UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K
  
  
 x                  ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
fiscal year ended:  August 31, 2009
 
 OR
 
 o                  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
transition period from _______________ to _________________
 
 Commission
File Number 0-18859
 
 SONIC
CORP.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              
              73-1371046(State
      of incorporation)
              
              (I.R.S.
      Employer Identification No.)
 
 300
      Johnny Bench DriveOklahoma City, Oklahoma
              73104(Address
      of principal executive offices)
              Zip
      Code
 
 Registrant’s
telephone number, including area code:  (405) 225-5000
  Securities
registered pursuant to section 12(b) of the Act:
 
 None
 
 Securities
registered pursuant to section 12(g) of the Act:
 
 Common
Stock, Par Value $.01 (Title of class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes T.  No
£.
 
 (Facing
Sheet Continued)
  
 
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes £.  No
T.
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file the reports), and (2) has been subject to the filing requirements for
the past 90 days.  Yes T.  No £.
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes £.  No
£.
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in  Part III of this
Form 10-K or any amendment to this Form 10-K.  T.
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):
 
 Large
      accelerated filerT
              Accelerated
      filer £
              Non-accelerated
      filer £
              Smaller
      reporting company £
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £.  No T.
 
 As of
February 28, 2009, the aggregate market value of the 57,065,207 shares of common
stock of the Company held by non-affiliates of the Company equaled $513,586,863
based on the closing sales price for the common stock as reported for that
date.
 
 As of
October 15,2009, the
Registrant had 61,079,661 shares of common stock issued and
outstanding.
 
 Documents Incorporated by
Reference
 
 Part III
of this report incorporates by reference certain portions of the definitive
proxy statement which the Registrant will file with the Securities and Exchange
Commission no later than 120 days after August 31, 2009.







FORM 10-K OF SONIC CORP.





TABLE
OF CONTENTS


PART
      IItem
      1.
              Business
              1Item
      1A.
              Risk Factors
              7Item
      1B.
              Unresolved Staff Comments
              12Item
      2.
              Properties
              12Item
      3.
              Legal Proceedings
              12Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              12Item
      4A.
              Executive Officers of the Company
              13PART
      IIItem
      5.
              Market for the Company’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of
      Equity Securities
              14Item
      6.
              Selected Financial Data
              15Item
      7.
              Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              17Item
      7A.
              Quantitative and Qualitative Disclosures About Market
      Risk
              26Item
      8.
              Financial Statements and Supplementary
    Data
              27Item
      9.
              Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
              27Item
      9A.
              Controls and Procedures
              27Item
      9B.
              Other Information
              30PART
      IIIItem
      10.
              Directors, Executive Officers and Corporate
      Governance
              30Item
      11.
              Executive Compensation
              30Item
      12.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              30Item
      13.
              Certain Relationships and Related Transactions, and
      Director Independence
              30Item
      14.
              Principal Accounting Fees and Services
              30PART
      IVItem
      15.
              Exhibits and Financial Statement
    Schedules
              30
  Table of Contents





FORM
10-K





SONIC
CORP.





PART I








Item
1.  Business





General





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





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





The
Sonic Brand





At a
standard Sonic Drive-In restaurant, a customer drives into one of 20 to 36
covered drive-in spaces, orders through an intercom speaker system, and has the
food delivered by a carhop.  Many Sonic Drive-Ins also include a
drive-thru lane and patio seating.





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





Business
Strategy





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





Restaurant
Locations





As of
August 31, 2009, the Company had 3,544Sonic
Drive-Ins in operation from coast to coast, consisting of 475 Partner
Drive-Ins and 3,069 Franchise
Drive-Ins.  Partner Drive-Ins are those Sonic Drive-Ins in which the
Company owns a majority interest and the supervisor and manager of the drive-in
typically own a minority interest.  Franchise Drive-Ins are owned and
operated by our franchisees.  The following table sets forth the
number of Partner Drive-Ins and Franchise Drive-Ins by state as of August 31,
2009:




1
 Table of Contents





States
            Partner
            Franchise
            TotalAlabama
            
            110
            110Arizona
            
            97
            97Arkansas
            
            195
            195California
            
            46
            46Colorado
            35
            48
            83Delaware
            
            4
            4Florida
            38
            78
            116Georgia
            12
            112
            124Idaho
            
            19
            19Illinois
            2
            39
            41Indiana
            
            29
            29Iowa
            2
            12
            14Kansas
            37
            99
            136Kentucky
            1
            84
            85Louisiana
            
            171
            171Maine
            
            1
            1Maryland
            
            1
            1Michigan
            
            7
            7Minnesota
            
            7
            7Mississippi
            
            122
            122Missouri
            15
            191
            206Montana
            
            1
            1Nebraska
            
            29
            29New
      Jersey
            
            9
            9New
      York
            
            2
            2Nevada
            
            23
            23New
      Mexico
            
            71
            71North
      Carolina
            
            96
            96Ohio
            
            42
            42Oklahoma
            91
            177
            268Oregon
            
            12
            12Pennsylvania
            
            20
            20South
      Carolina
            
            74
            74South
      Dakota
            
            4
            4Tennessee
            28
            200
            228Texas
            214
            736
            950Utah
            
            23
            23Virginia
            
            55
            55Washington
            
            8
            8West
      Virginia
            
            5
            5Wisconsin
            
            6
            6Wyoming
            
            4
            4Total
            475
            3,069
            3,544




Expansion





During fiscal year
2009, we opened 141 Sonic
Drive-Ins, which consisted of 11 Partner
Drive-Ins and 130 Franchise
Drive-Ins.  Expansion plans for fiscal year 2010 involve the opening
of multiple Sonic Drive-Ins under area development agreements, as well as
single-store development by long-standing franchisees.  We believe
that our existing as well as newly opened markets offer significant growth
opportunities for both Partner Drive-In and Franchise Drive-In
expansion.  The ability of Sonic and its franchisees to open the
anticipated number of Sonic Drive-Ins during fiscal year 2010 necessarily will
depend on various factors, including those discussed in this Form 10-K under
Item 1A. Risk Factors –
Failure to successfully implement our growth strategy could reduce, or reduce
the growth of, our revenue and net income.


2
 Table of Contents





Restaurant
Design and Construction





The
typical Sonic Drive-In consists of a kitchen housed in a one-story building
flanked by canopy-covered rows of 20 to 36 parking spaces, with each space
having its own payment terminal, intercom speaker system and menu
board.  In addition, since 1995, most new Sonic Drive-Ins have
incorporated a drive-thru service and patio seating area.





Marketing





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





Each year
Sonic develops a marketing plan with the involvement of the Sonic Franchise
Advisory Council.  (Information concerning the Sonic Franchise
Advisory Council is set forth on page 6 under Franchise
Program -Franchise Advisory
Council.)  Funding for our marketing plan is comprised of the
System Marketing Fund, the Sonic Brand Fund and local advertising
expenditures.





The
System Marketing Fund focuses on purchasing advertising on national cable and
broadcast networks and other national media, sponsorship and brand enhancement
opportunities.  The Sonic Brand Fund is our national media production
fund.    Our franchise agreements require advertising
contributions to these funds by franchisees.  Franchisees are also
required to spend additional amounts on local advertising, typically through
participation in the local advertising cooperative.





The total
amount spent on media (principally television) was approximately $184 million for
fiscal year 2009, and we expect media expenditures to exceed $178 million for
fiscal 2010.





Purchasing





We
negotiate with suppliers for our 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
products.  We approve suppliers of those products and require them to
adhere to our established product and food safety
specifications.  Suppliers manufacture several key products for Sonic
under private label and sell them to authorized distributors for resale to Sonic
Drive-Ins.  We require all Sonic Drive-Ins to purchase from approved
distribution centers.





Food
Safety and Quality Assurance





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


3
 Table of Contents


Company
Operations





Restaurant
Personnel.  A typical Partner Drive-In is operated by a
manager, two to four assistant managers, and approximately 25 hourly employees,
many of whom work part-time.  The manager has responsibility for the
day-to-day operations of the Partner Drive-In.  Each supervisor has
the responsibility of overseeing an average of four to seven Partner
Drive-Ins.  Sonic Restaurants, Inc. (“SRI”), Sonic’s operating
subsidiary, oversees the operations and development of and provides
administrative services to all Partner Drive-Ins.





Ownership
Program.  Our philosophy stresses an ownership relationship
with supervisors and managers.  As part of the ownership program,
either a limited liability company or a general partnership is formed to own and
operate each individual Partner Drive-In.  SRI owns a majority
interest, typically at least 60%, in each of these limited liability companies
and partnerships.  Generally, the supervisors and managers own a
minority interest in the limited liability company or partnership. The amount of
ownership percentage is separately negotiated for each Partner
Drive-In.  Supervisors and managers are not employees of Sonic or of
the limited liability companies or partnerships in which they have an ownership
interest.  As owners, they share in the cash flow and are responsible
for their share of any losses incurred by their Partner Drive-Ins.  We
believe that our ownership structure provides a substantial incentive for
Partner Drive-In supervisors and managers to operate their restaurants
profitably and efficiently.  Additional information regarding our
ownership program can be found under Ownership Program,in Part
II, Item 7, at page24 of this Form 10-K.





Sonic
records the interests of supervisors and managers as “minority interest in
earnings of Partner Drive-Ins” under costs and expenses on its financial
statements.  We estimate that the average percentage interest of a
supervisor was 17% and the average
percentage interest of a manager in a Partner Drive-In was 21% in fiscal year
2009.  Each Partner Drive-In distributes its available cash flow to
its supervisors and managers and to Sonic on a monthly basis pursuant to the
terms of the operating agreement or partnership agreement for that
restaurant.  Sonic has the right, but not the obligation, to purchase
the minority interest of the supervisor or manager in the
restaurant.  The amounts of the buy-in and the buy-out are generally
based on the Partner Drive-In’s sales during the preceding 12 months and
approximate the fair market value of a minority interest in that
restaurant.  Most supervisors and managers finance the buy-in with a
loan from a third-party financial institution.





Each
Partner Drive-In usually purchases equipment with funds borrowed from Sonic at
competitive rates.  In most cases, Sonic also owns or leases the land
and building and guarantees any third-party lease entered into for the
site.





Partner Drive-In
Data.  The following table provides certain financial
information relating to Partner Drive-Ins and the number of Partner Drive-Ins
opened and closed during the past five fiscal years.





2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Average
      Sales per Partner Drive-In (in
      thousands)
            
            $
            954
            
            
            $
            1,007
            
            
            $
            1,017
            
            
            $
            980
            
            
            $
            957Number
      of Partner Drive-Ins:Total
      Open at Beginning of Year
            
            
            684
            
            
            
            654
            
            
            
            623
            
            
            
            574
            
            
            
            539Newly-Opened
      and Re-Opened
            
            
            11
            
            
            
            29
            
            
            
            29
            
            
            
            35
            
            
            
            37Purchased
      from Franchisees
            
            
            --
            
            
            
            18
            
            
            
            15
            
            
            
            15
            
            
            
            4Sold
      to Franchisees(1)
            
            
            (205
            )
            
            
            (12
            )
            
            
            (10
            )
            
            
            --
            
            
            
            (5
            )Closed
            
            
            (15
            )
            
            
            (5
            )
            
            
            (3
            )
            
            
            (1
            )
            
            
            (1
            )Total
      Open at Year End
            
            
            475
            
            
            
            684
            
            
            
            654
            
            
            
            623
            
            
            
            574




(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 minority
  interest.





Franchise
Program





General.  As of
August 31, 2009, we had 3,069Franchise
Drive-Ins in operation.  A large number of successful multi-unit
franchisee groups have developed during the Sonic system’s 56 years of
operation.  Those franchisees continue to develop new Franchise
Drive-Ins in their franchise territories either through area development
agreements or single-site development.  Our franchisees opened 130 Franchise
Drive-Ins during fiscal year 2009.  We consider our franchisees a
vital part of our continued growth and believe our relationship with our
franchisees is good.




4
 Table of Contents


Franchise
Agreements.  For traditional drive-ins, the current franchise
agreement provides for an initial franchise fee of $45,000 per drive-in, a
royalty fee of up to 5% of gross sales on a graduated percentage basis,
advertising fees of up to 5.9% of gross sales, and a 20-year
term.  For fiscal year 2009, Sonic’s average royalty rate was equal to
3.87%.





Area Development
Agreements.  We use area development agreements to facilitate
the planned expansion of the Sonic Drive-In restaurant chain through multiple
unit development.  While many existing franchisees continue to expand
on a single drive-in basis, approximately 88% of the new
Franchise Drive-Ins opened during fiscal year 2009 occurred as a result of
then-existing area development agreements.  Each area development
agreement gives a developer the exclusive right to construct, own, and operate
Sonic Drive-Ins within a defined area.  In exchange, each developer
agrees to open a minimum number of Sonic Drive-Ins in the area within a
prescribed time period.





During
fiscal year 2009, we entered into nine new area
development agreements calling for the opening of 104Franchise
Drive-Ins and amended sevenexisting area
development agreements calling for the opening of an additional 37Franchise
Drive-Ins, all during the next seven years.  We currently have more
than 150area
development agreements in effect, calling for the development of approximately
970Sonic
Drive-Ins during the next seven years. We cannot give any assurance that our
franchisees will achieve that number of new Franchise Drive-Ins during the next
seven years.  Of the 196Franchise
Drive-Ins scheduled to open during fiscal year 2009 under area development
agreements in place at the beginning of that fiscal year, 115or 59% opened during
the period.  During fiscal year 2009, we terminated 14of the 170area
development agreements existing at the beginning of the fiscal
year.  The terminated area development agreements called for the
opening of 41
Franchise Drive-Ins in fiscal year 2009 and an additional24Franchise
Drive-Ins in the next seven fiscal years.  All of these terminations
were as a result of the franchisee failing to meet the development schedule
under the area development agreement.





In
addition to the area development agreement commitments, during fiscal 2007,
existing franchisees purchased options to develop drive-ins, which allow them to
open new drive-ins under an older form of license agreement with a lower
franchise fee and royalty rate, rather than the current form of license
agreement.  As of August 31, 2009, 264 options remained
outstanding.  The development options and area development agreements
together reflect a total development pipeline of 1,234drive-ins in
the next seven fiscal years.





Beginning
in fiscal 2010, we havealso offered
development incentives to our franchisees.  These incentives include
(i) a reduced franchise fee for the second drive-in and waiver of the franchise
fee for subsequent drive-ins opened by the franchisee in fiscal 2010; and (ii)
for all drive-ins opened in “developing markets” before March 31, 2011, waiver
of the franchise fee, waiver of the royalty fees during the first five years of
operation and payment of an additional advertising contribution during the
fourth and fifth years of operation.  “Developing markets” are those
markets where the penetration of Sonic Drive-Ins (as measured by population per
restaurant, advertising level and share of restaurant spending) has not yet
reached the level of market maturity established by management.





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





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





We had an
agreement with GE Capital Franchise Finance Corporation (“GEC”) pursuant to
which GEC made loans to existing Sonic franchisees who met certain underwriting
criteria set by GEC.  Under the terms of the agreement with GEC, Sonic
provided a guaranty of 10% of the outstanding balance of a loan from GEC to the
Sonic franchisee.  The portions of loans made by GEC to Sonic
franchisees that are guaranteed by the Company total $13.0million as of
August 31, 2009.  We ceased guaranteeing new loans made under the
program during fiscal year 2002 and have not been required to make any payments
under our agreement with GEC.





We have
an agreement with Irwin Franchise Capital Corporation (“IFCC”) pursuant to which
IFCC has agreed to make loans to existing Sonic franchisees who meet certain
underwriting criteria set by IFCC to finance the equipment and improvements for
our retrofit program in which significant trade dress modifications are being
made to Sonic Drive-Ins.  Under the terms of the agreement with IFCC,
we will provide a guaranty to IFCC of the greater of (i) 5% of the outstanding
balance of a loan from IFCC to the Sonic franchisee or (ii) $250,000, provided
that in no event will our maximum liability to IFCC exceed $3.75 million in the
aggregate.  As of August 31, 2009, the total amount guaranteed under
the IFCC agreement was $1.3million.


5
 Table of Contents





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 20 members selected by Sonic.  We have
six executive committee members who are selected at large, 12 regional members
representing four defined regions of the country, and two at large members
representing new franchisees and smaller operators.  We have four
Franchise Advisory Council task groups comprised of approximately 50 members who
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.





2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Average
      Sales Per Franchise Drive-In   (in
      thousands)
            
            $
            1,122
            
            
            $
            1,154
            
            
            $
            1,132
            
            
            $
            1,092
            
            
            $
            1,039Number
      of Franchise Drive-Ins:Total
      Open at Beginning of Year
            
            
            2,791
            
            
            
            2,689
            
            
            
            2,565
            
            
            
            2,465
            
            
            
            2,346New
      Franchise Drive-Ins
            
            
            130
            
            
            
            140
            
            
            
            146
            
            
            
            138
            
            
            
            138Sold
      to the Company
            
            
            --
            
            
            
            (18
            )
            
            
            (15
            )
            
            
            (15
            )
            
            
            (4
            )Purchased
      from the Company(1)
            
            
            205
            
            
            
            12
            
            
            
            10
            
            
            
            --
            
            
            
            5Closed
      and Terminated,Net
      of Re-openings
            
            
            (57
            )
            
            
            (32
            )
            
            
            (17
            )
            
            
            (23
            )
            
            
            (20
            )Total
      Open at Year End
            
            
            3,069
            
            
            
            2,791
            
            
            
            2,689
            
            
            
            2,565
            
            
            
            2,465





(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 minority
  interest.





Competition





We
compete in the restaurant industry, 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 speed and quality of
service, method of food preparation (made-to-order), food quality and variety,
signature food items, and limited-time promotions.  The quality of
service, featuring Sonic carhops, constitutes one of our primary marketable
points of difference from the competition.  There are many
well-established competitors with substantially greater financial and other
resources.  These competitors include a large number of national,
regional, and local food services, including quick-service restaurants and
casual dining restaurants.  A significant change in pricing or other
marketing strategies by one or more of those competitors could have an adverse
impact on Sonic’s sales, earnings, and growth.  In selling franchises,
we also compete with many franchisors of quick-service and other restaurants and
other business opportunities.





Seasonality





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





Employees





As of
August 31, 2009, we had 350full-time
corporate employees.  This number does not include the approximately
13,800full-time and part-time employees employed by separate partnerships and
limited liability companies that operate our Partner Drive-Ins or the
supervisors and managers of the Partner Drive-Ins who own a minority interest in
the separate partnerships or limited liability companies.





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


6
 Table of Contents





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 small group of
customers.





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.





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 2009, 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.





Item 1A.  Risk Factors




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




Events
reported in the media, such as incidents involving food-borne illnesses or food
tampering, whether or not accurate, can cause damage to our reputation and
rapidly affect sales and profitability.




Reports,
whether true or not, of food-borne illnesses, such as e-coli, avian flu, bovine
spongiform encephalopathy (commonly known as mad cow disease), hepatitis A or
salmonella, and injuries caused by food tampering have in the past severely
injured the reputations of participants in the restaurant industry and could in
the future affect us.  The potential for terrorism of our nation’s
food supply also exists and, if such an event occurs, it could have a negative
impact on our brand’s reputation and could severely hurt sales, revenues, and
profits.




Our
brand’s reputation is an important asset to the business; as a result, anything
that damages our brand’s reputation could immediately and severely hurt sales,
revenues, and profits.  If customers become ill from food-borne
illnesses or food tampering, we could also be forced to temporarily close some,
or all, Sonic Drive-Ins.  In addition, instances of food-borne
illnesses or food tampering occurring at the restaurants of competitors could,
by resulting in negative publicity about the restaurant industry, adversely
affect our sales on a local, regional, or


7
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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. Other key competitive factors include the
number and location of restaurants, quality and speed of service, attractiveness
of facilities, effectiveness of advertising and marketing programs, and new
product development by us and our competitors.  Some of our
competitors have substantially larger marketing budgets, which may provide them
with a competitive advantage.  In addition, our system competes within
the quick-service restaurant industry not only for customers but also for
management and hourly employees, suitable real estate sites, and qualified
franchisees.




Changing
dietary preferences may cause consumers to avoid our products in favor of
alternative foods.




The
restaurant industry is affected by consumer preferences and
perceptions.  Although we 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 franchisees may
not hire and train qualified managers and other restaurant
personnel.  Any operational shortcoming of a Franchise Drive-In is
likely to be attributed by consumers to the entire Sonic brand, thus damaging
our reputation and potentially affecting revenues and
profitability.




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




The
quick-service restaurant industry is affected by changes in economic conditions,
consumer 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.  Factors such as
interest rates, inflation, gasoline prices, food costs, labor and benefit costs,
legal claims, and the availability of management and hourly employees also
affect restaurant operations and administrative expenses.  Economic
conditions, including interest rates and other government policies impacting
land and construction costs and the cost and availability of borrowed funds,
affect our ability and our franchisees’ ability to finance new restaurant
development, improvements and additions to existing restaurants, and the
acquisition of restaurants from, and sale of restaurants to,
franchisees.  Inflation can cause increased food, labor and benefits
costs and can increase our operating expenses.  As operating expenses
increase, we recover increased costs by increasing menu prices, to the extent
permitted by competition, or by implementing alternative products or cost
reduction procedures.  We cannot ensure, however, that we will be able
to recover increases in operating expenses in this manner.




Our
financial results may fluctuate depending on various factors, many of which are
beyond our control.




Our sales
and operating results can vary from quarter to quarter and year to year
depending on various factors, many of which are beyond our
control.  Certain events and factors may directly and immediately
decrease demand for our products.  If customer demand decreases
rapidly, our results of operations would also decline
precipitously.  These events and factors include:




•
            variations
      in the timing and volume of Sonic Drive-Ins’
  sales;


8
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•
            sales
      promotions by Sonic and its
competitors;


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


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


•
            seasonal
      effects on demand for Sonic’s
products;


•
            unexpected
      slowdowns in new drive-in development
efforts;


•
            changes
      in competitive and economic conditions generally including increases in
      energy costs;


•
            changes
      in the cost or availability of ingredients or
  labor;


•
            weather
      and other acts of God; and


•
            changes
      in the number of franchise agreement
renewals.





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





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




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




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




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




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





•
            competition
      from other restaurants in current and future
  markets;


•
            the
      degree of saturation in existing
markets;


•
            consumer
      interest in the Sonic brand;


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


•
            sales
      levels at existing drive-ins;


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


•
            permitting
      and regulatory compliance;


•
            the
      cost and availability of construction
resources;


•
            the
      ability to meet construction
schedules;


•
            the
      availability of qualified franchisees and their financial and other
      development capabilities;the cost and availability of and delays in
      financing;


•
            the
      ability to hire and train qualified management
  personnel;


•
            weather;
      and


•
            general
      economic and business conditions.




If we are
unable to open as many new drive-ins as planned, if the drive-ins are less
profitable than anticipated or if we are otherwise unable to successfully
implement our growth strategy, revenue and profitability may grow more slowly or
even decrease.




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




On
December 20, 2006, the Company closed on a securitized financing facility
comprised of a $600 million fixed rate term loan and a $200 million variable
rate revolving credit facility.  As of August 31, 2009, we had $511million in
outstanding debt under the fixed rate note at an interest rate of 5.7% and
$187.3
million outstanding under the variable rate note at an interest rate of
1.4%.


9
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Our
increased leverage could have the following consequences:





•
            We
      may be more vulnerable in the event of deterioration in our business, in
      the restaurant industry or in the economy generally.  In
      addition, we may be limited in our flexibility in planning for or reacting
      to changes in our business and the industry in which we
      operate.


•
            We
      may be required to dedicate a substantial portion of our cash flow to the
      payment of interest on our indebtedness, which could reduce the amount of
      funds available for operations or development of new Partner Drive-Ins and
      thus place us at a competitive disadvantage as compared with competitors
      that are less leveraged.


•
            From
      time to time, we may engage in various capital markets, bank credit and
      other financing activities to meet our cash requirements.  We
      may have difficulty obtaining additional financing at economically
      acceptable interest rates.


•
            Our
      existing and future debt obligations may contain certain negative
      covenants including limitations on liens, consolidations and mergers,
      indebtedness, capital expenditures, asset dispositions, sale-leaseback
      transactions, stock repurchases and transactions with affiliates, which
      may reduce our flexibility in responding to changing business and economic
      conditions.


•
            Our
      debt obligations are subject to customary rapid amortization events and
      events of default.  Although management does not anticipate an
      event of default or any other event of noncompliance with the provisions
      of the notes, if such an event occurred, the unpaid amounts outstanding
      could become immediately due and
payable.


•
            The
      third-party insurance company that provides credit enhancements in the
      form of financial guaranties of our fixed and variable rate note payments
      has been the subject of credit rating downgrades by Standard & Poor’s
      and Moody’s, which ratings were CC and Caa2, respectively, at October 29,
      2009.  We are unable to determine whether additional downgrades
      may occur and what impact prior downgrades have had or additional
      downgrades would have on our insurer’s financial condition.  If
      the insurance company were to become the subject of insolvency or similar
      proceedings, our lenders would not be required to fund additional advances
      on our variable rate notes.  In addition, an event of default
      would occur if: (i) the insurance company were to become the subject of
      insolvency or similar proceedings and (ii) the insurance policy were not
      continued or sold to a third party (who would assume the insurance
      company’s obligations under the policy), but instead were terminated or
      canceled as a result of those proceedings. In an event of default, all
      unpaid amounts under the fixed and variable rate notes could become
      immediately due and payable only at the direction or consent of holders
      with a majority of the outstanding principal.  Such acceleration
      of our debt could have a material adverse effect on our liquidity if we
      were unable to negotiate mutually acceptable new terms with our lenders or
      if alternate funding were not available to
us.




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), 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 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 may become subject to regulatory
initiatives in the area of nutritional content, disclosure or advertising, such
as requirements to provide information about the nutritional content of our food
products, which could increase expenses.  The operation of our
franchise system is also subject to franchise laws and regulations enacted by a
number of states and rules promulgated by the U.S. Federal Trade
Commission.  Any future legislation regulating franchise relationships
may negatively affect our operations, particularly our relationship with our
franchisees.  Failure to comply with new or  10
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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.





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




Claims of
illness or injury relating to food content, food quality or food handling are
common in the quick-service restaurant industry.  In addition, class
action lawsuits have been filed, and may continue to be filed, against various
quick-service restaurants alleging, among other things, that quick-service
restaurants have failed to disclose the health risks associated with foods we
serve and that quick-service restaurants’ marketing practices have encouraged
obesity and other health issues.  In addition to decreasing our sales
and profitability and diverting management resources, adverse publicity or a
substantial judgment against us could negatively impact our reputation,
hindering the ability to attract and retain qualified franchisees and grow the
business.




Further,
we may be subject to employee, franchisee and other claims in the future based
on, among other things, discrimination, harassment, wrongful termination and
wage, rest break and meal break issues, including those relating to overtime
compensation.




We
may not be able to adequately protect our intellectual property, which could
decrease the value of our brand and products.




The
success of our business depends on the continued ability to use existing
trademarks, service marks and other components of our brand in order to increase
brand awareness and further develop branded products.  All of the
steps we have taken to protect our intellectual property may not be
adequate.




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 customer 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.




Disruptions
in the financial markets may adversely impact the availability and cost of
credit and consumer spending patterns.




The
disruptions to the financial markets and continuing economic downturn have
adversely impacted the availability of credit already arranged and the
availability and cost of credit in the future.  The disruptions in the
financial markets also had an adverse effect on the economy, which has
negatively impacted consumer spending patterns.  There can be no
assurance that various governmental responses to the disruptions in the
financial markets will restore consumer confidence, stabilize the markets or
increase liquidity or the availability of credit.


11
 Table of Contents




Ownership
and leasing of significant amounts of real estate exposes us to possible
liabilities and losses.




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




Catastrophic
events may disrupt our business.




Unforeseen
events, 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.





Item
1B.  Unresolved Staff Comments





None.





Item
2.  Properties





Of the 475 Partner
Drive-Ins operating as of August 31, 2009, we operated 262 of them on property
leased from third-parties and 213 of them on
property we own.  The leases expire on dates ranging from 2010 to
2028, with the majority of the leases providing for renewal
options.  All leases provide for specified monthly rental payments,
and some of the leases call for additional rentals based on sales
volume.  All leases require Sonic to maintain the property and pay the
cost of insurance and taxes.  We also own the real property on which
166 Franchise Drive-Ins are operated.  These leases for Franchise
Drive-Ins expire on dates ranging from 2012 to 2029, 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.





Our
corporate headquarters are located in the Bricktown district of downtown
Oklahoma City.  We have a 15-year lease to occupy approximately 83,000
square feet.  The lease expires in November 2018 and has two five-year
renewal options.  Sonic believes its properties are suitable for the
purposes for which they are being used.





Item
3.  Legal Proceedings





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





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





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


12
 Table of Contents





Item
4A.  Executive Officers of the Company





Identification
of Executive Officers





The
following table identifies the executive officers of the Company:





ExecutiveName
            Age
            Position
            Officer SinceJ.
      Clifford Hudson
            54
            Chairman
      of the Board of Directors and Chief Executive Officer
            June
      1985W.
      Scott McLain
            47
            President
      of Sonic Corp. and President of Sonic Industries Services
    Inc.
            April
      1996Stephen
      C. Vaughan
            43
            Executive
      Vice President and Chief Financial Officer
            January
      1996Omar
      Janjua
            51
            President
      of Sonic Restaurants, Inc.
            October
      2009Paige
      S. Bass
            40
            Vice
      President, General Counsel and Assistant Corporate
    Secretary
            January
      2007Carolyn
      C. Cummins
            51
            Vice
      President of Compliance and Corporate Secretary
            April
      2004Terry
      D. Harryman
            44
            Vice
      President and Controller
            January
      1999Claudia
      San Pedro
            40
            Vice
      President of Investor Relations and Brand Strategies and
      Treasurer
            January
      2007Sharon
      T. Strickland
            56
            Vice
      President of People
            January
      2008





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.  He has served in various
other offices with the Company since 1984.  Mr. Hudson has served as a
Director of the Company since 1993.  Mr. Hudson has served on the
Board of Trustees of the Ford Foundation since January 2006 and on the Board of
Trustees of the National Trust for Historic Preservation since January 2001,
where he now serves as Chairman of the Board.





W. Scott
McLain has served as President of the Company since May 2008.  He also
has served as President of Sonic Industries Services Inc. since September
2004.  He served as Executive Vice President of the Company from
November 2004 until May 2008.  He served as the Company’s Executive
Vice President and Chief Financial Officer from January 2004 until November 2004
and as the Company’s Senior Vice President and Chief Financial Officer from
January 2000 until January 2004.  Mr. McLain joined the Company in
1996.





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
Janjua has served as President of Sonic Restaurants, Inc. since September
2009.  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. Janjua worked for 18 years
with Yum Brands, Inc. in its Pizza Hut operations in various positions of
increasing responsibility, lastly as Vice President of Company
Operations.





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  13
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seven




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
January 1999.





Terry D.
Harryman has served as Vice President of the Company since January 2008 and as
the Company’s Controller since January 1999.  Mr. Harryman has also
served as the Controller of Sonic Restaurants, Inc. and Sonic Industries
Services Inc. since January 2002.  Mr. Harryman joined the Company in
1996.





Claudia
San Pedro has served as Vice President of Investor Relations and Brand
Strategies of the Company since October 2009.  She served as Vice
President of Investor Relations of the Company from January 2007 until October
2009.  She 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 Office of State Finance.





Sharon T.
Strickland has served as Vice President of People of the Company since January
2008.  She served as Senior Director of Potential from August 2005
until January 2008.  Ms. Strickland was a Human Resources Advisor for
Kerr-McGee Corporation from April 2004 until August 2005.




PART II





Item
5.  Market for the Company’sCommon 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
              August 31, 2009
            
            High
            
            
            Low
            
            Fiscal
      Year Ended
              August 31, 2008
            
            High
            
            
            LowFirst
      Quarter
            
            $
            18.19
            
            
            $
            5.78
            
            First
      Quarter
            
            $
            26.19
            
            
            $
            21.57Second
      Quarter
            
            $
            12.86
            
            
            $
            7.35
            
            Second
      Quarter
            
            $
            24.65
            
            
            $
            18.53Third
      Quarter
            
            $
            12.09
            
            
            $
            6.05
            
            Third
      Quarter
            
            $
            23.33
            
            
            $
            18.54Fourth
      Quarter
            
            $
            11.75
            
            
            $
            8.34
            
            Fourth
      Quarter
            
            $
            19.38
            
            
            $
            12.50





Stockholders





As of
October 15, 2009, the Company had 678 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, repurchases of the Company’s common stock, and payments under the
Company’s financing arrangements.  As in the past, future payment of
dividends will be considered after reviewing, among other factors, returns to
stockholders, profitability expectations and financing needs.





Issuer
Purchases of Equity Securities





None.





14





Item
6.  Selected Financial Data





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


15
 Table of Contents


Selected
Financial Data


(In
thousands, except per share data)





Year
      ended August 31,2009
            
            
            2008
            
            
            2007
            
            
            2006(1)
            
            
            2005(1)Income
      Statement Data:Partner
      Drive-In sales
            
            $
            567,436
            
            
            $
            671,151
            
            
            $
            646,915
            
            
            $
            585,832
            
            
            $
            525,988Franchise
      Drive-Ins:Franchise
      royalties
            
            
            126,706
            
            
            
            121,944
            
            
            
            111,052
            
            
            
            98,163
            
            
            
            88,027Franchise
      fees
            
            
            5,006
            
            
            
            5,167
            
            
            
            4,574
            
            
            
            4,747
            
            
            
            4,311Gain
      on sale of Partner Drive-Ins
            
            
            13,154
            
            
            
            3,044
            
            
            
            732
            
            
            ─
            
            
            ─Other
            
            
            6,487
            
            
            
            3,407
            
            
            
            7,196
            
            
            
            4,520
            
            
            
            4,740Total
      revenues
            
            
            718,789
            
            
            
            804,713
            
            
            
            770,469
            
            
            
            693,262
            
            
            
            623,066Cost
      of Partner Drive-In sales
            
            
            480,227
            
            
            
            548,102
            
            
            
            520,176
            
            
            
            468,627
            
            
            
            421,906Selling,
      general and administrative
            
            
            63,358
            
            
            
            61,179
            
            
            
            58,736
            
            
            
            52,048
            
            
            
            47,503Depreciation
      and amortization
            
            
            48,064
            
            
            
            50,653
            
            
            
            45,103
            
            
            
            40,696
            
            
            
            35,821Provision
      for impairment of long-livedassets
            
            
            11,163
            
            
            
            571
            
            
            
            1,165
            
            
            
            264
            
            
            
            387Total
      expenses
            
            
            602,812
            
            
            
            660,505
            
            
            
            625,180
            
            
            
            561,635
            
            
            
            505,617Income
      from operations
            
            
            115,977
            
            
            
            144,208
            
            
            
            145,289
            
            
            
            131,627
            
            
            
            117,449Interest
      expense, net
            
            
            35,657
            
            
            
            47,927
            
            
            
            44,406
            
            
            
            7,578
            
            
            
            5,785Income
      before income taxes
            
            $
            80,320
            
            
            $
            96,281
            
            
            $
            100,883
            
            
            $
            124,049
            
            
            $
            111,664Net
      income
            
            $
            49,442
            
            
            $
            60,319
            
            
            $
            64,192
            
            
            $
            78,705
            
            
            $
            70,443Income
      per share (2):Basic
            
            $
            0.81
            
            
            $
            1.00
            
            
            $
            0.94
            
            
            $
            0.91
            
            
            $
            0.78Diluted
            
            $
            0.81
            
            
            $
            0.97
            
            
            $
            0.91
            
            
            $
            0.88
            
            
            $
            0.75Weighted
      average shares used in calculation (2):Basic
            
            
            60,761
            
            
            
            60,403
            
            
            
            68,019
            
            
            
            86,260
            
            
            
            89,992Diluted
            
            
            61,238
            
            
            
            62,270
            
            
            
            70,592
            
            
            
            89,239
            
            
            
            93,647




Balance
      Sheet Data:Working
      capital (deficit)
            
            $
            84,813
            
            
            $
            (13,115
            )
            
            $
            (40,784
            )
            
            $
            (35,585
            )
            
            $
            (30,093
            )Property,
      equipment and capital leases, net
            
            
            523,938
            
            
            
            586,245
            
            
            
            529,993
            
            
            
            477,054
            
            
            
            422,825Total
      assets
            
            
            849,041
            
            
            
            836,312
            
            
            
            758,520
            
            
            
            638,018
            
            
            
            563,316Obligations
      under capital leases (including current portion)
            
            
            39,461
            
            
            
            37,385
            
            
            
            39,318
            
            
            
            36,625
            
            
            
            38,525Long-term
      debt (including current portion)
            
            
            699,550
            
            
            
            759,422
            
            
            
            710,743
            
            
            
            122,399
            
            
            
            60,195Stockholders’
      equity (deficit)
            
            
            (4,268
            )
            
            
            (64,116
            )
            
            
            (106,802
            )
            
            
            391,693
            
            
            
            387,917Cash
      dividends declared per common share
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─


(1)
            
            Previously
      reported prior-year results have been adjusted to implement SFAS 123R on a
      modified retrospective basis.


(2)
            
            Adjusted
      for a three-for-two stock split in
2006.


16
 Table of Contents


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, 2009, the Sonic system was comprised of
3,544 drive-ins, of which 13% were Partner Drive-Ins and 87% were Franchise
Drive-Ins.  Sonic Drive-Ins feature signature menu items such as
specialty drinks and frozen desserts, made-to-order sandwiches and a unique
breakfast menu.  The Company derives revenues primarily from Partner
Drive-In sales and royalties from franchisees.  The Company also
receives revenues from initial franchise fees and, to a lesser extent, from the
selling and leasing of signs and real estate.





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





Overview
of Business Performance.Fiscal year 2009
was a challenging year marked by economic disruptions and constrained consumer
discretionary spending.  In response to these and other challenges, we
made progress against a number of initiatives during the year.  In
January 2009, we introduced the Sonic Everyday Value Menu featuring 11 items for
$1.  We also made significant progress against our refranchising
initiative evidenced by the sale of 205 Partner Drive-Ins to franchisees during
the year.   Partner Drive-Ins now comprise 13% of the entire
system, down from 20% at the beginning of the fiscal year.





Investments
by franchisees in new and existing development remained solid throughout the
year, with the opening of 130 new drive-ins, the relocation or rebuilding
of 46 existing drive-ins, and the completion of 337 retrofits for the
fiscal year. We also opened the first Sonic Drive-Ins in several new markets and
new states with very strong opening results.





The
growth and success of our business is built around implementation of our
multi-layered growth strategy, which features the following
components:





·
            Same-store
      sales growth fueled by increased media expenditures, new product news,
      improved sales performance of Partner Drive-Ins and product and service
      differentiation initiatives;


·
            Expansion
      of the Sonic brand through new unit growth, particularly by
      franchisees;


·
            Increased
      franchising income stemming from franchisee new unit growth, same-store
      sales growth and our unique ascending royalty rate;
  and


·
            The
      use of excess cash for shareholder value-enhancing
      initiatives.





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


17
 Table of Contents


System-Wide
Performance


($
in thousands)





Year
      Ended August 31,2009
            
            
            2008
            
            
            2007Percentage
      increase in sales
            
            
            0.7
            %
            
            
            5.6
            %
            
            
            8.6
            %System-wide
      drive-ins in operation(1):Total
      at beginning of period
            
            
            3,475
            
            
            
            3,343
            
            
            
            3,188Opened
            
            
            141
            
            
            
            169
            
            
            
            175Closed
      (net of re-openings)
            
            
            (72
            )
            
            
            (37
            )
            
            
            (20
            )Total
      at end of period
            
            
            3,544
            
            
            
            3,475
            
            
            
            3,343Average
      sales per drive-in:
            
            $
            1,093
            
            
            $
            1,125
            
            
            $
            1,109Change
      in same-store sales(2):
            
            
            (4.3
            %)
            
            
            0.9
            %
            
            
            3.1
            %





(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.





System-wide
same-store sales decreased 4.3% during fiscal year 2009 primarily as a result of
a decrease in the average check amount.  The decrease in check is
consistent with an industry trend of consumers purchasing fewer items per
transaction and purchasing lower-priced items, such as items from our Everyday
Value Menu.  The Company has initiated strategies to offset this trend
including offering a free upgrade to a 44 ounce drink with the purchase of a
combo meal during the summer of 2009 and increasing the discount percentage when
consumers purchase a combo meal versus the ala carte menu pricing.





During
fiscal year 2009, our system-wide media expenditures were approximately $184
million as compared to $190 million in fiscal year
2008.  Approximately one-half of our media dollars are spent on
system-wide marketing fund efforts, which are largely used for network cable
television advertising.  Expenditures for national cable advertising
increased from approximately $95 million in fiscal year 2008 to approximately
$96 million in fiscal year 2009.  Increased network cable advertising
provides several benefits including the ability to more effectively target and
better reach the cable audience, which surpasses broadcast networks in terms of
viewers.  In addition, national cable advertising allows us to bring
additional depth to our media and expand our message beyond our traditional
emphasis on a single monthly promotion.  The balance of our
system-wide media expenditures is focused on local store
advertising.  Looking forward, we expect system-wide media
expenditures to exceed $178 million in fiscal 2010, with the system-wide
marketing fund representing approximately one-half of total media
expenditures.





The
following table provides information regarding drive-in development across the
system.  Retrofits represent investments to upgrade the exterior look
of our drive-ins, typically including an upgraded building exterior, new more
energy-efficient lighting, a significantly enhanced patio area, and improved
menu housings.





Year
      ended August 31,2009
            
            
            2008
            
            
            2007New
      drive-ins:Partner
            
            
            11
            
            
            
            29
            
            
            
            29Franchise
            
            
            130
            
            
            
            140
            
            
            
            146System-wide
            
            
            141
            
            
            
            169
            
            
            
            175Rebuilds/relocations:Partner
            
            
            4
            
            
            
            5
            
            
            
            7Franchise
            
            
            46
            
            
            
            64
            
            
            
            35System-wide
            
            
            50
            
            
            
            69
            
            
            
            42Retrofits,
      including rebuilds/relocations:Partner
            
            
            24
            
            
            
            167
            
            
            
            175Franchise
            
            
            383
            
            
            
            800
            
            
            
            316System-wide
            
            
            407
            
            
            
            967
            
            
            
            491


18
 Table of Contents





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)Year
      Ended August 31,
            
            2009
            
            
            2008
            
            
            Increase/
      (Decrease)
            
            
            Percent
      Increase/ (Decrease)Revenues:Partner
      Drive-In sales
            
            $
            567,436
            
            
            $
            671,151
            
            
            $
            (103,715
            )
            
            
            (15.5
            )%Franchise
      revenues:Franchise
      royalties
            
            
            126,706
            
            
            
            121,944
            
            
            
            4,762
            
            
            
            3.9Franchise
      fees
            
            
            5,006
            
            
            
            5,167
            
            
            
            (161
            )
            
            
            (3.1
            )Gain on sale of Partner Drive-Ins
            
            
            13,154
            
            
            
            3,044
            
            
            
            10,110
            
            
            
            332.1Other
            
            
            6,487
            
            
            
            3,407
            
            
            
            3,080
            
            
            
            90.4Total
      revenues
            
            $
            718,789
            
            
            $
            804,713
            
            
            $
            (85,924
            )
            
            
            (10.7
            )





Year
      Ended August 31,
            
            2008
            
            
            2007
            
            
            Increase/(Decrease)
            
            
            PercentIncrease/ (Decrease)Revenues:Partner
      Drive-In sales
            
            $
            671,151
            
            
            $
            646,915
            
            
            $
            24,236
            
            
            
            3.8
            %Franchise revenues:
              Franchise
      royalties
            
            
            121,944
            
            
            
            111,052
            
            
            
            10,892
            
            
            
            9.8Franchise fees
            
            
            5,167
            
            
            
            4,574
            
            
            
            593
            
            
            
            13.0Gain on sale of Partner
      Drive-Ins
            
            
            3,044
            
            
            
            732
            
            
            
            2,312
            
            
            
            315.8Other
            
            
            3,407
            
            
            
            7,196
            
            
            
            (3,789
            )
            
            
            (52.7
            )Total revenues
            
            $
            804,713
            
            
            $
            770,469
            
            
            $
            34,244
            
            
            
            4.4





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




Partner
      Drive-In Sales($
      in thousands)Year
      Ended August 31,2009
            
            
            2008
            
            
            2007Partner
      Drive-In sales
            
            $
            567,436
            
            
            $
            671,151
            
            
            $
            646,915Percentage
      change
            
            
            (15.5
            %)
            
            
            3.8
            %
            
            
            10.4
            %Partner
      Drive-Ins in operation(1):Total
      at beginning of period
            
            
            684
            
            
            
            654
            
            
            
            623Opened
            
            
            11
            
            
            
            29
            
            
            
            29Acquired
      from (sold to) franchisees, net
            
            
            (205
            )
            
            
            6
            
            
            
            5Closed
            
            
            (15
            )
            
            
            (5
            )
            
            
            (3
            )Total
      at end of period
            
            
            475
            
            
            
            684
            
            
            
            654Average
      sales per Partner Drive-In
            
            $
            954
            
            
            $
            1,007
            
            
            $
            1,017Percentage
      change
            
            
            (5.3
            %)
            
            
            (1.0
            %)
            
            
            3.8
            %Change
      in same-store sales(2)
            
            
            (6.4
            %)
            
            
            (1.6
            %)
            
            
            2.5
            %





(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.


19
 Table of Contents





For
fiscal year 2009, the decrease in Partner Drive-In revenues was largely driven
by the decline in same-store sales for existing drive-ins and the refranchising
of 205 Partner Drive-Ins.  As a result of the refranchising, Partner
Drive-Ins now comprise 13% of the entire system compared to 20% in fiscal
2008.





During
fiscal year 2009, same-store sales at Partner Drive-Ins declined 6.4%, as
compared to the 4.3% decrease for the system.   To counteract
this decline, the Company implemented initiatives designed to provide a unique
and high quality customer service experience with the goal of improving
same-store sales. These initiatives include restructuring the Partner Drive-In
organization, simplifying incentive compensation plans for store-level
management, implementing a customer service satisfaction measurement tool, and
implementing a more effective pricing tool at the drive-in level. These efforts
are expected to have a positive impact on Partner Drive-In sales going
forward.





During
fiscal year 2008, Partner Drive-In sales increased 3.8%.  The increase
was comprised of sales from newly constructed drive-ins and acquired drive-ins,
offset by the decrease in sales from lower same-store sales.





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





Franchise
      Information($
      in thousands)Year
      Ended August 31,2009
            
            
            2008
            
            
            2007Franchise
      fees and royalties(1)
            
            $
            131,712
            
            
            $
            127,111
            
            
            $
            115,626Percentage
      increase
            
            
            3.6
            %
            
            
            9.9
            %
            
            
            12.4
            %Franchise
      Drive-Ins in operation(2):Total
      at beginning of period
            
            
            2,791
            
            
            
            2,689
            
            
            
            2,565Opened
            
            
            130
            
            
            
            140
            
            
            
            146Acquired
      from (sold to) Company, net
            
            
            205
            
            
            
            (6
            )
            
            
            (5
            )Closed
            
            
            (57
            )
            
            
            (32
            )
            
            
            (17
            )Total
      at end of period
            
            
            3,069
            
            
            
            2,791
            
            
            
            2,689Franchise
      Drive-In sales
            
            $
            3,269,930
            
            
            $
            3,139,996
            
            
            $
            2,961,168Percentage
      increase
            
            
            4.1
            %
            
            
            6.0
            %
            
            
            8.2
            %Effective
      royalty rate
            
            
            3.87
            %
            
            
            3.88
            %
            
            
            3.75
            %Average
      sales per Franchise Drive-In
            
            $
            1,122
            
            
            $
            1,154
            
            
            $
            1,132Change
      in same-store sales(3)
            
            
            (3.9
            %)
            
            
            1.4
            %
            
            
            3.3
            %





(1)
            See
      Revenue Recognition
      Related to Franchise Fees and Royalties in the Critical Accounting Policies
      and Estimates section of Management’s Discussion and Analysis of
      Financial Condition and Results of
Operations.


(2)
            Drive-ins
      that are temporarily closed for various reasons (repairs, remodeling,
      relocations, etc.) are not considered closed unless the Company determines
      that they are unlikely to reopen within a reasonable
  time.


(3)
            Represents
      percentage change for drive-ins open for a minimum of 15
      months.





Franchise
royalties experienced a 4.1% increase related primarily to royalties from new
and refranchised drive-ins.  This increase was offset by the impact of
the decline in same-store sales at Franchise Drive-Ins.





Franchisees
opened 130 new drive-ins in fiscal year 2009, down from 140 new drive-ins in
fiscal year 2008. However, franchisee investment in existing drive-ins remained
strong during fiscal year 2009, including the relocation or rebuild of 46
drive-ins (versus 64 in the prior year) and the retrofit of 337 drive-ins
(versus 800 in fiscal year 2008).  Franchise fees decreased 3.1% to
$5.0 million as a result of fewer Franchise Drive-In openings, in addition to a
decline in fees associated with the termination of area development
agreements.





The
Company recognized a $13.2 million gain from the refranchising of 205 Partner
Drive-Ins during fiscal year 2009.  We retained a minority ownership
interest in the operations of 88 of the refranchised drive-ins.


20
 Table of Contents





Other
income increased 90.4% to $6.5 million in fiscal year 2009 from $3.4 million in
fiscal year 2008.  The increase relates primarily from rental revenue
on refranchised drive-ins in which the Company retained ownership of real
estate.





Operating
Expenses.  The following
table presents the overall costs of drive-in operations as a percentage of
Partner Drive-In sales.  Minority interest in earnings of Partner
Drive-Ins is included as a part of cost of sales, in the table below, since it
is directly related to Partner Drive-In operations.




Restaurant-Level
      MarginsYear
      ended August 31,
            
            
            Percentage
      points Increase/2009
            
            
            2008
            
            
            (Decrease)Costs
      and expenses:Partner
      Drive-Ins:Food
      and packaging
            
            
            27.6
            %
            
            
            26.5
            %
            
            
            1.1Payroll
      and other employee benefits
            
            
            32.2
            
            
            
            31.1
            
            
            
            1.1Minority
      interest in earnings of Partner Drive-Ins
            
            
            2.7
            
            
            
            3.3
            
            
            
            (0.6
            )Other
      operating expenses
            
            
            22.1
            
            
            
            20.9
            
            
            
            1.284.6
            %
            
            
            81.8
            %
            
            
            2.8Year
      endedAugust 31,
            
            
            Percentage
      pointsIncrease/2008
            
            
            2007
            
            
            (Decrease)Costs
      and expenses:Partner
      Drive-Ins:Food
      and packaging
            
            
            26.5
            %
            
            
            25.7
            %
            
            
            0.8Payroll
      and other employee benefits
            
            
            31.1
            
            
            
            30.4
            
            
            
            0.7Minority
      interest in earnings of Partner Drive-Ins
            
            
            3.3
            
            
            
            4.1
            
            
            
            (0.8
            )Other
      operating expenses
            
            
            20.9
            
            
            
            20.1
            
            
            
            0.881.8
            %
            
            
            80.3
            %
            
            
            1.5





Restaurant-level
margins declined overall in fiscal year 2009 as a result of higher commodity
prices, higher labor costs driven by minimum wage increases and the
de-leveraging impact of lower same-store sales.  These negative
impacts were offset by the decline in minority partners’ share of earnings
reflecting the margin pressures described above. During the year, the pressure
on commodity costs began to subside and turned favorable in the fourth
quarter.  Looking forward, the Company expects the commodity costs to
be favorable in fiscal year 2010.  However, the minimum wage increase
that was effective in July 2009 will continue to pressure labor
costs.





Selling,
General and Administrative (“SG&A”).  SG&A
expenses increased 3.6% to $63.4 million during fiscal year 2009 and 4.2% to
$61.2 million during fiscal year 2008 reflecting, in part, ongoing efforts to
manage expenses with slowing revenue growth.  Salary and health
insurance increases were the primary contributor to the increase for fiscal year
2009.  Stock-based compensation is included in SG&A, and, as of
August 31, 2009, total remaining unrecognized compensation cost related to
unvested stock-based arrangements was $12.2 million and is expected to be
recognized over a weighted average period of 1.1 years.  See Note 1
and Note 13 of the Notes to the Consolidated Financial Statements included in
this Form 10-K for additional information regarding our stock-based
compensation.





Depreciation
and Amortization.  Depreciation and
amortization expense decreased 5.1% to $48.1 million in fiscal year 2009
primarily as a result of refranchising Partner
Drive-Ins.  Depreciation and amortization expense increased 12.3% to
$50.7 million in fiscal year 2008 primarily as a result of additional capital
expenditures for newly-constructed Partner Drive-Ins, the retrofit and
relocation of existing Partner Drive-Ins and the acquisition of Franchise
Drive-Ins.  Capital expenditures during fiscal year 2009 were $36.1
million.  For fiscal year 2010, capital expenditures are expected to
be approximately $30 to $40 million.





Provision
for Impairment of Long-Lived Assets.  We assess
drive-in assets for impairment on a quarterly basis under the guidelines of SFAS
144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.”  Based on the Company’s analysis, we recorded a provision of
$11.2 million in fiscal year 2009 to reduce the carrying cost  21
 Table of Contents








Interest
Expense and Other Expense, Net.  Net interest
expense decreased $5.9 million to $42.0 million in fiscal year 2009 and
increased $3.5 million to $47.9 million in fiscal year 2008.  The
primary cause for the decrease in fiscal year 2009 is the $6.4 million gain from
the early extinguishment of debt that resulted from purchasing $25.0 million of
the Company’s fixed rate notes at a discount.  Excluding the gain, the
decrease in net interest expense relates to the reduction in debt due to
scheduled amortization payments on our fixed rate notes and a declining rate on
our variable rate notes.  The increase in fiscal year 2008 is the
result of interest on increased borrowings primarily used to fund share
repurchases earlier in the year and drive-in acquisitions from
franchisees.





Income
Taxes.  The provision for income taxes decreased for fiscal
year 2009 with an effective federal and state tax rate of 38.4% compared with
37.4% in fiscal year 2008 and 36.4% in fiscal year 2007. The higher rate in
fiscal year 2009 related to an increase in the valuation allowance of state net
operating losses offset by a reduction in the liability for unrecognized tax
benefits.  Our tax rate may continue to vary significantly from
quarter to quarter depending on the timing of option exercises and dispositions
by option-holders, changes to uncertain tax positions and as circumstances on
individual tax matters change.





Financial
Position





During
fiscal year 2009, current assets increased 103.3% to $202.1 million compared to
$99.4 million as of the end of fiscal year 2008.  Cash balances
increased by $93.3 million primarily as a result of refranchising Partner
Drive-Ins and advances under the Company’s variable funding notes. During fiscal
year 2009, noncurrent assets decreased 12.2% to $646.9 million compared to
$736.9 million as of the end of fiscal year 2008.  The decrease was
primarily the result of a $62.3 million reduction of net property and equipment
and a decrease of $29.5 million in goodwill, resulting from depreciation and the
refranchising of Partner Drive-Ins.





Total
liabilities decreased $47.1 million or 5.2% during fiscal year 2009 compared to
fiscal year 2008 primarily due to a $59.9 million decrease in long-term debt
which resulted from payments on the Company’s fixed rate notes.





Stockholders’
deficit decreased $59.8 million or 93.3% during fiscal year
2009.  Earnings of $49.4 million, along with $10.4 million for the
combination of stock compensation and the proceeds and related tax decrement
from the exercise of stock options, decreased the stockholders’
deficit.





Liquidity
and Sources of Capital





Operating
Cash Flows.Net cash
provided by operating was $88.7 million in fiscal year 2009 as compared to
$127.1 million in fiscal year 2008.  This decrease generally resulted
from a decrease in operating results as reflected by the decrease in net
income.





Investing
Cash Flows.Net cash provided by
investing activities was $51.5 million in fiscal year 2009 as compared to net
cash used in investing activities of $107.1 million in fiscal year
2008.  The purchase of property and equipment was more than offset by
the proceeds from the disposition of Partner Drive-In assets due to
refranchising. During fiscal year 2009, we opened 11 newly constructed Partner
Drive-Ins and sold 205 drive-ins to franchisees. The following table sets forth
the components of our investments in capital additions for fiscal year 2009 (in
millions):





New
      Partner Drive-Ins, including drive-ins under construction
            
            $
            18.6Retrofits,
      drive-thru additions and LED signs in existing drive-ins
            
            
            5.5Rebuilds,
      relocations and remodels of existing drive-ins
            
            
            4.5Replacement
      equipment for existing drive-ins and other
            
            
            7.5Total
      investing cash flows for capital additions
            
            $
            36.1





During
fiscal year 2009, we purchased the real estate for nine of the 11 newly
constructed drive-ins.


22
 Table of Contents





Financing
Cash Flows.Net cash used in
financing activities was $46.9 million in fiscal year 2009 as compared to $1.2
million in fiscal year 2008.  The increase in cash used for financing
activities in fiscal year 2009 primarily relates to the net repayment of
long-term debt compared to net borrowings in fiscal year 2008.  The
Company has a securitized financing facility of Variable Funding Notes that
provides for the issuance of up to $200.0 million in borrowings and certain
other credit instruments, including letters of credit.  As of August
31, 2009, our outstanding balance under the Variable Funding Notes totaled
$187.3 million at an effective borrowing rate of 1.4%, as well as $0.3 million
in outstanding letters of credit.  During fiscal year 2009, upon
request of the Company to draw down the remaining $12.3 million in Variable
Funding Notes from one of the lenders, the lender, which had previously filed
for Chapter 11 bankruptcy, notified the Company that it could not meet its
obligation.  The Company no longer considers the $12.3 million to be
available.





Despite
recent challenges with Partner Drive-In operations, operating cash flows remain
healthy, and we believe that cash flows from operations, along with existing
cash balances, will be adequate for mandatory repayment of any long-term debt
and funding of planned capital expenditures in fiscal year 2010.  See
Note 10 of the Notes to Consolidated Financial Statements for additional
information regarding our long-term debt.





Our
variable and 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.  The notes are also subject to customary rapid amortization
events and events of default.  Although management does not anticipate
an event of default or any other event of noncompliance with the provisions of
the debt, if such an event occurred, the unpaid amounts outstanding could become
immediately due and payable.  See Note 1 – Restricted Cash of the Notes
to Consolidated Financial Statements for additional information regarding
restrictions on cash.





We plan
capital expenditures of approximately $30 to $40 million in fiscal year 2010.
These capital expenditures primarily relate to the development of additional
Partner Drive-Ins, retrofit of existing Partner Drive-Ins and other drive-in
level expenditures. We expect to fund these capital expenditures through cash
flow from operations as well as cash on hand.





As of
August 31, 2009, our unrestricted cash balance of $137.6 million reflected the
impact of the cash generated from operating activities, borrowing activity,
refranchising, and capital expenditures mentioned above.  We believe
that existing cash and funds generated from operations, as well as borrowings
under the Variable Funding Notes, will meet our needs for the foreseeable
future.





Off-Balance
Sheet Arrangements





The
Company has obligations for guarantees on certain franchisee loans and lease
agreements. See Note 17 of the Notes to Consolidated Financial Statements for
additional information about these guarantees. Other than such guarantees and
various operating leases, which are disclosed more fully in “Contractual
Obligations and Commitments” below and Note 7 to our Consolidated Financial
Statements, the Company has no other material off-balance sheet
arrangements.


23
 Table of Contents





Contractual
Obligations and Commitments





In the
normal course of business, Sonic enters into purchase contracts, lease
agreements and borrowing arrangements.  Our commitments and
obligations as of August 31, 2009 are summarized in the following
table:




Payments
      Due by Period(In
      Thousands)Total
              
              
              Less than 1
      Year
              
              
              1
      – 3 Years
              
              
              3
      – 5 Years
              
              
              More
      than 5 YearsContractual
      ObligationsLong-term
      debt(1)
              
              $
              777,269
              
              
              $
              80,789
              
              
              $
              204,162
              
              
              $
              492,235
              
              
              $
              83Capital
      leases
              
              
              55,375
              
              
              
              5,861
              
              
              
              11,174
              
              
              
              10,849
              
              
              
              27,491Operating
      leases
              
              
              189,335
              
              
              
              11,909
              
              
              
              23,198
              
              
              
              22,206
              
              
              
              132,022Total
              
              $
              1,021,979
              
              
              $
              98,559
              
              
              $
              238,534
              
              
              $
              525,290
              
              
              $
              159,596


(1)
            The
      fixed-rate interest payments included in the table above assume that the
      related notes will be outstanding for the expected six-year term, and all
      other fixed-rate notes will be held to maturity.  Interest
      payments associated with variable-rate debt have not been included in the
      table.  Assuming the amounts outstanding under the variable-rate
      notes as of August 31, 2009 are held to maturity, and utilizing interest
      rates in effect at August 31, 2009, the interest payments will be
      approximately $3 million on an annual basis through December
      2013.





Impact
of Inflation





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





Impairment
of Long-Lived Assets.We
review Partner Drive-In 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.  During
fiscal year 2009, we reviewed Partner Drive-Ins and other long-lived assets with
combined carrying amounts of $52 million in property, equipment and capital
leases for possible impairment, and our cash flow assumptions resulted in
impairment charges totaling $11.2 million to write down certain assets to their
estimated fair value.





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. 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: discounted cash flow analyses and a market
multiple approach. The discounted estimates of future cash flows include
significant management assumptions such as revenue growth rates, operating
margins, weighted average cost of capital, and future economic and market
conditions. In addition, the market multiple approach includes significant
assumptions such as the use of recent historical market multiples to estimate
future market pricing.  These assumptions are significant factors in
calculating the value of the reporting units and can be affected by changes in  24
 Table of
Contents








During
the fourth quarter of fiscal year 2009, we performed our annual assessment of
recoverability of goodwill and other intangible assets and determined that no
impairment was indicated.  As of the 2009 impairment testing date, the
fair value of the Partner Drive-In reporting unit exceeded the carrying value by
approximately 15%. The carrying value of goodwill as of August 31, 2009, was
$76.3 million, all of which was allocated to the Partner Drive-In reporting
unit. If cash flows generated by our Partner 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.





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





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





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





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





Our
franchisees are required under the provisions of the license agreements to pay
royalties to Sonic each month based on a percentage of actual net
sales.  However, the royalty payments and supporting financial
statements are not due until the following month under the terms of our license
agreements.  As a result, we accrue royalty revenue in the month
earned based on estimates of Franchise Drive-Ins sales.  These
estimates are based on projections of average unit volume growth at Franchise
Drive-Ins collected from a majority of Franchise Drive-Ins.





Accounting
for Stock-Based Compensation.  We account for
stock-based compensation in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”).  We estimate the fair value of options granted using the
Black-Scholes option pricing model along with the assumptions shown in Note 13
of Notes to the Consolidated Financial Statements in this Form
10-K.  The assumptions used in computing the fair value of share-based
payments reflect our best estimates, but involve uncertainties relating to
market and other conditions, many of which are outside of our
control.  We estimate expected volatility based on historical daily
price changes of the Company’s stock for a period equal to the current expected
term of the options.  The expected option term is the number of years
the Company estimates that options will be outstanding prior to exercise  25
 Table of Contents









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.





We
account for uncertain tax positions under the provisions of Financial Accounting
Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes" (“FIN 48”) which sets out criteria for the use of judgment in assessing
the timing and amounts of deductible and taxable 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 result
in 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 than 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.  Certain Partner
Drive-Ins lease land and buildings from third parties.  Rent expense
for operating leases is recognized on a straight-line basis over the expected
lease term, including cancelable option periods when it is deemed to be
reasonably assured that we would incur an economic penalty for not exercising
the options.  Judgment is required to determine options expected to be
exercised.  Certain of our leases have provisions for 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.





Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk





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





Interest
Rate Risk.  Our exposure to interest rate risk at August 31,
2009 is primarily based on the fixed rate notes with an effective rate of 5.7%,
before amortization of debt-related costs.  At August 31, 2009, the
fair value of the fixed rate notes was estimated at $473.3million versus carrying
value of $511.9 million (including accrued interest).  The difference
between fair value and carrying value is attributable to interest rate decreases
subsequent to when the debt was originally issued, more than offset by the
increase in credit spreads required by issuers of similar debt instruments in
the current market.  Should interest rates and/or credit spreads
increase or decrease by one percentage point, the estimated fair value of the
fixed rate notes would decrease by approximately $11.8million or increase by
approximately $11.4 million, respectively.  The fair value estimate
required significant assumptions by management as there are few, if any,
securitized loan transactions occurring in the current
market.  Management used market information available for public debt
transactions for companies with ratings that are close to or lower than ratings
for the Company (without consideration for the third-party credit
enhancement).  Management believes this fair value is a reasonable
estimate with the information that is available.  The difference
between fair value and carrying value is  26
 Table of Contents








The
variable funding notes outstanding at August 31, 2009 totaled $187.3million, with a variable
rate of 1.4%.  The annual impact on our results of operations of a
one-point interest rate change for the balance outstanding at year-end would be
approximately $1.9million before
tax.  At August 31, 2009, the fair value of the variable funding notes
was estimated at $159.3 million versus carrying value of $187.3 million
(including accrued interest).  Should credit spreads increase or
decrease by one percentage point, the estimated fair value of the variable
funding notes would decrease by approximately $5.2 million or increase by
approximately $5.1 million, respectively.  The Company used similar
assumptions to value the variable funding notes as were used for the fixed rate
notes.  The difference between fair value and carrying value is
attributable to the increase in credit spreads required by issuers of similar
debt instruments in the current market.





We have
made certain loans to our franchisees totaling $9.5million as of August 31,
2009.  The interest rates on these notes are generally between 5.0%
and 10.5%.  We believe the carrying amount of these notes approximates
their fair value.





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





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





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 the Chief Financial Officer,
of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures (as defined in Rule 13a-14 under the Securities Exchange
Act of 1934).  Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company’s disclosure controls
and procedures were effective.  There were no significant changes in
the Company’s internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.








Management's
Report on Internal Control over Financial Reporting





The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company’s internal
control system was designed to provide reasonable assurance to the Company’s
management and Board of Directors regarding the preparation and fair
presentation of published financial statements. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.





The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of August 31, 2009.  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


27
 Table of Contents




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




28




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,
2009, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria).  Sonic Corp.’s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over
Financial Reporting.  Our responsibility is to express an opinion on
the 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, 2009, 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, 2009 and 2008, and the related consolidated statements of
income, stockholders’ deficit, and cash flows for each of the three years in the
period ended August 31, 2009 of Sonic Corp. and our report dated October 29,
2009 expressed an unqualified opinion thereon.




ERNST
      & YOUNG LLP




Oklahoma
City, Oklahoma


October
29, 2009




29
 Table of Contents


Item
9B.  Other Information





No
information was required to be disclosed in a Form 8-K during the Company’s
fourth quarter of its 2009 fiscal year which was not reported.




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 internet website at the internet address:
http://www.sonicdrivein.com.





Information
regarding Sonic’s executive officers is set forth under Item 4A of Part I of
this report.  The other information required by this item is
incorporated by reference from the definitive proxy statement which Sonic will
file with the Securities and Exchange Commission no later than 120 days after
August 31, 2009 (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.”





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:





PagesReport
      of Independent Registered Public Accounting Firm
            F-1Consolidated
      Balance Sheets at August 31, 2009 and 2008
            F-2Consolidated
      Statements of Income for each of the three years in the period ended
      August 31, 2009
            F-4Consolidated
      Statements of Stockholders’ Deficit for each of the three years in the
      period ended August 31, 2009
            F-5Consolidated
      Statements of Cash Flows for each of the three years in the period ended
      August 31, 2009
            F-6Notes
      to Consolidated Financial Statements
            F-8


30
 Table of Contents





Financial
Statement Schedules





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




PageSchedule
      II
            -
            Valuation
      and Qualifying Accounts
            F-34





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 hereby incorporates by
reference from Exhibit 3.1 to the Company’s Form S-1 Registration Statement No.
33-37158 filed on October 3, 1990.





3.02.           Certificate
of Amendment of Certificate of Incorporation of the Company, March 4, 1996,
which the Company hereby incorporates by reference from Exhibit 3.05 to the
Company’s Form 10-K for the fiscal year ended August 31, 2000.





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





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





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





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





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





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





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





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





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


31
 Table of Contents





10.05.         Form
of Sonic Industries LLC License Agreement (the Number 4.4/5.4 License
Agreement), which the Company hereby incorporates by reference from Exhibit No.
10.08 to the Company’s Form 10-K for the fiscal year ended August 31,
2007.





10.06.         Form
of Sonic Industries LLC License Agreement (the Number 5.5 License Agreement),
which the Company hereby incorporates by reference from Exhibit No. 10.09 to the
Company’s Form 10-K for the fiscal year ended August 31, 2007.





10.07.         Form
of Sonic Industries LLC License Agreement (the Number 7 License Agreement),
which the Company hereby incorporates by reference from Exhibit No. 10.10 to the
Company’s Form 10-K for the fiscal year ended August 31, 2007.





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





10.09.         Form
of Sonic Industries LLC Area Development Agreement (the Number 7 Area
Development Agreement), which the Company hereby incorporates by reference from
Exhibit No. 10.13 to the Company’s Form 10-K for the fiscal year ended August
31, 2007.





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





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





10.12.         1991
Sonic Corp. Stock Option Plan, which the Company hereby incorporates by
reference from Exhibit 10.5 to the Company’s Form S-1 Registration Statement No.
33-37158.*





10.13.         1991
Sonic Corp. Stock Purchase Plan, amended and restated effective April 2, 2008,
which the Company hereby incorporates by reference from Exhibit 10.17 to the
Company’s Form 10-K for fiscal year ended August 31, 2008.*





10.14.         1991
Sonic Corp. Directors’ Stock Option Plan, which the Company hereby incorporates
by reference from Exhibit 10.08 to the Company’s Form 10-K for the fiscal year
ended August 31, 1991.*





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





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





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





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





10.19.         Employment
Agreement with J. Clifford Hudson dated December 15, 2008, which the Company
hereby incorporates by reference from Exhibit 10.01 to the Company’s Form 10-Q
for the second fiscal quarter ended February 28, 2009.*





10.20.         Employment
Agreement with W. Scott McLain dated December 15, 2008, which the Company hereby
incorporates by reference from Exhibit 10.05 to the Company’s Form 10-Q for the
second fiscal quarter ended February 28, 2009.*





10.21.         Employment
Agreement with Omar Janjua dated October 15, 2009.*


32
 Table of Contents





10.22.         Employment
Agreement with Stephen C. Vaughan dated December 15, 2008, which the Company
hereby incorporates by reference from Exhibit 10.09 to the Company’s Form 10-Q
for the second fiscal quarter ended February 28, 2009.*





10.23.         Employment Agreement with
Paige S. Bass datedDecember 15, 2008, which the Company hereby
incorporates by reference from Exhibit 10.02 to the Company’s Form 10-Q for the
second fiscal quarter ended February 28, 2009.*





10.24.         Employment
Agreement with Carolyn Cummins, which the Company hereby incorporates by
reference from Exhibit 10.03 to the Company’s Form 10-Q for the second fiscal
quarter ended February 28, 2009.*





10.25.         Employment
Agreement with Terry D. Harryman dated December 15, 2008, which the Company
hereby incorporates by reference from Exhibit 10.04 to the Company’s Form 10-Q
for the second fiscal quarter ended February 28, 2009.*





10.26.         Employment Agreement with
Claudia San Pedro datedDecember 15, 2008, which the Company hereby
incorporates by reference from Exhibit 10.06 to the Company’s Form 10-Q for the
second fiscal quarter ended February 28, 2009.*





10.27.         Employment
Agreement with Sharon T. Strickland dated December 15, 2008,, which the Company
hereby incorporates by reference from Exhibit 10.08 to the Company’s Form 10-Q
for the second fiscal quarter ended February 28, 2009.*





10.28.         2001
Sonic Corp. Stock Option Plan, which the Company hereby incorporates by
reference from Exhibit No. 10.32 to the Company’s Form 10-K for the fiscal year
ended August 31, 2001.*





10.29.         2001
Sonic Corp. Directors’ Stock Option Plan, which the Company hereby incorporates
by reference from Exhibit No. 10.33 to the Company’s Form 10-K for the fiscal
year ended August 31, 2001.*





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





21.01.         Subsidiaries
of the Company.





23.01.         Consent
of Independent Registered Public Accounting Firm.





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





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





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





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





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





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





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


33
 Table of Contents





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





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


34
 Table of Contents





Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders of


Sonic
Corp.





We have
audited the accompanying consolidated balance sheets of Sonic Corp. as of August
31, 2009 and 2008, and the related consolidated statements of income,
stockholders’ deficit, and cash flows for each of the three years in the period
ended August 31, 2009. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sonic Corp. at August
31, 2009 and 2008, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended August 31, 2009, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Sonic Corp.’s internal
control over financial reporting as of August 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated October
29, 2009, expressed an unqualified opinion thereon.





As
discussed in Note 12 to the consolidated financial statements, in fiscal year
2008 the Company adopted Financial Accounting Standards Board Interpretation No.
48 “Accounting for Uncertainty in Income Taxes.”




ERNST
      & YOUNG LLP





Oklahoma
City, Oklahoma


October
29, 2009


F-1
 Table of Contents





Sonic
Corp.





Consolidated
Balance Sheets





August 31,2009
            
            
            2008(In
      Thousands)AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            137,597
            
            
            $
            44,266Restricted
      cash
            
            
            24,900
            
            
            
            14,934Accounts
      and notes receivable, net
            
            
            27,585
            
            
            
            29,838Inventories
            
            
            3,365
            
            
            
            4,553Prepaid
      expenses and other
            
            
            8,685
            
            
            
            5,836Total
      current assets
            
            
            202,132
            
            
            
            99,427Noncurrent
      restricted cash
            
            
            10,468
            
            
            
            11,192Notes
      receivable, net
            
            
            7,679
            
            
            
            3,163Property,
      equipment and capital leases, net
            
            
            523,938
            
            
            
            586,245Goodwill,
      net
            
            
            76,299
            
            
            
            105,762Trademarks,
      trade names and other intangibles, net
            
            
            12,011
            
            
            
            12,418Debt
      origination costs, net
            
            
            11,071
            
            
            
            16,121Other
      assets, net
            
            
            5,443
            
            
            
            1,984Total
      assets
            
            $
            849,041
            
            
            $
            836,312


F-2
 Table of Contents





Sonic
Corp.





Consolidated
Balance Sheets (continued)





August
      31,2009
            
            
            2008(In
      Thousands)Liabilities
      and stockholders’ deficitCurrent
      liabilities:Accounts
      payable
            
            $
            17,174
            
            
            $
            20,762Deposits
      from franchisees
            
            
            1,833
            
            
            
            3,213Accrued
      liabilities
            
            
            34,512
            
            
            
            46,200Income
      taxes payable
            
            
            8,156
            
            
            
            1,016Obligations
      under capital leases and long-term debt due within one
year
            
            
            55,644
            
            
            
            41,351Total
      current liabilities
            
            
            117,319
            
            
            
            112,542Obligations
      under capital leases due after one year
            
            
            36,516
            
            
            
            34,503Long-term
      debt due after one year
            
            
            646,851
            
            
            
            720,953Other
      noncurrent liabilities
            
            
            26,116
            
            
            
            18,083Deferred
      income taxes
            
            
            26,507
            
            
            
            14,347Commitments
      and contingencies (Notes
      7, 8, 15, 16 and 17)Stockholders’
      deficit:Preferred
      stock, par value $.01; 1,000,000 shares authorized; none
      outstanding
            
            
            –
            
            
            
            –Common
      stock, par value $.01; 245,000,000 shares authorized; shares issued
      117,781,040 in 2009 and 117,044,879 in 2008
            
            
            1,178
            
            
            
            1,170Paid-in
      capital
            
            
            219,736
            
            
            
            209,316Retained
      earnings
            
            
            649,398
            
            
            
            599,956Accumulated
      other comprehensive income
            
            
            (1,500
            )
            
            
            (2,191
            )868,812
            
            
            
            808,251Treasury
      stock, at cost; 56,683,932 shares in 2009 and 56,600,080 shares in
      2008
            
            
            (873,080
            )
            
            
            (872,367
            )Total
      stockholders’ deficit
            
            
            (4,268
            )
            
            
            (64,116
            )Total
      liabilities and stockholders’ deficit
            
            $
            849,041
            
            
            $
            836,312





See
accompanying notes.


F-3
 Table of Contents





Sonic
Corp.





Consolidated
Statements of Income





Year
      ended August 31,2009
            
            
            2008
            
            
            2007(In
      Thousands, Except Per Share Data)Revenues:Partner
      Drive-In sales
            
            $
            567,436
            
            
            $
            671,151
            
            
            $
            646,915Franchise
      Drive-Ins:Franchise
      royalties
            
            
            126,706
            
            
            
            121,944
            
            
            
            111,052Franchise
      fees
            
            
            5,006
            
            
            
            5,167
            
            
            
            4,574Gain
      on sale of Partner Drive-Ins
            
            
            13,154
            
            
            
            3,044
            
            
            
            732Other
            
            
            6,487
            
            
            
            3,407
            
            
            
            7,196718,789
            
            
            
            804,713
            
            
            
            770,469Costs
      and expenses:Partner
      Drive-Ins:Food
      and packaging
            
            
            156,521
            
            
            
            177,533
            
            
            
            166,531Payroll
      and other employee benefits
            
            
            182,740
            
            
            
            208,479
            
            
            
            196,785Minority
      interest in earnings of Partner Drive-Ins
            
            
            15,351
            
            
            
            21,922
            
            
            
            26,656Other
      operating expenses, exclusive of depreciation and amortization included
      below
            
            
            125,615
            
            
            
            140,168
            
            
            
            130,204480,227
            
            
            
            548,102
            
            
            
            520,176Selling,
      general and administrative
            
            
            63,358
            
            
            
            61,179
            
            
            
            58,736Depreciation
      and amortization
            
            
            48,064
            
            
            
            50,653
            
            
            
            45,103Provision
      for impairment of long-lived assets
            
            
            11,163
            
            
            
            571
            
            
            
            1,165602,812
            
            
            
            660,505
            
            
            
            625,180Income
      from operations
            
            
            115,977
            
            
            
            144,208
            
            
            
            145,289Interest
      expense
            
            
            43,457
            
            
            
            49,946
            
            
            
            41,227Debt
      extinguishment and other costs
            
            
            (6,382
            )
            
            
            –
            
            
            
            6,076Interest
      income
            
            
            (1,418
            )
            
            
            (2,019
            )
            
            
            (2,897
            )Net
      interest expense
            
            
            35,657
            
            
            
            47,927
            
            
            
            44,406Income
      before income taxes
            
            
            80,320
            
            
            
            96,281
            
            
            
            100,883Provision
      for income taxes
            
            
            30,878
            
            
            
            35,962
            
            
            
            36,691Net
      income
            
            $
            49,442
            
            
            $
            60,319
            
            
            $
            64,192Basic
      income per share
            
            $
            0.81
            
            
            $
            1.00
            
            
            $
            0.94Diluted
      income per share
            
            $
            0.81
            
            
            $
            0.97
            
            
            $
            0.91





See
accompanying notes.


F-4
 Table of Contents


Sonic
Corp.





Consolidated
Statements of Stockholders’ Deficit





Common Stock
            
            
            Paid-in
            
            
            Retained
            
            
            Accumulated
      Other Comprehensive
            
            
            Treasury StockShares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            Income
            
            
            Shares
            
            
            Amount(In
      Thousands)Balance
      at August 31, 2006
            
            
            114,988
            
            
            
            1,150
            
            
            
            173,802
            
            
            
            476,694
            
            
            
            (484
            )
            
            
            29,506
            
            
            
            (259,469
            )Exercise
      of common stock options
            
            
            1,235
            
            
            
            12
            
            
            
            8,524
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Stock-based
      compensation expense, including capitalized compensation of
      $232
            
            
            –
            
            
            
            –
            
            
            
            7,290
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Tax
      benefit related to exercise of employee stock options
            
            
            –
            
            
            
            –
            
            
            
            4,066
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Purchase
      of treasury stock
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            25,572
            
            
            
            (580,215
            )Net
      change in deferred hedging losses, net of tax of $1,464
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (2,364
            )
            
            
            –
            
            
            
            –Net
      income
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            64,192
            
            
            
            –
            
            
            
            –
            
            
            
            –Balance
      at August 31, 2007
            
            
            116,223
            
            
            
            1,162
            
            
            
            193,682
            
            
            
            540,886
            
            
            
            (2,848
            )
            
            
            55,078
            
            
            
            (839,684
            )Exercise
      of common stock options
            
            
            822
            
            
            
            8
            
            
            
            6,285
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Stock-based
      compensation expense
            
            
            –
            
            
            
            –
            
            
            
            7,428
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Tax
      benefit related to exercise of employee stock options
            
            
            –
            
            
            
            –
            
            
            
            1,921
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Purchase
      of treasury stock
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            1,522
            
            
            
            (32,683
            )Net
      change in deferred hedging losses, net of tax of $407
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            657
            
            
            
            –
            
            
            
            –Retained
      earnings adjustment for adoption of FIN 48
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (1,249
            )
            
            
            –
            
            
            
            –
            
            
            
            –Net
      income
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            60,319
            
            
            
            –
            
            
            
            –
            
            
            
            –Balance
      at August 31, 2008
            
            
            117,045
            
            
            
            1,170
            
            
            
            209,316
            
            
            
            599,956
            
            
            
            (2,191
            )
            
            
            56,600
            
            
            
            (872,367
            )Exercise
      of common stock options
            
            
            736
            
            
            
            8
            
            
            
            4,503
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Stock-based
      compensation expense
            
            
            –
            
            
            
            –
            
            
            
            6,910
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Tax
      decrement related to exercise of employee stock options
            
            
            –
            
            
            
            –
            
            
            
            (993
            )
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Purchase
      of treasury stock
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            84
            
            
            
            (713
            )Net
      change in deferred hedging losses, net of tax of $428
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            691
            
            
            
            –
            
            
            
            –Net
      income
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            49,442
            
            
            
            –
            
            
            
            –
            
            
            
            –Balance
      at August 31, 2009
            
            
            117,781
            
            
            
            1,178
            
            
            
            219,736
            
            
            
            649,398
            
            
            
            (1,500
            )
            
            
            56,684
            
            
            
            (873,080
            )





See
accompanying notes.


F-5
 Table of Contents





Sonic
Corp.





Consolidated
Statements of Cash Flows





Year
      ended August 31,2009
            
            
            2008
            
            
            2007(In
      Thousands)Cash
      flows from operating activitiesNet
      income
            
            $
            49,442
            
            
            $
            60,319
            
            
            $
            64,192Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
            
            
            47,601
            
            
            
            50,212
            
            
            
            44,432Amortization
            
            
            463
            
            
            
            441
            
            
            
            671Gain
      on dispositions of assets, net
            
            
            (12,506
            )
            
            
            (2,954
            )
            
            
            (3,267
            )Stock-based
      compensation expense
            
            
            6,910
            
            
            
            7,428
            
            
            
            7,058Provision
      for deferred income taxes
            
            
            24
            
            
            
            (2,439
            )
            
            
            (1,592
            )Provision
      for impairment of long-lived assets
            
            
            11,163
            
            
            
            571
            
            
            
            1,165Excess
      tax benefit from exercise of employee stock options
            
            
            (776
            )
            
            
            (2,033
            )
            
            
            (4,117
            )Debt
      extinguishment and other costs
            
            
            (6,382
            )
            
            ─
            
            
            
            5,283Payment
      for hedge termination
            
            ─
            
            
            ─
            
            
            
            (5,640
            )Amortization
      of debt costs to interest expense
            
            
            4,531
            
            
            
            5,896
            
            
            
            4,256Other
            
            
            950
            
            
            
            190
            
            
            
            185Decrease
      (increase) in operating assets:Restricted
      cash
            
            
            (8,755
            )
            
            
            212
            
            
            
            (8,965
            )Accounts
      and notes receivable
            
            
            (2,352
            )
            
            
            (3,226
            )
            
            
            (709
            )Inventories
      and prepaid expenses
            
            
            203
            
            
            
            337
            
            
            
            159Increase
      (decrease) in operating liabilities:Accounts
      payable
            
            
            (5,000
            )
            
            
            2,454
            
            
            
            106Deposits
      from franchisees
            
            
            (459
            )
            
            
            1,196
            
            
            
            3,556Accrued
      and other liabilities
            
            
            3,597
            
            
            
            8,539
            
            
            
            14,242Total
      adjustments
            
            
            39,212
            
            
            
            66,824
            
            
            
            56,823Net
      cash provided by operating activities
            
            
            88,654
            
            
            
            127,143
            
            
            
            121,015Cash
      flows from investing activitiesPurchases
      of property and equipment
            
            
            (36,145
            )
            
            
            (105,426
            )
            
            
            (110,912
            )Acquisition
      of businesses, net of cash received
            
            ─
            
            
            
            (20,895
            )
            
            
            (10,760
            )Proceeds
      from sale/leaseback of real estate
            
            
            7,097
            
            
            ─
            
            
            
            12,619Investments
      in direct financing leases
            
            
            (517
            )
            
            
            (67
            )
            
            
            (302
            )Collections
      on direct financing leases
            
            
            957
            
            
            
            1,427
            
            
            
            1,544Proceeds
      from dispositions of assets
            
            
            86,770
            
            
            
            17,339
            
            
            
            13,668Proceeds
      from sale of minority interests in Partner Drive-Ins
            
            
            5,190
            
            
            
            5,120
            
            
            
            3,701Purchases
      of minority interests in Partner Drive-Ins
            
            
            (11,753
            )
            
            
            (6,048
            )
            
            
            (4,369
            )Decrease
      (increase) in intangibles and other assets
            
            
            (55
            )
            
            
            1,447
            
            
            
            212Net
      cash provided by (used in)  investing activities
            
            
            51,544
            
            
            
            (107,103
            )
            
            
            (94,599
            )




(Continued on following
page)


F-6
 Table of Contents





Sonic
Corp.





Consolidated
Statements of Cash Flows (continued)





Year
      ended August 31,2009
            
            
            2008
            
            
            2007(In
      Thousands)Cash
      flows from financing activitiesProceeds
      from borrowings
            
            $
            16,883
            
            
            $
            165,250
            
            
            $
            1,404,490Payments
      on long-term debt
            
            
            (64,838
            )
            
            
            (123,321
            )
            
            
            (815,396
            )Purchases
      of treasury stock
            
            ─
            
            
            
            (46,628
            )
            
            
            (564,984
            )Debt
      issuance costs
            
            
            (98
            )
            
            
            (226
            )
            
            
            (28,166
            )Restricted
      cash for debt obligations
            
            
            (487
            )
            
            
            (1,463
            )
            
            
            (15,910
            )Payments
      on capital lease obligations
            
            
            (2,897
            )
            
            
            (2,640
            )
            
            
            (2,471
            )Exercises
      of stock options
            
            
            3,794
            
            
            
            5,796
            
            
            
            7,732Excess
      tax benefit from exercise of employee stock options
            
            
            776
            
            
            
            2,033
            
            
            
            4,117Net
      cash used in financing activities
            
            
            (46,867
            )
            
            
            (1,199
            )
            
            
            (10,588
            )Net
      increase in cash and cash equivalents
            
            
            93,331
            
            
            
            18,841
            
            
            
            15,828Cash
      and cash equivalents at beginning of the year
            
            
            44,266
            
            
            
            25,425
            
            
            
            9,597Cash
      and cash equivalents at end of the year
            
            $
            137,597
            
            
            $
            44,266
            
            
            $
            25,425Supplemental
      cash flow informationCash
      paid during the year for:Interest
      (net of amounts capitalized of $212, $734 and $576,
      respectively)
            
            $
            38,446
            
            
            $
            44,727
            
            
            $
            36,501Income
      taxes (net of refunds)
            
            
            12,961
            
            
            
            35,316
            
            
            
            32,651Obligation
      to acquire treasury stock
            
            ─
            
            
            ─
            
            
            
            14,432Additions
      to capital lease obligations
            
            
            5,299
            
            
            
            1,055
            
            
            
            5,164Accounts
      and notes receivable and decrease in capital leaseobligations
      from property and equipment sales
            
            
            4,412
            
            
            
            348
            
            
            
            1,500Stock
      options exercised by stock swap
            
            
            713
            
            
            
            488
            
            
            
            799Change
      in obligation for purchase of property and equipment
            
            
            (1,162
            )
            
            
            (222
            )
            
            
            1,134





See
accompanying notes.


F-7
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)






1. 
Summary of Significant Accounting Policies




Operations





Sonic
Corp. (the “Company”) operates and franchises a chain of quick-service drive-ins
in the United States.  It derives its revenues primarily from Partner
Drive-In sales and royalty fees from franchisees.  The Company also
leases signs and real estate, and owns a minority interest in several Franchise
Drive-Ins.





Principles
of Consolidation





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





Certain
amounts have been reclassified in the Consolidated Financial Statements to
conform to the fiscal year 2009 presentation.





Use
of Estimates





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





Cash
Equivalents





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





Restricted
Cash





As of
August 31, 2009, the Company had restricted cash balances totaling $35,368 for
funds required to be held in trust for the benefit of senior note holders under
the Company’s debt arrangements.  The current portion of restricted
cash of $24,900 represents amounts to be returned to Sonic or paid to service
current debt obligations.  The noncurrent portion of $10,468
represents interest reserves required to be set aside for the duration of the
debt.





Accounts
and Notes Receivable





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





Inventories





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


F-8
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








1. 
Summary of Significant Accounting Policies (continued)





Property,
Equipment and Capital Leases





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





Accounting
for Long-Lived Assets





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





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





Goodwill
and Other Intangible Assets





The
Company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets.”  Goodwill is
determined based on acquisition purchase price in excess of the fair value of
identified assets.  Intangible assets with lives restricted by
contractual, legal, or other means are amortized over their useful
lives.  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 in accordance with SFAS No.
142.  The Company’s reporting units are defined as Partner Drive-Ins
and Franchise Operations (see additional information regarding the Company’s
reporting units in Note 14, Segment Information).  SFAS No. 142
requires a two-step process for testing impairment.  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.


F-9
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)





1. 
Summary of Significant Accounting Policies (continued)





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. 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: discounted cash flow analyses and a market
multiple approach. The discounted estimates of future cash flows include
significant management assumptions such as revenue growth rates, operating
margins, weighted average cost of capital, and future economic and market
conditions. In addition, the market multiple approach includes significant
assumptions such as the use of recent historical market multiples to estimate
future market pricing.  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 our ability to identify buyers in the market.  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 under SFAS No. 142 consist
primarily of acquired franchise agreements, franchise fees, and other
intangibles.  Amortization expense is calculated using the
straight-line method over the expected period of benefit, not exceeding 20
years.  The Company’s trademarks and trade names were deemed to have
indefinite useful lives and are not subject to amortization.  See Note
5 for additional disclosures related to goodwill and other
intangibles.





Ownership
Program





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





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





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


F-10
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








1. 
Summary of Significant Accounting Policies (continued)





Revenue
Recognition, Franchise Fees and Royalties





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





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





The
Company’s franchisees are required under the provisions of the license
agreements to pay the Company royalties each month based on a percentage of
actual net royalty sales.  However, the royalty payments and
supporting financial statements are not due until the following
month.  As a result, the Company accrues royalty revenue in the month
earned based on estimates of Franchise Drive-In sales.  These
estimates are based on projections of average
unit volume growth at Franchise Drive-Ins from preliminary data collected from
drive-ins for the month, along with consideration of actual sales at Partner
Drive-Ins.





Operating
Leases





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





Advertising
Costs





Costs
incurred in connection with the advertising and promoting of the Company’s
products are included in other operating expenses and are expensed as
incurred.  Such costs amounted to $32,997, $36,801, and $35,241 for
fiscal years 2009, 2008 and 2007, respectively.





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


F-11
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








1.
 Summary of Significant Accounting Policies (continued)





Stock-Based
Compensation





In
accordance with Statement of Financial Accounting Standards No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123R”), stock-based compensation is measured
at the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the requisite employee service period (generally
the vesting period of the grant).





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





2009
            
            
            2008
            
            
            2007Selling,
      general and administrative
            
            $
            6,910
            
            
            $
            7,428
            
            
            $
            7,059Income
      tax benefit
            
            
            (2,452
            )
            
            
            (2,820
            )
            
            
            (2,254
            )Net
      stock-based compensation expense
            
            $
            4,458
            
            
            $
            4,608
            
            
            $
            4,805Impact
      on net income per share:Basic
            
            $
            0.07
            
            
            $
            0.08
            
            
            $
            0.07Diluted
            
            $
            0.07
            
            
            $
            0.07
            
            
            $
            0.07





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





Income
Taxes





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





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





FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” (“FIN 48”) prescribes a threshold for
recognizing the financial statement effects of a tax position 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 of being realized upon ultimate settlement with a taxing
authority. Liabilities for unrecognized tax benefits related to such tax
positions are included in other long-term liabilities unless the tax position is
expected to be settled within the upcoming year, in which case the liabilities
are included in accrued expenses and other current liabilities. Interest and
penalties related to unrecognized tax benefits are included in income tax
expense.


F-12
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)


1. 
Summary of Significant Accounting Policies (continued)
 
 Additional
information regarding the Company’s unrecognized tax benefits, including changes
in such amounts during fiscal years 2009 and 2008, is provided in Note
12.
 
 Disclosures About Fair Value
of Financial Instruments





Effective
September 1, 2008, we implemented Financial Accounting Standards No. 157, "Fair
Value Measurement" ("FAS 157"), which defines fair value, establishes a
framework for its measurement and expands disclosures about fair value
measurements.  That framework provides a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair
value.  The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs (level 3
measurements).  The three levels of the fair value hierarchy under FAS
157 are described below:





Level
1—Quoted prices in active markets for identical assets or
liabilities.





Level
2—Other significant observable inputs (including quoted prices for similar
securities, interest rates, prepayment, credit risk, etc.).





Level
3—Significant unobservable inputs.





The
asset’s or liability’s fair value measurement level within the fair value
hierarchy is based on the lowest level of any input that is significant to the
fair value measurement.  Valuation techniques used need to maximize
the use of observable inputs and minimize the use of unobservable
inputs.





The
following table presents financial assets and liabilities measured at fair value
on a recurring basis as of August 31, 2009 by FAS 157 valuation
hierarchy:




Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            Carrying
      ValueCash
      equivalents
            
            $
            137,597
            
            
            $
            –
            
            
            $
            –
            
            
            $
            137,597Restricted
      cash (current)
            
            
            24,900
            
            
            
            –
            
            
            
            –
            
            
            
            24,900Restricted
      cash (noncurrent)
            
            
            10,468
            
            
            
            –
            
            
            
            –
            
            
            
            10,468Total
      assets at fair value
            
            $
            172,965
            
            
            $
            –
            
            
            $
            –
            
            
            $
            172,965





New Accounting
Pronouncements




In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”).  SFAS 159 permits companies to choose to measure many
financial instruments and certain other items at fair value.  If the
fair value option is elected, unrealized gains and losses will be recognized in
earnings at each subsequent reporting date. SFAS 159 was effective for our
fiscal year beginning September 1, 2008.  The adoption of SFAS 159
did not have a material impact on our financial
statements.


F-13
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








1. 
Summary of Significant Accounting Policies (continued)





In
December 2007, the FASB issued FASB Statement No. 141(revised 2007), “Business
Combinations” (“SFAS 141(R)”).  This standard retains the fundamental
requirements in SFAS No. 141 that the acquisition method of accounting be used
for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141(R) requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at their fair values at the acquisition date. Costs incurred by the
acquirer to effect the acquisition are not allocated to the assets acquired or
liabilities assumed, but are recognized separately.  SFAS 141(R) is
effective prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008, which for us will be business combinations with an
acquisition date beginning on or after September 1, 2009.  The adoption of SFAS
141(R) is not anticipated to have a material impact on our financial
statements.





In
December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests
in Consolidated Financial Statements, an amendment to ARB No. 51” (“SFAS
160”).  This standard establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary and clarifies that a noncontrolling interest in a subsidiary is an
ownership interest that should be reported as equity in the consolidated
financial statements. SFAS 160 establishes a single method of accounting for
changes in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation and requires a parent to recognize a gain or loss in net income
when a subsidiary is deconsolidated. SFAS 160 also requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interest and to disclose, on the face of the
consolidated statement of income, the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008, which for us
will be our fiscal year beginning September 1, 2009.  The adoption of SFAS 160
is not anticipated to have a material impact on our financial
statements.





In May
2009, the FASB issued FASB Statement No. 165,“Subsequent Events” (“SFAS
165”), which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS 165 also requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date (i.e., whether the evaluation date represents the date the
financial statements were issued or were available to be issued). This statement
is effective for interim or annual reporting periods ending after June 15, 2009.
During the year ended August 31, 2009, the Company adopted SFAS 165. The Company
evaluated subsequent events through the date and time the financial statements
were issued on October 29, 2009. The adoption of SFAS 165 did not have a
significant impact on our consolidated financial statements.





In June
2009, the FASB issued FASB Statement No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles”
(“SFAS 168”). SFAS 168 confirmed that The FASB Accounting Standards Codification
(the “Codification”) will become the single official source of authoritative
U.S. generally accepted accounting principles ("GAAP") (other than guidance
issued by the SEC), superseding existing FASB, American Institute of Certified
Public Accountants, Emerging Issues Task Force, and related literature. After
that date, only one level of authoritative GAAP will exist, and all other
literature will be considered non-authoritative. The Codification does not
change GAAP; instead, it introduces a new structure that is organized in an
easily accessible, user-friendly online research system. The Codification, which
changes the referencing of financial standards, becomes effective for interim
and annual periods ending on or after September 15, 2009. The Company will apply
the Codification beginning in the first quarter of fiscal 2010. The adoption of
SFAS 168 is not expected to have a material impact on our consolidated financial
statements.


F-14
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








2.  Net
Income Per Share





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





2009
            
            
            2008
            
            
            2007Numerator:Net
      income
            
            $
            49,442
            
            
            $
            60,319
            
            
            $
            64,192Denominator:Weighted
      average shares outstanding – basic
            
            
            60,761
            
            
            
            60,403
            
            
            
            68,019Effect
      of dilutive employee stock options
            
            
            477
            
            
            
            1,867
            
            
            
            2,573Weighted
      average shares – diluted
            
            
            61,238
            
            
            
            62,270
            
            
            
            70,592Net
      income per share – basic
            
            $
            0.81
            
            
            $
            1.00
            
            
            $
            0.94Net
      income per share – diluted
            
            $
            0.81
            
            
            $
            0.97
            
            
            $
            0.91Anti-dilutive
      employee stock options excluded
            
            
            6,493
            
            
            
            3,255
            
            
            
            1,858





3.  Assets
Held for Sale and Impairment of Long-Lived Assets





Assets
held for sale consist of Partner Drive-Ins that we expect to sell within one
year. Such assets are classified as assets held for sale upon meeting the
requirements of SFAS 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.”  These assets are recorded at the lower of the carrying
amount or fair value less costs to sell.Assets are no longer depreciated
once classified as held for sale.  These assets are included in the
prepaid expenses and other account and classified as current assets on the
consolidated balance sheet. The following table sets forth the components of
assets held for sale:





August 31,
      2009
            
            
            August 31,
      2008Assets:Property,
      equipment and capital leases, net
            
            $
            1,531
            
            
            $
            –Goodwill,
      net
            
            
            1,274
            
            
            
            –Other
            
            
            134
            
            
            
            –Total
      assets held for sale
            
            
            2,939
            
            
            
            –






During
the third quarter of fiscal year 2009, a potential buyer expressed an intent to
purchase certain assets of the Company.  As a result, the assets were
classified as held for sale.  However, the transaction was not
consummated.  Management has determined it is no longer probable that a
sale of the assets will be completed within one year, and that the assets do not
meet the criteria to remain classified as held for sale. As a result, the assets
have been reclassified as held and used and are reflected in “property,
equipment and capital leases, net” and “goodwill, net” in the August 31, 2009
consolidated balance sheet.  Depreciation has been retroactively applied to
these assets.


F-15
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








3. 
 Assets Held for Sale and Impairment of Long-Lived Assets
(continued)





During
the fiscal years ended August 31, 2009, 2008 and 2007, the Company identified
impairments for certain drive-in assets and surplus property through regular
quarterly reviews of long-lived assets.  The
recoverability of Partner Drive-Ins is assessed by estimating the undiscounted
net cash flows expected to be generated over the remaining life of the Partner
Drive-Ins.  This involves estimating same-store sales and margins for
the cash flows period. The amount of impairment, if any, is measured based on
projected discounted future net cash flows. When impairment exists, the carrying
value of the asset is written down to fair value.   The Company
experienced declining sales and cash flows in certain drive-ins in the current
economic environment.  The assumptions on future sales and estimated
cash flows were also updated.During fiscal year 2009, these
analyses resulted in provisions for impairment totaling $11,163, including
$7,462 to write down the carrying amount of building and leasehold improvements
on underperforming drive-ins, $3,276 to write down the carrying amount of
equipment on underperforming drive-ins and $425 to reduce the carrying amount of
six surplus properties down to fair value.  During fiscal year 2008,
these analyses resulted in provisions for impairment totaling $571, including
$99 to write down the carrying amount of building and leasehold improvements on
an underperforming drive-in, and $472 to reduce the carrying amount of five
surplus properties down to fair value.  During fiscal year 2007, these
analyses resulted in provisions for impairment totaling $1,165, including $412
to reduce the carrying amount of assets in excess of fair value for two
drive-ins, and $753 to reduce to fair value the carrying amount of assets for
three properties leased to franchisees.





4. 
Accounts and Notes Receivable





Accounts
and notes receivable consist of the following at August 31, 2009 and
2008:





2009
            
            
            2008Current
      Accounts and Notes Receivable:Royalties
      and other trade receivables
            
            $
            16,775
            
            
            $
            14,556Notes
      receivable from franchisees
            
            
            1,740
            
            
            
            2,387Notes
      receivable from advertising funds
            
            
            3,881
            
            
            
            2,587Other
            
            
            5,994
            
            
            
            10,92228,390
            
            
            
            30,452Less
      allowance for doubtful accounts and notes receivable
            
            
            805
            
            
            
            614$
            27,585
            
            
            $
            29,838Noncurrent
      Notes Receivable:Notes
      receivable from franchisees
            
            $
            7,753
            
            
            $
            3,266Less
      allowance for doubtful notes receivable
            
            
            74
            
            
            
            103$
            7,679
            
            
            $
            3,163





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





F-16
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)






5.
Goodwill, Trademarks, Trade Names and Other Intangibles
 
 The gross
carrying amount of franchise agreements, franchise fees and other intangibles
subject to amortization was $7,823 and $8,013 at August 31, 2009 and 2008,
respectively.  The estimated amortization expense for each of the five
years after August 31, 2009 is approximately $395. Accumulated amortization
related to these intangible assets was $1,856 and $1,639 at August 31, 2009 and
2008, respectively.  The carrying amount of trademarks and trade names
not subject to amortization was $6,044 at August 31, 2009 and
2008.


The
entire balance of the Company’s goodwill relates to Partner
Drive-Ins.  The changes in the carrying amount of goodwill for fiscal
years ending August 31, 2009 and 2008 were as follows:





2009
            
            
            2008Balance
      as of September 1,
            
            $
            105,762
            
            
            $
            102,628Goodwill
      acquired during the year
            
            
            1,354
            
            
            
            4,422Goodwill
      acquired for minority interests in Partner Drive-Ins
            
            
            –
            
            
            
            4,007Goodwill
      disposed of for minority interests in Partner Drive-Ins
            
            
            (2
            )
            
            
            (3,229
            )Goodwill
      disposed of related to the sale of Partner Drive-Ins
            
            
            (30,815
            )
            
            
            (2,066
            )Balance
      as of August 31,
            
            $
            76,299
            
            
            $
            105,762





6.   Refranchising
of Partner Drive-Ins





During
fiscal year 2009, the Company refranchised the operations of 205 Partner
Drive-Ins and recorded a $13.2 million gain.  We retained a minority
operating interest in 88 of these refranchised drive-ins.


7.   Leases





Description
of Leasing Arrangements





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





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


F-17
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








7.   Leases
(continued)





Direct
Financing Leases





Components
of net investment in direct financing leases are as follows at August 31, 2009
and 2008:





2009
            
            
            2008Minimum
      lease payments receivable
            
            $
            2,807
            
            
            $
            3,292Less
      unearned income
            
            
            747
            
            
            
            792Net
      investment in direct financing leases
            
            
            2,060
            
            
            
            2,500Less
      amount due within one year
            
            
            537
            
            
            
            899Amount
      due after one year
            
            $
            1,523
            
            
            $
            1,601





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.




Future
minimum rental payments receivable as of August 31, 2009 are as
follows:





Operating
            
            
            Direct
      FinancingYear
      ending August 31:2010
            
            $
            10,028
            
            
            $
            7272011
            
            
            9,995
            
            
            
            5242012
            
            
            10,002
            
            
            
            3942013
            
            
            9,963
            
            
            
            3082014
            
            
            9,966
            
            
            
            226Thereafter
            
            
            93,086
            
            
            
            628143,040
            
            
            
            2,807Less
      unearned income
            
            
            –
            
            
            
            747$
            143,040
            
            
            $
            2,060




F-18
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)





7.   Leases
(continued)
  Capital
Leases
 
 Components
of obligations under capital leases are as follows at August 31, 2009 and
2008:
 
 2009
              
              
              2008Total
      minimum lease payments
              
              $
              55,375
              
              
              $
              52,988Less
      amount representing interest averaging 6.5% in 2009 and 7.1% in
      2008
              
              
              15,914
              
              
              
              15,603Present
      value of net minimum lease payments
              
              
              39,461
              
              
              
              37,385Less
      amount due within one year
              
              
              2,945
              
              
              
              2,882Amount
      due after one year
              
              $
              36,516
              
              
              $
              34,503





Maturities
of these obligations under capital leases and future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of August 31, 2009 are as
follows:





Operating
            
            
            CapitalYear
      ending August 31:2010
            
            $
            11,909
            
            
            $
            5,8612011
            
            
            11,690
            
            
            
            5,7042012
            
            
            11,508
            
            
            
            5,4702013
            
            
            11,232
            
            
            
            5,4592014
            
            
            10,974
            
            
            
            5,390Thereafter
            
            
            132,022
            
            
            
            27,491189,335
            
            
            
            55,375Less
      amount representing interest
            
            
            --
            
            
            
            15,914$
            189,335
            
            
            $
            39,461





F-19
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)






7.   Leases
(continued)
 
 Total
rent expense for all operating leases and capital leases consists of the
following for the years ended August 31:
 
 2009
              
              
              2008
              
              
              2007Operating
      leases:Minimum
      rentals
              
              $
              14,690
              
              
              $
              14,438
              
              
              $
              13,644Contingent
      rentals
              
              
              199
              
              
              
              163
              
              
              
              229Sublease
      rentals
              
              
              (1,330
              )
              
              
              (527
              )
              
              
              (553
              )Capital
      leases:Contingent
      rentals
              
              
              945
              
              
              
              1,326
              
              
              
              1,300$
              14,504
              
              
              $
              15,400
              
              
              $
              14,620
 
 The
aggregate future minimum rentals receivable under noncancelable subleases of
operating leases as of August 31, 2009 was $29,345.





8.  Property,
Equipment and Capital Leases





Property,
equipment and capital leases consist of the following at August 31, 2009 and
2008:





Estimated
      Useful Life
            
            2009
            
            
            2008Property
      and equipment:Home
      office:Leasehold
      improvements
            Life
      of lease
            
            $
            4,491
            
            
            $
            3,891Computer
      and other equipment
            2 –
      5 yrs
            
            
            42,612
            
            
            
            40,043Drive-ins,
      including those leased to others:Land
            
            
            
            170,679
            
            
            
            176,201Buildings
            8 –
      25 yrs
            
            
            372,224
            
            
            
            382,268Equipment
            5 –
      7 yrs
            
            
            126,432
            
            
            
            192,323Property
      and equipment, at cost
            
            
            
            716,438
            
            
            
            794,726Less
      accumulated depreciation
            
            
            
            225,388
            
            
            
            240,251Property
      and equipment, net
            
            
            
            491,050
            
            
            
            554,475Capital
      Leases:Leased
      home office building
            Life
      of lease
            
            
            9,990
            
            
            
            9,321Leased
      drive-in buildings, equipment and other assets under capital leases,
      including those held for sublease
            Life
      of lease
            
            
            43,288
            
            
            
            40,298Less
      accumulated amortization
            
            
            
            20,390
            
            
            
            17,849Capital
      leases, net
            
            
            
            32,888
            
            
            
            31,770Property,
      equipment and capital leases, net
            
            
            $
            523,938
            
            
            $
            586,245








F-20
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)






8.  Property, Equipment and
Capital Leases (continued)









9.  Accrued
Liabilities





Accrued
liabilities consist of the following at August 31, 2009 and 2008:





2009
            
            
            2008Wages
      and other employee benefits
            
            $
            5,224
            
            
            $
            7,685Taxes,
      other than income taxes
            
            
            11,374
            
            
            
            16,004Accrued
      interest
            
            
            887
            
            
            
            1,121Minority
      interest in consolidated drive-ins
            
            
            1,501
            
            
            
            2,123Unredeemed
      gift cards and gift certificates
            
            
            7,109
            
            
            
            6,283Other
            
            
            8,417
            
            
            
            12,984$
            34,512
            
            
            $
            46,200





10. Long-Term
Debt





Long-term
debt consists of the following at August 31, 2009 and 2008:





2009
            
            
            20085.7%
      Class A-2 senior notes, due December 2031
            
            $
            511,107
            
            
            $
            573,300Class
      A-1 senior variable funding notes
            
            
            187,250
            
            
            
            185,000Other
            
            
            1,193
            
            
            
            1,122699,550
            
            
            
            759,422Less
      long-term debt due within one year
            
            
            52,699
            
            
            
            38,469Long-term
      debt due after one year
            
            $
            646,851
            
            
            $
            720,953





Maturities
of long-term debt for each of the five years after August 31, 2009 are $52,699
in 2010, $70,234 in 2011, $89,309 in 2012, $487,004 in 2013, and $304
thereafter.





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





F-21
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)






10. Long-Term Debt
(continued)


In
December 2006, various subsidiaries of the Company issued $600,000 of Class A-2
senior notes in a private transaction.  The proceeds were used to
refinance the outstanding balance under the senior secured credit facility,
along with costs associated with the transaction.  The Class A-2 notes
are the first issuance under a facility that will allow Sonic to issue
additional series of notes in the future subject to certain
conditions.  These notes have a fixed interest rate of 5.7%, subject
to upward adjustment after the expected six-year repayment term.  Loan
origination costs associated with this debt totaled $23,378, and the unamortized
balance of $11,071 is categorized as debt origination costs, net, on the
Consolidated Balance Sheet as of August 31, 2009.  Amortization of
these loan costs and the hedge loss discussed below produces an overall weighted
average interest cost of 6.8%.  The Class A-2 notes have an expected
life of six years, with a legal final repayment date in December
2031.  If the debt extends beyond the expected life, rapid
amortization and cash trapping provisions of the debt agreements will be
triggered which will cause the remaining principal balance to be given higher
priority of payment from the secured sources.
 
 The
Company anticipates paying the debt in full based on the expected
life.


In
connection with issuance of the Class A-2 notes, various subsidiaries of the
Company also completed a securitized financing facility of Class A-1 senior
variable funding notes.  This facility allows for the issuance of up
to $200,000 of notes and certain other credit instruments, including letters of
credit.  Considering the $187,250 outstanding at August 31, 2009 and
$325 in outstanding letters of credit, $12,425 was unused and available under
the Class A-1 notes.  The effective interest rate on the outstanding
balance for the Class A-1 notes at August 31, 2009 and 2008 was 1.42% and 3.69%,
respectively. There is a commitment fee on the unused portion of the Class A-1
notes of 0.5%.  During fiscal year 2009, upon request of the Company
to draw down the remaining $12,250 in Class A-1 senior variable funding notes
from the lender who committed to advance one-half of the funds for the variable
funding notes, the lender, which had previously filed for Chapter 11 bankruptcy,
notified the Company that it could not meet its obligation.  The
Company no longer considers the $12,250 to be available.





The Class
A-1 and Class A-2 senior notes were issued by special purpose, bankruptcy
remote, indirect subsidiaries of the Company that hold substantially all of
Sonic’s franchising assets and Partner Drive-In real estate used in operation of
the Company’s existing business.  As of August 31, 2009, total assets
for these combined indirect subsidiaries were approximately $466,000, including
receivables for royalties, Partner Drive-In real estate, intangible assets, loan
origination costs and restricted cash balances of $35,369.  The Class
A-1 and Class A-2 notes are secured by Sonic’s franchise royalty payments,
certain lease and other payments and fees and, as a result, the repayment of
these notes is expected to be made solely from the income derived from these
indirect subsidiaries’ assets.  Sonic Industries LLC, which is the
subsidiary that acts as franchisor, has guaranteed the obligations of the
co-issuers and pledged substantially all of its assets to secure such
obligations.





F-22
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








10. Long-Term
Debt (continued)




The
third-party insurance company that provides credit enhancements in the form of
financial guaranties of our Class A-1 and Class A-2 note payments has been the
subject of credit rating downgrades by Standard & Poor’s and Moody’s, which
ratings were CC and Caa2, respectively at October 29, 2009.  We are
unable to determine whether additional downgrades may occur and what impact
prior downgrades have had or additional downgrades would have on our insurer’s
financial condition.  If the insurance company were to become the
subject of insolvency or similar proceedings, our lenders would not be required
to fund additional amounts on our Class A-1 variable funding
notes.  In addition, an event of default would occur if: (i) the
insurance company were to become the subject of insolvency or similar
proceedings and (ii) the insurance policy were not continued or sold to a third
party (who would assume the insurance company’s obligations under the policy),
but instead were terminated or canceled as a result of those proceedings. In an
event of default, all unpaid amounts under the Class A-1 and Class A-2 notes
could become immediately due and payable only at the direction or consent of
holders with a majority of the outstanding principal. While no assurance can be
provided, if this were to occur, we believe that we could negotiate mutually
acceptable terms with our lenders or obtain alternate funding.
 
 Although
the Company does not guarantee the Class A-1 and Class A-2 notes, the Company
has agreed to cause the performance of certain obligations of its subsidiaries,
principally related to the servicing of the assets included as collateral for
the notes and certain indemnity obligations.
 
 In August
2006, the Company entered into a forward starting swap agreement with a
financial institution to hedge part of the exposure to changing interest rates
until new financing was closed in December 2006.  The forward starting
swap was designated as a cash flow hedge, and was subsequently settled in
conjunction with the closing of the Class A-2 notes, as planned.  The
loss resulting from settlement of $5,640 ($3,483, net of tax) was recorded in
accumulated other comprehensive income and is being amortized to interest
expense over the expected term of the Class A-2 notes.  Amortization
of this loss during fiscal years 2009 and 2008 totaled $1,050 ($691, net of tax)
and $1,063 ($657, net of tax) in interest expense, respectively.  Over
the next 12 months, the Company expects to amortize $801 ($492, net of tax) to
interest expense for this loss.  The cash flows resulting from these
hedge transactions are included in cash flows from operating activities on the
Consolidated Statement of Cash Flows.





The
following table presents the components of comprehensive income for the years
ended August 31, 2009, 2008 and 2007:




2009
            
            
            2008
            
            
            2007Net
      Income
            
            $
            49,442
            
            
            $
            60,319
            
            
            $
            64,192Decrease
      (increase) in deferred hedging loss, net of tax
            
            
            691
            
            
            
            657
            
            
            
            (2,364
            )Total
      comprehensive income
            
            $
            50,133
            
            
            $
            60,976
            
            
            $
            61,828





F-23
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)







11. Other
Noncurrent Liabilities
 
 Other
noncurrent liabilities consist of the following at August 31, 2009 and
2008:
 
 2009
              
              
              2008Minority
      interests in consolidated drive-ins
              
              $
              1,916
              
              
              $
              3,097Deferred
      area development fees
              
              
              8,014
              
              
              
              6,993Escalating
      land leases payable
              
              
              6,545
              
              
              
              5,517Deferred
      income real estate installment sales
              
              
              4,348
              
              
              
              912Deferred
      income- sale/leaseback
              
              
              4,134
              
              
              
              563Other
              
              
              1,159
              
              
              
              1,001$
              26,116
              
              
              $
              18,083


12. 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:





2009
            
            
            2008
            
            
            2007Current:Federal
            
            $
            17,513
            
            
            $
            21,881
            
            
            $
            31,369State
            
            
            2,487
            
            
            
            5,730
            
            
            
            3,85920,000
            
            
            
            27,611
            
            
            
            35,228Deferred:Federal
            
            
            9,456
            
            
            
            7,259
            
            
            
            1,272State
            
            
            1,422
            
            
            
            1,092
            
            
            
            19110,878
            
            
            
            8,351
            
            
            
            1,463Provision
      for income taxes
            
            $
            30,878
            
            
            $
            35,962
            
            
            $
            36,691





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





2009
            
            
            2008
            
            
            2007Amount
      computed by applying a tax rate of 35%
            
            $
            28,112
            
            
            $
            33,698
            
            
            $
            35,309State
      income taxes (net of federal income tax benefit)
            
            
            2,541
            
            
            
            4,434
            
            
            
            2,726Employment
      related and other tax credits, net
            
            
            (1,401
            )
            
            
            (1,732
            )
            
            
            (1,443
            )Other
            
            
            1,626
            
            
            
            (438
            )
            
            
            99Provision
      for income taxes
            
            $
            30,878
            
            
            $
            35,962
            
            
            $
            36,691


F-24
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








12. Income
Taxes (continued)





Deferred
tax assets and liabilities consist of the following at August 31, 2009 and
2008:





2009
            
            
            2008Current
      deferred tax assets (liabilities):Allowance
      for doubtful accounts and notes receivable
            
            $
            315
            
            
            $
            274Property,
      equipment and capital leases
            
            
            107
            
            
            
            200Accrued
      litigation costs
            
            
            272
            
            
            
            309Prepaid
      expenses
            
            
            (570
            )
            
            
            (551
            )Deferred
      income from franchisees
            
            
            27
            
            
            
            (282
            )Deferred
      income from affiliated technology fund
            
            
            220
            
            
            
            250Current
      deferred tax assets, net
            
            $
            371
            
            
            $
            200Noncurrent
      deferred tax assets (liabilities):Net
      investment in direct financing leases including differences related to
      capitalization and amortization
            
            $
            (2,841
            )
            
            $
            (3,062
            )Investment
      in partnerships, including differences in capitalization, depreciation and
      direct financing leases
            
            
            (11,158
            )
            
            
            (17,504
            )Capital
      loss carryover
            
            
            –
            
            
            
            1,419State
      net operating losses
            
            
            5,231
            
            
            
            4,411Property,
      equipment and capital leases
            
            
            (24,232
            )
            
            
            (9,429
            )Deferred
      income from affiliated franchise fees
            
            
            1,327
            
            
            
            2,167Accrued
      liabilities
            
            
            331
            
            
            
            219Intangibles
      and other assets
            
            
            158
            
            
            
            166Deferred
      income from franchisees
            
            
            3,104
            
            
            
            2,751Stock
      compensation
            
            
            8,349
            
            
            
            7,569Loss
      on cash flow hedge
            
            
            928
            
            
            
            1,357Debt
      extinguishment
            
            
            (2,473
            )
            
            
            –(21,276
            )
            
            
            (9,936
            )Valuation
      allowance
            
            
            (5,231
            )
            
            
            (4,411
            )Noncurrent
      deferred tax liabilities, net
            
            $
            (26,507
            )
            
            $
            (14,347
            )Deferred
      tax assets and (liabilities):Deferred
      tax assets (net of valuation allowance)
            
            $
            15,138
            
            
            $
            16,681Deferred
      tax liabilities
            
            
            (41,274
            )
            
            
            (30,828
            )Net
      deferred tax liabilities
            
            $
            (26,136
            )
            
            $
            (14,147
            )


F-25
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








12. Income
Taxes (continued)





State net
operating loss carryforwards expire generally beginning in
2010.  Management does not believe the Company will be able to realize
the state net operating loss carryforwards and therefore has provided a
valuation allowance of $5.2 million and $4.4 million as of August 31, 2009 and
August 31, 2008, respectively.





As of
August 31, 2008, the Company has capital loss carryovers of approximately $8.7
million which expire beginning in fiscal year 2011.  Management
believes the Company will realize these carryovers during fiscal year 2009, and
has included the benefit in the current year tax accrual.





As of
August 31, 2009, the Company has approximately $3,419 of unrecognized tax
benefits, including approximately $1,296 of interest and penalty.  The
liability for unrecognized tax benefits decreased by $1,964.  The
majority of the change resulted from a reduction due to the expiration of
statutes of limitations which decreased the unrecognized tax benefit by
$1,539.   Other reductions included positions for prior years in
which cash settlements of audits were less than the liability recorded, and a
reduction in liabilities recorded for prior year estimated interest of $242 and
$471, respectively. The Company recognizes estimated interest and penalties as a
component of its income tax expense, net of federal
benefit.   The entire balance of unrecognized tax benefits, if
recognized, would favorably impact the effective tax rate.  A
reconciliation of the beginning and ending amount of the unrecognized tax
benefits follows:





2009Opening
      balance upon adoption at September 1, 2008
            
            $
            5,383Additions
      based on tax positions related to the current year
            
            
            –Additions
      for tax positions of prior years
            
            
            494Reductions
      for tax positions of prior years
            
            
            (713
            )Reductions
      for settlements
            
            
            (206
            )Reductions
      due to statute expiration
            
            
            (1,539
            )Balance
      at August 31, 2009
            
            $
            3,419





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 a decrease of $165 to $1,280, depending on the
timing and terms of the examination resolutions.


F-26
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








13.  Stockholders’
Equity





Stock
Purchase Plan





The
Company has an employee stock purchase plan for all full-time regular
employees.  Employees are eligible to purchase shares of common stock
each year through a payroll deduction not in excess of the lesser
of  10% of compensation or $25. The aggregate amount of stock that
employees may purchase under this plan is limited to 1,139 shares. The purchase
price will be between 85% and 100% of the stock’s fair market value and will be
determined by the Company’s Board of Directors.





Stock-Based
Compensation





The Sonic
Corp. 2006 Long-Term Incentive Plan (the “2006 Plan”) provides flexibility to
award various forms of equity compensation, such as stock options, stock
appreciation rights, performance shares, restricted stock and other stock-based
awards.  At August 31, 2009, 1,761 shares were available for grant
under the 2006 Plan.  The Company has historically granted only stock
options with an exercise price equal to the market price of the Company’s stock
at the date of grant, a contractual term of seven to ten years, and a vesting
period of three years.  The Company’s policy is to recognize
compensation cost for these options on a straight-line basis over the requisite
service period for the entire award.  Additionally, the Company’s
policy is to issue new shares of common stock to satisfy stock option
exercises.





In
January 2009, in addition to issuing stock options, the Company awarded 426
performance share units (“PSUs”) to certain executives under the 2006
Plan.  These PSUs, which vest at the end of the three-year period if
certain Company performance criteria are met, are payable in the Company’s
common stock.  Also, in January 2009, the Company began to award
restricted stock units (“RSUs”) to its directors under the 2006 Plan. A total of
42 RSUs were granted in 2009. The RSUs have a vesting period of three years and
their fair value is based on our closing stock price on the date of grant and
are payable in the Company’s common stock.





The
Company measures the compensation cost associated with share-based payments by
estimating the fair value of stock options as of the grant date using the
Black-Scholes option pricing model.  The Company believes that the
valuation technique and the approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of the Company’s
stock options granted during 2009, 2008 and 2007.  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 per
share weighted average fair value of stock options granted during 2009, 2008 and
2007 was $3.50, $6.10 and $7.10, 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:





2009
            2008
            2007Expected
      term (years)
            4.6
            4.5
            4.5Expected
      volatility
            38%
            28%
            28%Risk-free
      interest rate
            1.4%
            3.1%
            4.6%Expected
      dividend yield
            0%
            0%
            0%


F-27
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








13.  Stockholders’
Equity (continued)





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





SFAS 123R
requires the cash flows resulting from the tax benefits for tax deductions in
excess of the compensation expense recorded for those options (excess tax
benefits) to be classified as financing cash flows.  These excess tax
benefits were $776, $2,033 and $4,117 for the years ended August 31, 2009, 2008
and 2007, respectively, and are classified as a financing cash inflow in the
Company’s Consolidated Statements of Cash Flows.  The proceeds from
exercises of stock options are also classified as cash flows from financing
activities and totaled $3,794, $5,796 and $7,732 for each of the years ended
August 31, 2009, 2008 and 2007, respectively.





Stock
Options





A summary
of stock option activity under the Company’s share-based compensation plans for
the year ended August 31, 2009 is presented in the following table:




Options
            
            
            Weighted
      Average Exercise Price
            
            
            Weighted
      Average Remaining Contractual Life(Yrs.)
            
            
            Aggregate
      Intrinsic ValueOutstanding-beginning
      of year
            
            
            7,762
            
            
            $
            16.51Granted
            
            
            1,830
            
            
            
            10.22Exercised
            
            
            (719
            )
            
            
            6.25Forfeited
      or expired
            
            
            (1,121
            )
            
            
            18.02Outstanding
      August 31, 2009
            
            
            7,752
            
            
            $
            15.76
            
            
            
            4.62
            
            
            $
            6,430Exercisable
      August 31, 2009
            
            
            4,816
            
            
            $
            16.14
            
            
            
            3.85
            
            
            $
            4,426





The total
intrinsic value of options exercised during the years ended August 31, 2009,
2008 and 2007 was $2,597, $10,992 and $19,408, respectively.  At
August 31, 2009, total remaining unrecognized compensation cost related to
unvested stock-based arrangements was $12.2 and is expected to be recognized
over a weighted average period of 1.1 years.


F-28
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








13.  Stockholders’
Equity (continued)





Performance
Share Units





The fair
value of each PSU granted is equal to the market price of the Company’s stock at
date of grant. As of August 31, 2009, the Company’s performance was not expected
to meet the minimum threshold for the 2009 grant to vest, therefore, the PSUs
have not been expensed and the Company has not realized any tax
deductions.





A summary
of the Company’s PSU activity during the year ended August 31, 2009 is presented
in the following table:





Performance
      Share Units
            
            
            Weighted-Average
      Grant Date Fair Value
            
            
            Total
      Fair Value ($)Outstanding-beginning
      of year
            
            
            —
            
            
            $
            —Granted
            
            
            426
            
            
            
            10.15
            
            
            $
            4,324Issued
            
            
            —
            
            
            
            —Forfeited
            
            
            13
            
            
            
            10.15Outstanding
      August 31, 2009
            
            
            413
            
            
            $
            10.15
            
            
            $
            4,192Exercisable
      August 31, 2009
            
            
            —
            
            
            $
            —
            
            
            $
            —Not
      Vested at August 31, 2009
            
            
            413
            
            
            $
            10.15
            
            
            $
            4,192





Accumulated
Other Comprehensive Income





In August
2006, the Company entered into a forward starting swap agreement with a
financial institution to hedge part of the interest rate risk associated with
the pending securitized debt transaction.  The forward starting swap
was designated as a cash flow hedge, and was subsequently settled in conjunction
with the closing of the Class A-2 notes, as planned.  The loss
resulting from settlement was recorded net of tax in accumulated other
comprehensive income and is being amortized to interest expense over the
expected term of the debt.  See Note 10 for additional
information.





14.
Segment Information




FASB
Statement No. 131, “Disclosures about Segments of an Enterprise and Related
Information” (“SFAS 131”) establishes annual and interim reporting standards for
an enterprise’s operating segments.  Operating segments are generally
defined as components of an enterprise about 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 determined that it
has two reportable segments: Partner Drive-Ins and Franchise
Operations.  The Partner Drive-Ins segment consists of the drive-in
operations in which the Company owns a majority interest and derives its
revenues from operating drive-in restaurants.  The Franchise
Operations segment consists of franchising activities and derives its revenues
from royalties and initial franchise fees received from
franchisees.  The accounting policies of the segments are described in
the 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.





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


F-29
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








2009
            
            
            2008
            
            
            2007Revenues:Partner
      Drive-Ins
            
            $
            567,436
            
            
            $
            671,151
            
            
            $
            646,915Franchise
      Operations
            
            
            131,712
            
            
            
            127,111
            
            
            
            115,626Gain
      on Sale of Partner Drive-Ins
            
            
            13,154
            
            
            
            3,044
            
            
            
            732Unallocated
      revenues
            
            
            6,487
            
            
            
            3,407
            
            
            
            7,196$
            718,789
            
            
            $
            804,713
            
            
            $
            770,469Income
      from Operations:Partner
      Drive-Ins
            
            $
            87,209
            
            
            $
            123,049
            
            
            $
            126,739Franchise
      Operations
            
            
            131,712
            
            
            
            127,111
            
            
            
            115,626Gain
      on Sale of Partner Drive-Ins
            
            
            13,154
            
            
            
            –
            
            
            
            –Unallocated
      revenues
            
            
            6,487
            
            
            
            6,451
            
            
            
            7,928Unallocated
      expenses:Selling,
      general and administrative
            
            
            (63,358
            )
            
            
            (61,179
            )
            
            
            (58,736
            )Depreciation
      and amortization
            
            
            (48,064
            )
            
            
            (50,653
            )
            
            
            (45,103
            )Provision
      for impairment of long-lived assets
            
            
            (11,163
            )
            
            
            (571
            )
            
            
            (1,165
            )$
            115,977
            
            
            $
            144,208
            
            
            $
            145,289





15.  Net
Revenue Incentive Plan





The
Company has a Net Revenue Incentive Plan (the “Incentive Plan”), as amended,
which applies to certain members of management and is at all times discretionary
with the Company’s Board of Directors.  If certain predetermined
earnings goals are met, the Incentive Plan provides that a predetermined
percentage of the employee’s salary may be paid in the form of a
bonus.  The Company recognized as expense incentive bonuses of $1,187,
$1,324, and $2,943 during fiscal years 2009, 2008 and 2007,
respectively.





16.  Employment
Agreements





The
Company has employment contracts with its Chairman and Chief Executive Officer
and several members of its senior management. These contracts provide for use of
Company automobiles or related allowances, medical, life and disability
insurance, annual base salaries, as well as an incentive bonus.  These
contracts also contain provisions for payments in the event of the termination
of employment and provide for payments aggregating $9,200 at August 31, 2009 due
to loss of employment in the event of a change in control (as defined in the
contracts).





17.  Contingencies





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





The
Company initiated an agreement with Irwin Franchise Capital Corporation
(“Irwin”) in September 2006, pursuant to which existing Sonic franchisees may
qualify with Irwin to finance drive-in retrofit projects.  The
agreement provides that Sonic will guarantee at least $250 of such financing,
limited to 5% of the aggregate amount of loans, not to exceed
$3,750.  As of August 31, 2009, the total amount guaranteed under the
Irwin agreement was $724.  The agreement provides for release of
Sonic’s guarantee on individual loans under the program that meet certain
payment history criteria at the mid-point of each loan’s
term.  Existing loans under the program have terms through
2016.  In the event of default by a franchisee, the Company is
obligated to pay Irwin the outstanding balances, plus limited interest and
charges up to Sonic’s guarantee limitation.  Irwin is obligated to
pursue collections as if Sonic’s guarantee were not  F-30
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








17.  Contingencies
(continued)








The
Company has an agreement with GE Capital Franchise Finance Corporation (“GEC”),
pursuant to which GEC made loans to existing Sonic franchisees who met certain
underwriting criteria set by GEC.  Under the terms of the agreement
with GEC, the Company provided a guarantee of 10% of the outstanding balance of
loans from GEC to the Sonic franchisees, limited to a maximum amount of
$5,000.  As of August 31, 2009, the total amount guaranteed under the
GEC agreement was $1,304.  The Company ceased guaranteeing new loans
under the program during fiscal year 2002 and has not been required to make any
payments under its agreement with GEC.   Existing loans under
guarantee will expire through 2013.  In the event of default by a
franchisee, the Company has the option to fulfill the franchisee’s obligations
under the note or to become the note holder, which would provide an avenue of
recourse with the franchisee under the notes.  Based on the ending
date for this program, no liability is required for these
guarantees.





The
Company has obligations under various lease agreements with third-party lessors
related to the real estate for Partner Drive-Ins that were sold to
franchisees.  Under these agreements, the Company remains secondarily
liable for the lease payments for which it was responsible as the original
lessee.  As of August 31, 2009, the amount remaining under guaranteed
lease obligations for which no liability has been provided totaled
$11,405.  In addition, capital lease obligations totaling $1,070 are
still reflected as liabilities as of August 31, 2009 for properties sold to
franchisees.  At this time, the Company has no reason to anticipate
any default under the foregoing leases.





Effective
November 30, 2005, the Company extended a note purchase agreement to a bank that
serves to guarantee the repayment of a franchisee loan and also benefits the
franchisee with a lower financing rate.  In the event of default by
the franchisee, the Company would purchase the franchisee loan from the bank,
thereby becoming the note holder and providing an avenue of recourse with the
franchisee.  As of August 31, 2009, the balance of the loan was $377
and an immaterial liability has been provided for the fair value of this
guarantee.


F-31
 Table of Contents


Sonic
Corp.
 
 Notes
to Consolidated Financial Statements (continued)
 
 August
31, 2009, 2008 and 2007
 
 (In
Thousands, Except Per Share Data)


18.  Selected
QuarterlyFinancial Data (Unaudited)





First
      Quarter
            
            
            Second
      Quarter
            
            
            Third
      Quarter
            
            
            Fourth
      Quarter
            
            
            Full
      Year2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Income
      statement data:Partner
      Drive-In sales
            
            $
            153,047
            
            
            $
            159,285
            
            
            $
            141,708
            
            
            $
            147,139
            
            
            $
            144,279
            
            
            $
            178,338
            
            
            $
            128,402
            
            
            $
            186,389
            
            
            $
            567,436
            
            
            $
            671,151Gain
      on the Sale of Partner Drive-Ins
            
            
            236
            
            
            
            (28
            )
            
            
            (47
            )
            
            
            437
            
            
            
            10,727
            
            
            
            3
            
            
            
            2,238
            
            
            
            2,633
            
            
            
            13,154
            
            
            
            3,044Other
            
            
            30,783
            
            
            
            30,924
            
            
            
            27,336
            
            
            
            27,045
            
            
            
            36,897
            
            
            
            34,657
            
            
            
            43,183
            
            
            
            37,891
            
            
            
            138,199
            
            
            
            130,518Total
      revenues
            
            
            184,066
            
            
            
            190,181
            
            
            
            168,997
            
            
            
            174,621
            
            
            
            191,903
            
            
            
            212,998
            
            
            
            173,823
            
            
            
            226,913
            
            
            
            718,789
            
            
            
            804,713Partner
      Drive-In operating expenses
            
            
            130,635
            
            
            
            129,174
            
            
            
            121,784
            
            
            
            119,497
            
            
            
            119,807
            
            
            
            144,514
            
            
            
            108,001
            
            
            
            154,917
            
            
            
            480,227
            
            
            
            548,102Selling,
      general and administrative
            
            
            16,162
            
            
            
            14,914
            
            
            
            16,300
            
            
            
            15,540
            
            
            
            16,420
            
            
            
            15,716
            
            
            
            14,476
            
            
            
            15,009
            
            
            
            63,358
            
            
            
            61,179Impairment
      of long-lived assets
            
            
            414
            
            
            ─
            
            
            ─
            
            
            
            99
            
            
            
            7,490
            
            
            ─
            
            
            
            3,260
            
            
            
            472
            
            
            
            11,163
            
            
            
            571Other
            
            
            13,019
            
            
            
            12,206
            
            
            
            12,529
            
            
            
            12,694
            
            
            
            11,453
            
            
            
            13,044
            
            
            
            11,062
            
            
            
            12,709
            
            
            
            48,064
            
            
            
            50,653Total
      expenses
            
            
            160,230
            
            
            
            156,294
            
            
            
            150,613
            
            
            
            147,830
            
            
            
            155,170
            
            
            
            173,274
            
            
            
            136,799
            
            
            
            183,107
            
            
            
            602,812
            
            
            
            660,505Income
      from operations
            
            
            23,836
            
            
            
            33,887
            
            
            
            18,384
            
            
            
            26,791
            
            
            
            36,733
            
            
            
            39,724
            
            
            
            37,024
            
            
            
            43,806
            
            
            
            115,977
            
            
            
            144,208Debt
      extinguishment and other costs
            
            ─
            
            
            ─
            
            
            
            (6,382
            )
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            
            (6,382
            )
            
            ─Interest
      expense, net
            
            
            11,666
            
            
            
            11,980
            
            
            
            10,778
            
            
            
            12,214
            
            
            
            9,911
            
            
            
            11,968
            
            
            
            9,684
            
            
            
            11,765
            
            
            
            42,039
            
            
            
            47,927Income
      before income taxes
            
            
            12,170
            
            
            
            21,907
            
            
            
            13,988
            
            
            
            14,577
            
            
            
            26,822
            
            
            
            27,756
            
            
            
            27,340
            
            
            
            32,041
            
            
            
            80,320
            
            
            
            96,281Provision
      for income taxes
            
            
            5,039
            
            
            
            8,324
            
            
            
            5,337
            
            
            
            5,324
            
            
            
            10,049
            
            
            
            10,517
            
            
            
            10,453
            
            
            
            11,797
            
            
            
            30,878
            
            
            
            35,962Net
      income
            
            $
            7,131
            
            
            $
            13,583
            
            
            $
            8,651
            
            
            $
            9,253
            
            
            $
            16,773
            
            
            $
            17,239
            
            
            $
            16,887
            
            
            $
            20,244
            
            
            $
            49,442
            
            
            $
            60,319Net
      income per share:Basic
            
            $
            0.12
            
            
            $
            0.22
            
            
            $
            0.14
            
            
            $
            0.15
            
            
            $
            0.28
            
            
            $
            0.29
            
            
            $
            0.28
            
            
            $
            0.34
            
            
            $
            0.81
            
            
            $
            1.00Diluted
            
            $
            0.12
            
            
            $
            0.22
            
            
            $
            0.14
            
            
            $
            0.15
            
            
            $
            0.27
            
            
            $
            0.28
            
            
            $
            0.28
            
            
            $
            0.33
            
            
            $
            0.81
            
            
            $
            0.97Weighted
      average shares outstanding:Basic
            
            
            60,459
            
            
            
            60,772
            
            
            
            60,464
            
            
            
            60,303
            
            
            
            60,886
            
            
            
            60,167
            
            
            
            61,052
            
            
            
            60,370
            
            
            
            60,761
            
            
            
            60,403Diluted
            
            
            61,210
            
            
            
            63,065
            
            
            
            61,148
            
            
            
            62,384
            
            
            
            61,215
            
            
            
            62,023
            
            
            
            61,377
            
            
            
            61,609
            
            
            
            61,238
            
            
            
            62,270


F-32
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements (continued)





August
31, 2009, 2008 and 2007





(In
Thousands, Except Per Share Data)








19.  Fair
Values of Financial Instruments





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





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





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





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





As of
August 31, 2009 and 2008, carrying values approximate their estimated fair
values.





Borrowed funds—Fair values for
fixed rate borrowings are estimated using a discounted cash flow analysis that
applies interest rates currently being offered on borrowings as similar as
available in terms of amounts and terms to those currently
outstanding.  There are few leveraged loan transactions occurring in
the current market.  M arket
information available for public debt transactions for companies with ratings
that are close to or lower than ratings for the Company (without consideration
for the third-party credit enhancement) was used in estimating fair
value.  Management believes this fair value is a reasonable estimate
with the information that is available.





The
carrying amounts, including accrued interest, and estimated fair values of the
Company’s fixed-rate borrowings at August 31, 2009 were $511,903 and $473,266, respectively,
and at August 31, 2008 were $574,193 and $517,315, respectively.  Carrying
values, including
accrued interest, and estimated fair valuesfor variable-rate borrowings
at
August 31, 2009 were $187,333 and $159,303,
respectively, and at August 31, 2008 were $185,219 and $185,253,
respectively.


F-33
 Table of Contents





Sonic Corp.





Schedule
II – Valuation and Qualifying Accounts





Description
            
            Balance
      at Beginning of Year
            
            
            Additions
      Charged to Costs and Expenses
            
            
            Amounts
      Written Off Against the Allowance
            
            
            (Transfer)
      Recoveries
            
            
            Balance
      at End of Year(In
      Thousands)Allowance
      for doubtful accounts and notes receivableYear
      ended:August
      31, 2009
            
            
            717
            
            
            
            454
            
            
            
            296
            
            
            
            4
            
            
            
            879August
      31, 2008
            
            
            711
            
            
            
            337
            
            
            
            335
            
            
            
            4
            
            
            
            717August
      31, 2007
            
            
            635
            
            
            
            269
            
            
            
            235
            
            
            
            42
            
            
            
            711Accrued
      carrying costs for drive-in closings and disposalsYear
      ended:August
      31, 2009
            
            
            44
            
            
            
            –
            
            
            
            –
            
            
            
            2
            
            
            
            46August
      31, 2008
            
            
            91
            
            
            
            –
            
            
            
            47
            
            
            
            –
            
            
            
            44August
      31, 2007
            
            
            113
            
            
            
            –
            
            
            
            22
            
            
            
            –
            
            
            
            91


F-34
 Table of Contents


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has caused the undersigned, duly-authorized, to
sign this report on its behalf on this 29th day of October, 2009.





Sonic
      Corp.By:
            /s/  J. Clifford
      HudsonJ.
      Clifford HudsonChairman
      and Chief Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
undersigned have signed this report on behalf of the registrant, in the
capacities and as of the dates indicated.





Signature
            
            Title
            
            Date/s/  J. Clifford
      Hudson
            
            Chairman
      of the Board of Directors and Chief Executive Officer
            
            October
      29, 2009J.
      Clifford Hudson,Principal
      Executive Officer/s/ Stephen C. Vaughan
            
            Executive
      Vice President and Chief Financial Officer
            
            October
      29, 2009Stephen
      C. Vaughan,Principal
      Financial Officer/s/ Terry D. Harryman
            
            Vice
      President and Controller
            
            October
      29, 2009Terry
      D. Harryman,Principal
      Accounting Officer/s/ Douglas N. Benham
            
            Director
            
            October
      29, 2009Douglas
      N. Benham/s/ Leonard Lieberman
            
            Director
            
            October
      29, 2009Leonard
      Lieberman/s/ Michael J. Maples
            
            Director
            
            October
      29, 2009Michael
      J. Maples/s/ Federico F.Peña
            
            Director
            
            October
      29, 2009Federico
      F. Peña/s/ J. Larry Nichols
            
            Director
            
            October
      29, 2009J.
      Larry Nichols/s/ H. E. Rainbolt
            
            Director
            
            October
      29, 2009H.E.
      Rainbolt/s/  Frank E.
      Richardson
            
            Director
            
            October
      29, 2009Frank
      E. Richardson/s/ Robert M. Rosenberg
            
            Director
            
            October
      29, 2009Robert
      M. Rosenberg


Table of Contents





EXHIBIT
INDEX





Exhibit Number and
    Description10.21.
            
            Employment
      Agreement with Omar Janjua dated October 15, 200921.01.
            
            Subsidiaries
      of the Company23.01.
            
            Consent
      of Independent Registered Public Accounting Firm31.01.
            
            Certification
      of Chief Executive Officer pursuant to S.E.C. Rule
  13a-1431.02.
            
            Certification
      of Chief Financial Officer pursuant to S.E.C. Rule
  13a-1432.01.
            
            Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section
    135032.02.
            
            Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section
    1350