SONIC CORP (Form: 10-K, Received: 10/25/2013 14:29:20)

FORM 10-K

SONIC CORP.

PART I

Item 1. Business

Overview

Sonic Corp. operates and franchises the largest chain of drive-in restaurants (“Sonic Drive-Ins”) in the United States. References to “Sonic Corp.,” “Sonic,” “the Company,” “we,” “us” and “our” in this Form 10-K are references to Sonic Corp. and its subsidiaries.

The first Sonic Drive-In restaurant opened in 1953. As of the end of our fiscal year on August 31, 2013, the Sonic system included 3,522 Sonic Drive-Ins in 44 states of which 396 were owned and operated by Sonic Restaurants, Inc., the Company’s operating subsidiary (“Company Drive-Ins”), and 3,126 were owned and operated by franchisees (“Franchise Drive-Ins”).

Sonic Corp. was incorporated in the State of Delaware in 1990 in connection with its 1991 initial public offering of common stock. Sonic is publicly traded on the NASDAQ Stock Exchange (Ticker: SONC).

Restaurant Design and Construction

The typical Sonic Drive-In consists of a kitchen housed in a one-story building, which is approximately 1,500 square feet, flanked by canopy-covered rows of 16 to 24 parking spaces, with each space having its own payment terminal, intercom speaker system and menu board. At a typical Sonic Drive-In , a customer drives into one of the parking spaces, orders through the intercom speaker system and has the food delivered by a carhop. Most Sonic Drive-Ins also include a drive-thru lane and patio seating to provide customers alternative dining options.

Sonic maintains a highly diverse menu. The strategy is to ensure the menu items appeal to a broad range of target customers. The menu includes a variety of traditional and healthy choices as well as creative and fun items. Sonic’s signature food items include specialty drinks (such as cherry limeades and slushes), ice cream desserts, made-to-order sandwiches and hamburgers , a variety of hot dogs including six-inch premium beef hot dogs and f ootlong quarter - pound coneys, hand-battered onion rings, tater tots and wraps . Sonic Drive-Ins also offer breakfast items that include a variety of breakfast burritos and serve the full menu all day.

Strategy

Sonic has developed and implemented a strategy designed to enhance the Sonic brand and to achieve high levels of customer satisfaction and repeat business. The key elements of its strategy are:

·	A distinctive drive-in concept focusing on a unique menu of quality, made-to-order food products including several signature items ;

·	A commitment to customer service featuring the quick delivery of food by skating carhops ; and

·	A commitment to strong franchisee relationships.

Sonic’s growth strategies include the following:

S ame-store sales growth fueled by Sonic’s core brand strengths, including consistent drive-in execution, improved high-quality products, new product news and service differentiation with skating carhops. These strengths are complemented by increased media effectiveness, the use of innovative technology to enhance the customer experience and improved drive-in and operating margins with the use of the Sonic system’s new point-of-sale technology;

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·	Improved performance of Company Drive-Ins, including consistent and improved operations execution, improved speed of service, cleanliness of drive-ins and focus on the customer experience; and

·	Expansion of Sonic Drive-Ins.

Restaurant Locations

As of August 31, 2013, 3,522 Sonic Drive-Ins were in operation from coast to coast in 44 states , consisting of 396 Company Drive-Ins and 3,126 Franchise Drive-Ins .

Expansion

During fiscal year 2013 , we opened 27 Sonic Drive-Ins, which consisted of two Company Drive-Ins and 25 Franchise Drive-Ins. Expansion plans for fiscal year 2014 involve the opening of multiple Sonic Drive-Ins under development agreements, as well as single-store development by new and long-standing franchisees. We believe that our existing , as well as newly opened markets , offer significant growth opportun ities for both Company Drive-In and Franchise Drive-In expansion over the long term.

Marketing

We have a fully integrated marketing strategy that includes a national advertising campaign. We have designed this marketing program to differentiate Sonic Drive-Ins from our competitors by emphasizing high quality distinctive made-to-order menu items and personalized service featuring skating carhops. 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 highlight limited time products and signature menu items.

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 4 under Franchise Program - Franchise Advisory Council .) Funding for our marketing plan is provided by the System Marketing Fund, the Sonic Brand Fund and local advertising expenditures. The System Marketing Fund primarily focuses on purchasing advertising on national cable and broadcast networks and other national media, sponsorship and brand enhancement opportunities. The Sonic Brand Fund supports national media production as well as other programs designed to promote or enhance the Sonic brand. Franchisees are also required to spend additional amounts on local advertising, typically through participation in the local advertising cooperative. Our franchise agreements require advertising contributions by franchisees of up to 5.9% of gross sales to these marketing funds and local advertising cooperatives .

Purchasing

We negotiate with suppliers for the Sonic Drive-Ins’ primary food products 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 and packaging items. 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 Sonic Drive-Ins. We require all Sonic Drive-Ins to purchase from approved distributors.

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 program includes components to monitor and ensure the safety and quality of Sonic’s products and procedures at every stage of the food preparation and production cycle including, but not limited to, employee training, supplier product inspections and testing and unannounced drive-in food safety

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auditing by independent third parties. All Sonic Drive-In employees are required to be trained in food safety in their first stage of training, utilizing an internal training program, referred to as the STAR Training Program. This program includes specific training on food safety information and requirements for every station in the drive-in. We also require our drive-in managers and assistant managers to pass and maintain the ServSafe® certification. ServSafe® is the most recognized food safety training certification in the restaurant industry.

I nformation Systems

Sonic Drive-Ins are equipped with information technology systems that are designed to provide operational tools for sales and inventory. This technology includes industry- specific, off-the-shelf systems as well as proprietary software that assist in managing food and beverage costs. These solutions are integrated with our point-of-sale systems to provide daily, weekly and period-to-date information that is important for managers to run efficient and effective operations. We have centralized financial and accounting systems for Company Drive-Ins . We also have systems that receive transaction-level data from Franchise Drive-Ins. We believe these systems are important in analyzing and improving profit margins and accumulating marketing information. In addition, w e use a Pay-at-Your-Stall ( “ PAYS ” ) payment system, a network-based credit-card terminal at each stall of the drive-in to facilitate credit and debit card transactions by the customer. We are also making strategic investments in technology tools such as mobile payment and gift card capabilities, digital technology point-of-purchase menu boards, and social media to enhance the customers’ experience and drive sales. We are further investing in new point-of-sale systems to improve drive-in level operations and profits.

Company Operations

Management Structure. A typical Company 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 Company Drive-In. Supervisors oversee several Company Drive -Ins and supervise the managers of those drive-ins. The employee compensation program at Company Drive-Ins for managers and supervisors is comprised of a guaranteed base compensation with additional significant incentive compensation based on drive-in level performance.

Company Drive-In Data . The following table provides certain financial information relating to Company Drive-Ins and the number of Company Drive-Ins opened, purchased from or sold to franchisees, and closed during the past five fiscal years and should be read in conjunction with the information in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.


	2013		2012		2011		2010		2009
Average sales per Company Drive-In	$	990	$	958	$	920	$	893	$	954
( in thousands )
Number of Company Drive-Ins:
Total open at beginning of year		409		446		455		475		684
New Company Drive-Ins		2		1		3		5		11
Purchased from franchisees		1		-		1		-		-
Sold to franchisees ⁽¹⁾		-		(35)		(6)		(16)		(205)
Closed (net of re-openings)		(16)		(3)		(7)		(9)		(15)
Total open at end of year		396		409		446		455		475
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(1) The large number of drive-ins sold by Sonic in fiscal 2009 reflects the refranchising initiative which Sonic implemented in fiscal 2009 and includes 88 drive-ins in which Sonic retained a noncontrolling interest.

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Franchise Program

General . As of August 31, 2013, we had 3,126 Franchise Drive-Ins in operation. A large number of successful multi-unit franchisee groups have developed during the Sonic system’s 60 years of operation. Those franchisees continue to develop new Franchise Drive-Ins in their franchise territories either through development agreements or single-site development. Our franchisees opened 25 drive-ins during fiscal year 2013. We consider our franchisees a vital part of our continued growth and believe our relationship with our franchisees is good.

Franchise Agreements . For traditional drive-ins, the current franchise agreement provides for a franchise fee of $45,000 per drive-in, a royalty fee of up to 5% of gross sales on a graduated percentage basis, and a 20-year term. For fiscal year 2013, Sonic’s average royalty rate was 3.74%. The franchisee also pays advertising fees of up to 5.9% of gross sales .

From time to time, at our discretion, the Company offers incentives to franchisees to increase the development of Sonic Drive-Ins in certain markets. These incentives typically offer reduced or waived franchise fees and/or royalty fees upon certain conditions.

Development Agreements . We use development agreements to facilitate the planned expansion of the Sonic Drive-In restaurant chain through single and multiple unit development. While many existing franchisees continue to expand on a single drive-in basis, more than half of the new Franchise Drive-Ins opened during fiscal year 2013 occurred as a result of then-existing development agreements. Each 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.

We offer development agreements for construction of one or more new Sonic Drive-Ins over a defined period of time and in a defined geographic area. Franchisees who enter into development agreements are required to pay a fee, a portion of which is credited against franchise fees due when Sonic Drive-Ins are opened in the future. Franchisees may forfeit such fees and lose their rights to future development if they do not maintain the required schedule of openings.

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. As described above, we may offer incentives to franchisees from time to time, at our discretion, to increase the development of Sonic Drive-Ins.

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 23 members selected by Sonic . We have seven executive committee members who are selected at large and 16 regional members representing all regions of the country. We also have four Franchise Advisory Council task groups comprised of 52 members who generally serve three-year terms and lend support on individual key priorities.

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. The table should be read in conjunction with the information in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.

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	2013		2012		2011		2010		2009
Average sales per Franchise Drive-In	$	1,125	$	1,081	$	1,054	$	1,043	$	1,122
( in thousands )
Number of Franchise Drive-Ins:
Total open at beginning of year		3,147		3,115		3,117		3,069		2,791
New Franchise Drive-Ins		25		36		40		80		130
Sold to the Company		(1)		-		(1)		-		-
Purchased from the Company ⁽¹⁾		-		35		6		16		205
Closed (net of re-openings)		(45)		(39)		(47)		(48)		(57)
Total open at end of year		3,126		3,147		3,115		3,117		3,069
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Competition

We compete in the restaurant industry, specifically in the segment known as the quick-service restaurant (“QSR”) segment, a highly competitive industry in terms of price, service, 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 distinctive food and service with signature food items and skating carhops and the method of food preparation (made-to-order). 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 service establishments , including QSRs, casual - dining restaurants and convenience stores . A significant change in market conditions or in pricing or other marketing strategies by one or more of Sonic’s competitors could have an adverse impact on Sonic’s sales, earnings and growth. Furthermore, the restaurant industry has few barriers to entry, and new competitors may emerge at any time. In selling franchises, we als o compete with many franchisors of QSR and other restaurants , in addition to franchisors of 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 Sonic Drive-Ins , which tends to reduce customer visits to our drive-ins.

Employees

As of August 31, 2013 , we had 333 full-time corporate employees and approximately 10,900 full -time and part-time restaurant employees . None of our employees are subject to a collective bargaining agreement. We believe that we have good labor relations with our employees.

Intellectual Property

Sonic owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information, including the “Sonic” logo and trademark, which are of material importance to our business. Depending on the jurisdiction, trademarks and service marks generally are valid as long as they are used and/or registered. Patents, copyrights and licenses are of varying durations.

Customers

Our business is not dependent upon either a single customer or a small group of customers.

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Government Contracts

No portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.

Government Regulation

Our restaurants are subject to licensing and regulation by state and local health, safety, fire and other authorities, including licensing requirements and regulations for the sale of food. The development and construction of new restaurants is subject also to compliance with applicable zoning, land use and environmental regulations. We are also subject to federal regulation and state laws that regulate the offer and sale of franchises and substantive aspects of the franchisor-franchisee relationship. Various federal and state labor laws govern our relationship with our employees and affect operating costs. These laws govern minimum wage requirements, overtime pay, meal and rest breaks, unemployment tax rates, health care and benefits, workers' compensation rates, citizenship or residency requirements, child labor regulations and discriminatory conduct. Federal, state and local government agencies have established or are in the process of establishing regulations requiring that we disclose to our customers nutritional information regarding our menu items. We have processes in place to monitor compliance with applicable laws and regulations governing our operations.

Environmental Matters

We are not aware of any federal, state or local environmental laws or regulations that will materially affect our earnings or competitive position or result in material capital expenditures. However, we cannot predict the effect on operations of possible future environmental legislation or regulations. During fiscal year 2013, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.

Available Information

We maintain a website with the address of 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 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.

Forward-Looking Information

This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, principally in the sections captioned “Business,” “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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. In some cases, forward-looking statements can be identified by words such as “anticipate,” “estimate,” “expect,” “goals,” “guidance,” “plan,” “may,” “will,” “would” and similar expressions. 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. We undertake no obligation to publicly update or revise them, except as may be required by law.

Item 1A. Risk Factors

We caution you that our business and operations are subject to a number of risks and uncertainties. The factors listed below are important factors that could cause our actual results to differ materially from our historical

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results and from projections in forward-looking statements contained in this report, in our other filings with the Securities and Exchange Commission, in our news releases and in oral statements by our representatives. However, other factors that we do not anticipate or that we do not consider significant based on currently available information may also have an adverse effect on our results.

Events reported in the media, including social 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 or food tampering have in the past severely injured the reputations of participants in the restaurant industry and could affect us in the future. The potential for terrorism affecting 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 ability to remain a trusted brand and increase sales and profits depends on our ability to manage the potential impact on Sonic of food-borne illnesses or reports of food-borne illnesses . We have implemented a food safety and quality assurance program to minimize the risk of food-borne illness . Nevertheless, these risks cannot be completely eliminated. Any outbreak of such illness attributed to our restaurants or within the food service industry, or any widespread negative publicity regarding our brand or the restaurant industry in general, 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 with respect to price, service, location, personnel, dietary trends, including nutritional content of quick-service foods, and quality of food and is often affected by changes in consumer tastes and preferences, 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 and our distinctive service experience. Other key competitive factors include the number and location of restaurants, speed of service, attractiveness of facilities, effectiveness of advertising and marketing programs and new product development by us and our competitors. We cannot ensure that we will compete successfully in the restaurant industry on these factors. In addition, s ome of our competitors have substantially larger marketing budgets, which may provide them with a competitive advantage. O ur system also competes within the QSR 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 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 different 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.

We have significantly increased the percentage of restaurants owned and operated by our franchisees. 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 they may not invest in facilities and initiatives as necessary to compete successfully in the restaurant industry. Franchisees also may fail to properly implement the requirements of the Patient Protection and Affordable Care Act (the “ACA”) enacted in 2010 or may respond to the ACA in a manner that is viewed negatively by employees or consumers. In addition, franchisees may not hire and train qualified managers and other restaurant personnel and may not adequately plan for and train their own successors.

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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.

Changes in economic, market and other conditions could adversely affect Sonic and its franchisees, and thereby Sonic’s operating results.

The QSR industry is affected by changes in economic conditions, consumer tastes and 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. We are also affected by these factors, and the concentration of 35% of our Drive-Ins in Texas and Oklahoma further subject us to risk particularly if these factors impact those states. Factors such as interest rates, inflation, gasoline prices, energy costs, food and packaging costs, labor and benefit costs, legal claims and the availability of management and hourly employees also affect restaurant operations and administrative expenses for all Drive-Ins . Economic conditions, including disruptions in the financial markets, 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 and the consumer environment, or by implementing alternative products or processes, or by implementing other cost reduction procedures. We cannot ensure, however, that we will be able to recover increases in operating expenses 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 , and we cannot ensure that we will be able to respond to or address the events and factors sufficiently . If customer demand decreases rapidly, our results of operations , including store-level sales and profits, would also decline precipitously. These events and factors include:

·	sales promotions and product offerings by Sonic and its competitors;

·	changes in average same-store sales and customer visits;

·	the inability to purchase sufficient levels of media;

·	variations in the price, availability and shipping costs of supplies such as food products;

·	seasonal effects on demand for Sonic’s products;

·	unexpected slowdowns in new drive-in development or franchise agreement renewals ;

·	changes in competitive conditions;

·	changes in economic conditions generally, including consumer spending ;

·	consumer sensitivity to price and value ;

·	changes in consumer tastes and preferences ;

·	changes in the cost of labor; and

·	weather and other acts of God .

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, acts of terrorism, financial or other difficulties of suppliers, disease or food-borne illnesses, droughts, inclement weather or other conditions. We source 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.

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

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

·	competition from other restaurants in current and future markets;

·	the degree of saturation in existing markets;

·	consumer interest in and acceptance of the Sonic brand in existing and new markets ;

·	the identification and availability of suitable and economically viable locations;

·	sales and profit levels at existing drive-ins;

·	the negotiation of acceptable lease or purchase terms for new locations;

·	permitting and regulatory requirements ;

·	the cost and availability of construction resources and financing ;

·	the ability to meet construction schedules;

·	the availability of qualified franchisees and their financial and other development capabilities , including their desire and ability to access and commit capital ;

·	the ability to hire and train qualified management personnel;

·	sufficient marketing efforts;

·	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 May 20, 2011 , the Com pany closed on a securitized financing facility comprised of a $ 500 million fixed rate term loan and a $ 100 million variable rate revolving credit facility. Effective July 22, 2013, we refinanced $155 million of the fixed rate term loan. As of August 31, 2013 , we had $ 292.4 million in outstanding debt including accrued interest under the fixed rate notes at an interest rate of 5.4% , with an anticipated repayment date of May 2018, and $155.2 million in outstanding debt including accrued interest under the fixed rate notes at an interest rate of 3.75%, with an anticipated repayment date of July 2020. We believe our current leverage ratio is moderate. We have historically generated net operating cash flows significantly in excess of our debt service requirements. In the event that we default on our debt obligations, the following consequences could apply :

·	O ur flexibility may be reduced in responding to changes in business , industry , regulatory or economic conditions.

·	Our ability to obtain additional financing in the future for acquisitions, working capital, capital expenditures and general corporate or other purposes could be impaired or any such financing may not be available on terms favorable to us.

Any substantial decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt service requirements or force us to modify our operations or sell assets; as a result a substantial portion of our cash flows could be required for debt service and might not be available for our operations or other purposes.

·	Unpaid amounts outstanding could become immediately due and payable.

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 depends 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),

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environmental (including litter), traffic and other regulations. More stringent requirements of local and state governmental bodies with respect to zoning, land use and environmental factors could delay, prevent or make cost prohibitive to the continuing operations of an existing restaurant or the development of new restaurants in particular locations. 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 work authorization requirements), federal and state laws prohibiting discrimination and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act. 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 have and will become subject to regulatory initiatives in the area of nutritional content, disclosure and 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 government-mandated increases in the minimum wage, and although such increases are not expected to be material, there may be material increases in the future. Enactment and enforcement of various federal, state and local laws, rules and regulations on immigration and labor organizations may adversely impact the availability and costs of labor for our restaurants in a particular area or across the United States. In addition, our vendors may be affected by higher minimum wage standards or availability of labor, which may increase the price of goods and services they supply to us.

We are implementing various aspects of the ACA in our business as they take effect. There are no assurances that a combination of cost management and price increases can accommodate all of the costs associated with compliance.

Litigation from customers, franchisees, employees and others could harm our reputation and impact operating results.

Our legal and regulatory environment exposes us to complex compliance and litigation risk. Claims of illness or injury relating to food content, food quality or food handling are common in the QSR industry , as are intellectual property claims (including often aggressive or opportunistic attempts to enforce patents used in information technology systems). In addition, class action lawsuits have been filed, and may continue to be filed, against various QSRs alleging, among other things, that QSRs have failed to disclose the health risks associated with foods we serve and that QSR marketing practices have encouraged obesity and other health issues. There are also litigation and compliance risks and costs associated with privacy, consumer data protection and similar laws, particularly as they apply to children, as well as laws related to the collection or use of consumer, employee or franchisee data. 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.

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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.

Our reputation and business could be materially harmed as a result of data breaches.

Unauthorized intrusion into portions of our computer systems or those of our franchisees that process and store information related to our customer s and their transactions may result in the theft of customer data. We rely on proprietary and commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as payment card and personal information. Further, the systems currently used for transmission and approval of payment card transactions, and the technology utilized in payment cards themselves, all of which can put payment card data at risk, are determined and legally mandated by payment card industry standards, not by us. Improper activities by third parties, advances in computer and software capabilities and encryption technology, new tools and discoveries and other events or developments may facilitate or result in a compromise or breach of our or our franchisees’ computer systems. Any such compromises or breaches could cause interruptions in our operations and damage to our reputation, subject us to costs and liabilities and hurt sales, revenues and profits.

Unreliable or inefficient drive-in tech nology and lack of support for drive-in technology could adversely impact operating results.

We rely on proprietary and commercially available technologies at our drive-ins, including point-of-sale and payment card systems. These systems may be unreliable or inefficient, and the technology vendors may limit or terminate product support and maintenance, which could impact the reliability of critical systems supporting drive-in operations. Additionally, replacement parts and support and maintenance skills may become scarce, cost prohibitive or non-existent. Any such deficiencies could impact sales and profitability by disrupting our operations, damaging our reputation or subjecting us to excessive costs and liabilities.

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 Company 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 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, or the prospect of such events, including war, terrorism and other international conflicts, public health issues , including health epidemics or pandemics, 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.

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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Of the 396 Company Drive-Ins operating as of August 31, 2013 , we operated 177 of them on property leased from third parties and 219 of them on property we own. The leases expire on dates ranging from 2014 to 2030 , with the majority of the leases providing for renewal options. All leases provide for specified monthly rental payments and /or additional rentals based on sales volume. Most leases require Sonic to maintain the property and pay the cost of insurance and taxes. We also own and lease 142 properties and sublease 44 properties to franchisees and other parties. These leases with franchisees expire on dates ranging from 2013 to 2030, with the majority of the leases providing for renewal options. The majority of the leases for Franchise Drive-Ins provide for percentage rent based on sales volume, with a minimum base rent. These leases generally require the franchisee to maintain the property and pay the costs of insurance and taxes. Virtually all of our owned properties are pledged as collateral under the terms of our securitized financing facility, as described under “Liquidity and Sources of Capital” in Part II, Item 7.

Our corporate headquarters is located in Oklahoma City. We have a n existing lease to occupy approximately 83,000 square feet. This 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. Mine Safety Disclosures

Not applicable .

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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	58	Chairma n of the Board of Directors, Chief Executive Officer and President	1985

Stephen C. Vaughan	47	Executive Vice President and Chief Financial Officer	1996

Omar R. Janjua	55	President of Sonic Restaurants, Inc. and Chief Restaurant Operations Officer of Sonic Industries Services Inc.	2009

John H. Budd III	46	Senior Vice President and Chief Development and Strategy Officer	2013

Craig J. Miller	52	Senior Vice President and Chief Information Officer of Sonic Industries Services Inc.	2011

James P. O’Reilly	4 7	Senior Vice President and Chief Marketing Officer	2012

Paige S. Bass	44	Vice President, General Counsel and Assistant Corporate Secretary	2007

Michelle E. Britten	46	Vice President and Controller	2012

Carolyn C. Cummins	55	Vice President of Compliance and Corporate Secretary	2004

Claudia San Pedro	44	Vice President of Investor Relations and Communications and Treasurer	2007

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 from November 2004 until May 2008 and again in April 2013 to the present . 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.

Stephen C. Vaughan has served as Executive Vice President of the Company and Chief Financial Officer since August 2008 and was the Company’s Vice President and Chief Financial Officer from November 2004 until August 2008. Mr. Vaughan also served as Treasurer of the Company from November 2001 until April 2005. He joined the Company in 1992.

Omar R. Janjua has served as President of Sonic Restaurants, Inc. since September 2009 and Chief Restaurant Operations Officer on Sonic Industries Services Inc. since March 2013. He also served as Executive Vice President of Operations of Sonic Industries Services Inc. from September 2010 until March 2013 . He served as Executive Vice President and Chief Operating Officer for The Steak n Shake Company from June 2007 to September 2009. Prior to joining Steak n Shake, Mr. Jan jua worked for 18 years with YUM! Brands, Inc. in its Pizza Hut operations in various positions of increasing responsibility, the most recent of which was Vice President of Company Operations.

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John H. Budd III has served as Senior Vice President and Chief Development and Strategy Officer since joining the Company in August 2013. Mr. Budd served in several progressive positions for Boston Consulting Group from 1997 until joining Sonic. His most recent position with Boston Consulting Group was Partner and Managing Director.

Craig J. Miller has served as Senior Vice President and Chief Information Officer of Sonic Industries Services In c. since J anuary 2010 . He served as the Executive Vice President and Chief Information Officer for Movie Gallery , Inc., also known as Hollywood Video, from September 2008 until September 2009 . In February 2010, Movie Gallery , Inc. filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Mr . Miller was Senior Vice President of Shared Information Services for Bank of America from February 2005 until July 2008.

James P. O’Reilly has served as Senior Vice President and Chief Marketing Officer of Sonic Corp. since April 2012. He served as the Chief Concept Officer of Einstein Noah Restaurant Group, Inc. from April 2009 until joining Sonic. Prior to April 2009, Mr. O'Reilly served for 13 years in progressive roles throughout the YUM! system including Senior Vice President of US Marketing, Chief Marketing Officer of KFC – US and international roles with KFC, Taco Bell, Pizza Hut and Yum! Restaurants International.

Paige S. Bass has served as Vice President and General Counsel of the Company since January 2007 and has also served as Assistant Corporate Secretary since October 2008. Ms. Bass joined the Company as Associate General Counsel in 2004. Prior to joining the Company, Ms. Bass was employed as an associate with the law firm of Crowe & Dunlevy in Oklahoma City, Oklahoma.

Michelle E. Britten has served as Vice President and Controller of the Company since November 2012. She served as Senior Director of Corporate Accounting from April 2009 until November 2012 and as Senior Director of SEC Reporting from January 2007 until April 2009. Ms. Britten joined the Company in 2005 as its Director of SEC Reporting.

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 joined the Company as Assistant General Counsel in 1999.

Claudia San Pedro has served as Vice President of Investor Relations and Communications of the Company since January 2013 and was its Vice President of Investor Relations from July 2010 until January 2013 . She served as Vice President of Investor Relations and Brand Strategies from October 2009 until July 2010. Ms. San Pedro has also served as Treasurer of the Company since January 2007 and as Treasurer of Sonic Industries Services Inc. and Sonic Restaurants, 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 Oklahoma Office of State Finance.

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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 sales price for the Company’s common stock during each fiscal quarter within the two most recent fiscal years as reported on NASDAQ.


Fiscal Year Ended					Fiscal Year Ended
August 31, 2013	High		Low		August 31, 2012	High		Low
First Quarter	$	10.83	$	9.06	First Quarter	$	9.31	$	6.35
Second Quarter	$	11.60	$	9.62	Second Quarter	$	8.45	$	6.49
Third Quarter	$	13.59	$	11.08	Third Quarter	$	8.57	$	6.84
Fourth Quarter	$	16.99	$	13.16	Fourth Quarter	$	10.94	$	7.92

Stockholders

As of October 15, 201 3 , the Company had 707 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, payments under the Company’s financing arrangements and other stockholder value - enhancing initiatives . As in the past, future payment of dividends will be considered after reviewing, among other factors, returns to stockholders, profitability expectations and financing needs.

Issuer Purchases of Equity Securities

While we did not repurchase any shares during the fourth quarter of fiscal 2013, we continue to maintain our share repurchase program. In August 2013, the Board of Directors extended the share repurchase program through August 31, 2014, with a total authorization of up to $40 million. Share repurchases may be made from time to time in the open market or in negotiated transactions, depending on share price, market conditions and other factors. The share repurchase program may be extended, modified, suspended or discontinued at any time .

Item 6. Selected Financial Data

The follo w ing 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 in Part II, Item 7 , and the Company’s Consolidated Financial Statements included elsewhere in this report.

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

		Year ended August 31,
	2013		2012		2011		2010		2009

Income Statement Data:
Company Drive-In sales	$	402,296	$	404,443	$	410,820	$	414,369	$	567,436
Franchise Drive-Ins:
Franchise royalties and fees		130,737		128,013		125,871		125,137		131,712
Lease revenue		4,785		6,575		6,023		6,879		3,985
Other		4,767		4,699		3,237		4,541		3,148
Total revenues		542,585		543,730		545,951		550,926		706,281
Cost of Company Drive-In sales		343,209		347,470		356,236		354,659		464,876
Selling, general and administrative		66,022		65,173		64,943		66,847		63,358
Depreciation and amortization		40,387		41,914		41,225		42,615		48,064
Provision for impairment of long-lived assets		1,776		764		824		15,161		11,163
Other operating (income) expense, net		1,943		(531)		(585)		763		(12,508)
Total expenses		453,337		454,790		462,643		480,045		574,953
Income from operations		89,248		88,940		83,308		70,881		131,328
Interest expense, net ⁽¹⁾		32,949		30,978		54,929		36,073		35,657
Income before income taxes	$	56,299	$	57,962	$	28,379	$	34,808	$	95,671
Net income-including noncontrolling interests		36,701		36,085		19,225		25,839		64,793
Net income-noncontrolling interests ⁽²⁾		-		-		-		4,630		15,351
Net income-attributable to Sonic Corp.	$	36,701	$	36,085	$	19,225	$	21,209	$	49,442

Income per share:
Basic	$	0.65	$	0.60	$	0.31	$	0.35	$	0.81
Diluted	$	0.64	$	0.60	$	0.31	$	0.34	$	0.81
Weighted average shares used in calculation:
Basic		56,384		60,078		61,781		61,319		60,761
Diluted		57,191		60,172		61,943		61,576		61,238

Balance Sheet Data:
Working capital	$	67,792	$	26,635	$	22,178	$	15,320	$	84,813
Property, equipment and capital leases, net		399,661		443,008		464,875		489,264		523,938
Total assets		660,794		680,760		679,742		737,320		849,041
Obligations under capital leases
(including current portion)		26,864		31,676		34,063		36,256		39,461
Long-term debt (including current portion)		447,294		481,793		497,013		591,621		699,550
Stockholders’ equity (deficit)		77,464		59,247		51,833		22,566		(2,352)
Cash dividends declared per common share		-		-		-		-		-
—————————

(1) Includes net (gain) loss from early extinguishment of debt of $4.4 million , $23.0 million, $0.3 million and $(6.4) million for fiscal years 2013 , 2011, 2010 and 2009, respectively.

(2 ) Effective April 1, 2010, we revised our compensation program at the Company Drive-In level. As a result of these changes, noncontrolling interests are immaterial for fiscal years 2013, 2012 and 2011 and have been included in payroll and other employee benefits.

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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-in restaurants in the United States . As of August 31, 2013 , the Sonic system was comprised of 3,522 drive-ins, of which 11 % were Company Drive-Ins and 89 % were Franchise Drive-Ins. Sonic ’s signature food items include s pecialty drinks (such as cherry limeades and slushes), ice cream desserts, made -to-order sandwiches and hamburgers, a variety of hot dogs including six-inch premium beef hot dogs and footlong quarter pound coneys, hand-battered onion rings, tater tots and wraps . Sonic Drive-Ins also offer breakfast items that include a variety of breakfast burritos and serve the full menu all day. We derive our revenues primarily from Company Drive-In sales and royalties from franchisees. We also receive revenues from leasing real estate to franchisees, franchise fees , earnings from minority investments in franchise operations and other miscellaneous revenues.

Costs of Company Drive-In sales relate directly to Company Drive-In sales. Other expenses, such as depreciation, amortization and general and administrative expenses, relate to our franchising operations, as well as Company Drive-In operations. Our revenues and Company Drive-In expenses are directly affected by the number and sales volumes of Company Drive-Ins . Our revenues and, to a lesser extent, selling, general and administrative expenses also are affected by the number and sales volumes of Franchise Drive-Ins. Franchise royalties and franchise fees are directly affected by the number of operating Franchise Drive-In s and new drive-in openings. Lease revenues are generated by the leasing of land and buildings for Company Drive-Ins that have been sold to franchisees.

Overview of Business Performance . System-wide same-store sales increased 2.3 % during fiscal year 2013 as compared to an increase of 2.2% for fiscal year 2012. Same-store sales at Company Drive-Ins increased by 2 .5 % during fiscal year 2013 as compared to an increase of 2.8% for 2012. We believe the successful implementation of initiatives, including product quality improvements , a greater emphasis on personalized service and a tiered pricing strategy , have set a solid foundation for growth which is reflected in our operating results . We continue to focus on our innovative product pipeline, and our recent shift to a higher proportion of national media expenditures is supporting our day-part promotional strategy to drive same-store sales. To achieve earnings per share growth, w e u tilize a multi-layered growth strategy which incorporates same-store sales growth, operating leverage, new drive-in development, an ascending royalty rate and deployment of cash . Positive same-store sales is the most important layer and drives operating leverage and increased operating cash flows .

Revenues decreased slightly to $542.6 million for fiscal year 2013 from $543.7 million for the same period last year, which was primarily related to a $2.1 million decline in Company Drive-Ins sales resulting from the refranchising of 34 lower-performing Company Drive-Ins during the second fiscal quarter of 2012, offset by an increase in same-store sales. Franchising revenues increased $0.9 million during fiscal year 2013 reflecting an increase in royalties primarily related to positive same-store sales of 2.3% at Franchise Drive-Ins, the refranchising of the 34 drive-ins mentioned above, partially offset by the decline in lease revenues resulting from the transaction during the second quarter of fiscal year 2013, in which a franchisee purchased land and buildings leased or subleased from us relating to previously refranchised drive-ins. Restaurant margins at Company Drive-Ins improved by 60 basis points during fiscal year 2013, reflecting the leverage of positive same-store sales and, to a lesser extent, the refranchising of the 34 Company Drive-Ins mentioned above.

Net income and diluted earnings per share for fiscal year 2013 were $36.7 million and $0.64, respectively, as compared to net income of $36.1 million or $0.60 per diluted share for fiscal year 2012. Excluding various non ‑GAAP adjustments further described below, net income per diluted share was $0.72 for fiscal year 2013.

The following non-GAAP adjustments are intended to supplement the presentation of the Company’s financial results in accordance with GAAP. We believe the exclusion of these items in evaluating the change in net income and diluted earnings per share for the period s below provides useful information to investors and management regarding the underlying business trends and the performance of our ongoing operations and is helpful for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the financial results for the Company and predicting future performance.

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	Fiscal Year Ended				Fiscal Year Ended
	August 31, 2013				August 31, 2012
	Net		Diluted		Net		Diluted
	Income		EPS		Income		EPS
Reported – GAAP	$	36,701	$	0.64	$	36,085	$	0.60
After-tax loss from early extinguishment of debt ⁽¹⁾		2,798		0.05		-		-
Retroactive tax benefit of WOTC and resolution of tax matters ⁽²⁾		(743)		(0.02)		-		-
After-tax loss on closure of Company Drive-Ins ⁽³⁾		1,510		0.03		-		-
After-tax impairment charge for point-of-sale assets ⁽⁴⁾		1,013		0.02		-		-
Adjusted - Non-GAAP	$	41,279	$	0.72	$	36,085	$	0.60
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(1) Loss on early extinguishment of debt including $0.5 million and $3.9 million in the second and fourth quarters of fiscal year 2013, respectively.

(2) Tax benefit which includes the retroactive reinstatement of the Work Opportunity Tax Credit (“WOTC”) and resolution of certain income tax matters during the second quarter of fiscal year 2013.

(3) Loss of $2.4 million on the closure of 12 lower-performing Company Drive-Ins as a result of an assessment in advance of capital expenditures for pending technology initiatives.

(4) Impairment charge of $1.6 million related to the write-off of assets associated with a change in the vendor for the Sonic system’s new point-of- sale technology .


	Fiscal Year Ended				Fiscal Year Ended
	August 31, 2012				August 31, 2011
	Net		Diluted		Net		Diluted
	Income		EPS		Income		EPS
Reported – GAAP	$	36,085	$	0.60	$	19,225	$	0.31
After-tax net loss from early extinguishment of debt ⁽¹⁾		-		-		14,439		0.24
Tax benefit from favorable tax settlement ⁽²⁾		-		-		(1,073)		(0.02)
Adjusted - Non-GAAP	$	36,085	$	0.60	$	32,591	$	0.53
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(1) Net loss on early extinguishment of debt including a $5.2 million gain and a $28.2 million loss in the second and third quarters of fiscal year 2011, respectively.

(2) Tax benefit recognized during the first quarter of fiscal year 2011 relating to the favorable settlement of state tax audits.

The following table provides information regarding the number of Company Drive-Ins and Franchise Drive-Ins operating as of the end of the years indicated as well as the system-wide change in sales and average unit volume. System-wide information includes both Company 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.

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System-wide Performance
($ in thousands)

	Year ended August 31,
	2013			2012			2011
Increase in total sales		2.4	%		2.7	%		1.9	%

System-wide drive-ins in operation ⁽¹⁾ :
Total at beginning of year		3,556			3,561			3,572
Opened		27			37			43
Closed (net of re-openings)		(61)			(42)			(54)
Total at end of year		3,522			3,556			3,561

Average sales per drive-in	$	1,109		$	1,066		$	1,037

Change in same-store sales ⁽²⁾		2.3	%		2.2	%		0.5	%
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(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.

Results of Operations

Revenues . The following table sets forth the components of revenue for the reported periods and the relative change between the comparable periods.



Revenues
($ in thousands)

							Percent
	Year ended August 31,				Increase		Increase
	2013		2012		(Decrease)		(Decrease)
Revenues:
Company Drive-In sales	$	402,296	$	404,443	$	(2,147)	(0.5)	%
Franchise Drive-Ins:
Franchise royalties		130,009		125,989		4,020	3.2
Franchise fees		728		2,024		(1,296)	(64.0)
Lease revenue		4,785		6,575		(1,790)	(27.2)
Other		4,767		4,699		68	1.4
Total revenues	$	542,585	$	543,730	$	(1,145)	(0.2)	%

							Percent
		Year ended August 31,			Increase		Increase
		2012		2011	(Decrease)		(Decrease)
Revenues:
Company Drive-In sales	$	404,443	$	410,820	$	(6,377)	(1.6)	%
Franchise Drive-Ins:
Franchise royalties		125,989		124,127		1,862	1.5
Franchise fees		2,024		1,744		280	16.1
Lease revenue		6,575		6,023		552	9.2
Other		4,699		3,237		1,462	45.2
Total revenues	$	543,730	$	545,951	$	(2,221)	(0.4)	%

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The following table reflects the changes in sales and same-store sales at Company Drive-Ins. It also presents information about average unit volumes and the number of Company Drive-Ins, which is useful in analyzing the growth of Company Drive-In sales.


Company Drive-In Sales
($ in thousands)

	Year ended August 31,
		2013			2012			2011
Company Drive-In sales		$	402,296		$	404,443		$	410,820
Percentage decrease			(0.5)	%		(1.6)	%		(0.9)	%

Company Drive-Ins in operation ⁽¹⁾ :
Total at beginning of year			409			446			455
Opened			2			1			3
Acquired from (sold to) franchisees, net			1			(35)			(5)
Closed (net of re-openings)			(16)			(3)			(7)
Total at end of year			396			409			446

Average sales per Company Drive-In		$	990		$	958		$	920

Change in same-store sales ⁽²⁾			2.5	%		2.8	%		1.8	%
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(2) Represents percentage change for drive-ins open for a minimum of 15 months.

Same-store sales for Company Drive-Ins increased 2.5% for fiscal year 2013 and 2.8% for fiscal year 2012, showing continued momentum from the Company’s successful implementation of initiatives to improve product quality , service and value perception . Furthermore, we continued to focus on our innovative product pipeline and increased media effectiveness . Company Drive-In sales decreased $2.1 million, or 0.5%, during fiscal year 2013 as compared to 2012. This decrease was primarily attributable to a n $ 11.3 million reduction in sales from the refranchising of 34 lower-performing drive- ins during the second quarter of fiscal year 2012 and a $ 2.5 million decrease related to drive-ins that were closed during or subsequent to fiscal year 2012, partially offset by a $ 10.0 million improvement in same-store sales and $ 1.7 million of incremental sales from new drive-in openings.

For fiscal year 2012, Company Drive-In sales decreased $6.4 million, or 1.6%, as compared to 2011. This decrease was primarily attributable to an $ 18.6 million reduction in sales from the refranchis ed drive-ins discussed earlier and a $ 2.3 million decrease related to drive-ins that were closed during or subsequent to fiscal year 201 1, partially offset by an $11.0 million improvement in same-store sales and $3.5 million of incremental sales from new drive-in openings.

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The following table reflects the change in franchis e sales, the number of Franchise Drive-Ins, average unit volumes and franchising revenues . 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.


Franchise Information
($ in thousands)

	Year ended August 31,
	2013			2012			2011
Franchise Drive-In sales	$	3,479,880		$	3,386,218		$	3,278,208
Percentage increase		2.8	%		3.3	%		2.3	%

Franchise Drive-Ins in operation ⁽¹⁾ :
Total at beginning of year		3,147			3,115			3,117
Opened		25			36			40
Acquired from (sold to) the Company, net		(1)			35			5
Closed (net of re-openings)		(45)			(39)			(47)
Total at end of year		3,126			3,147			3,115

Average sales per Franchise Drive-In	$	1,125		$	1,081		$	1,054

Change in same-store sales ⁽²⁾		2.3	%		2.2	%		0.4	%

Franchising revenues ⁽³⁾	$	135,522		$	134,588		$	131,894
Percentage increase (decrease)		0.7	%		2.0	%		(0.1)	%

Effective royalty rate ⁽⁴⁾		3.74	%		3.72	%		3.79	%
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(2) Represents percentage change for drive-ins open for a minimum of 15 months.

(3) Consists of revenues derived from franchising activities, including royalties, franchise fees and lease revenues. See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” included in this Form 10-K .

(4) Represents franchise royalties as a percentage of Franchise Drive-In sales.

Same-store sales for Franchise Drive-Ins increased 2.3% for fiscal year 2013 and 2.2% for fiscal year 2012, showing continued momentum from the initiatives we have implemented to improve product quality, service and value perception. Furthermore, we continued to focus on our innovative product pipeline and increased media effectiveness . Franchising revenues increased $0.9 million, or 0.7%, for fiscal year 2013 as compared to 2012. The increase in franchising revenues was primarily driven by a $4.0 million increase in franchise royalties partially offset by a $1.8 million decline in lease revenue and a $1.3 million decline in franchise fees. The increase in franchise royalties is primarily attributable to a 2.3% increase in same-store sales, partially offset by various development incentives and certain franchisee restructuring efforts. In addition, approximately $0.4 million of the increase in royalties during fiscal year 2013 was attributable to incremental royalties from the 34 drive-ins refranchised in the second quarter of fiscal year 2012. Lease revenues decreased compared to the prior year resulting from a franchisee’s purchase of land and buildings leased or subleased from the Company relating to previous refranchised drive-ins. The effective royalty rate increased slightly compared to fiscal year 2012 primarily as a result of improved same-store sales offset by various development incentives and certain franchisee restructuring efforts.

Franchising revenues increased by $2.7 million, or 2.0%, to $134.6 million for fiscal year 2012 as compared to $131.9 million for fiscal year 2011. The increase in f ranchise revenues was primarily driven by a $1.9 million increase in royalties resulting from same-store sales increases combined with incremental royalties

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from newly constructed and refranchised drive-ins. These royalty increases and the effective royalty rate were negatively impacted by various development incentives and certain franchisee restructuring efforts.

Other revenues were flat in fiscal year 2013 and increased $1.5 million to $4.7 million in fiscal year 2012 as compared to the prior year. The increase in fiscal year 2012 was primarily due to changes in income from minority investments in franchise operations .

Operating Expenses . The following table presents the overall costs of drive-in operations as a percentage of Company Drive-In sales. Other operating expenses include direct operating costs such as marketing, telephone and utilities, repair and maintenance, rent, property tax and other controllable expenses.



Company Drive-In Margins

	Year ended August 31,				Percentage Points
	2013		2012		Increase (Decrease)
Costs and expenses :
Company Drive-Ins:
Food and packaging	28.5	%	28.1	%	0.4
Payroll and other employee benefits	35.4		35.7		(0.3)
Other operating expenses	21.4		22.1		(0.7)
Cost of Company Drive-In sales	85.3	%	85.9	%	(0.6)


	Year ended August 31,				Percentage Points
	2012		2011		(Decrease)
Costs and expenses :
Company Drive-Ins:
Food and packaging	28.1	%	28.1	%	-
Payroll and other employee benefits	35.7		36.4		(0.7)
Other operating expenses	22.1		22.2		(0.1)
Cost of Company Drive-In sales	85.9	%	86.7	%	(0.8)

Drive-in level margins improved by 60 basis points during fiscal year 2013 reflecting leverage from improved same-store sales and, to a lesser extent, the refranchising of 34 lower-performing Company Drive-Ins during the second quarter of fiscal year 2012. Food and packaging costs were unfavorable by 40 basis points, which primarily resulted from a product mix shift due to summer promotion activity . Payroll and other employee benefits, as well as o ther operating expenses , improved 100 basis points primarily as a result of leveraging labor with improved sales and the refranchising of the 34 drive-ins discussed above.

Drive-in level margins improved 80 basis points in fiscal year 201 2, as compared to 2011, reflecting leverage from improved same-store sales and the refranchising of lower-performing drive-ins discussed above. Food and packaging costs remained flat during fiscal year 2012, which was a combination of moderating commodity cost inflation during the latter half of the year, effective inventory management, and moderate price increases taken over the preceding 12 months. Payroll and other employee benefits as well as other operating expenses improved by a combined 80 basis points primarily as a result of leveraging labor with improved sales.

Selling, General and Administrative (“SG&A ”) . SG&A expenses increased 1.3% to $66.0 million for fiscal year 2013, and remained relatively flat increasing 0.4 % to $ 65.2 million during fiscal year 201 2 as compared to fiscal 2011 . The increase in SG&A expense for fiscal year 2013 was largely attributable to an increase in variable compensation offset by a decline in bad debt expense due to improved sales and profitability at Franchise Drive-Ins.

Depreciation and Amortization . Depreciation and amortization expense decreased 3.6 % to $ 40.4 million in fiscal year 2013 and increased 1.7 % to $ 41.9 million in fiscal year 2012. The decline in fiscal year 2013 was

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primarily a result of a franchisee’s purchase of land and building leased or subleased from the Company relating to previously refranchised drive-ins during the second quarter of fiscal year 2013. The increase in depreciation and amortization expense for fiscal year 2012 was primarily attributable to the amortization of intellectual property acquired during the second quarter of fiscal year 2012 for the Sonic system’s legacy point-of-sale technology that is expected to be replaced over the next several years .

Provision for Impairment of Long-Lived Assets . Provision for impairment of long-lived assets increased $1.0 million to $1 .8 million in fiscal year 2013, compared to $0.8 million for fiscal years 2012 and 2011. The increase in fiscal year 2013 was primarily the result of the $1.6 million impa irment charge for the write-off of assets associated with a change in the v endor for the Sonic system’s new point-of-sale technology.

Other Operating Income and Expense, Net . Fiscal year 2013 reflected $1.9 million in net expenses compared to a net income of $0.5 million and $0.6 million for fiscal years 2012 and 2011, respectively . This $2.4 million increase was primarily a result of the closure of 12 lower-performing Company Drive-Ins on August 31, 2 013, in conjunction with an assessment in advance of capital expenditures for pending technology initiatives .

Net Interest Expense . Excluding the items outlined below, n et interest expense decreased $2.5 million and $0.9 million in fiscal year 2013 and 2012, respectively, primarily related to a decline in our long-term debt balance. In fiscal year 2013, net interest expense includes a $4.4 million loss on extinguishment of debt related to our $20.0 million debt prepayment during the second quarter and our $155.0 million partial debt refinancing in the fourth quarter. Fiscal year 2011 reflects a $ 28.2 million loss from the early extinguishment of debt related to the refinancing of our debt in May 2011 and a $5.2 million gain from the early extinguishment of debt related to the repurchase of our variable funding notes in the second quarter of fiscal year 2011. See “Liquidity and Sources of Capital” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” below for additional information on factors that could impact interest expense.

Income Taxes . The provision for income taxes reflects an effective tax rate of 34.8 % for fiscal year 2013 compared with 37.7 % for fiscal year 2012 . The lower effective income tax rate for fiscal year 2013 was primarily attributable to the expiration of a state statute of limitations related to an uncertain tax position and legislation that reinstated and extended the Work Opportunity Tax Credit (“WOTC”) . The tax rate for fiscal year 2012 increased from the fiscal year 2011 rate of 32.3%. This increase was primarily attributable to a $1. 1 million favorable settlement of state tax audits during the first quarter of fiscal year 2011 and the expiration of tax credit programs during the second quarter of fiscal year 2012 . Our fiscal year 2014 tax rate may vary depending upon the reinstatement of employment tax credit programs that are scheduled to expire on December 31, 2013, and pending resolution of certain tax matters . Further, o ur tax rate may continue to vary significantly from quarter to quarter depending on the timing of stock option exercises and dispositions by option-holders and as circumstances on other tax matters change.

Financial Position

Total assets decreased $ 20. 0 million , or 2.9%, to $ 660. 8 million during fiscal year 2013 from $ 680.8 million at the end of fiscal year 2012 . The decrease during the year was primarily due to a decline in net property, equipment and capital leases of $43.3 million, reflecting the second quarter of fiscal year 2013 sale of land and buildings to a franchisee for previously refranchised drive-ins, as well as from depreciation during the year, partially offset by capital additions. This decline is, in part, offset by a $25.2 million increase in cash from our operations , partially offset by capital expenditures, purchases under our stock repurchase programs and debt repayments.

Total liabilities decreased $38 . 2 million, or 6. 1 %, to $583. 3 million during fiscal year 2013 from $621.5 million at the end of fiscal year 2012. This decrease was primarily attributable to scheduled and early de bt principal repayments of $ 34. 5 million during fiscal year 2013 .

Total stockholders’ equity increased $ 18.2 million, or 30.7 %, to $ 77. 5 million during fiscal year 2013 from $ 59.2 million at the end of fiscal year 2012 . This increase was largely attributable to current- year earnings of $36.7 m illion and $14. 0 million related to stock option exercises and the related tax benefits . These increases were partially offset by $35.5 million in purchases of common stock under our stock repurchase program during fiscal year 2013 .

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Liquidity and Sources of Capital

Operating Cash Flows . Net cash provided by operating activities decreased $7.3 million to $87.8 million for fiscal year 2013 as compared to $95.1 million in fiscal year 2012. This decrease is primarily driven by a $14.3 million increase in income tax payments during fiscal year 2013, compared to fiscal year 2012, resulting from our ability to apply 2011 tax payments to our 2012 tax provision and the timing of extension payments. Apart from these tax items, operating cash flow would have increased during the year primarily as a result of growth in same-store sales and profitability as well as an increase in accounts payable and other liabilities.

Investing Cash Flows. Cash used in investing activities decreased $22.9 million to $1.2 million for fiscal year 2013 compared to $24.1 million for fiscal year 2012. During fiscal year 2013, we used $41.3 million of cash for purchases of property and equipment as outlined in the table below. These cash outflows were mostly offset by $33.5 million in proceeds primarily related to the franchisee purchase of land and buildings leased or subleased from us relating to previously refranchised drive-ins, described above. The balance of the change largely relates to a decrease in notes receivable of $5.0 million stemming mainly from a note payment from one of our advertising funds and regular principal payments on other notes. Additionally, in fiscal year 2012, we purchased intellectual property related to the legacy point-of-sale technology that is expected to be replaced over the next several years. The following table sets forth the components of our investments in property and equipment for fiscal year 2013 (in millions):


Replacement equipment and technology for existing drive-ins	$	17.1
Brand technology investments		13.2
New Company Drive-Ins, including drive-ins under construction		4.1
Rebuilds, relocations and remodels of existing drive-ins		3.9
Acquisition of underlying real estate for drive-ins		1.9
Retrofits, drive-thru additions and LED signs in existing drive-ins		1.1
Total purchases of property and equipment	$	41.3

Financing Cash Flows. Net cash used in financing activities increased $1 3 . 5 million to $6 1.4 million for fiscal year 2013 as compared to $47.9 million in fiscal year 2012. This increase primarily relates to a debt prepayment of $20.0 million on our Series 2011-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2011 Fixed Rate Notes”), a $6.6 million increase in purchases of treasury stock and $5.1 million in debt issuance and extinguishment costs associated with the partial debt refinancing transaction discussed below. These uses of cash were partially offset by $16.3 million in proceeds from stock option exercises during fiscal year 2013 .

On May 20, 2011, various subsidiaries of ours (the “Co-Issuers”) issued $500 million of 2011 Fixed Rate Notes in a private transaction which bears interest at 5.4% per annum. The 2011 Fixed Rate Notes have an expected life of seven years with an anticipated repayment date in May 2018. The Co-Issuers also entered into a securitized financing facility of Series 2011-1 Senior Secured Variable Funding Notes, Class A-1 (the "2011 Variable Funding Notes"). This revolving credit facility allows for the issuance of up to $100 million of 2011 Variable Funding Notes and certain other credit instruments, including letters of credit. Interest on the 2011 Variable Funding Notes is based on the one-month London Interbank Offered Rate (“LIBOR”) or Commercial Paper (“CP”), depending on the funding source, plus the base spread mentioned below, per annum. There is a 0.5% annual commitment fee payable monthly on the unused portion of the 2011 Variable Funding Notes facility.

We used the $535 million of net proceeds from the issuance of the 2011 Fixed Rate Notes and 2011 Variable Funding Notes (collectively, the “2011 Notes”) to repay in full the existing debt and to pay the costs associated with our original 2006 securitized financing transaction, including the existing noteholder and insurer make-whole premiums. Loan origination costs associated with our 2011 refinancing totaled $16.4 million and were allocated between the 2011 Notes.

As mentioned above, in the second quarter of fiscal year 2013, we made a debt prepayment, at par, of $20.0 million on our 2011 Fixed Rate Notes. I n the fourth quarter of fiscal year 2013, we refinanced $155 million of the 2011 Fixed Rate Notes with the issuance of $155 million of Series 2013-1 Senior Secured Fixed Rate Notes,

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Class A-2 (the “2013 Fixed Rate Notes”) in a private transaction which bears interest at 3.75% per annum. The 2013 Fixed Rate Notes have an expected life of seven years, interest payable monthly, with no scheduled principal amortization. As a result, mandatory debt payments will decrease from $15.0 million to $9.8 million per year. Additionally, we extended our 2011 Variable Funding Note’s renewal date by two years to May 2018 and decreased the base spread from 3.75% to 3.50% in the fourth quarter of fiscal year 2013.

At August 31, 2013, the balance outstanding under the 2011 Fixed Rate Notes and the 2013 Fixed Rate Notes, including accrued interest, totaled $292.4 million and $155.2 million, respectively, and there was no outstanding balance under our 2011 Variable Funding Notes. The weighted-average interest cost of the 2011 Fixed Rate Notes and 2013 Fixed Rate Notes was 5.9% and was 4.1%, respectively. The weighted-average interest cost includes the effect of the loan origination costs.

In fiscal year 2013, the debt prepayment and the partial debt refinancing resulted in a pro-rata write-off of loan origination costs from the 2011 Fixed Rate Notes representing a majority of the $4.4 million loss which is reflected in “Net loss from early extinguishment of debt” on the Consolidated Statements of Income and Comprehensive Income. An additional $4.1 million in debt origination costs were capitalized in conjunction with the 2013 Fixed Rate Notes. Loan costs are being amortized over each note’s expected life. The amount of loan costs expected to be amortized over the next 12 months is reflected in “ O ther current assets” on the Consolidated Balance Sheets. For additional information on our 2011 Notes and 2013 Fixed Rate Notes, see note 10 – Debt, included in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

We plan capital expenditures of approximately $65 to $ 70 million in fiscal year 2014. These capital expenditures primarily relate to drive-in level expenditures for new point-of-sale and digital point-of-purchase technology. We expect to fund these capital expenditures through cash flow from operations as well as cash on hand .

On October 13, 2011, our Board of Directors approved a $30 million share repurchase program. Under that program, we were authorized to purchase up to $30 million of our outstanding shares of common stock through August 31, 2012. During fiscal year 2012, we completed this share repurchase program.

On August 15, 2012, our Board of Directors approved a new share repurchase program. Under the new program, we were authorized to purchase up to $40 million of our outstanding shares of common stock through August 31, 2013. In January 2013, the Board of Directors increased the share repurchase authorization to $55 million. During fiscal year 2013, approximately 3.3 million shares were acquired pursuant to this program for a total cost of $35.5 million; this is in addition to the approximately 0.1 million shares that were acquired for a total cost of $1.1 million during the fourth quarter of fiscal year 2012 . In August 2013, the Board of Directors extended the share repurchase program through August 31, 2014 , with a total authorization of up to $40.0 million, which was available as of August 31, 2013 . Share repurchases may be made from time to time in the open market or in negotiated transactions , depending on share price, market conditions and other factors. The share repurchase program may be extended, modified, suspended or discontinued at any time. Subsequent to the end of fiscal year 2013, we purchased approximately 250 thousand shares under this program for a cost of $ 4.5 million . We plan to fund t he share repurchase program from existing cash on hand at August 31, 2013, and cash flows from operations.

As of August 31, 2013 , our total cash balance of $96.5 million ($ 77.9 million of unrestricted and $18.6 million of restricted cash balances) reflected the impact of the cash generated from operating activities, cash used for share repurchases , debt prepayment and capital expenditures mentioned above . We believe that existing cash, funds generated from operatio ns and the $100 million available under our 2011 Variable Funding Notes will meet our nee ds for the foreseeable future .

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Off-Balance Sheet Arrangements

The Company has obligations for guarantees on certain franchisee loans, which in the aggregate are immaterial, and obligations for guarantees on certain franchisee lease agreements. Other than such guarantees and various operating leases and purchase obligations, which are disclosed below in “Contractual Obligations and Commitments” and in note 7 - Leases and note 16 – Commitments and Contingencies to our Consolidated Financial Statements, 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. The following table presents our commitments and obligations as of August 31, 2013 (in thousands):



				Payments Due by Fiscal Year
										More than
				Less than		1 - 3		3 - 5		5 Years
				1 Year		Years		Years		(2019 and
		Total		(2014)		(2015-2016)		(2017-2018)		thereafter)
Contractual Obligations
Long-term debt ⁽¹⁾	$	559,521	$	31,958	$	61,926	$	299,497	$	166,140
Capital leases		34,387		6,090		10,002		8,706		9,589
Operating leases		141,998		11,195		21,754		19,463		89,586
Purchase Obligations ⁽²⁾		50,523		25,855		24,668		-		-
Other ⁽³⁾		13,782		-		-		-		-
Total	$	800,211	$	75,098	$	118,350	$	327,666	$	265,315
————

(1) Includes scheduled principal and interest payments on our 2011 Fixed Rate Notes and 2013 Fixed Rate Notes and assumes these notes will be outstanding for the expected seven-year life with an anticipated repayment date in May 2018 and July 2020, respectively.

(2) Purchase obligations primarily relate to the Company’s estimated share of system-wide commitments to purchase food products. We have excluded agreements that are cancelable without penalty. These amounts require estimates and could vary due to the timing of volumes and changes in market pricing.

(3) Includes $2.6 million of unrecognized tax benefits related to uncertain tax positions and $11.2 million related to guarantees of franchisee leases and loan agreements. As we are not able to reasonably estimate the timing or amount of these payments, if any, the related balances have not been reflected in the “Payments Due by Fiscal Year” section of the table.

Impact of Inflation

We are impacted by inflation which has caused increases in our food, labor and benefits costs and has increased our operating expenses. To the extent permitted by competition, increased costs are recovered through a combination of menu price increases and alternative products or processes, or by implementing other cost reduction procedures.

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.

We perform a periodic review of 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 the following significant accounting policies and estimates involve a high degree of risk, judgment and/or complexity.

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Accounting for Long-Lived Assets . We review Company Drive-In 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. These impairment tests require us to estimate fair values of our drive-ins by making assumptions regarding future cash flows and other factors. It is reasonably possible that our estimate s o f future cash flows could change resulting in the need to write down to fair value certain Company Drive-In assets.

We assess the recoverability of goodwill and other intangible assets related to our brand and drive-ins at least annually and more frequently if events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable or as a result of allocating goodwill to Company Drive-Ins that are sold. Goodwill impairment testing first requires a comparison of the fair value of each reporting unit to the carrying value. We estimate fair value based on a comparison of two approaches: an income approach, using the discounted cash flow method, and a market approach, using the guideline public company method. The discounted estimates of future cash flows include significant management assumptions such as revenue growth rates, operating margins, capital expenditures, weighted average cost of capital, and future economic and market conditions. In addition, the market approach includes significant assumptions such as the use of projected cash flow and revenue multiples derived from a comparable set of public companies as well as a control premium based on recent market transactions. These assumptions are significant factors in calculating the value of the reporting units and can be affected by changes in consumer demand, commodity pricing, labor and other operating costs, our cost of capital and changes in guideline public company market multiples. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired. The amount of the impairment is the difference between the carrying value of the goodwill and the “implied” fair value, which is calculated as if the reporting unit had just been acquired and accounted for as a business combination.

During the fourth quarter of fiscal year 201 3 , we performed our annual assessment of recoverability of goodwill and other intangible assets and determined that no impairment was indicated. As of the impairment testing date, the fair value for both reporting unit s significantly exceeded the carrying value . As of August 31, 2013 , the Company had $ 77.1 million of goodwill, of which $ 71.1 million was attributable to the Company Drive-Ins segment and $6.0 million was attributable to the Franchise Operations segment. If cash flows generated by our Company Drive-Ins were to decline significantly in the future or there were negative revisions to key assumptions, we may be required to record impairment charges to reduce the carrying amount of goodwill.

Revenue Recognition Related to Franchise Fees and Royalties . 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. 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 franchise fees and 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 pay royalties based on a percentage of sales. Royalties are recognized as revenue when they are earned .

Accounting for Stock-Based Compensation . We estimate the fair value of options granted using the Black-Scholes option pricing model along with the assumptions shown in note 13 – Stockholders’ Equity in the Notes to the Consolidated Financial Statements in this Form 10-K. The assumptions used in computing the fair value of s tock -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 could have been materially different. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted.

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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.

Although we believe we have adequately accounted for our uncertain tax positions, from time to time, audits result in proposed assessments where the ultimate resolution may give rise to us owing additional taxes. We adjust our uncertain tax positions in light of changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an estimate, and penalty and interest accruals associated with uncertain tax positions until they are resolved. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters. However, to the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.

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 . We lease the land and buildings for certain Company Drive-Ins 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 terms of some 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.

Accounts and Notes Receivable . We charge interest on past due accounts receivable and recognize income as it is collected. Interest accrues on notes receivable based on the contractual terms of the respective note s . We monitor all accounts and notes receivable for delinquency and provide for estimated losses for specific receivables that are not likely to be collected. We assess credit risk for accounts and notes receivable of specific franchisees based on payment history, current payment patterns, the health of the franchisee’s business, and an assessment of the franchisee’s ability to pay outstanding balances. In addition to allowances for bad debt for specific franchisee receivables, a general provision for bad debt is estimated for accounts receivable based on historical trends. Account balances generally are charged against the allowance when we believe it is probable that the receivable will not be recovered and legal remedies have been exhausted. We continually review our allowance for doubtful accounts.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Sonic’s use of debt directly exposes the Company to interest rate risk. 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. The Company does not utilize financial instruments for trading purposes. Sonic manages its debt portfolio to achieve an overall desired position of fixed and floating rates.

Interest Rate Risk . Our exposure to interest rate risk at August 31, 20 1 3 , was primarily based on the 2011 Fixed Rate Notes and 2013 F ixed R ate N otes with an effective rate of 5.4 % and 3.75 %, respectively, before amortization of debt-related costs. At August 31, 20 1 3 , the fair value of the 2011 Fixed Rate Notes and 2013 F ixed R ate N otes approximated the ir carrying value of $ 4 47.6 million , including accrued interest. To derive the fair value, management used market information available for public debt transactions for companies with ratings that are similar

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to our ratings and information gathered from brokers who trade in our notes. Management believes this fair value is a reasonable estimate. Should interest rates and/or credit spreads increase or decrease by one percentage point, the estimated fair value of the 2011 F ixed R ate N otes and 2013 Fixed Rate Notes would decrease or increase by approximately $ 19 million, respectively. The fair value estimate require d significant assumptions by management.

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 generally do not ma k e any long-term commitments to purchase any minimum quantities under these arrangements other than as disclosed above in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Contractual Obligations and Commitments . ” We also do not use financial instruments to hedge commodity prices because these purchase arrangements 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.

Item 8. Financial Statements and Supplementary Data

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

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

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 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). Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level .

There were no significant changes in the Company’s internal controls over financial reporting during the quarter e nded August 31, 2013 , that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

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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, 2013 . 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, 201 3 , the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm that audited the financial statements included in this annual report has issued an attestation report on the Company’s internal control over financial reporting. This report appears on the following page.

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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, 20 13 , based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (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 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, 20 13 , 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, 20 13 and 20 12 , and the related consolidated statements of income and comprehensive income , stockholders’ equity , and cash flows for each of the three years in the period ended August 31, 20 13, of Sonic Corp. and our report dated October 2 5 , 201 3, expressed an unqualified opinion thereon.


	/s/ ERNST & YOUNG LLP

Oklahoma City, Oklahoma
October 2 5 , 201 3

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Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

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 website , 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, 201 3 (the “Proxy Statement”), under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

Item 11. Executive Compensation

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

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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 “Equity Compensation Plan Information.”

Item 13. Certain Relationships and Related Transactions, and Director Independence

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 of the Board of Directors” and “Compensation Committee Interlocks and Insider Participation.”

Item 14. Principal Accounting Fees and Services

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

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PART IV

Item 15. Exhibits and Financial Statement Schedules

Financial Statements

The following consolidated financial statements of the Company appear immediately following this Item 15:


	Page
Report of Independent Registered Public Accounting Firm	F- 1
Consolidated Balance Sheets at August 31, 2013 and 2012	F- 2
Consolidated Statements of Income and Comprehensive Income for each of the three years in the period ended August 31, 2013	F- 3
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended August 31, 2013	F- 4
Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 2013	F- 5
Notes to Consolidated Financial Statements	F- 6

Financial Statement Schedules

The Company has included the following schedule immediately following this Item 15:


	Page
Schedule II - Valuation and Qualifying Accounts	F- 27

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.

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 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 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 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 incorporates by reference from Exhibit 3.04 to the Company’s Form 10-K for the fiscal year ended August 31, 2006.

4.01. Bylaws of the Company, as amended and restated January 14, 2010, which the Company incorporates by reference from Exhibit 3.05 to the Company’s Form 10-K for fiscal year ended August 31, 2010.

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

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

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10.01. Form of Sonic License Agreement, which the Company incorporates by reference from Exhibit 10. 10 to the Company’s Form 10-K for the fiscal year ended August 31, 2007 .

10.02. Form of Sonic Development Agreement, which the Company incorporates by reference from Exhibit No. 10. 13 to the Company’s Form 10-K for the fiscal year ended August 31, 2007.

10.0 3 . Form of Sonic Sign Lease Agreement, which the Company incorporates by reference from Exhibit 10.4 to the Company’s Form S-1 Registration Statement No. 33-37158.

10.0 4 . Sonic Corp. Stock Purchase Plan, as amended and restated effective April 20, 2011, which the Company incorporates by reference from Exhibit 10.07 to the Company’s Form 10-K for the fiscal year ended August 31, 2012. *

10.0 5 . Sonic Corp. Savings and Profit-Sharing Plan, as amended and restated effective January 1 , 2013, which the Company incorporates by reference from Exhibit 10.1 to the Company’s Form 10- Q filed on July 3, 2013 .*

10.0 6 . Sonic Corp. Nonqualified Deferred Compensation Plan as amended and restated April 10, 2013. *

10. 07 . Form of Indemnification Agreement for Directors, which the Company incorporates by reference from Exhibit 10.7 to the Company’s Form S-1 Registration Statement No. 33-37158.*

10. 08 . Form of Indemnification Agreement for Officers, which the Company incorporates by reference from Exhibit 10.14 to the Company’s Form 10-K for the fiscal year ended August 31, 1995.*

10. 09 . Form of Chief Executive Officer Amended and Restated Employment A greement dated November 1, 2012, which the Company incorporates by reference from Exhibit 10.12 to the Company’s Form 10-K for the fiscal year ended August 31, 2012. *

10.1 0 . Form of Executive Officer Amended and Restated Employment Agreement dated November 1, 2012 , which the Company incorporates by reference from Exhibit 10.13 to the Company’s Form 10-K for the fiscal year ended August 31, 2012. *

10.1 1 . Form of Amended and Restated Sonic Corp. Executive Severance Plan dated November 1, 2012 , which the Company incorporates by reference from Exhibit 10.14 to the Company’s Form 10-K for the fiscal year ended August 31, 2012. *

10.1 2 . 2001 Sonic Corp. Stock Option Plan, as amended and restated effective January 14, 2010, which the Company incorporates by reference from Exhibit (d)(3) to the Company’s Schedule TO filed March 31, 2010.*

10.1 3 . 2001 Sonic Corp. Directors’ Stock Option Plan, as amended and restated January 14, 2010, which the Company incorporates by reference from Exhibit 10.27 to the Company’s Form 10-K filed on October 29, 2010.*

10.1 4 . Sonic Corp. 2006 Long-Term Incentive Plan, as amended and restated effective October 13, 2011, which the Company incorporates by reference from Exhibit 10.26 to the Company’s Form 10-K filed on October 28, 2011.*

10.1 5 . Form of Award Agreement under Sonic Corp. 2006 Long-Term Incentive Plan, which the Company incorporates by reference from Exhibit (d)(2) to the Company’s Schedule TO filed March 31, 2010.*

10.1 6 . Sonic Corp. Senior Executive Cash Incentive Plan dated January 6, 2011, which the Company incorporates by reference from Exhibit 10.01 to the Company’s Form 10-Q filed on April 8, 2011.*

10. 17 . Sonic Corp. Employee Cash Incentive Plan dated January 6, 2011, which the Company incorporates by reference from Exhibit 10.02 to the Company’s Form 10-Q filed on April 8, 2011.*

10. 18 . Base Indenture dated May 20, 2011 among Sonic Capital LLC, Sonic Industries LLC, America’s Drive-In Brand Properties LLC, America’s Drive-In Restaurants LLC, SRI Real Estate Holding LLC and SRI Real

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Estate Properties LLC, each as Co-Issuer of the Fixed Rate Notes and Citibank, N.A., as Trustee and Securities Intermediary, which the Company incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K filed on May 26, 2011 .

10. 19 . Supplemental Indenture dated May 20, 2011 among Sonic Capital LLC, Sonic Industries LLC, America’s Drive-In Brand Properties LLC, America’s Drive-In Restaurants LLC, SRI Real Estate Holding LLC and SRI Real Estate Properties LLC, each as Co-Issuer of the Fixed Rate Notes, and Citibank, N.A. as Trustee and the Series 2011-1 Securities Intermediary, which the Company incorporates by reference from Exhibit 99.2 to the Company’s Form 8-K filed on May 26, 2011.

10.2 0 . Class A-1 Note Purchase Agreement dated May 20, 2011 among Sonic Capital LLC, Sonic Industries LLC, America’s Drive-In Brand Properties LLC, America’s Drive-In Restaurants LLC, SRI Real Estate Holding LLC and SRI Real Estate Properties LLC, each as Co-Issuer and Sonic Industries Services Inc., as Manager, certain private conduit investors, financial institutions and funding agents, Barclays Bank PLC, as provider of letters of credit, and Barclays Bank PLC, as a swing-line lender and as Administrative Agent of the Fixed Rate Notes, which the Company incorporates by reference from Exhibit 99.3 to the Company’s Form 8-K filed on May 26, 2011.

10.2 1 . Guarantee and Collateral Support Agreement dated May 20, 2011 made by Sonic Franchising LLC, as Guarantor in favor of Citibank N.A. as Trustee, which the Company incorporates by reference from Exhibit 99.4 to the Company’s Form 8-K filed on May 26, 2011.

10.2 2 . Parent Company Support Agreement dated May 20, 2011 made by Sonic Corp. in favor of Citibank N.A., as Trustee, which the Company incorporates by reference from Exhibit 99.5 to the Company’s Form 8-K filed on May 26, 2011.

10.2 3 . Supplemental Indenture dated July 18, 2013 among Sonic Capital LLC, Sonic Industries LLC, America's Drive-In Brand Properties LLC, America's Drive-In Restaurants LLC, SRI Real Estate Holding LLC and SRI Real Estate Properties LLC, each as Co-Issuer of the Series 2013-1 Notes, and Citibank, N.A., as Trustee and Series 2013-1 Securities Intermediary, which the Company incorporates by reference to the Company’s Form 8 ‑ K filed on July 24, 2013.

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.

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

F- 5

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(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 restaurants in the United States. It derives its revenues primarily from Company Drive-In sales and royalty fees from franchisees. The Company also leases signs and real estate, and receives equity earnings in noncontrolling ownership in a number of Franchise Drive-Ins.

Principles of Consolidation

The accompanying financial statements include the accounts of the Company, its wholly owned subsidiaries and a number of Company Drive-Ins in which a subsidiary has a controlling ownership interest . All intercompany accounts and transactions have been eliminated.

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.

Reclassifications

Certain amounts reported in previous years, which are not material, have been combined and reclassified to conform to the current - year presentation.

Cash Equivalents

Cash equivalents consist of highly liquid investments, primarily money market accounts that mature in three months or less from date of purchase, and depository accounts.

Restricted Cash

As of August 31, 201 3 , the Company had restricted cash balances totaling $ 18.6 million for funds required to be held in trust for the benefit of senior noteholders under the Company’s debt arrangements. The current portion of restricted cash of $ 11.8 million represents amounts to be returned to Sonic or paid to service current debt obligations. The noncurrent portion of $ 6.8 million 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 and recognizes income as it is collected. Interest accrues on notes receivable based on the contractual terms of the respective note. The Company monitors all accounts and notes receivable for delinquency and provides for estimated losses for specific receivables that are not likely to be collected. The Company assesses credit risk for accounts and notes receivable of specific franchisees based on payment history, current payment patterns, the health of the franchisee’s business, and an assessment of the franchisee’s ability to pay outstanding balances. In addition to allowances for bad debt for specific franchisee receivables, a general provision for bad debt is estimated for the Company’s accounts receivable based on historical trends. Account balances generally are charged against the allowance when the Company believes it is probable that

F- 6

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

the receivable will not be recovered and legal remedies have been exhausted. The Company continually reviews its allowance for doubtful accounts.

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 amortization of capital leases are 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

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 management’s assessment as well as independent market value assessments of the assets’ estimated sales values.

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. The Company tests all goodwill and other intangible assets not subject to amortization at least annually for impairment using the fair value approach on a reporting unit basis. The Company’s reporting units are defined as Company Drive-Ins and Franchise Operations (see additional information regarding the Company’s reporting units in note 1 4 - Segment Information). The Company test s for impairment using historical cash flows and other relevant facts and circumstances as the primary basis for its estimates of future cash flows. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. These impairment tests require the Company to estimate fair values of its drive-ins by making assumptions regarding future cash flows and other factors.

The Company assess es the recoverability of goodwill and other intangible assets related to the brand and drive-ins at least annually and more frequently if events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable or as a result of allocating goodwill to Company Drive-Ins that are sold. During fiscal year 2013, the Company adopted Accounting Standards Update (“ASU”) No. 2011-08 “Testing Goodwill for Impairment . ” Under this pronouncement the Company could have assessed qualitative factors to determine if it was necessary to perform the two-step goodwill impairment test. The Company did not utilize this shortcut method, but

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

chose to continue to apply the two-step impairment approach for fiscal year 2013. The Company estimate s fair value based on a comparison of two approaches: an income approach, using the discounted cash flow method, and a market approach , using the guideline public company method . The discounted estimates of future cash flows include significant management assumptions such as revenue growth rates, operating margins, capital expenditures, weighted average cost of capital, and future economic and market conditions. In addition, the market approach includes significant assumptions such as the use of projected cash flow and revenue multiples derived from a comparable set of public companies as well as a control premium based on recent market transactions . These assumptions are significant factors in calculating the value of the reporting units and can be affected by changes in consumer demand, commodity pricing, labor and other operating costs, the Company’s cost of capital and changes in guideline public company market multiples . If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired. The amount of the impairment is the difference between the carrying value of the goodwill and the “implied” fair value, which is calculated as if the reporting unit had just been acquired and accounted for as a business combination.

The Company’s intangible assets subject to amortization consist primarily of acquired franchise agreements, intellectual property and other intangibles. Amortization expense is calculated using the straight-line method over the asset’s expected useful life . See note 5 - Goodwill and Other Intangibles for additional related disclosures .

Refranchising and Closure of Company Drive-Ins

Gains and losses from the sale or closure of Company Drive-Ins are recorded as “O ther operating ( income ) expense, net ” on the Consolidated Statements of Income and Comprehensive Income .

Revenue Recognition, Franchise Fees and Royalties

Revenue from Company Drive-In sales is recognized when food and beverage products are sold. Company Drive-In sales are presented net of sales tax and other sales-related taxes.

The Company records a liability in the period in which a gift card is sold. The g ift cards do not have expiration dates. As gift cards are redeemed, the liability is reduced with revenue recognized on redemptions at Company Drive-Ins. Breakage is the amount on a gift card that is not expected to be redeemed and that the Company is not required to remit to a state under unclaimed property laws. The Company estimates breakage based upon the historical trend in redemption patterns from previously sold gift cards. The Company’s policy is to recognize the breakage , using the delayed recognition method , when it is apparent that there is a remote likelihood the gift card balance will be redeemed. The Company reduces the gift card liability for the estimated breakage and uses that amount to defray the costs of operating the gift card program. There is no income recognized on unredeemed gift card balances.

F ranchise fees are recognized in income when the Company has substantially performed or satisfied all material services or conditions relating to the sale of the franchise and the fees are nonrefundable. D evelopment 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 franchise fees and 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.

The Company’s franchisees pay royalties based on a percentage of sales . Royalties are recognized as revenue when they are earned .

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

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 the Company would incur an economic penalty for not exercising the options. Within the terms of some of the 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 the Company has the right to control the use of the leased 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 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 $ 22.4 million , $ 22.6 million and $22.5 million in fiscal year s 2013, 201 2 and 201 1, respectively .

Under the Company’s franchise agreements, both Company Drive-Ins and Franchise Drive-Ins must contribute a minimum percentage of revenues to a national media production fund (Sonic Brand Fund) and spend an additional minimum percentage of gross revenues on advertising, either directly or through Company-required participation in advertising cooperatives. A significant portion of the advertising cooperative contributions is remitted to the System Marketing Fund, which purchases advertising on national cable and broadcast networks , local broadcast networks and funds other national media expenses and sponsorship opportunities. As stated in the terms of existing franchise 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 Company Drive-Ins are recorded as expense on the Company’s financial statements.

Stock-Based Compensation

Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense on a straight-line basis over the requisite service period of the award (generally the vesting period of the grant) or to an employee’s eligible retirement date, if earlier .

The Company grants incentive stock options (“ISOs”), non-qualified stock options (“NQs”) and restricted stock units (“RSUs”). For grants of NQs and RSUs, the Company expects to recognize a tax benefit upon exercise of the option or vesting of the RSU . As a result, a tax benefit is recognized on the related stock-based compensation expense for these types of awards . For grants of ISOs , a tax benefit only results if the option holder has a disqualifying disposition. As a result of the limitation on the tax benefit for ISOs , 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. For additional information on stock-based compensation s ee note 1 3 - Stockholders’ Equity.

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

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 from 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 NQs , the vesting of RSUs, and disqualifying dispositions of ISOs .

The threshold for recognizing the financial statement effects of a tax position is when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority. Interest and penalties related to unrecognized tax benefits are included in income tax expense.

Additional information regarding the Company’s unrecognized tax benefits is provided in note 1 2 - Income Taxes.

Comprehensive Income

Comprehensive income is defined as the change in equity of a business entity during a period from transactions and other events and circumstances from non-owner sources and is reflected in the Consolidated Statements of Income and Comprehensive Income , based on ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income , ” adopted during fiscal year 2013.

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. The forward starting swap was designated as a cash flow hedge, and was subsequently settled in conjunction with the closing of the Company’s 2006 securitized debt transaction , as planned. The loss resulting from settlement was recorded net of tax in accumulated other comprehensive income and amortized to interest expense over the expected term of the debt. In conjunction with the Company’s May 2011 refinancing discussed in note 10 – Debt, the Company’s deferred hedging loss was reclassified from accumulated other comprehensive income into earnings during third quarter fiscal year 2011.

Fair Value Measurements

The Company’s financial assets and liabilities consist of cash and cash equivalents, accounts and notes receivable, accounts payable and long-term debt. The fair value of cash and cash equivalents, accounts receivable, and accounts payable approximates their carrying amounts due to the short term nature of these assets and liabilities.

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

·	Notes receivable - As of August 31, 2013 and 2012, the carrying amounts of notes receivable (both current and non-current) approximate fair value due to the effect of the related allowance for doubtful accounts.

Long-term debt - The Company prepares a discounted cash flow analysis for its fixed rate borrowings to estimate fair value each quarter. This analysis uses Level 2 inputs from market information available for public debt transactions for companies with ratings that are similar to the Company’s ratings and from

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

information gathered from brokers who trade in the Company’s notes. The fair value estimate required significant assumptions by management. Management believes this fair value is a reasonable estimate. For more information regarding the Company’s long-term debt, see note 10 - Debt and note 1 1 - Fair Value of Financial Instruments.

Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis, which means these assets and liabilities are not measured at fair value on an ongoing basis but are subject to periodic impairment tests. For the Company, these items primarily include long-lived assets, goodwill and other intangible assets. Refer to sections “ Accounting for Long-Lived Assets” and “Goodwill and Other Intangible Assets,” discussed above, for inputs and valuation techniques used to measure the fair value of these nonfinancial assets. The fair value was based upon management’s assessment as well as independent market value assessments which involved Level 2 and Level 3 inputs.

New Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“ FASB ”) issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” This pronouncement was issued to simplify how entities test for impairment of indefinite-lived intangible assets. Under this pronouncement, an entity has the option first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired . In conclusion of this assessment , if an entity finds that it is not more likely than not that an indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with ASC Topic 350, “Intangibles – Goodwill and Other . ” This pronouncement is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 , with early adoption permitted. The adoption of this pronouncement is not expected to have a material impact on the Company’s consolidated financial statements.

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

2. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share :


	Year ended August 31,
	2013		2012		2011
Numerator:
Net income	$	36,701	$	36,085	$	19,225

Denominator:
Weighted average common shares outstanding– basic		56,384		60,078		61,781
Effect of dilutive employee stock options and
unvested restricted stock units		807		94		162
Weighted average common shares – diluted		57,191		60,172		61,943

Net income per common share – basic	$	0.65	$	0.60	$	0.31
Net income per common share – diluted	$	0.64	$	0.60	$	0.31

Anti-dilutive securities excluded ⁽¹⁾		3,278		6,705		6,367
—————————

(1) A nti-dilutive securities consist of stock options and unvested restricted stock units that were not included in the computation of diluted earnings per share because either the exercise price of the options was greater than the average market price of the common stock or the total assumed proceeds under the treasury stock method resulted in negative incremental shares and thus the inclusion would have been anti-dilutive.

3. Impairment of Long-Lived Assets

During the fiscal years ended August 31, 2013, 2012 and 2011, the Company identified impairments for certain brand technology assets, surplus property and drive-in assets through regular quarterly reviews of long-lived assets. The recoverability of Company Drive-Ins is assessed by estimating the undiscounted net cash flows expected to be generated over the remaining life of the Company Drive-Ins. This involves estimating same-store sales and margins for the cash flow period s . When impairment exists, the carrying value of the asset is written down to fair value.

The Company’s assessment in fiscal year 2013 resulted in provisions for impairment totaling $1.8 million . Of this total, $1.6 million related to the write -off of assets as sociated with a change in the vendor providing technology for the Sonic system’s new point-of-sale technology . The remaining $0.2 million reflects reduc ing the carrying amount of surplus properties to fair value .

I n fiscal year s 2012 and 2011 the Company recorded $0.8 million in provisions for impairment resulting from the assessment of surplus properties in both years and properties leased to franchisees in fiscal year 2011 . These write-downs were completed to reduce the carrying amount of these properties to fair value .

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

4. Accounts and Notes Receivable

Accounts and notes receivable consist of the following:


	Year ended August 31,
	2013		2012
Current Accounts and Notes Receivable:
Royalties and other trade receivables	$	16,506	$	17,030
Notes receivable from franchisees		4,003		1,304
Notes receivable from advertising funds		5,203		4,825
Other		4,977		6,109
Accounts and notes receivable, gross		30,689		29,268
Allowance for doubtful accounts and notes receivable		(1,547)		(2,195)
Accounts and notes receivable, net	$	29,142	$	27,073

Noncurrent Notes Receivable:
Notes receivable from franchisees	$	5,003	$	5,286
Notes receivable from advertising funds		5,810		7,152
Allowance for doubtful notes receivable		(800)		(797)
Notes receivable, net	$	10,013	$	11,641

The Company’s receivables are primarily due from franchisees, all of whom are in the restaurant business. Substantially all of the notes receivable from franchisees are collateralized by real estate or equipment. During fiscal year 2013, notes receivable from franchisees increased as a result of a franchise e ’s purchase of real estate discussed in note 6 – Other Operating Income and Expenses. The notes receivable from advertising funds represent transactions in the normal course of business.

5. Goodwill and Other Intangibles

As of August 31, 201 3 , the Company had $ 77.1 million of goodwill, of which $ 71. 1 million was attributable to the Company Drive-Ins segment and $ 6.0 million was attributable to the Franchise Operations segment. There have been no changes in the goodwill balance attributable to the Franchise Operations segment since August 31, 201 2 .

The changes in the carrying amount of goodwill were as follows:


	Year ended August 31,
	2013		2012
Balance at beginning of year	$	76,997	$	81,625
Goodwill acquired during the year		96		-
Goodwill disposed of related to the sale of Company Drive-Ins		-		(4,628)
Balance at end of year	$	77,093	$	76,997

The gross carrying amount of franchise agreements, intellectual property, franchise fees and other intangibles subject to amortization was $ 10.3 million and $ 10.2 million at August 31, 201 3 and 201 2 , respectively. Accumulated amortization related to these intangible assets was $ 4.1 million and $ 3.4 million at August 31, 201 3 and 201 2 , respectively. Intangible assets amortization expense for the fiscal years ended August 31, 201 3 , 201 2 and 201 1 was $ 0.9 million , $0. 8 million and $0. 4 million, respectively. At August 31, 201 3 , the remaining weighted-

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

average life of amortizable intangible assets was approximately 11 years. Estimated intangible assets amortization expense is $ 0 .9 million annually for fiscal years 201 4 , 201 5 , 201 6 and 201 7 and $ 0 .3 million for fiscal year 201 8 .

6. Other Operating Income and Expenses

During fiscal year 2013, the Company completed an assessment in advance of capital expenditures for pending technology initiative s and closed 12 lower-performing Company Drive-Ins as of August 31, 2013 , resulting in a loss of $2.4 million . Th e loss included rent accruals for the remaining lease term, write-down of real estate and other costs associated with store closures. Additionally , in the second quarter of fiscal year 2013, a franchisee purchase d land and buildings leased or subleased from the Company relating to previously refranchised drive-ins. At the time of the sale, these assets had a carrying value of $38.4 million. The Company received $29.7 million in cash at closing and is receiv ing the remaining $8.7 million (plus interest) over 24 months through the combination of a note receivable and a direct financing lease. In conjunction with the sale and the assignment of third - party leases, the Company removed its escalating lease liability related to the sol d properties which resulted in the small gain and partially offset the drive ‑in closure loss described above .

7 . Leases

Leasing Arrangements as a Lessor

The Company’s leasing operations consist principally of leasing certain land, buildings and signs as well as subleasing certain buildings to franchise operators. The land and building portions of these leases are classified as operating leases with lease terms expiring through September 2030 . 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 sign portions of these leases are classified principally as direct financing leases and expire through March 20 21 . Additional direct financing leases, entered into as a result of the franchisee-exercised option discussed in note 6 – Other Operating Income and Expenses , include land and buildings expiring in December 2014 and assignment of capital leases expiring through March 2018 .

The Company has one significant master lease agreement with a franchisee as a result of previously refranchised drive-ins. The lease consist s of leasing land, buildings and signs for a period of 15 years and is classified as an operating lease. There are four renewal options at the end of the primary term for periods of five years for property that is owned by the Company. For property owned by third parties, the lease term runs concurrent ly with the term of the third-party lease arrangement. The lease include s a provisio n for contingent rentals that may be received on the basis of a percentage of sales in excess of stipulated amounts. The lease contain s an escalation clause based on sa les over the life of the lease.

Components of net investment in direct financing leases are as follows at August 31:



	2013		2012
Minimum lease payments receivable	$	1,701	$	1,041
Less unearned income		(170)		(228)
Net investment in direct financing leases		1,531		813
Less amount due within one year		(344)		(233)
Amount due after one year	$	1,187	$	580

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.

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

Future minimum rental payments receivable as of August 31, 2013 , are as follows:



	Operating		Direct Financing
Years ended August 31:
2014	$	6,173	$	407
2015		6,371		896
2016		6,280		174
2017		6,304		133
2018		6,283		65
Thereafter		47,334		26
	$	78,745		1,701
Less unearned income				(170)
			$	1,531

Leasing Arrangements as a Lessee

Certain Company Drive-Ins lease land and buildings from third parties. These leases, with lease terms expiring through August 2030 , include provisions for contingent rents 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.

Maturities 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, 2013 , are as follows:



	Operating		Capital
Years ended August 31:
2014	$	11,195	$	6,090
2015		11,153		5,246
2016		10,601		4,756
2017		9,899		4,515
2018		9,564		4,191
Thereafter		89,586		9,589
Total minimum lease payments	$	141,998		34,387
Less amount representing interest averaging 6.3%				(7,523)
Present value of net minimum lease payments				26,864
Less amount due within one year				(4,406)
Amount due after one year			$	22,458

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

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



	2013		2012		2011
Operating leases:
Minimum rentals	$	13,154	$	14,555	$	14,185
Contingent rentals		93		103		138
Sublease rentals		(1,747)		(2,851)		(2,847)
Capital leases:
Contingent rentals		823		799		745
Total rent expense	$	12,323	$	12,606	$	12,221

The aggregate future minimum rentals receivable under noncancelable operating and capital subleases as of August 31, 2013, were $14.4 million and $1.9 million, respectively .

8. Property, Equipment and Capital Leases

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



	Estimated
	Useful Life	2013		2012
Property, equipment and capital leases:
Land		$	153,868	$	171,102
Buildings and improvements	8 – 25 yrs		336,383		363,428
Drive-In Equipment	5 – 7 yrs		114,990		118,975
Brand technology development and other equipment	2 – 5 yrs		76,585		61,492
Property and equipment, at cost			681,826		714,997
Accumulated depreciation			(301,236)		(295,735)
Property and equipment, net			380,590		419,262

Capital leases	Life of lease		47,371		49,896
Accumulated amortization			(28,300)		(26,150)
Capital leases, net			19,071		23,746
Property, equipment and capital leases, net		$	399,661	$	443,008

Depreciation expense for property and equipment was $ 35.6 million , $ 37. 2 million and $ 3 7.3 million for fiscal years 20 13 , 201 2 and 201 1 , respectively. Land, buildings and equipment with a carrying amount of $ 157. 0 million at August 31 , 201 3 , were leased under operating leases to franchisees and other parties. The accumulated depreciation related to these buildings and equipment was $ 51. 6 million at August 31, 2013 . Amortization expense related to capital leases is included within “ D epreciation and amortization” on the Consolidated Statements of Income and Comprehensive Income . As of August 31, 201 3 , the Company had no drive -ins under construction with costs to complete.

Interest incurred in connection with the construction of new drive-ins and technology projects is capitalized. Capitalized interest was $0.7 million and $0.3 million for fiscal year s 2013 and 2012 , respectively . No interest was capitalized in fiscal year 2011.

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

9. Accrued Liabilities

Accrued liabilities consist of the following at August 31:



	2013		2012
Wages and employee benefit costs	$	14,611	$	11,061
Property taxes, sales and use taxes and employment taxes		9,219		8,869
Unredeemed gift cards		8,272		7,274
Other		5,119		5,403
	$	37,221	$	32,607

10 . Debt

Long-term debt consists of the following at August 31:



	2013		2012
Class A-2 2013-1 senior secured fixed rate notes	$	155,000	$	-
Class A-2 2011-1 senior secured fixed rate notes		291,988		481,250
Class A-1 2011-1 senior secured variable funding notes		-		-
Other		306		543
		447,294		481,793
Less long-term debt due within one year		(9,914)		(15,180)
Long-term debt due after one year	$	437,380	$	466,613

At August 31, 201 3 , future maturities of long-term debt were $ 10.0 million for fiscal year 2014, $ 9.8 million annually for fiscal year s 2015, 2016 and 2017 , and $ 253.0 million for fiscal year 2018.

On May 20, 2011 , various subsidiaries of the Company (the “Co-Issuers”) issued $500 million of Series 2011-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2011 Fixed Rate Notes”) in a private transaction which bears interest at 5.4% per annum. The 2011 Fixed Rate Notes have an expected life of seven years with an anticipated repayment date in May 2018 . T he Co-Issuers also entered into a securitized financing facility of Series 2011-1 Senior Secured Variable Funding Notes, Class A-1 (the "2011 Variable Funding Notes"). This revolving credit facility allows for the issuance of up to $100 million of 2011 Variable Funding Notes and certain other credit instruments, including letters of credit. Interest on the 2011 Variable Funding Notes is based on the one-month London Interbank Offered Rate (“LIBOR”) or Commercial Paper (“CP”) , depending on the funding source, plus the base spread mentioned below, per annum. There is a 0.5% annual commitment fee payable monthly on the unused portion of the 2011 Variable Funding Notes facility.

Sonic used the $535 million of net proceeds from the issuance of the 2011 Fixed Rate Notes and 2011 Variable Funding Notes (collectively, the “2011 Notes”) to repay its existing Series 2006-1 Senior Secured Variable Funding Notes, Class A-1 (the “2006 Variable Funding Notes”) and Series 2006-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2006 Fixed Rate Notes” and, together with the 2006 Variable Funding Notes, the“2006 Notes”) in full and to pay the costs associated with the securitized financing transaction, including the existing noteholder and insurer make-whole premiums. Loan origination costs associated with the Company’s 2011 refinancing totaled $16.4 million and were allocated between the 2011 Notes.

In connection with the 2011 transaction described above, the Company recognized a $28.2 million loss from the early extinguishment of debt during the third quarter of fiscal year 2011, which primarily consisted of a $25.3 million prepayment premium and the write-off of unamortized deferred loan fees remaining from the

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

refinanced debt. In addition, the Company’s deferred hedging loss was reclassified from accumulated other comprehensive income into earnings during the third quarter of fiscal year 2011. Prior to the 2011 refinancing, d uring the second quarter of fiscal year 2011, the Company repurchased $62.5 million of its 2006 Variable Funding Notes in a privately negotiated transaction. The Company recognized a gain of $5.2 million on the extinguishment of the notes during the second fiscal quarter of 2011. These transactions are reflected within “ N et loss from early extinguishment of debt” in the accompanying Consolidated Statements of Income and Comprehensive Income.

In the second quarter of fiscal year 2013, the Co-Issuers made a debt prepayment , at par , of $20.0 million on the 2011 Fixed Rate Notes. I n the fourth quarter of fiscal year 2013, the Co-Issuers refinanc ed and paid $155 million of the 2011 Fixed Rate Notes with the issuance of $155 million of Series 2013-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2013 Fixed Rate Notes”) in a private transaction which bears interest at 3.75% per annum. The 2013 Fixed Rate Notes have an expected life of seven year s , interest payable monthly, with no scheduled principal amortization. Additionally, the Co-Issuers extended the 2011 Variable Funding Note’s renewal date by two years to May 2 1 , 2018 and decreased the base spread from 3.75% to 3.50% in the fourth quarter of fiscal year 2013.

At August 31, 2013 , the balance outstanding under the 2011 Fixed Rate Notes and 2013 Fixed Rate Notes , including accrued interest, was $292.4 million and $ 155.2 , respectively and there was no outstanding balance under the 2011 Variable Funding Notes . As of August 31, 2012, t he balance outstanding under the 201 1 Fixed Rate Notes totaled $ 482.0 million, including accrued interest . The weighted-average interest cost of the 2011 Fixed Rate Notes and 2013 Fixed Rate Notes was 5.9 % and 4.1% , respectively . The weighted-average interest cost includes the effect of the loan origination costs.

While the 2011 Notes and the 2013 Fixed Rate Notes are structured to provide for seven-year lives, from their original issuance date, respectively, they have a legal final maturity date of May 2041 . The Company intends to repay or refinance the 2011 Notes and the 2013 Fixed Rate Notes on or before the end of their expected lives. In the event the 2011 Notes and the 2013 Fixed Rate Notes are not paid in full by the end of their expected li ves , the Notes are subject to an upward adjustment in the interest rate of at least 5% per annum. In addition, principal payments will accelerate by applying all of the royalties, lease revenues and other fees securing the debt, after deducting certain expenses, until the debt is paid in full. Also, any unfunded amount under the 2011 Variable Funding Notes will become unavailable.

The Co-Issuers and Sonic Franchising LLC (the “Guarantor”) are existing special purpose, bankruptcy remote, indirect subsidiaries of Sonic Corp. that hold substantially all of Sonic's franchising assets and real estate. As of August 31, 2013, assets for these combined indirect subsidiaries totaled $ 322.3 million, including receivables for royalties, certain Company and Franchise Drive-In real estate, intangible assets and restricted cash balances of $ 18.6 million . The 2011 Notes and the 2013 Fixed Rate Notes are secured by franchise fees, royalty payments and lease payments, and the repayment of the 2011 Notes and the 2013 Fixed Rate Notes is expected to be made solely from the income derived from the Co-Issuer's assets. In addition, the Guarantor, a Sonic Corp. subsidiary that acts as a franchisor, has guaranteed the obligations of the Co-Issuers under the 2011 Notes and the 2013 Fixed Rate Notes and pledged substantially all of its assets to secure those obligations.

Neither Sonic Corp., the ultimate parent of the Co-Issuers and the Guarantor, nor any other subsidiary of Sonic, guarantee s or is in any way liable for the obligations of the Co-Issuers under the 2011 Notes and the 2013 Fixed Rate Notes . The Company has, however, agreed to cause the performance of certain obligations of its subsidiaries,

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

principally related to managing the assets included as collateral for the 2011 Notes and the 2013 Fixed Rate Notes and certain indemnity obligations relating to the transfer of the collateral assets to the Co-Issuers.

The 2011 Notes and the 2013 Fixed Rate 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. If certain covenants or restrictions are not met, the 2011 Notes and the 2013 Fixed Rate Notes are subject to customary accelerated repayment events and events of default. Although management does not anticipate an event of default or any other event of noncompliance with the provisions of the debt, if such event occurred, the unpaid amounts outstanding could become immediately due and payable.

1 1 . Fair Value of Financial Instruments

The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company has no financial liabilities that are required to be measured at fair value on a recurring basis.

The Company categorizes its assets and liabilities recorded at fair value based upon the following fair value hierarchy established by FASB:

Level 1 valuations use quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 valuations use inputs other than actively quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: (a) quoted prices for similar assets or liabilities in active markets, (b) quoted prices for identical or similar assets or liabilities in markets that are not active, (c) inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves observable at commonly quoted intervals and (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

·	Level 3 valuations use unobservable inputs for the asset or liability. Unobservable inputs are used to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The Company’s cash equivalents are carried at cost which approximates fair value and totaled $39.1 million and $25.9 million at August 31, 2013 and 2012, respectively. This fair value is estimated using Level 1 methods.

At August 31, 2013, the fair value of the Company’s 2011 Fixed Rate Notes and 2013 Fixed Rate Notes approximated the carrying value of $ 447.6 million , including accrued interest. At August 31, 2012, the fair value of the Company’s 2011 Fixed Rate Notes was estimated at $510.8 million versus a carrying value of $482.0 million, including accrued interest. The fair value of the 2011 Fixed Rate Notes and the 2013 Fixed Rate Notes is estimated using Level 2 inputs from market information available for public debt transactions for companies with ratings that are similar to the Company’s ratings and from information gathered from brokers who trade in the Company’s notes.

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

1 2 . 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:



	2013		2012		2011
Current:
Federal	$	16,741	$	17,851	$	5,060
State		2,688		3,892		2,223
		19,429		21,743		7,283

Deferred
Federal		439		180		1,876
State		(270)		(46)		(5)
		169		134		1,871
Provision for income taxes	$	19,598	$	21,877	$	9,154

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


	2013		2012		2011
Amount computed by applying a tax rate of 35%	$	19,705	$	20,287	$	9,933
State income taxes (net of federal income tax benefit)		229		928		602
Employment related and other tax credits, net		(1,572)		(1,291)		(1,730)
Adjustment of prior year deferred tax items		-		1,559		-
Valuation allowance for state net operating losses		1,343		972		839
Other		(107)		(578)		(490)
Provision for income taxes	$	19,598	$	21,877	$	9,154

During fiscal year 2012, the Company conducted a reconciliation of its tax basis balance sheet and identified certain adjustments which were recorded in fiscal year 2012 to appropriately reflect the Company’s current and deferred tax accounts. As a result of this reconciliation process, the Company recorded an additional income tax provision of $1 .6 million for fiscal year 2012. Management of the Company evaluated the impact of this adjustment and concluded the effect of this adjustment was immaterial to the current and prior year financial statements.

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

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


	2013		2012
Deferred tax assets:
Allowance for doubtful accounts and notes receivable	$	898	$	1,145
Leasing transactions		3,599		3,346
Deferred income		4,124		6,004
Accrued liabilities		1,995		1,200
Stock compensation		8,024		11,899
Other		676		745
State net operating losses		8,703		7,361
Total deferred tax assets		28,019		31,700
Valuation allowance		(8,703)		(7,361)
Total deferred tax assets after valuation allowance	$	19,316	$	24,339

Deferred tax liabilities:
Prepaid expenses	$	(1,369)	$	(1,265)
Investment in partnerships, including differences in capitalization,
depreciation and direct financing leases		(2,061)		(2,408)
Property, equipment and capital leases		(25,433)		(24,466)
Intangibles and other assets		(18,337)		(16,965)
Debt extinguishment		(4,191)		(4,191)
Total deferred tax liabilities		(51,391)		(49,295)
Net deferred tax liabilities	$	(32,075)	$	(24,956)

Net deferred tax assets and liabilities are classified as follows:
Current	$	2,840	$	4,821
Noncurrent		(34,915)		(29,777)
Total	$	(32,075)	$	(24,956)

State net operating loss carryforwards expire beginning in December 2013 through May 2034 . Management does not believe the Company will be able to realize the state net operating loss carryforwards and therefore has provided a valuation allowance of $ 8.7 million and $7.4 million as of August 31, 2013 and 2012, respectively.

As of August 31, 2013 and 2012 , the Company had approximately $2.6 million and $5.5 million of unrecognized tax benefits, including approximately $0.3 million and $0.7 million of accrued interest and penalty , respectively . The liability for unrecognized tax benefits decreased $2.9 million in fiscal year 2013. The majority of the change was due to the favorable resolution of a federal tax audit, a statute of limitations expiration of a state tax position and a tax method change, offset by a new uncertain position related to a federal credit. Of this change, only $0.7 million impacted the Company’s tax rate.

The Company recognizes estimated interest and penalties as a component of its income tax expense, net of federal benefit , as a component of “Provision for income taxes” in the Consolidated Sta tements of Income and Comprehensive Income . During the years ended August 31, 2013, 2012 and 2011, the Company recognized net benefits of $0.4 million, $0.1 million and $0.5 million, respectively.

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

As of August 31, 2013, 2012 and 2011, there are $2.6 million, $1.9 million and $3.1 million, respectively, of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate. A reconciliation of unrecognized tax benefits is as follows for fiscal years ended August 31 :



	2013		2012
Balance at beginning of year	$	5,451	$	4,775
Additions based on tax positions related to the current year		628		834
Additions for tax positions of prior years		960		1,670
Reductions for tax positions of prior years		(3,816)		(469)
Reductions for settlements		-		(68)
Reductions due to statute expiration		(640)		(1,291)
Balance at end of year	$	2,583	$	5,451

The Company or one of its subsidiaries is subject to U.S. federal income tax and income tax in multiple U.S. state jurisdictions. The Company is currently undergoing examinations or appeals by various state and federal authorities. The Company anticipates that the finalization of these examinations or appeals, combined with the expiration of applicable statutes of limitations and the additional accrual of interest related to unrecognized benefits on various return positions taken in years still open for examination , could result in a change to the liability for unrecognized tax benefits during the next 12 months ranging from an increase of $1.3 million to a decrease of $2.0 million depending on the timing and terms of the examination resolutions. At August 31, 2013, the Company was subject to income tax examinations for its U.S. federal income taxes and for state and local income taxes generally after fiscal year 20 09 .

At August 31, 2013 and 2012, the Company had an income tax receivable of $9.8 million and $10.3 million, respectively, primarily relating to expected refunds from amended tax returns. Based on information available at August 31, 201 3 , the Company anticipate s receiving or being able to apply a majority of these refunds to other tax obligations during fiscal year 201 4 . As a result, $7.7 million was classified as current during fiscal year 201 3 .

13. Stockholders’ Equity

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (“ESPP”) that permits eligible employees to purchase the Company’s common stock at a 15% discount from the stock’s fair market value. Participating employees may purchase shares of common stock each year up to the lesser of 10% of their base compensation or $25 thousand in the stock’s fair market value. At August 31, 2013, 0.9 million shares were available for grant under the ESPP.

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 share-based awards. At August 31, 2013, 1.7 million shares were available for grant under the 2006 Plan. The Company grants stock options with contractual terms of seven to ten years and a vesting period of three years and RSUs also with a vesting period of three years. Effective in January 2013, awards granted to the Company’s Board of Directors vest over one year. The Company’s policy is to issue shares from treasury stock to satisfy stock option exercises, the vesting of RSUs and shares issued under the ESPP.

Total stock-based compensation cost recognized for fiscal years 2013, 2012 and 2011 was $3.6 million, $4.3 million and $5.6 million, respectively, with related income tax benefits of $ 1.2 million, $1.2 million and $1.3 million,

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

respectively. At August 31, 2013, total remaining unrecognized compensation cost related to unvested stock-based arrangements was $ 4.6 million and is expected to be recognized over a weighted average period of 1. 9 years.

The Company measures the compensation cost associated with stock option-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 the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted during 2013, 2012 and 2011. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards. The fair value of RSUs granted is equal to the Company’s closing stock price on the date of the grant.

The per share weighted average fair value of stock options granted during 2013, 2012 and 2011 was $ 4.69 , $2.88 and $4.63 , 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:



	2013		2012		2011
Expected term (years)	4.9		4.9		4.7
Expected volatility	48	%	48	%	46	%
Risk-free interest rate	0.8	%	0.8	%	2.0	%
Expected dividend yield	-	%	-	%	-	%

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 historical exercise patterns.

Stock Options

A summary of stock option activity under the Company’s stock-based compensation plans for the year ended August 31, 2013, is presented in the following table:



	Options		Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (Yrs.)		Aggregate Intrinsic Value
Outstanding September 1, 2012	7,258	$	12.41
Granted	729		11.28
Exercised	(1,527)		10.71
Forfeited or expired	(898)		15.42
Outstanding at August 31, 2013	5,562	$	12.25	3.29	$	26,239
Exercisable at August 31, 2013	4,138	$	13.22	2.43	$	16,936

Proceeds from the exercise of stock options for fiscal years 2013, 2012 and 2011 were $ 16.3 million, $0.3 million and $2.1 million, respectively. The total intrinsic value of options exercised during the years ended August 31, 2013, 2012 and 2011 was $ 3.8 million, $0.1 million and $0.8 million, respectively.

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

Restricted Stock Units

A summary of the Company’s RSU activity during the year ended August 31, 2013 is presented in the following table:



	Restricted Stock Units		Weighted Average Grant Date Fair Value
Outstanding September 1, 2012	119	$	8.31
Granted	32		11.26
Vested	(80)		8.57
Outstanding at August 31, 2013	71	$	9.36

The aggregate fair value of restricted stock that vested during the years ended August 31, 2013, 2012 and 2011 was $ 0.9 million, $0.5 million and $0.7 million, respectively.

Share Repurchase Programs

On October 13, 2011, the Company’s Board of Directors approved a $30 million share repurchase program. Under that program, the Company was authorized to purchase up to $30 million of its outstanding shares of common stock through August 31, 2012. During fiscal year 2012, the Company completed this share repurchase program.

On August 15, 2012, the Company’s Board of Directors approved a share repurchase program authorizing the Company to purchase up to $40 million of its outstanding shares of common stock. In January 2013, the Board of Directors increased the repurchase program to $55 million in authorized purchases through August 31, 2013. During fiscal year 2013, approximately 3.3 million shares were acquired pursuant to this program for a total cost of $35.5 million; this is in addition to the approximately 0.1 million shares that were acquired for a total cost of $1.1 million during the fourth quarter of fiscal year 2012. In August 2013, the Board of Directors extended the share repurchase program through August 31, 2014, with a total authorization of up to $40.0 million, which was available as of August 31, 2013. Share repurchases may be made from time to time in the open market or in negotiated transactions, depending on share price, market conditions and other factors. The stock repurchase program may be extended, modified, suspended or discontinued at any time . S ubsequent to the end of fiscal year 2013, the Company purchased approximately 250 thousand shares under this program for a cost of $ 4.5 million.

1 4 . Segment Information

Operating segments are generally defined as components of an enterprise for which separate discrete financial information is available as the basis for management to allocate resources and assess performance.

Based on internal reporting and management structure, the Company has two reportable segments: Company Drive ‑ Ins and Franchise Operations. The Company Drive-Ins segment consists of the drive-in operations in which the Company owns a controlling ownership interest and derives its revenues from operating drive-in restaurants. The Franchise Operations segment consists of franchising activities and derives its revenues from royalties, franchise fees and lease revenues received from franchisees. The accounting policies of the segments are the same as those described in note 1 - Summary of Significant Accounting Policies. Segment information for total assets and capital expenditures is not presented as such information is not used in measuring segment performance or allocating resources between segments.

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

The following table presents the revenues and income from operations for each reportable segment, along with reconciliation to reported revenue, income from operations and income before income taxes:



	Year ended August 31,
	2013		2012		2011
Revenues:
Company Drive-Ins	$	402,296	$	404,443	$	410,820
Franchise Operations		135,522		134,588		131,894
Unallocated revenues		4,767		4,699		3,237
Total revenues	$	542,585	$	543,730	$	545,951

Income from operations:
Company Drive-Ins	$	59,087	$	56,973	$	54,584
Franchise Operations		135,522		134,588		131,894
Unallocated income		2,824		5,230		3,822
Unallocated expenses:
Selling, general and administrative		(66,022)		(65,173)		(64,943)
Depreciation and amortization		(40,387)		(41,914)		(41,225)
Provision for impairment of long-lived assets		(1,776)		(764)		(824)
Income from operations		89,248		88,940		83,308
Net interest expense		(32,949)		(30,978)		(54,929)
Income before income taxes	$	56,299	$	57,962	$	28,379

1 5 . Employee Benefit and Cash Incentive Plans

The Company sponsors a qualified defined contribution 401(k) plan for employees meeting certain eligibility requirements. Under the plan, employees are entitled to make pre-tax contributions. The Company matches an amount equal to the employee ’ s contributions up to a maximum of 6% of the employee ’ s salaries depending on years of service . The Company’s contributions during fiscal years 201 3 , 201 2 and 201 1 were $ 1.9 million , $1. 7 million and $1. 6 million, respectively.

The Company has Cash Incentive Plans (the “Incentive Plans”) that apply to certain members of management , and grants of awards under the I ncentive P lans are at all times subject to the approval of the Company’s Board of Directors. Under certain awards pursuant to the I ncentive P lans, if predetermined earnings goals for a fiscal year are met, the Incentive Plans provide 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 $ 6.7 million , $ 4.9 million and $ 5.4 million during fiscal years 201 3 , 201 2 and 201 1 , respectively.

1 6 . Commitments and Contingencies

Litigation

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Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2013, 2012 and 2011

(In Thousands, Except Per Share Data)

Lease Commitments

The Company has obligations under various operating lease agreements with third-party lessors related to the real estate for certain Company Drive-In operations that were sold to franchisees. Under these agreements, which expire through 2029 , the Company remains secondarily liable for the lease payments for which it was responsible as the original lessee. As of August 31, 2013, the amount remaining under these guaranteed lease obligations totaled $ 11.1 million . At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore, no liability has been provided.

Purchase Obligations

At August 31, 201 3 , the Company had purchase obligations of approximately $ 51 million which primarily related to its estimated share of system-wide commitments for food products . The Company ha s excluded agreements that are cancelable without penalty.

1 7 . Selected Quarterly Financial Data (Unaudited)



	First Quarter				Second Quarter				Third Quarter					Fourth Quarter
	2013		2012		2013		2012			2013		2012		2013		2012
Total revenues ⁽¹⁾	$	126,008	$	128,279	$	111,141	$	115,084		$	146,634	$	149,427	$	158,802	$	150,940
Income from operations		17,203		16,754		12,018		10,548			29,994		30,736		30,033		30,902
Net income ⁽²⁾	$	6,133	$	5,499	$	3,577	$	1,677		$	14,793	$	14,407	$	12,198	$	14,502

Basic income
per share ⁽³⁾	$	0.11	$	0.09	$	0.06	$	0.03		$	0.26	$	0.24	$	0.22	$	0.25
Diluted income
per share ⁽³⁾	$	0.11	$	0.09	$	0.06	$	0.03		$	0.26	$	0.24	$	0.21	$	0.25
—————————

(1) Revenues were impacted by the refranchising of 34 Company Drive-Ins during the latter part of the Company’s second fiscal quarter of 2012.

(2) Includes losses on early extinguishment of debt of $0.5 million and $3.9 million in the second and fourth quarter of fiscal year 2013, respectively, a tax benefit of $0.7 million from the retroactive reinstatement of the Work Opportunity Tax Credit (“WOTC”) and resolution of income tax matters in the second quarter of fiscal year 2013, as well as a $2.4 million loss on the closure of 12 lower-performing Company Drive-Ins as a result of an assessment in advance of capital expenditures for pending technology initiatives and an impairment charge of $1.6 million related to the write-off of assets associated with a change in the vendor for the Sonic system’s new point-of-sale technology in the fourth quarter of fiscal year 2013 .

(3) The sum of per share data may not agree to annual amounts due to rounding.

DB1/66685817.5

SONIC CORP. NONQUALIFIED DEFERRED COMPENSATION PLAN

PREAMBLE

A . Establishment . Sonic Corp., a Delaware corporation (“Company”), originally established the Sonic Corp. Nonqualified Deferred Compensation Plan to be effective June 1, 2011 (“Plan”). The Company has amended and restated the Plan in its entirety to be effective April 10, 2013 (unless otherwise provided herein) to incorporate all amendment(s) that have been made to the Plan to date, to remove certain limitations imposed on compensation to be deferred under the Plan, to remove those provisions allowing for mid-year eligibility for participation in the Plan, and to clari fy certain terms of the Plan.

B. Purpose . The Plan shall provide participating Employees the ability to defer payment of Compensation. The Plan is also intended to provide the amount of benefit which could otherwise be earned under the Sonic Corp. Savings and Profit Sharing Plan, or any successor plan (the “401(k) Plan”), but which cannot be contributed to the 401(k) Plan due to the limitations imposed by the Code which limit benefits that may be contributed by such Employee as a “salary deferral contribution” under Code Section 401(k) and benefits that may be contributed by the Company as a “matching contribution” under Code Section 401(m) (collectively referred to as the “IRS Limitations”).

C. ERISA Status . The Plan is intended to qualify for the exemptions provided under Title I of ERISA for plans that are not tax-qualified and that are maintained primarily to provide deferred compensation for a select group of management or highly compensated employees as defined in Section 201(2) of ERISA.

ARTICLE I

DEFINITIONS

1.1 “Account” shall mean the individual bookkeeping record established by the Committee showing the monetary value of the interest in this Plan of each Participant or Beneficiary. Such Account shall not constitute a separate fund of assets apart from the Company’s general assets. The Participant’s Account will be divided into a series of “Subaccounts.” Each Plan Year a separate Subaccount shall be established for each Participant to reflect all amounts contributed on the Participant’s behalf for such Plan Year and such Subaccount shall be further divided to reflect Deferral amounts and all Company Contributions contributed on the Participant’s behalf for the Plan Year. For purposes of this Plan, the term “Account(s)” shall include the term “Subaccount(s)” if the context so requires, and the term “Subaccount(s)” shall include the term “Account(s)” if the context so requires.

1.2 “Affiliate” shall mean a member of a controlled group of corporations as defined in Code Section 414(b), a group of trades or businesses (whether or not incorporated) which are under common control as defined in Code Section 414(c), or an affiliated service group as defined in Code Section 414(m) of which the Company is a member; and any entity otherwise required to be aggregated with the Company pursuant to Code Section 414(o) or the regulations issued thereunder; and any other entity in which the Company has an ownership interest and to which the Company elects to make participation in this Plan available.

1.3 “Annual Bonus” shall mean the bonus that may be earned by the Participant for each fiscal year of the Company and which shall be paid immediately following the close of the fiscal year in which such Annual Bonus is earned. Such amounts shall be reported on the payroll records of the Participant’s Employer and designated as the Participant’s Annual Bonus. The Annual Bonus shall qualify as “fiscal year compensation” under Treasury Regulation Section 1.409A-2(a)(6).

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DB1/66685817.5

For illustration purposes only, a Participant may earn an Annual Bonus for the Company’s fiscal year beginning September 1, 2010 through August 31, 2011. Such Annual Bonus is expected to be paid within two months after the end of the fiscal year, but in no event shall the Annual Bonus be paid before August 31, 2011.

1.4 “Compensation” shall, except as otherwise described in this Section 1.4, mean the “compensation” (as defined under Section 1.10 of the 401(k) Plan, as amended) payable to an eligible Employee by the Company. In no event shall any amounts paid under the Company’s long term cash incentive award program which is earned over a three year performance period be considered “Compensation” for purposes of this Plan and no Deferral may be made with respect to such amounts. The amount of a Participant’s Compensation that is to be considered for various purposes under this Plan may be limited as follows:

A. Deferral Elections Made Prior to the Restatement Date. For Deferral Elections made prior to the Restatement Date, such Deferral Election shall not consider Compensation in excess of Two Hundred Forty Five Thousand Dollars ($245,000), as adjusted for increases in the cost of living in accordance with Code Section 401(a)(17).

B. Deferral Elections Made On or After the Restatement Date. For Deferral Elections made on or after the Restatement Date, all Compensation earned by a Participant shall be taken into consideration without regard to limitations imposed by Code Section 401(a)(17).

C. Matching Contributions and/or Profit Sharing Contributions. For purposes of Matching Contributions and/or Profit Sharing Contributions to be made under this Plan (both before and after the Restatement Date), Compensation in excess of Two Hundred Forty Five Thousand Dollars ($245,000), as adjusted for increases in the cost of living in accordance with Code Section 401(a)(17), shall be disregarded.

The application of the Compensation limits set forth in A, B, and C above are illustrated as follows: Any Deferral Election made on or before August 31, 2013 with respect to Annual Bonus to be earned for the fiscal year September 1, 2013 through August 31, 2014 (and any subsequent fiscal year) and any Deferral Election made on or before December 31, 2013 with respect to Salary to be earned during any calendar year beginning on or after January 1, 2014, shall not be limited by reference to the requirements of Code Section 401(a)(17). However, any Matching Contributions and/or Profit Sharing Contributions made on behalf of any Participant under this Plan shall continue to be calculated by reference to the Compensation limitation provided for in this Section 1.4, regardless of when made.

1.5 “Beneficiary” shall mean the Beneficiary designated by each Participant i n accordance with Section 11.2.

1.6 “Board” shall mean the Board of Directors of the Company.

1.7 “Code” shall mean the Internal Revenue Code of 1986, as it may be amended from time to time, and the rules and regulations promulgated thereunder.

1.8 “Committee” shall mean the Compensation Committee of the Board.

1.9 “Company” shall mean Sonic Corp. or its successor or successors.

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DB1/66685817.5

1.10 “Company Contributions” shall mean, collectively, the Matching Contributions and Profit Sharing Contributions, if any, made to a Participant’s Company Contribution Account by the Company each Plan Year.

1.11 “Company Contribution Account” shall mean the Subaccount of each Participant’s Account showing the monetary value of the Participant’s interest in this Plan which is attributable to Matching Contributions and/or Profit Sharing Contributions credited pursuant to Sections 3.2 and 3.3, if any. A separate Company Contribution Subaccount shall be maintained for each Plan Year.

1.12 “Deferral” shall mean the amount deferred by a Participant each Plan Year from Salary and/or Annual Bonus pursuant to the Deferral Election filed by the Participant in such Plan Year.

1.13 “Deferral Election” shall mean the irrevocable election filed by a Participant under Article II of this Plan pursuant to which a portion of his or her Salary and/or Annual Bonus for this Plan Year is to be deferred in accordance with the provisions of this Plan. Notwithstanding the preceding, for Deferral Elections made prior to the Restatement Date, such Deferral Election shall only be applied to the first Two Hundred Forty Five Thousand Dollars ($245,000), as adjusted for increases in the cost of living in accordance with Code Section 401(a)(17), of Compensation, including amounts attributable to both Salary and Annual Bonus. Notwithstanding the preceding, any Deferral Election made on or after the Restatement Date shall apply to all Compensation earned by the Participant, without regard to the limitations imposed by Code Section 401(a)(17).

1.14 “Disability” shall mean the Participant either (a) as determined by the Committee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (b) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under a Company or Affiliate accident and health plan covering employees of the Participant’s Employer.

1.15 “Distribution Election” means the election made by the Participant in connection with his or her Deferral Election, indicating the chosen form of payment for benefits payable at Separation from Service, as determined by the Participant. As described in Article V, this Plan allows a Participant to elect to take a distribution of benefits under this Plan in either a single lump sum payment or annual installment payments over a period not to exceed either five (5) or ten (10) years.

1.16 “Earnings” means the increase or decrease in the Participant’s Account balance, determined on each Valuation Date, which shall be determined based on the Investment Funds in which the Participant’s Account balance is deemed to be invested, as chosen by the Participant.

1.17 “Effective Date” shall generally mean the original effective date of this Plan, June 1, 2011.

1.18 “Employee” shall mean an individual employed by a member of the Employer Group.

1.19 “Employer” shall mean the Company or the Affiliate employing the Participant.

1.20 “Employer Group” shall mean the (i) Company and (ii) any other member of the group of commonly controlled corporations or other businesses that include the Company, as determined in accordance with Code Sections 414(b) and (c) and the Treasury Regulations thereunder, except that in applying Sections 1563(a)(1), (2) and (3) for purposes of determining the controlled group of corporations

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under Section 414(b), the phrase “at least 50 percent” shall be used instead of “at least 80 percent” each place the latter phrase appears in such sections and in applying Section 1.414(c)-2 of the Treasury Regulations for purposes of determining trades or businesses that are under common control for purposes of Section 414(c), the phrase “at least 50 percent” shall be used instead of “at least 80 percent” each place the latter phrase appears in Section 1.414(c)-2 of the Treasury Regulations.

1.21 “401(k) Plan” shall mean the Sonic Corp. Savings and Profit Sharing Plan.

1.22 “Investment Funds” means one or more of the established funds or indices that are identified by the Committee as options into which a Participant can elect to invest such Participant’s Account. These Investment Funds are used solely to calculate the Earnings that are added (or subtracted, as the case may be) to each Participant’s Account balance based on the Investment Funds chosen by the Participant for purposes of investing such Participant’s Account. All investment of a Participant’s Account shall be a “deemed” investment for bookkeeping purposes, and it may be that no actual cash amounts are invested in any Investment Funds. The Committee shall select the various Investment Funds available to the Participants with respect to this Plan which may include (or be identical to) the investment options offered under he 401(k) Plan. Investment Funds may be replaced, new funds may be added, or both, from time to time in the discretion of the Committee.

1.23 “Matching Contributions” shall mean the amount contributed to the Participant’s Account as a Matching Contribution pursuant to Section 3.2 hereof.

1.24 “Participant” shall mean an Employee who has been designated by the Committee as being eligible to participate in this Plan.

1.25 “Plan” shall mean the Sonic Corp. Nonqualified Deferred Compensation Plan set forth in this document, as it may be amended from time to time.

1.26 “Plan Year” shall mean the twelve-month period beginning each January 1 and ending each December 31, provided, that the first Plan Year shall begin June 1, 2011 and end December 31, 2011.

1.27 “Profit Sharing Contributions” shall mean the amount contributed to the Participant’s Account as a profit sharing contribution pursuant to Section 3.3 hereof.

1.28 “Restatement Date” shall generally mean the date of this amended and restated Plan, April 10 , 2013.

1.29 “Salary” shall mean the portion of a Participant’s Compensation that is not attributable to any amounts paid as an Annual Bonus.

1.30 “Separation from Service” shall mean a Participant’s cessation of Employee status by reason of his or her retirement, death or termination of employment. A Participant shall be deemed to have terminated employment for such purpose at such time as the level of his or her bona fide services to be performed as an Employee (or non-employee consultant) permanently decreases to a level that is not more than twenty percent (20%) of the average level of services he or she rendered as an Employee during the immediately preceding thirty-six (36) months (or such shorter period for which he or she may have rendered such Service). Any such determination as to Separation from Service, however, shall be made in accordance with the applicable standards of the Treasury Regulations issued under Code Section 409A. In addition to the foregoing, a Separation from Service will not be deemed to have occurred while the Participant is on military leave, sick leave or other bona fide leave of absence if the period of such

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leave does not exceed six (6) months or any longer period for which such Participant’s right to reemployment with one or more members of the Employer Group is provided either by statute or contract.

1.31 “Specified Employee” shall, for any Plan Year in which any stock of the Company is publicly traded on an established securities market, mean a “key employee” (within the meaning of that term under Code Section 416(i)), as determined by the Committee in accordance with the applicable standards of Code Section 409A and the Treasury Regulations thereunder and applied on a consistent basis for all non-qualified deferred compensation plans of the Employer Group subject to Code Section 409A. The Specified Employees shall be identified on December 31 of each calendar year and shall have that status for the twelve (12)-month period beginning on April 1 of the following calendar year. Determinations by the Committee regarding Specified Employees shall be final and binding on all affected parties.

1.32 “ Termination Date” shall mean the date on which a Participant has a Separation from Service.

1.33 “Valuation Date” shall mean each business day on which the financial markets are open for trading activity or such other dates as may be established by the Committee.

1.34 “Year of Service” shall have the meaning given to such term in the 401(k) Plan.

ARTICLE II

ELIGIBILITY

2.1 Eligibility to Participate in the Plan. Participation in this Plan shall be made available to a select group of Employees who are providing services to the Company or an Affiliate in key positions of management and responsibility, as determined by the Committee. The determination as to the eligibility of any Employee to participate in this Plan shall be in the sole and absolute discretion of the Committee, whose decision in that regard shall be conclusive and binding for all purposes hereunder. Even if an Employee has, for prior Plan Years, been permitted to defer amounts into the Plan, the Committee shall have complete discretion to exclude one or more individuals from Participant status for one or more Plan Years as the Committee deems appropriate. However, no such exclusion shall become effective until the first day of the first Plan Year coincident with or next following the date of the Committee resolution authorizing such exclusion. If any individual is excluded from Participant status for one or more Plan Years, then such individual shall not be entitled to defer any part of his or her Salary and/or Annual Bonus, as applicable, for those Plan Years.

2.2 Deferral Election; Investment Funds; Distribution Elections. An Employee’s participation in this Plan shall be effective upon the notification to the Employee by the Committee of eligibility to participate. Upon notification by the Committee, the Participant may (i) make a Deferral Election with respect to the Participant’s Salary and/or Annual Bonus, (ii) select the Investment Fund(s) in which the Participant’s Account shall deemed to be invested, and (iii) make a Distribution Election for amounts to be contributed to this Plan for the Participant for the Plan Year to which the Deferral Election shall apply. Each Deferral Election shall be made in compliance with all of the following requirements and shall not be effective unless such requirements are met:

A. The Deferral Election must be exercised by means of a written notice on the form provided by the Committee for such purpose and such Deferral Election must be filed timely with the Committee (or its designee). A Deferral Election may be made with respect to Salary an d/or Annual Bonus, as follows:

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(i) For purposes of deferring Salary amounts, the Deferral Election must be filed on or before the last day of the calendar year immediately preceding the start of this Plan Year for which the Salary amounts subject to t hat election are to be earned.

(ii) For purposes of deferring the Annual Bonus, or any portion thereof, the Deferral Election must be filed on or before the last day of the fiscal year immediately preceding the start of the fiscal year for which the Annual Bonus amounts subject to that election are to be earned, regardless of when such Annual Bonus amounts may be paid. Notwithstanding anything to the contrary herein, the first Annual Bonus that may be subject to a Deferral Election shall be the Annual Bonus that may be earned by a Participant during any fiscal year beginning on or after September 1, 2011. No amounts to be paid in October, 2011 as an Annual Bonus relating to the fiscal year beginning September 1, 2010 and ending August 31, 2011 shall be available for Deferral.

For illustration purposes only, if the Participant is eligible to earn an Annual Bonus for the taxable year beginning September 1, 2012 and ending August 31, 2013 and such Annual Bonus will be paid in October, 2013, the Deferral Election made with respect to such Annual Bonus must be completed o n or before September 1, 2012.

(iii) Effective as of the Restatement Date, all Participants, including any newly eligible Participant, may only make a Deferral Election during the general election period contemplated under Section 2.2.A(i) (Salary) and Section 2.2.A(ii) (A nnual Bonus). Any Deferral Election made with respect to a Participant’s Salary shall only be effective as of the first day of the calendar year immediately following the date on which such Deferral Election is made. Similarly, any Deferral Election made with respect to a Participant’s Annual Bonus shall only be effective as of the first day of the fiscal year immediately following the date on which such Deferral Election is made.

(iv) For purposes of the first Plan Year (June 1, 2011 through December 31, 2011), each Employee who (1) is designated as a Participant in this Plan, and (2) wishes to make Deferrals from Salary into this Plan for such Plan Year, may become a Participant on July 1, 2011 and, therefore, must file a Deferral Election on or before July 1, 2011. Such Deferral Election shall be applicable to Salary (as designated by the Participant) earned on or after July 1, 2011.

B. Each Deferral Election shall separately specify the percent of Salary and Annual Bonus to be deferred. The percent of Salary and Annual Bonus which a Participant may elect to defer must be at least 1% and no more than 100%. These minimums and maximums apply separately to Salary and Annual Bonus and may be changed at any time by the Committee without the formality of a Plan amendment.

C. The Participant shall specify in the Deferral Election his or her Distribution Election by indicating that the payment of all Deferral amounts for the relevant Plan Year shall be made in either:

(i) a single lump sum payment,

(ii) substantially equal annual installments over five (5) years; or

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(iii) substantially equal annual installments over ten (10) years.

In a Plan Year the Participant shall make a Distribution Election in connection with his or her Deferral Election applicable to Salary and a separate Distribution Election in connection with his or her Deferral Election applicable to Annual Bonus. The Participant does not have to make the same Distribution Election for Deferrals of Salary and/or Annual Bonus. The Distribution Election made in connection with a Participant’s Deferral Election (Salary and/or Annual Bonus) shall apply to all amounts contributed by the Participant as a Deferral (Salary and/or Annual Bonus, as applicable). All amounts contributed on the Participant’s behalf as a Company Contribution in the Plan Year shall be distributed pursuant to the Distribution Election made by the Participant pursuant to the Participant’s Deferral Election applicable to Salary , or if no Deferral Election is made with respect to Salary, such Company Contributions shall be distributed pursuant to the Distribution Election made by the Participant pursuant to the Participant’s Deferral Election applicable to Annual Bonus that is made in August of the Plan Year in which such Company Contribution is made. Any Distribution Election made by the Participant shall not apply to amounts contributed to the Participant’s Account in a prior or subsequent Plan Year. Different Distribution Elections can be made for different Plan Years.

D. The Participant shall specify allocation of such Participant’s Election Deferral among the various available Investment Funds. These allocations can be changed at anytime throughout the year without a limit on the number of times the investment allocations can be changed.

E. Any Deferral Election made by a Participant shall only be effective if the Participant is still an employee of the Company or an Affiliate as of the date that the Salary and/or Annual Bonus, as applicable, would have been paid but for the Deferral Election.

F. A Participant’s Deferral Election for a particular Plan Year shall become irrevocable as of the first day of that Plan Year unless the Participant (i) terminates employment, (ii) dies, (iii) receives a hardship distribution under this Plan, or (iv) receives a hardship distribution under the 401(k) Plan. If a Participant receives a distribution in accordance with Treas. Reg. §1.401(k)-1(d)(3) from a tax- qualified 401(k) Plan of the Company on or after the date on which the 401(k) Plan relies upon the distribution being deemed necessary to satisfy an immediate and heavy financial need of the Participant, (i) the Participant’s Deferral contributions shall immediately terminate, and (ii) the Participant will not be eligible to make Deferrals under this Plan for the greater of six (6) months or as long as the 401(k) Plan requires the Participant to suspend Deferrals after receipt of the hardship distribution.

G. The Distribution Election made for a particular Plan Year shall become irrevocable as of the first day of that Plan Year, and no subsequent changes may be made to that Distribution Election. The Distribution Election made by a Participant for a Plan Year shall apply to all amounts contributed by the Participant as Deferrals and all amounts contributed on the Participant’s behalf as Company Contributions for that Plan Year.

2.3 Loss of Eligibility . If the Committee determines that a Participant’s employment performance is no longer at a level that warrants reward through participation in this Plan and, as a result of such performance, the Participant is no longer deemed to be an eligible Employee for purposes of this Plan, but the Participant’s employment with the Company does not terminate, to the extent consistent

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with Code Section 409A, the Participant’s existing Deferral Election shall remain in effect until the end of the applicable Plan Year, but no new Deferral Election may be made by such Participant after notice of such determination is given by the Committee.

2.4 Future Deferral Elections . Participants may continue to file Deferral Elections under this Plan for one or more subsequent Plan Years pursuant to the requirements of Section 2.2 until the earliest of:

(i) his or her exclusion from this Plan upon written notice from the Committee as set forth in Section 2.1,

(ii) his or her cessation of Employee status, or

(iii) the termination of this Plan.

Notwithstanding anything to the contrary herein, if a Participant wishes to make Deferrals under this Plan, he or she must file a new Deferral Election for each Plan Year. Deferral Elections made for a prior Plan Year shall not apply to any other Plan Year. No “evergreen” Deferral Elections will be permitted.

ARTICLE III

CREDITS TO ACCOUNT

3.1 Deferral Contributions. Any amount deferred, pursuant to Article II, from the Participant’s Salary and/or Annual Bonus, as applicable, otherwise payable to a Participant shall be credited to the Account of such Participant as soon as practicable after the date on which such amounts would otherwise have been paid to the Participant.

3.2 Matching Contributions. The Committee shall credit a Matching Contribution, calculated as provided in this Section 3.2, to the Company Contribution Account of each Participant who has deferred amounts under either this Plan during any Plan Year pursuant to Section 2.2 above and/or under the 401(k) Plan pursuant to the applicable provisions of the 401(k) Plan. The Matching Contribution for each Plan Year, if any, shall be computed as follows:

A. the Committee shall, using the matching contribution formula provided for in the 401(k) Plan, compute a maximum matching contribution amount for each Participant for a Plan Year, based upon the salary deferrals made by the Participant to the 401(k) Plan plus Deferrals made by the Participant pursuant to the Participant’s Deferral Election under this Plan;

B. the Committee shall determine the amount of matching contributions actually made for the Participant to the 401(k) Plan, taking into consideration any reduction in such amounts as a result of the imposition of IRS Limitations; and

C. the difference between (A) and (B), if any, is the Matching Contribution to be credited to the Participant’s Company Contribution Account under this Plan for the applicable Plan Year.

Illustration of Matching Contribution Calculation: The Participant has five (5) Years of Service. Under the 401(k) Plan matching contribution formula, the Participant is entitled to a matching contribution of 100% of salary deferrals up to 3% of compensation plus

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50% of salary deferrals up to the next 3% of compensation. The Participant contributes $6,500 to the 401(k) Plan as a salary deferral. The Participant contributes $10,000 to this Plan as a Deferral. The Participant’s Compensation is $300,000. Under both the 401(k) Plan and this Plan, the Participant’s Compensation is limited to $245,000. The maximum Matching Contribution calculated under Section 3.2(A) is $11,025 (100% of deferrals up to 3% of $245,000 ($7,350) plus 50% of deferrals up to 3% of $245,000 ($3,675)). The Participant contributed only $6,500 to the 401(k) Plan. The contribution to the 401(k) Plan for purposes of Section 3.2(B) is $6,500. The difference (for purposes of Section 3.2(C)) is $4,525 ($11,025 - $6,500). Therefore, $4,525 would be contributed to the Participant’s Company Contribution Account.

The Committee shall credit any Matching Contribution made on the Participant’s behalf, if any, to the Participant’s Account as soon as administratively practicable following the end of this Plan Year in which the 401(k) Plan year ends.

3.3 Profit Sharing Contributions. For each Plan Year, the Committee shall credit each Participant’s Account with an amount that represents a Profit Sharing Contribution, as determined in accordance with this Section 3.3. For clarification purposes, the Committee will only credit a Profit Sharing Contribution under this Section 3.3 if a profit sharing contribution is made to the 401(k) Plan. In no event shall any Profit Sharing Contribution be made under this Section 3.3 in any Plan Year in which no profit sharing contribution is made under the 401(k) Plan. If a Profit Sharing Contribution is to be made to this Plan, the Profit Sharing Contribution shall be equal in amount to the additional contribution, if any, which would have been allocated as a profit sharing contribution to the Participant’s account in the 401(k) Plan in which the Participant is eligible to participate, if the Participant had not elected to defer, pursuant to this Plan, Compensation that otherwise would have been paid during the plan year of the 401(k) Plan which ends in this Plan Year. The Committee shall credit the Profit Sharing Contribution to the Account of each Participant entitled thereto as soon as administratively practicable following the end of this Plan Year.

3.4 Earnings. In accordance with the requirements of Article II, at the time of making the Deferral Elections, and at such other times as allowed by the Committee, the Participant shall designate, on a form provided by the Committee, the Investment Funds in which the Participant’s Account will be deemed to be invested for purposes of determining the amount of Earnings to be credited to that Account. Such designations may vary by Subaccount. Any Company Contributions pursuant to Section 3.2 and or Section 3.3 shall be deemed to be invested in the same Investment Funds elected by the Participant for his or her Deferrals for the Plan Year for which the Company Contribution is made (even though it is credited in a subsequent Plan Year), or if none, as elected by the Participant for his or her Deferrals from Annual Bonuses for such Plan Year. On a quarterly or other basis selected by the Committee, the Committee shall credit to each Participant’s Account the Earnings that would have resulted to the Account if the amounts credited to the Account were invested as elected by the Participant.

3.5 Subaccounts. Multiple Subaccounts shall be established for each Participant, one for each Plan Year. Each Plan Year, the Subaccount for such Plan Year shall be credited with the Deferral attributable to Salary and/or Annual Bonus amounts, as applicable, subject to that Plan Year’s Deferral Election. Such amounts shall be credited to the Subaccount at such times as the Salary and/or Annual Bonus amounts, as applicable, would have otherwise become due and payable to the Participant in the absence of such Deferral Election. Such Subaccount shall also be credited with any Matching Contributions and/or Profit Sharing Contributions that would be owed to the Participant under Sections 3.2 and 3.3, respectively, for the Plan Year. Each Subaccount will hold all amounts contributed on the Participant’s behalf for the applicable Plan Year, plus Earnings, and no amount contributed on the Participant’s behalf in any other Plan Year. No transfers between Subaccounts are allowed.

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ARTICLE IV

VESTING

4.1 Vesting . A Participant shall vest in his Account balance pursuant to the following provisions:

A. Deferrals . A Participant shall always be one hundred percent (100%) vested in his or her Deferrals.

B. Company Contributions . A Participant shall vest in amounts attributable to Matching Contributions and/or Profit Sharing Contributions contributed to the Plan or such Participant’s behalf as follows:

(i) Death or Disability. If a Participant has a Separation from Service as a result of death or Disability, the Participant’s Account balance will be one hundred percent (100%) vested.

(ii) Change in Control . In the event of the occurrence of a Change of Control of the Participant’s Employer (as described in Section 5.7), the Participant’s Account balance will be one hundred percent (100%) vested.

(iii) Completion of Service Vesting . If not vested earlier pursuant to Sections 4.1(B)(i) or 4.1(B)(ii), the right to receive payment of any amount under this Plan attributable to Matching Contributions and/or Profit Sharing Contributions shall be determined by applying the Participant’s vesting percentage calculated pursuant to the terms of the 401(k) Plan. In addition to crediting service with Related Employers, as that term is defined in the 401(k) Plan, the Company will credit service with organizations and their predecessors in which the Company owns an interest but which do not qualify as Related Employers. Payment will be made in accordance with Article V.

4.2 Forfeitures . Unless a Participant is vested in his Account balance pursuant to this Artice IV, the unvested portion of a Participant’s Account shall be forfeited upon the Participant’s Separation from Service.

ARTICLE V

BENEFITS

5.1 Distribution of Vested Benefits Upon Separation from Service . If a distribution is not made earlier pursuant to the terms of this Article V, upon a Participant’s Separation from Service for reasons other than death or Disability, the Participant’s vested interest in each of such Participant’s Subaccounts shall be paid in cash, to the Participant, in the form selected by the Participant in his or her Distribution Election for the applicable Plan Year and with respect to the applicable Subaccount ( e.g. , Salary and/or Annual Bonus). A Participant may make a separate Distribution Election with respect the Deferral Election made with respect to Salary and/or Annual Bonus and may make a separate Distribution Election with respect to each Plan Year. The Participant may elect from among the following optional forms of payment:

A. a lump sum distribution;

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B. substantially equal annual installments over five (5) years; or

C. substantially equal annual installments over ten (10) years.

All amounts contributed on the Participant’s behalf as a Company Contribution in the Plan Year shall be distributed pursuant to the Distribution Election made by the Participant applicable to Salary amounts (regardless of whether the Participant actually makes a Deferral Election with respect to his Salary amounts), or if no Distribution Election is made with respect to Salary, such Company Contributions shall be distributed in a lump sum payment.

For illustration purposes only, Participant A elects to defer Salary earned in calendar year 2014 by making a Deferral Election on or before December 31, 2013. The distribution election made by Participant A on such Deferral Election will apply to Salary amounts earned in calendar year 2014 and Company Contributions allocable to Salary amounts earned in calendar year 2014 even if such Company Contributions are paid after the close of the Plan Year in 2015. For example, Participant A receives a Matching Contribution under the Plan of $4,000 based on the requirements of Section 3.2 as applied to amounts of Compensation earned in 2014 but the Matching Contribution is not “allocated” until January 2015 once the amount is calculated. Such Matching Contribution shall be distributed as elected by Participant A on the Deferral Election filed on or before December 31, 2013.

Subject to Section 5.9, payment shall be made, or in the case of installment payments, shall commence, as soon as administratively practicable following the Participant’s Separation from Service, but in no event later than sixty (60) days after the Participant’s Termination Date. If installment payments are the selected form of benefit, the initial installment payment shall be made as provided above, subject to the six-month delay requirements described in Section 5.9. Each subsequent installment payment shall be paid on the anniversary of the date upon which the initial installment payment was actually paid under this Section 5.1, including a payment date which was delayed as a result of the six-month delay.

5.2 Distribution of Benefits Upon Death . Payment of a Participant’s benefit on account of death shall be made to the Beneficiary of such Participant in a single lump sum cash distribution within ninety (90) days of a Participant’s death. In the event that a Participant dies after he or she has begun to receive installment payments under Section 5.1, the Beneficiary of such Participant shall receive as a death benefit a single lump sum cash distribution equal to the entire value of the remaining Account within ninety (90) days of a Participant’s death. The full payment of the applicable death benefits shall completely discharge all obligations on the part of the Company to the Participant (and the Participant’s Beneficiary) with respect to the operation of this Plan, and rights under this Plan shall terminate.

5.3 Distribution of Benefits Upon Disability . If a Participant has a Separation from Service as a result of a Disability (even if the official determination of such Disability does not occur until after the Participant’s Termination Date), such Participant shall be entitled to the entire value of all amounts credited to such Participant’s Account, determined as of the Valuation Date coincident with or immediately preceding the date of distribution . Payment of a Participant’s benefit on account of a Separation from Service as a result of Disability shall be made to the Participant in a lump sum in cash as soon as practicable following the date on which the Committee determines that the Participant has suffered a Disability; provided, however, that such payment shall be paid within ninety (90) days of the Participant’s Termination Date.

5.4 Hardship Distributions . In the event that the Committee, upon written request of a Participant, determines that the Participant has suffered an unforeseeable emergency, the Company shall pay to the Participant from the Participant's Account, as soon as practicable, but in no event later than

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sixty (60) days, following such determination, an amount necessary to meet the emergency (the “Emergency Benefit”), after deduction of any and all taxes as may be required pursuant to Section 5.11. For purposes of this Plan, an unforeseeable emergency shall be defined, as set forth in Code Section 409A, as a severe financial hardship to the Participant resulting from illness or accident of the Participant, the Participant’s spouse, or a dependent (as defined in Code Section 152, without regard to Code Sections 152(b)(1), (b)(2), and (d)(1)(B)) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Whether a Participant is faced with an unforeseeable emergency permitting a distribution under this Section 5.4 is to be determined by the Committee based on the relevant facts and circumstances of each case, but, in any case, a distribution on account of an unforeseeable emergency may not be made to the extent that such emergency is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participant’s assets, to the extent liquidation of such assets would not cause severe financial hardship, or by cessation of deferrals under this Plan. With respect to that portion of the Account which is distributed to a Participant as an Emergency Benefit, in accordance with this Section, no further benefit shall be payable to the Participant under this Plan. Notwithstanding anything in this Plan to the contrary, if a Participant receives an Emergency Benefit in any Plan Year: (i) the Participant’s Deferral Election shall immediately terminate, and (ii) the Participant will not be eligible to make a Deferral Election for twelve months thereafter; provided however, that the Participant may execute a Deferral Election prior to the first day of the Plan Year immediately following the Plan Year in which the unforeseeable emergency occurs that shall be given effect on the day immediately following termination of such twelve-month period.

5.5 Default Distribution . If the Participant did not elect to receive a distribution of his Account pursuant to Section 5.1, such Participant shall receive a distribution of his Account balance in a single lump sum at Separation from Service. Such payment of any benefit from the Account shall commence as soon as practical, but in no event later than sixty (60) days after the Participant’s Termination Date.

5.6 Small Account . To the extent consistent with Code Section 409A (including the plan aggregation rules under Treasury Regulation section 1.409A-1(c) or any successor provision), if the aggregate balance of the Participant’s Account is not greater than the applicable limit under Code Section 402(g) at the time that the Participant is scheduled to receive a distribution of his Account, and the Participant is not otherwise at that time participating in (or has an account balance under) any other non-qualified elective account balance plan subject to Code Section 409A and maintained by one or more members of the Company controlled group, then that balance shall be distributed to the Participant in a lump sum distribution as soon as administratively practical following the date on which the Account balance falls below applicable limit under Code Section 402(g) at the time, whether or not the Participant elected that form of distribution or distribution event, so long as such distribution results in the termination and liquidation of the entirety of the Participant’s interest under this Plan (and all aggregated arrangements).

5.7 Change in Control . Notwithstanding anything to the contrary in this Article V, to the extent consistent with Code Section 409A, if there is a Change in Control of (i) the Participant’s Employer, or (ii) a corporation that is a majority shareholder of such Employer (as defined in Treasury Regulation Section 1.409A-3), or (iii) a corporation in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain ending with the Employer, this Plan shall distribute the Accounts of all Participants employed by such entity or its subsidiaries impacted by such Change in Control, in a single lump sum within thirty (30) days after such Change in Control. The Committee shall determine an appropriate Valuation Date to be used in connection with the distributions to be made, which Valuation Date shall not be more than one month prior to the date of distribution. A “Change in Control” means (1) a change in the ownership of the Employer within the meaning of

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Treasury Regulation Section 1.409A-3; or (2) the date a majority of the members of the Board is replaced during any twelve consecutive month period by directors whose appointment or election is not endorsed by a majority of the members of the Board immediately before the date of the appointment or election; or (3) a change in the effective control of the Employer or its direct or ultimate parent within the meaning of Treasury Regulation Section 1.409A-3 or (4) the sale or disposition of all or substantially all of the assets of the Employer during a twelve month period to a person not considered related under Treasury Regulation Section 1.409A-3. A transaction shall not constitute a Change of Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in the same proportions by the persons who held the Company's securities immediately before such transaction.

5.8 Payment Forms .

A. Lump Sum Payment . A lump sum payment made to a Participant or Beneficiary shall be equal to the balance of the Account immediately prior to the payment.

B. Installment Payments . An installment payment made to a Participant or Beneficiary shall be equal to the balance of the Account immediately prior to the payment, multiplied by a fraction, the numerator of which is one (1) and the denominator of which commences at the number of annual payments initially chosen and is reduced by one (1) in each succeeding year. Any amounts remaining in the Participant’s Account during a period in which the Participant is receiving Annual Payments shall continue to participate in Earnings based upon the Participant’s Investment Funds. If an installment form of payment is elected, then the distribution shall be deemed to be made on a pro rata basis out of all investment options in which amounts credited to the Participant’s Subaccount are deemed to be invested.

For purposes Code Section 409A, the right to a series of installment payments under this Plan shall be treated as a right to a series of separate payments.

5.9 Required Six-Month Delay for Certain Distributions . For any Plan Year in which any stock of the Company is publicly traded on an established securities market, notwithstanding any provision to the contrary in this Plan, no distribution which becomes due and payable by reason of a Participant’s Separation from Service shall be made to such Participant prior to the earlier of (i) the first day of the seventh (7th) month following the date of the Participant’s Separation from Service or (ii) the date of his or her death, if the Participant is deemed at the time of such Separation from Service to be a Specified Employee and such delayed commencement is otherwise required in order to avoid a prohibited distribution under Code Section 409A(a)(2). Upon the expiration of the applicable deferral period, all payments deferred pursuant to this Section (whether they would have otherwise been payable in a single sum or in installments in the absence of such deferral) shall be paid in a lump sum to the Participant, and any remaining payments due under this Plan shall be paid in accordance with the normal payment dates specified for them herein. During such deferral period, the Participant’s Account shall continue to share in accrued Earnings.

5.10 Payment Date under Section 409A . In accordance with Treasury Regulation Section 1.409A-3(d), a distribution under this Plan will be treated as made on the designated payment date if the payment is made (i) at such date or a later date within the same calendar year, or if later, by the 15th day of the third month following the date designated in this Plan (provided the Participant may not, directly or indirectly, designate the year of payment), or (ii) at a date no earlier than 30 days before the designated Payment Date and the Participant (or, in the event of the death of the Participant, his or her Beneficiary) may not directly or indirectly designate the calendar year of the payment.

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5.11 Taxes .

A. Payment of FICA Taxes . The Company shall pay from other income an amount necessary to pay the Federal Insurance Contributions Act (FICA) tax imposed under Code Section 3101, Code Section 3121(a) and Code Section 3121(v)(2) on compensation deferred under this Plan at the same time the compensation is deferred.

B. Tax Withholding . The Company may withhold from a payment or from the Participant’s other compensation any federal, state, or local taxes required by law to be withheld with respect to such payment and such sums as the Company may reasonably estimate as necessary to cover any taxes for which the Company may be liable to withhold on behalf of a Participant and which may be assessed with regard to such payment, provided, that no amounts shall be withheld from such payment for Federal Insurance Contributions Act (FICA) tax imposed under Code Section 3101, Code Section 3121(a) and Code Section 3121(v)(2) to the extent such tax amounts were previously paid on the amount distributed from this Plan.

ARTICLE VI

ADMINISTRATION OF THE PLAN

6.1 The Plan shall be administered by the Committee. The members of the Committee shall not receive compensation with respect to their services for the Committee. The members of the Committee shall serve without bond or security for the performance of their duties hereunder unless applicable law makes the furnishing of such bond or security mandatory or unless required by the Company.

6.2 The Committee shall perform any act which this Plan authorizes expressed by a vote at a meeting or in a writing signed by a majority of its members without a meeting. The Committee may, by a writing signed by a majority of its members, appoint any member of the Committee to act on behalf of the Committee. Any person who is a member of the Committee shall not vote or decide upon any matter relating solely to such member or vote in any case in which the individual right or claim of such member to any benefit under this Plan is particularly involved. If, in any matter or case in which a person is so disqualified to act, the remaining persons constituting the Committee cannot resolve such matter or case, the Board will appoint a temporary substitute to exercise all the powers of the disqualified person concerning the matter or case in which such person is disqualified.

6.3 The Committee may designate in writing other persons to carry out its responsibilities’ under this Plan, and may remove any person designated to carry out its responsibilities under this Plan by notice in writing to that person. The Committee may employ persons to render advice with regard to any of its responsibilities. All usual and reasonable expenses of the Committee shall be paid by the Company. The Company shall indemnify and hold harmless each member of the Committee from and against any and all claims and expenses (including, without limitation, attorneys’ fees and related costs), in connection with the performance by such member of duties in that capacity, other than any of the foregoing arising in connection with the willful neglect or willful misconduct of the person so acting.

6.4 The Committee shall establish rules and procedures, not contrary to the provisions of this Plan, for the administration of this Plan and the transaction of its business. The Committee shall determine the eligibility of any individual to participate in this Plan, shall interpret this Plan in its sole and absolute discretion, and shall determine all questions arising in the administration, interpretation and

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application of this Plan. All determinations of the Committee shall be conclusive and binding on all Employees, Participants and Beneficiaries.

6.5 Any action to be taken hereunder by the Company shall be taken by resolution adopted by the Board or by a committee thereof; provided, however, that by resolution, the Board or a committee thereof may delegate to any officer of the Company the authority to take any such actions hereunder.

ARTICLE VII

CLAIMS REVIEW PROCEDURE

7.1 In the event that a Participant or Beneficiary is denied a claim for benefits under this Plan (the “Claimant”), the Committee shall provide to the Claimant written notice of the denial within 90 days after the claim is filed (45 days in the case of a Disability claim) unless an extension of time for processing the claim is necessary because more information is needed (or, in the case of a Disability claim, an extension is necessary for reasons beyond the control of the Committee), in which case a decision will be rendered not later than 180 days (75 days in the case of a Disability claim which may be further extended to 105 days if the additional extension is necessary due to reasons beyond the control of the Committee) after the initial receipt of the claim. If such an extension of time for processing the claim is required, written notice of the extension and additional information that is necessary to process the claim will be furnished to the Claimant prior to the expiration of the initial 90-day (or 45-day) period and will indicate the special circumstances requiring an extension of time for processing the claim and will indicate the date the Committee expects to render its decision. In no event will such extension exceed a period of 90 days from the end of the initial period. The notice shall set forth:

(i) the specific reason or reasons for the denial;

(ii) specific references to pertinent Plan provisions on which the Committee based its denial;

(iii) a description of any additional material or information needed for the Claimant to perfect the claim and an explanation of why the material or information is needed;

(iv) if the claim is a claim for a Disability benefit, the Participant will be notified if an internal rule, guideline, protocol or other similar criterion was relied on by the Committee and the Participant will be provided with a copy of such rule, guideline, protocol, or other criterion free of charge on the Participant’s request. If the claim is a claim for a Disability benefit and the denial is based on a medical necessity or other similar exclusion or limit, the Participant will be provided, free of charge at his or her request, an explanation of how that exclusion or limit and any clinical judgments apply to the Participant’s medical circumstances.

(v) a statement that the Claimant may:

(i) request a review upon written application to the Committee;

(ii) review pertinent Plan documents; and

(iii) submit issues and comments in writing; and

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(vi) that any appeal the Claimant wishes to make of the adverse determination must be in writing and received by the Committee within 60 days (180 days in the case of a Disability claim) after receipt of the Committee’s notice of denial of benefits. The Committee’s notice must further advise the Claimant that failure to appeal the action to the Committee in writing within the 60-day (or I80-day) period will render the Committee’s determination final, binding, and conclusive.

7.2 If the Claimant should appeal to the Committee, the Claimant, or the duly authorized representative of such Claimant, may submit, in writing, whatever issues and comments such Claimant, or the duly authorized representative of such Claimant, believes are pertinent. The Committee shall re-examine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The Committee shall advise the Claimant in writing of its decision on the appeal, the specific reasons for the decision, and the specific Plan provisions on which the decision is based. The notice of the decision shall be given within 60 days (45 days in the case of a Disability claim) of the Claimant’s written request for review, unless special circumstances (such as a hearing) would make the rendering of a decision within the 60-day (or 45-day) period infeasible, but in no event shall the Committee render a decision regarding the denial of a claim for benefits later than 120 days (90 days in the case of a Disability claim) after its receipt of a request for review. If an extension of time for review is required because of special circumstances, written notice of the extension shall be furnished to the Claimant prior to the date the extension period commences. The Claimant will also be entitled to receive, on request and free of charge, access to and copies of all documents, records, and other information relevant to the claim. In addition, if the claim is a claim for a Disability benefit, the Participant will be notified if an internal rule, guideline, protocol or other similar criterion was relied on by the Committee and will be provided with a copy of such rule, guideline, protocol, or other criterion free of charge at the Participant’s request. If the claim is a claim for a Disability benefit and the denial is based on a medical necessity or other similar exclusion or limit, the Participant will be provided, free of charge at his or her request, an explanation of how that exclusion or limit and any clinical judgments apply to the Participant’s medical circumstances. In the case of a Disability claim, the review on appeal must be made by a different decision-maker from the Committee and that decision-maker cannot give procedural deference to the original decision. If the Claimant is dissatisfied with the Committee’s (or other independent fiduciary’s) review decision, the Claimant has the right to file suit in a federal or state court.

ARTICLE VIII

LIMITATION OF RIGHTS

The establishment of this Plan shall not be construed as giving to any Participant, Employee or any person whomsoever, any legal, equitable or other rights against the Company, or its officers, directors, agents or shareholders, or as giving to any Participant or Beneficiary any equity or other interest in the assets or business of the Company or shares of Company stock or as giving any employee the right to be retained in the employment of the Company. All Employees and Participants shall be subject to discharge to the same extent they would have been if this Plan had never been adopted.

ARTICLE IX

LIMITATION OF ASSIGNMENT AND PAYMENTS
TO LEGALLY INCOMPETENT DISTRIBUTEE

9.1 No benefits which shall be payable under this Plan to any person shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of the

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same shall be void. No benefit shall in any manner be subject to the debts, contracts, liabilities, engagements or torts of any person, nor shall it be subject to attachment or legal process for or against any person, except to the extent required by law.

9.2 Whenever any benefit which shall be payable under this Plan is to be paid to or for the benefit of any person who is then a minor or determined by the Committee, on the basis of qualified medical advice, to be incompetent, the Committee need not require the appointment of a guardian or custodian, but shall be authorized to cause the same to be paid over to the person having custody of the minor or incompetent, or to cause the same to be paid to the minor or incompetent without the intervention of a guardian or custodian, or to cause the same to be paid to a legal guardian or custodian of the minor or incompetent, if one has been appointed, or to cause the same to be used for the benefit of the minor or incompetent.

ARTICLE X

AMENDMENT TO OR TERMINATION OF THE PLAN

The Board and the Committee, or either of them acting independently, reserve the right at any time to amend or terminate this Plan in whole or in part or to add a supplement to this Plan to provide benefits ‘for specified Participants. No amendment shall have the effect of retroactively depriving Participants or Beneficiaries of rights already accrued under this Plan. Any amendment to this Plan shall be executed by an officer of the Company. Upon termination of this Plan, the Committee may, in its sole and absolute discretion, subject only to compliance with Code Section 409A restrictions and requirements for plan termination distributions, direct that all benefits hereunder will be paid as soon as administratively practicable thereafter.

ARTICLE XI

GENERAL AND MISCELLANEOUS

11.1 Unfunded Plan . This Plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of executives within the meaning of sections 201, 301, and 401 of ERISA, and therefore is exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Board or Committee may terminate the Plan and make no further benefit payments or remove certain Employees as Participants if it is determined by the United States Department of Labor, a court of competent jurisdiction, or an opinion of counsel that the Plan constitutes an employee pension benefit plan within the meaning of section 3(2) of ERISA (as currently in effect or hereafter amended) which is not so exempt.

11.2 Designation of Beneficiary . Each Participant may designate in writing a Beneficiary or Beneficiaries (which Beneficiary may be an entity other than a natural person) to receive any payments which may be made following the Participant's death. No Beneficiary designation shall become effective until it is filed with the Committee. Such designation may be changed or canceled by the Participant at any time without the consent of any such Beneficiary. Any such designation, change or cancellation must be made in a form approved by the Committee and shall not be effective until received by the Committee, or its designee. If a Participant designates more than one Beneficiary, the interests of such Beneficiaries shall be paid in equal shares, unless the Participant has specifically designated otherwise. If there is no Beneficiary designation in effect, or if there is no surviving designated Beneficiary, then the Participant's surviving spouse shall be the Beneficiary. If there is no surviving spouse to receive any benefits payable in accordance with the preceding sentence, the duly appointed and currently acting personal representative of the Participant's estate (which shall include either the Participant's probate estate or

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DB1/66685817.5

living trust) shall be the Beneficiary. In any case where there is no such personal representative of the Participant's estate duly appointed and acting in that capacity within 90 days after the Participant's death (or such extended period as the Committee determines is reasonably necessary to allow such personal representative to be appointed, but not to exceed 180 days after the Participant's death), then the Beneficiary shall mean the person or persons who can verify by affidavit or court order to the satisfaction of the Committee that they are legally entitled to receive the benefits specified hereunder. In the event any amount is payable under the Plan to a minor, payment shall not be made to the minor, but instead be paid (i) to that person's living parent(s) to act as custodian, (ii) if that person's parents are then divorced, and one parent is the sole custodial parent, to such custodial parent, or (iii) if no parent of that person is then living, to a custodian selected by the Committee to hold the funds for the minor under the Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which the minor resides. If no parent is living and the Committee decides not to select another custodian to hold the funds for the minor, then payment shall be made to the duly appointed and currently acting guardian of the estate for the minor or, if no guardian of the estate for the minor is duly appointed and currently acting within 60 days after the date the amount becomes payable, payment shall be deposited with the court having jurisdiction over the estate of the minor.

11.3 Unsecured General Creditor . Notwithstanding any other provision of this Plan, Participants shall be unsecured general creditors, with no secured or preferential rights to any assets of the Company or any other party for payment of benefits under this Plan. Any property held by the Company for the purpose of generating the cash flow for benefit payments shall remain its general, unpledged and unrestricted assets. The Company’s obligations under the Plan shall be an unfunded and unsecured promise to pay money in the future.

11.4 Trust Fund . The Company shall be responsible for the payment of all benefits provided under the Plan. At its discretion, the Company may establish one (1) or more trusts, with such trustees as the Committee may approve, for the purpose of assisting in the payment of such benefits. Although such a trust shall be irrevocable, its assets shall be held for payment of all if the Company’s general creditors in the event of insolvency. To the extent any benefits provided under the Plan are paid from any such trust, the Company shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of the Company.

11.5 Not a Contract of Employment . This Plan shall not constitute a contract of employment between the Company and the Participant. Nothing in this Plan shall give a Participant the right to be retained in the service of the Company or to interfere with the right of the Company to discipline or discharge a Participant at any time.

11.6 Protective Provisions . Each Participant and Beneficiary shall cooperate with the Committee by furnishing any and all information requested by the Committee in order to facilitate the payment of benefits hereunder. If a Participant or Beneficiary refuses to cooperate with the Committee, the Company shall have no further obligation to the Participant or Beneficiary under the Plan, other than payment of the then-current balance of the Participant’s Account in accordance with prior elections.

11.7 Governing Law . The provisions of this Plan shall be construed and interpreted according to the laws of the State of Delaware, except as preempted by federal law.

11.8 Validity . If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein.

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DB1/66685817.5

11.9 Captions. The Section headings and numbers are included only for convenience of reference and are not to be taken as limiting or extending the meaning of any of the terms and provisions of this Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular.

11.10 Notice . Any notice required or permitted under the Plan shall be sufficient if in writing, hand delivered or sent by email, registered or certified mail. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Mailed notice to the Committee shall be directed to General Counsel, Sonic Corp., at the Company’s address. Mailed notice to a Participant or Beneficiary shall be directed to the individual’s last known address in the Company’s records.

11.11 Successors . The provisions of this Plan shall bind and inure to the benefit of the Company. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of the Company, and successors of any such corporation or other business entity.

11.12 Code Section 409A . Notwithstanding any provision of the Plan to the contrary, the Plan is intended to comply with the requirements of Code Section 409A. Accordingly, all provisions herein, or incorporated by reference, shall be construed and interpreted to comply with Code Section 409A. All payments to be made upon a Participant’s termination of employment may only be made upon a separation from service under Code Section 409A and no payment shall be permitted unless such termination qualifies as a separation from service under Code Section 409A. Notwithstanding any provision of the Plan to the contrary, if a Participant is a “specified employee” within the meaning of Code Section 409A at the time of termination of employment, to the extent necessary to comply with Code Section 409A, any payment required under this Plan shall be held for delayed payment and shall be distributed on or immediately after the date which is 6 months after the date of the Participant’s termination of employment. For these purposes, a “specified employee” shall mean an employee who, at any time during the 12-month period ending on the identification date, is a “specified employee” under Code Section 409A, as determined by the Committee. The determination of “specified employees,” including the number and identity of persons considered “specified employees” and the identification date, shall be made by the Committee in accordance with the provisions of Sections 416(i) and Code 409A. In no event may the Participant, directly or indirectly, designate the calendar year of a payment.

IN WITNESS WHEREOF, Sonic Corp., the Company, has caused this document to be executed on this 10th day of April , 2013, but effective as of the Restatement Date.

Sonic Corp.

By: /s/ Claudia San Pedro

It s: Vice President

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DB1/66685817.5




Delaware		73-1371046
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)




300 Johnny Bench Drive		73104
Oklahoma City, Oklahoma		(Zip Code)
(Address of principal executive offices)


Large accelerated filer o	Accelerated filer x
Non-accelerated filer o (Do no check if a smaller reporting company)	Smaller reporting company o



SONIC CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

	August 31,
	2013		2012
ASSETS
Current assets:
Cash and cash equivalents	$	77,896	$	52,647
Restricted cash		11,823		10,200
Accounts and notes receivable, net		29,142		27,073
Income taxes receivable		7,728		-
Inventories		3,678		3,289
Prepaid expenses		5,032		4,399
Other current assets		5,423		9,543
Total current assets		140,722		107,151
Noncurrent restricted cash		6,791		7,903
Notes receivable, net		10,013		11,641
Property, equipment and capital leases, net		399,661		443,008
Goodwill		77,093		76,997
Debt origination costs, net		9,230		10,555
Other assets, net		17,284		23,505
Total assets	$	660,794	$	680,760

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	13,100	$	11,048
Deposits from franchisees		4,048		3,055
Accrued liabilities		37,221		32,607
Income taxes payable		4,241		14,326
Current maturities of long-term debt and capital leases		14,320		19,480
Total current liabilities		72,930		80,516
Obligations under capital leases due after one year		22,458		27,377
Long-term debt due after one year		437,380		466,613
Deferred income taxes		34,915		29,777
Other noncurrent liabilities		15,647		17,230
Commitments and contingencies (Notes 7,8,15,16)
Stockholders’ equity:
Preferred stock, par value $.01; 1,000 shares authorized; none outstanding		-		-
Common stock, par value $.01; 245,000 shares authorized; shares issued
118,309 in 2013 and 118,309 in 2012		1,183		1,183
Paid-in capital		224,768		230,543
Retained earnings		758,138		722,614
Treasury stock, at cost; 62,025 shares in 2013 and 60,325 shares in 2012		(906,625)		(895,093)
Total stockholders’ equity		77,464		59,247
Total liabilities and stockholders’ equity	$	660,794	$	680,760


SONIC CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

							Accumulated
							Other							Total
	Common		Paid-in		Retained		Comprehensive		Treasury Stock			Noncontrolling		Stockholders’
	Stock		Capital		Earnings		Loss		Shares	Amount		Interests		Equity
Balance at August 31, 2010	$	1,183	$	224,453	$	670,488	$	(843)	56,676	$	(872,937)	$	222	$	22,566
Total comprehensive income,
net of income taxes		-		-		19,225		843	-		-		-		20,068
Changes to noncontrolling interests		-		1,866		-		-	-		-		(222)		1,644
Stock-based compensation expense		-		5,644		-		-	-		-		-		5,644
Exercise of stock options and
issuance of restricted stock		-		(2,267)		(2,197)		-	(375)		6,594		-		2,130
Other		-		(297)		(85)		-	15		26		-		(356)
Balance at August 31, 2011	$	1,183	$	229,399	$	687,431	$	-	56,316	$	(866,317)	$	-	$	51,696
Total comprehensive income,
net of income taxes		-		-		36,085		-	-		-		-		36,085
Stock-based compensation expense		-		4,295		-		-	-		-		-		4,295
Purchase of treasury stock		-		-		-		-	4,157		(31,102)		-		(31,102)
Exercise of stock options and
issuance of restricted stock		-		(820)		(529)		-	(108)		1,629		-		280
Other		-		(2,331)		(373)		-	(40)		697		-		(2,007)
Balance at August 31, 2012	$	1,183	$	230,543	$	722,614	$	-	60,325	$	(895,093)	$	-	$	59,247
Total comprehensive income,
net of income taxes		-		-		36,701		-	-		-		-		36,701
Stock-based compensation expense		-		3,630		-		-	-		-		-		3,630
Purchase of treasury stock		-		-		-		-	3,332		(35,480)		-		(35,480)
Exercise of stock options and
issuance of restricted stock		-		(6,127)		(1,057)		-	(1,607)		23,527		-		16,343
Other		-		(3,278)		(120)		-	(25)		421		-		(2,977)
Balance at August 31, 2013	$	1,183	$	224,768	$	758,138	$	-	62,025	$	(906,625)	$	-	$	77,464


PART I

Item 1.	Business	1

Item 1A.	Risk Factors	6

Item 1B.	Unresolved Staff Comments	12

Item 2.	Properties	12

Item 3.	Legal Proceedings	12

Item 4.	Mine Safety Disclosures	12

Item 4A.	Executive Officers of the Company	13

PART II

Item 5.	Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15

Item 6.	Selected Financial Data	15

Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 8.	Financial Statements and Supplementary Data	29

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29

Item 9A.	Controls and Procedures	29

Item 9B.	Other Information	32

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	32

Item 11.	Executive Compensation	32

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	32

Item 13.	Certain Relationships and Related Transactions, and Director Independence	32

Item 14.	Principal Accounting Fees and Services	32

PART IV

Item 15.	Exhibits and Financial Statement Schedules	33



SONIC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	Year ended August 31,
	2013		2012		2011
Cash flows from operating activities:
Net income	$	36,701	$	36,085	$	19,225
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization		40,387		41,914		41,225
Stock-based compensation expense		3,630		4,295		5,644
Net loss from early extinguishment of debt		4,443		-		23,035
Other		2,381		788		2,404
(Increase) decrease in operating assets:
Restricted cash		(2,431)		2,586		(5,136)
Accounts receivable and other assets		1,613		(2,591)		(2,124)
Increase (decrease) in operating liabilities:
Accounts payable		2,324		(932)		(552)
Accrued and other liabilities		5,129		(828)		(281)
Income taxes		(6,338)		13,811		662
Total adjustments		51,138		59,043		64,877
Net cash provided by operating activities		87,839		95,128		84,102

Cash flows from investing activities:
Purchases of property and equipment		(41,338)		(24,175)		(21,200)
Proceeds from sale of assets		33,475		9,929		6,448
Other		6,679		(9,863)		(1,321)
Net cash used in investing activities		(1,184)		(24,109)		(16,073)

Cash flows from financing activities:
Payments on and purchases of debt		(189,499)		(15,220)		(624,171)
Proceeds from borrowings		155,000		-		535,000
Restricted cash for securitization obligations		1,921		269		6,409
Purchases of treasury stock		(36,582)		(30,000)		-
Proceeds from exercise of stock options		16,343		280		2,130
Debt issuance and extinguishment costs		(5,137)		(57)		(40,248)
Other		(3,452)		(3,153)		(3,676)
Net cash used in financing activities		(61,406)		(47,881)		(124,556)

Net increase (decrease) in cash and cash equivalents		25,249		23,138		(56,527)
Cash and cash equivalents at beginning of year		52,647		29,509		86,036
Cash and cash equivalents at end of year	$	77,896	$	52,647	$	29,509

Supplemental cash flow information
Cash paid during the year for:
Interest	$	27,352	$	29,283	$	29,033
Income taxes (net of refunds)		25,440		11,114		10,523
Non-cash investing and financing activities:
Change in obligation to acquire treasury stock		(1,102)		1,102		-
Notes receivable and direct financing leases from property disposition		8,661		-		-
Stock options exercised by stock swap		-		-		1,572
Change in obligation for purchase of property and equipment		(477)		(1,061)		(524)



Sonic Corp .
Schedule II – Valuation and Qualifying Accounts

			Additions		Amounts
	Balance at		Charged to		Written Off
	Beginning of		Costs and		Against the		(Transfers)		Balance at
Description	Year		Expenses		Allowance		Recoveries		End of Year
		(In Thousands)

Allowance for doubtful accounts and notes receivable
Years ended:
August 31, 2013	$	2,992		(367)		(278)		-	$	2,347
August 31, 2012		3,366		764		(1,152)		14		2,992
August 31, 2011	$	3,210		1,462		(1,337)		31	$	3,366

Accrued carrying costs for drive-in closings and disposals
Years ended:
August 31, 2013	$	568		809		(249)		(29)	$	1,099
August 31, 2012		421		366		(219)		-		568
August 31, 2011	$	47		575		(150)		(51)	$	421


	Sonic Corp.

By:	/s/ J. Clifford Hudson
	J. Clifford Hudson
	Chief Executive Officer

Signature	Title	Date

/s/ J. Clifford Hudson	Chairma n of the Board of Directors, Chief Executive Officer and President	October 2 5 , 201 3
J. Clifford Hudson, Principal Executive Officer		October 2 5 , 201 3

/s/ Stephen C. Vaughan	Executive Vice President and Chief Financial Officer	October 25, 2013
Stephen C. Vaughan, Principal Financial Officer	Executive Vice President and Chief Financial Officer	October 25, 2013

/s/ Michelle E. Britten	Vice President and Controller	October 25, 2013
Michelle E. Britten , Principal Accounting Officer	Vice President and Controller	October 25, 2013

/s/ Douglas N. Benham	Director	October 25, 2013
Douglas N. Benham	Director	October 25, 2013

/s/ Kate S. Lavelle	Director	October 25, 2013
Kate S . Lavelle	Director	October 25, 2013

/s/ Michael J. Maples	Director	October 25, 2013
Michael J. Maples	Director	October 25, 2013

/s/ J. Larry Nichols	Director	October 25, 2013
J. Larry Nichols	Director	October 25, 2013

/s/ Federico F. Peña	Director	October 25, 2013
Federico F. Peña	Director	October 25, 2013

/s/ H. E. Rainbolt	Director	October 25, 2013
H.E. Rainbolt	Director	October 25, 2013

/s/ Frank E. Richardson	Director	October 25, 2013
Frank E. Richardson	Director	October 25, 2013

/s/ Robert M. Rosenberg	Director	October 25, 2013
Robert M. Rosenberg	Director	October 25, 2013

/s/ Jeffrey H. Schutz	Director	October 25, 2013
Jeffrey H. Schutz	Director	October 25, 2013

/s/ Kathryn L. Taylor	Director	October 25, 2013
Kathryn L. Taylor	Director	October 25, 2013


1 0.0 6	Sonic Corp. Nonqualified Deferred Compensation Plan, as amended and restated April 10, 2013
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
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