or securities laws in the state of the transferee/assignee will be complied with in the event Developer transfers, conveys or assigns any interest herein.  In the event the regulatory authorities of such state require that any interest under this Agreement be registered with such authorities, Developer agrees to bear the expense of any such registration and provide the necessary information to Sonic to insure that any such applications or registrations with such regulatory authorities are filed in an accurate and complete manner.
12


(e)           In the event Developer or its successor is a corporation or partnership or similar entity, it is agreed as follows:

(i)           The Partnership Agreement, voting stock of or other ownership interest therein (“Securities”) shall reflect that the Securities are restricted by the terms of this Agreement.  Developer shall furnish Sonic at the time of execution of this Agreement or assignment to the corporation or partnership, an agreement executed by all stockholders or partners of the Developer, stating that no stockholder or partner will sell, assign or transfer voluntarily or by operation of law any Securities of the Developer to any person or entity without the written consent of Sonic.  All Securities issued by Developer will bear the following legend which shall be printed legibly and conspicuously on each stock certificate or other evidence of ownership interest:

“The transfer of these securities is subject to the terms and conditions of a Development Agreement with Sonic Industries LLC dated ______________, and certain License Agreements executed thereunder.  Reference is made to said Development Agreement and to the restrictive provisions of the articles and bylaws of this corporation.”

A stop transfer order shall be in effect against the transfer of any securities on the Developer’s records during the term of this agreement, unless the transferee is approved in accordance with subsection (c) above.

(f)           Sonic’s consent to a transfer of Developer’s interest under subsection (b) is expressly conditioned upon the continuing personal guarantee of the obligations of Developer under this Agreement by all transferees and the execution by said transferees of personal guarantees of each License Agreement entered into pursuant to this Agreement.

(g)           Developer acknowledges and agrees that the restrictions on transfer imposed herein are reasonable and are necessary to protect the Developmental Rights, the Sonic System and the Proprietary Marks, as well as Sonic’s excellent reputation and image, and are for the protection of Sonic, Developer and other licensees.  Any assignment or transfer permitted by this section shall not be effective until Sonic receives a completely executed copy of all transfer documents, and consents in writing.

(h)           This Agreement shall inure to the benefit of Sonic, its successors and assigns, and Sonic shall have the right to transfer or assign all or any part of its interest herein to any person or legal entity.

15.             MULTIPLE PARTY DEVELOPER.   If the Developer consists of more than one person or entity, each of those persons and/or entities shall have joint and several liability under this Agreement.  If the Developer consists of more than one person or entity, each of those persons and/or entities hereby irrevocably appoint __________________________________________ as their lawful attorney-in-fact to execute all amendments to this Agreement, all License Agreements issued pursuant to this Agreement, all addenda and amendments to those License Agreements, and all other documents and instruments Sonic may request in connection with this Agreement.  The foregoing appointment shall constitute a power coupled with an interest and shall survive the death or incapacity of any of the foregoing persons.
13


16.            NOTICES

For purposes of this section, “notice address” shall be:

(a)           If to Sonic at:                         300 Johnny Bench Drive
Oklahoma City, Oklahoma 73104
Attention:  General Counsel

(b)           If to Developer at:                 ______________________________
______________________________

or at such other address as Sonic or Developer shall have specified by notice to the other party hereunder.  All notices hereunder shall be in writing and shall be duly given and deemed effective as follows:

(i)           if by hand delivery to a notice address, notice shall be effective upon delivery,

(ii)           if sent by receipted, overnight delivery service to a notice address, notice shall be effective the earlier of receipt by addressee or 24 hours from deposit with the delivery service, or

(iii)           if by registered or certified, postage prepaid mail to a notice address, notice shall be effective upon receipt by addressee.

17.             NO JOINT VENTURE.   Nothing herein contained or done pursuant to this Agreement shall be deemed to constitute Developer as an agent, partner, or joint venturer of Sonic and neither party shall have the authority to act for the other in any manner to create obligations or debts which would be binding on the other; neither party shall be responsible for any obligations or expenses whatsoever of the other.

18.             GOVERNING LAW .   This Agreement shall be deemed to have been made and entered into in the State of Oklahoma and all rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of Oklahoma. Developer agrees that jurisdiction over Developer and venue exist and are proper and that venue shall exclusively be within the same federal judicial district where the corporate headquarters of Sonic are located and within any and all other courts, whether federal, state, or local, located within that district.  Developer waives any and all defenses and objections, and Developer agrees not to assert any defense or objection to jurisdiction over Developer and to venue as described hereinabove regarding any action, proceeding or litigation instituted by Sonic against Developer.  Sonic and Developer that any and all breaches of this agreement, including breaches occurring after termination, cancellation, or expiration of this agreement, shall be deemed to have occurred where the corporate headquarters of Sonic are located.

19.             REMEDIES CUMULATIVE; WAIVER; CONSENTS.   All rights and remedies of Sonic and of Developer enumerated in this Agreement shall be cumulative and, except as specifically contemplated otherwise by this Agreement, none shall exclude any other right or remedy allowed at law or in equity and said rights or remedies may be exercised and enforced concurrently.  No waiver by Sonic or by Developer of any covenant or condition or the breach of any covenant or condition of this Agreement to be kept or performed by the other party shall constitute a waiver by the waiving party of any subsequent breach or nonobservance on any other occasion of the same or any other covenant or condition of this Agreement.  Subsequent acceptance by Sonic of any payments due to it hereunder shall not be deemed to be a waiver by Sonic of any preceding breach by Developer of any terms, covenants or conditions of this Agreement.
14


Whenever this Agreement requires Sonic’s prior approval or consent, Developer shall make a timely written request to Sonic therefor, and such approval shall be obtained in writing.  Sonic will also consider granting, in its sole discretion, other reasonable requests individually submitted by Developer in writing for Sonic’s prior waiver of any obligation imposed by this Agreement.  Sonic makes no warranties or guarantees upon which Developer may rely, and assumes no liability or obligation to Developer, by providing any waiver, approval, consent, or suggestion to Developer in connection with this Agreement, or by reason of any neglect, delay or denial of any request therefor.  Unless otherwise consented to in writing, any waiver granted by Sonic shall be subject to Sonic’s continuing review, may subsequently be revoked for any reason if the violation remains outstanding effective upon Developer’s receipt of 20 days prior written notice, and shall be without prejudice to any other rights Sonic may have.

20.             SEVERABILITY.   If any provision of this Agreement or the application of any provision to any person or to any circumstances shall be determined to be invalid or unenforceable, then such determination shall not affect any other provision of this Agreement or the application of such provision to any other person or circumstance, all of which other provisions shall remain in full force and effect, and it is the intention of Sonic and Developer that if any provision of this Agreement is susceptible of two or more constructions, one of which would render the provision enforceable and the other or others of which would render the provision unenforceable, then the provision shall have the meaning which renders it enforceable.

21.             ENTIRE AGREEMENT.   This Agreement together with all License Agreements executed hereunder constitutes the entire agreement between Sonic and Developer in respect of the subject matter hereof, and this Agreement supersedes all prior and contemporaneous agreements between Sonic and Developer in connection with the subject matter of this Agreement.  No officer, employee or other servant or agent of Sonic or Developer is authorized to make any representation, warranty or other promise not contained in this Agreement.  No change, termination or attempted waiver of any of the provisions of this Agreement shall be binding upon Sonic or Developer unless in writing and signed by Sonic and Developer.

22.             JOINT AND SEVERAL OBLIGATION.   If the Developer consists of more than one person, their liability under this Agreement shall be deemed to be joint and several.

23.             COUNTERPART; PARAGRAPH HEADINGS; PRONOUNS.   This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.  The section headings in this Agreement are for convenience of reference only and shall not be deemed to alter or affect any provision thereof.  Each pronoun used herein shall be deemed to include the other number and genders.
15


24.             ACKNOWLEDGMENTS.                                                                 Developer acknowledges that:

(a)           It has conducted an independent investigation of the business contemplated by this Agreement and recognizes that it involves business risks making the success of the venture largely dependent upon the business abilities of Developer.  Sonic expressly disclaims the making of, and Developer acknowledges that it has not received or relied upon, any warranty or guarantee, express or implied, as to the potential volume, profits or success of the business venture contemplated by this Agreement, including without limitation any representation regarding the likelihood of further or timely development by Sonic Restaurants, Inc. or other developers in the Franchised Area.

(b)           It has no knowledge of any representations by Sonic or its officers, directors, shareholders, employees, agents or servants about the business contemplated by this Agreement, that are contrary to the terms of this Agreement or the documents incorporated herein, and further represents to Sonic, as an inducement to its entry into this Agreement, that it has made no misrepresentations in obtaining this Agreement.

(c)           It has received, read and understood this Agreement, the attachments hereto, including the License Agreement attached hereto as Exhibit B; Sonic has fully and adequately explained the provisions of each to its satisfaction; and Sonic has accorded it ample time and opportunity to consult with advisors of its own choosing about the potential benefits and risks of entering into this Agreement.

(d)           It is aware of the fact that some present licensees of Sonic may operate under different forms of agreement and, consequently, that Sonic’s obligations and rights in respect to its various franchise owners may differ materially in certain circumstances.

In witness of their agreement, the parties hereto have duly executed this Agreement as of the day and year first written above.

Sonic:                                                                                     Sonic Industries LLC

By: _________________________________
       (Vice) President
Dated: _______________________, 2007


Developer:                                                                                             ____________________________________

Dated: ______________________, 2007
16


EXHIBIT A
TO
DEVELOPMENT AGREEMENT


[Description of Reserved Area]

EXHIBIT B
TO
DEVELOPMENT AGREEMENT


[#7 Form of License Agreement]

EXHIBIT C
TO
DEVELOPMENT AGREEMENT


[Developing Market Advertising Addendum to License Agreement]

DEVELOPING MARKET ADVERTISING ADDENDUM TO LICENSE
AGREEMENT(PRIVATE)
(CIF ______)

Sonic Industries LLC (“Sonic”), a Delaware limited liability company, and ____________________ (the “Licensee”) hereby enter into this Addendum to License Agreement (this “Agreement”) as of this   _ day of   , 2007.

Whereas, Sonic and the Licensee entered into that certain Development Agreement dated the __ day of ___________, 2007 (the “Development Agreement”) which provides that in the event the geographical area to be developed by Licensee (the “Franchised Area”) is in a Designated Market Area (“DMA”) that Sonic has identified as a “Developing Market” that Licensee will enter into this Agreement;

Whereas, the Franchised Area is in a DMA identified by Sonic as a Developing Market;

Now, therefore, in consideration of Sonic’s and the Licensee’s mutual covenants and agreements contained in this Agreement and as required by the Development Agreement, and for other good and valuable consideration which the parties hereby acknowledge, the parties agree as follows:

1.    Developing Market Advertising .  The parties hereby add the following new Section 11.01(i) to the License Agreement:

(i)           Licensee acknowledges that the Franchised Area is located in a Designated Market Area (“DMA”) that Sonic has identified as a “Developing Market” and that the provisions of Section 11.01(a) for Developing Markets shall apply.

2.            Governing Law .  The internal laws of Oklahoma shall govern the terms and provisions of this Agreement.

3.            Other Provisions .  Except to the extent modified by this Agreement, the terms and provisions of the License Agreement shall remain in full force and effect.

Sonic:                                                                                     Sonic Industries LLC

By: _________________________________
                                      (Vice) President

Licensee:                                                                                                ___________________________________


EXHIBIT D
TO
DEVELOPMENT AGREEMENT

[Special Training Addendum to License Agreement]

SPECIAL TRAINING ADDENDUM TO LICENSE AGREEMENT(PRIVATE)
(CIF ______)

Sonic Industries LLC (“Sonic”), a Delaware limited liability company, and ____________________ (the “Licensee”) hereby enter into this Addendum to License Agreement (this “Agreement”) as of this   _ day of   , 2007.

Whereas, Sonic and the Licensee entered into that certain Development Agreement dated the __ day of _______, 2007 (the “Development Agreement”) which provides that in the event the Licensee is developing its first three Sonic drive-ins, Developer will be required to accept and pay for the services of the Sonic A-Team, a special training team, and will enter into this Agreement;

Whereas, the Licensee is developing its first three Sonic drive-ins;

Now, therefore, in consideration of Sonic’s and the Licensee’s mutual covenants and agreements contained in this Agreement and as required by the Development Agreement, and for other good and valuable consideration which the parties hereby acknowledge, the parties agree as follows:

1.    Special Training Program .  The parties hereby add the following new Section 6.04(c) to the License Agreement:

“(c)           Licensee further acknowledges the importance of obtaining proper training of its employees during the development of its first drive-ins and agrees to accept and pay the expenses of the Sonic A-Team, a special training team, in connection with the opening of the Sonic Restaurant.”

2.            Governing Law .  The internal laws of Oklahoma shall govern the terms and provisions of this Agreement.

3.            Other Provisions .  Except to the extent modified by this Agreement, the terms and provisions of the License Agreement shall remain in full force and effect.

Sonic:                                                                                     Sonic Industries LLC

By: _________________________________
      (Vice) President

Licensee:                                                                                                ___________________________________

            


SCHEDULE I


Guaranty and Restriction Agreement



GUARANTY AND RESTRICTION AGREEMENT

The undersigned (the “Guarantor”), Sonic Industries LLC (“Sonic”), and ___________ (the “Developer”), enter into this Guaranty and Restriction Agreement (this “Agreement”) as of the ____ day of __________, 2007.
 
                                                                                                                                                                                              W I T N E S S E T H:

Whereas, Sonic is entering into a Development Agreement (the “Development Agreement”) dated the same date as this Agreement with the Developer; and

                Whereas, as a condition to entering into the Development Agreement, Sonic has asked that the Guarantor provide a personal guaranty of certain obligations of the Developer set forth in the Development Agreement; and

                Whereas, Sonic also has asked that the Guarantor and the Developer agree to a restriction on the transfer of the equity interests in the Developer; and

Whereas, the Guarantor is willing to give a personal guaranty as recited above in accordance with the terms and conditions of this Agreement.

Now, therefore, in consideration of the mutual covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties agree as follows:

1.            Personal Guaranty of all Obligations .  The Guarantor hereby guarantees the prompt and full payment and performance of the following obligations under the Development Agreement:

(a)           All royalties due Sonic pursuant to the License Agreements entered into by and between the Developer and Sonic pursuant to the Development Agreement.

(b)           All brand contribution fees to the Sonic Brand Fund pursuant to the License Agreements entered into by and between the Developer and Sonic pursuant to the Development Agreement.

(c)           All contributions to approved advertising cooperatives pursuant to the License Agreements entered into by and between the Developer and Sonic pursuant to the Development Agreement.

(d)           All other duties and financial obligations owing to Sonic or its affiliates by the Developer relating to the Development Agreement and the Sonic drive-in restaurants covered by the License Agreements, including any sign lease agreements, entered into by and between the Developer and Sonic pursuant to the License Agreements.


(e)           The Guarantor hereby approves and agrees to be bound by all duties and financial obligations owing to Sonic or its affiliates by the Developer under all  existing and future amendments to the Development Agreement entered into by Developer and Sonic.

2.            Nature of Guaranty .  This guaranty shall constitute an absolute, unconditional, irrevocable and continuing guaranty.  Sonic shall not have any obligation to take any action against any other person or entity for collection of any payments prior to making any demand for payment or bringing any action against the Guarantor.

3.            Permitted Actions .  From time to time, Sonic shall have the right to take, permit or suffer to occur any “Permitted Action,” as defined below, without modifying, reducing, waiving, releasing, impairing or otherwise affecting the obligations of the Guarantor under this Agreement, without giving notice to the Guarantor or obtaining the Guarantor’s consent, without the necessity of any reservations of rights against the Guarantor, and without liability on the part of Sonic.  As used in this Section 3, the phrase “Permitted Action” shall mean (a) an agreed amendment, extension of time or change in the manner or place of payment or performance of any financial obligation or duty under the Development Agreement or the License Agreements, (b) any waiver, leniency or indulgence by Sonic of any default under the provisions of the Development Agreement or the License Agreements and (c) any delay or failure by Sonic to exercise any right or remedy Sonic may have under the Development Agreement or the License Agreements.

4.            Waiver of Notice of Acceptance .  The Guarantor acknowledges and waives notice of Sonic’s acceptance of the Guarantor’s guaranty pursuant to the terms of this Agreement.

5.            Restrictions on Transfer .  The Developer shall not issue any additional shares of capital stock without the prior, written consent of Sonic.  The Guarantor shall not transfer, assign or pledge any of its shares of capital stock in the Developer to any person without the prior, written consent of Sonic.

6.            Disputes .  Any dispute between the parties concerning this Agreement will be resolved in accordance with the arbitration provisions contained in the Development Agreement.

7.            Attorneys’ Fees, Costs and Expenses .  In any action brought by Sonic to enforce the obligations of the Guarantor, Sonic also shall have the right to collect its reasonable attorneys’ fees, court costs, and expenses incurred in the action.

8.            Headings .  The headings used in this Agreement appear strictly for the parties’ convenience in identifying the provisions of this Agreement and shall not affect the construction or interpretation of the provisions of this Agreement.

9.            Binding Effect .  This Agreement binds and inures to the benefit of the parties and their respective successors, legal representatives, heirs and permitted assigns.


10.            Waiver .  The failure of a party to insist in any one or more instances on the performance of any term or condition of this Agreement shall not operate as a waiver of any future performance of that term or condition.

11.            Governing Law .  Notwithstanding the place where the parties execute this Agreement, the internal laws of Oklahoma shall govern the construction of the terms and the application of the provisions of this Agreement.

12.            Amendments .  No amendments to this Agreement shall become effective or binding on the parties, unless agreed to in writing by all of the parties.

13.            Time .  Time constitutes an essential part of each and every part of this Agreement.

14.            Notice .  Except as otherwise provided in this Agreement, when this Agreement makes provision for notice or concurrence of any kind, the sending party shall deliver or address the notice to the other party by certified mail, telecopy, or nationally-recognized overnight delivery service to the following address or telecopy number:

Sonic:                                                                                     300 Johnny Bench Drive
Oklahoma City, Oklahoma 73104
Attention: General Counsel
Facsimile (405) 225-5973
Guarantor:                                                                           _____________________________
                                                                                                              _____________________________
(___) ___-____

Developer:                                                                           _____________________________
                                                                                                              _____________________________
(___) ___-____

All notices pursuant to the provisions of this Agreement shall run from the date that the other party receives the notice or three business days after the party places the notice in the United States mail.  Each party may change the party’s address by giving written notice to the other parties.

Executed and delivered as of the day and year first set forth above.

Sonic:                                                                                     Sonic Industries LLC
By: ________________________________
      (Vice) President

Guarantor:                                                                                              ____________________________________

Developer:                                                                                             ____________________________________
By: _________________________________
       (Vice) President

Exhibit 21.01

Subsidiaries of the Company

America’s Drive-In Brand Properties LLC, a Kansas limited liability company
America’s Drive-In Holding Inc., a Kansas corporation
America’s Drive-In Restaurants LLC, a Kansas limited liability company
Sonic Capital LLC, a Delaware limited liability company
Sonic Community Development, Inc., an Oklahoma corporation
Sonic Industries LLC, a Delaware limited liability company
Sonic Industries Franchising LLC, a Delaware limited liability company
Sonic Industries Services Inc., an Oklahoma corporation
Sonic Restaurants, Inc., an Oklahoma corporation
Sonic Property Development, L.L.C., an Oklahoma limited liability company
Sonic Technology Fund, L.L.C., an Oklahoma limited liability company
Sonic Value Card, L.L.C., a Virginia limited liability company
SPOTlight, LLC, an Oklahoma limited liability company
SRI Real Estate Holding LLC, a Delaware limited liability company
SRI Real Estate Properties LLC, a Delaware limited liability company


As of August 31, 2007, Sonic Restaurants, Inc. or America’s Drive-In Holding Inc. owns the majority interest in 654 partnerships and limited liability companies, each of which operates a Sonic Drive-In restaurant.  The names of those 654 majority-owned entities have been omitted.
 
 
 
Exhibit 23.01
Consent of Independent Registered Public Accounting Firm
 
 
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-26359) pertaining to the Sonic Corp. Savings and Profit Sharing Plan, Registration Statement (Form S-8 No. 333- 131450 ) pertaining to the Sonic Corp. 2006 Long-Term Incentive Plan, the Registration Statement (Form S-8 No. 333-64890) pertaining to the 1991 Sonic Corp. Stock Option Plan, 2001 Sonic Corp. Stock Option Plan and 2001 Sonic Corp. Directors’ Stock Option 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, the Registration Statement (Form S-8 No. 33-40988) pertaining to the 1991 Sonic Corp. Stock Purchase Plan, the Registration Statement (Form S-8 No. 33-40987) pertaining to the 1991 Sonic Corp. Directors’ Stock Option Plan and the Registration Statement (Form S-3 No. 33-95716) for the registration of 1,420,000 shares of its common stock, and the related Prospectuses of our reports dated October 17, 2007, with respect to the consolidated financial statements and schedule of Sonic Corp. and the effectiveness of internal control over financial reporting of Sonic Corp., included in the Annual Report (Form 10-K) for the year ended August 31, 2007.
 
 
 
  ERNST & YOUNG LLP
Oklahoma City, Oklahoma
 
October 24, 2007
 



 


 
Exhibit 31.01
CERTIFICATION

I, J. Clifford Hudson, certify that:

1. I have reviewed this annual report on Form 10-K of Sonic Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
 
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
 
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in this case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
 
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 


Date: October 26, 2007
/s/ J. Clifford Hudson
J. Clifford Hudson,
Chief Executive Officer

 

Exhibit 31.02

CERTIFICATION

I, Stephen C. Vaughan, certify that:

1. I have reviewed this annual report on Form 10-K of Sonic Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
 
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in this case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
 
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 


Date: October 26, 2007
/s/ Stephen C. Vaughan
Stephen C. Vaughan,
Chief Financial Officer

 

Exhibit 32.01

 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
 
 
The undersigned hereby certifies that to his knowledge the annual report of Sonic Corp. (the “Company”) filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly represents, in all material respects, the financial condition and results of operations of the Company.
 
 

 
Date: October 26, 2007
 
 
 
 
 
 
 
/s/ J. Clifford Hudson
 
 
J. Clifford Hudson,
 
 
Chief Executive Officer
 
 

Exhibit 32.02

 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
 
 
The undersigned hereby certifies that to his knowledge the annual report of Sonic Corp. (the “Company”) filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly represents, in all material respects, the financial condition and results of operations of the Company.
 
 

 
Date: October 26, 2007
 
 
 
 
 
 
 
/s/ Stephen C. Vaughan
 
 
Stephen C. Vaughan,
 
 
Chief Financial Officer