-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U3Cz6B9yOwhKgh97yEjpHEdl0bfUbPEcLBaNJBSEEYG7cjit3/3S92vA/ln5HVXB EvdPFkopeEy4pPNzo26++w== 0001047469-98-042202.txt : 19981126 0001047469-98-042202.hdr.sgml : 19981126 ACCESSION NUMBER: 0001047469-98-042202 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981125 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONIC CORP CENTRAL INDEX KEY: 0000868611 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 731371046 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18859 FILM NUMBER: 98758839 BUSINESS ADDRESS: STREET 1: 101 PARK AVENUE STREET 2: STE 1400 CITY: OKLAHOMA CITY STATE: OK ZIP: 73102-7202 BUSINESS PHONE: 4052807654 MAIL ADDRESS: STREET 1: 101 PARK AVE STREET 2: 14TH FLOOR CITY: OKLAHOMA CITY STATE: OK ZIP: 73102 10-K 1 FORM 10-K 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 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Commission File Number August 31, 1998 0-18859 - ------------------------- ---------------------- SONIC CORP. ----------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 73-1371046 - ------------------------ ---------------- (State of Incorporation) (IRS Employer Identification No.) 101 Park Avenue Oklahoma City, Oklahoma 73102 -------------------------------------- ------------ (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (405) 280-7654 Securities Registered Pursuant to Section 12(b) of the Exchange Act: None Securities Registered Pursuant to Section 12(g) of the Exchange Act: Common Stock, Par Value $.01 Rights to Purchase Series A Junior Preferred Stock, Par Value $.01 Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for the shorter period that the Registrant has had to file the reports), and (2) has been subject to the filing requirements for the past 90 days. YES X . No . ---- ---- Indicate by check mark if this Form 10-K does not contain and, to the best of the Registrant's knowledge, the Registrant's definitive proxy statement or information statement incorporated by reference in Part III of this Form 10-K will not contain a disclosure of delinquent filers pursuant to Item 405 of Regulation S-K. YES X . No . ---- ---- As of November 10, 1998, the aggregate market value of the 17,560,930 shares of common stock of the Company held by non-affiliates of the Company equaled approximately $326 million, based on the closing sales price for the common stock as reported for that date. As of November 10, 1998, the Registrant had 18,888,101 shares of common stock issued and outstanding (excluding 1,692,370 shares of common stock held as treasury stock). (Facing Sheet Continued) 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 in connection with the Company's annual meeting of stockholders following the fiscal year ended August 31, 1998. FORM 10-K OF SONIC CORP. TABLE OF CONTENTS
Page ---- PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . 11 Item 4A. Executive Officers of the Company. . . . . . . . . . . . . . . . . . 11 PART II Item 5. Market for the Company's Common Stock and Related Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . 16 Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 23 PART III (Incorporated by reference from the Company's definitive proxy statement for its annual meeting of stockholders following the fiscal year ended August 31, 1998) PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . 23
FORM 10-K SONIC CORP. PART I ITEM 1. BUSINESS GENERAL Sonic Corp. (the "Company") operates and franchises the largest chain of drive-in restaurants in the United States. As of August 31, 1998, the Company had 1,847 restaurants in operation, consisting of 292 Company-owned restaurants and 1,555 franchised restaurants, principally in the south central and southeastern United States. Sonic restaurants offer made-to-order hamburgers and other sandwiches and feature Sonic signature items, such as extra-long cheese coneys, hand-battered onion rings, tater tots, specialty soft drinks, including cherry limeades and slushes, and frozen desserts. At a typical Sonic restaurant, a customer drives into one of 24 to 36 covered drive-in spaces, orders through an intercom, and has the food delivered by a carhop within an average of four minutes. In September of 1995, the Company reorganized its operating subsidiaries into two, directly-held subsidiaries consisting of Sonic Industries Inc. and Sonic Restaurants, Inc. Sonic Industries Inc. serves as the franchisor of the Sonic restaurant chain, as well as the insurance and administrative services center for the Company. Sonic Restaurants, Inc. develops and operates the Company's Company-owned restaurants. In February of 1996, the Company sold its equipment sales division to N. Wasserstrom & Sons, Inc. of Columbus, Ohio, and discontinued that line of business. The Company continues to rent Sonic pole signs to its franchisees. The Company's objective is to maintain its position as, or to become, a leading operator in terms of the number of quick-service restaurants within each of its core and developing markets. The Company has developed and is implementing a strategy designed to build the Sonic brand and to continue to achieve high levels of customer satisfaction and repeat business. The key elements of that strategy are (1) a unique drive-in concept focusing on a menu of quality made-to-order and signature food items; (2) a commitment to customer service featuring the quick delivery of food by carhops; (3) the expansion of Company-owned and franchised restaurants within the Company's core and developing markets; (4) an owner/operator philosophy, in which managers have an equity interest in their restaurant, thereby providing an incentive for managers to operate Company-owned restaurants profitably and efficiently; and (5) a commitment to support the Sonic system. The Company has its principal executive offices at 101 Park Avenue, Oklahoma City, Oklahoma 73102. Its telephone number is (405) 280-7654. As used in this report, the word "Company" means Sonic Corp. and each of its subsidiaries and predecessors, unless the context indicates otherwise. RESTAURANT LOCATIONS As of August 31, 1998, the Company owned or franchised 1,847 drive-in restaurants, principally in the south central and southeastern United States. The Company's core markets, consisting of the nine contiguous states of Texas, Oklahoma, Tennessee, Missouri, Arkansas, Kansas, Louisiana, Mississippi, and New Mexico, contained approximately 81% of all Sonic restaurants as of August 31, 1998. Developing markets primarily are located in Alabama, Arizona, Colorado, Florida, Georgia, Kentucky, North Carolina, South Carolina, and Virginia. The following table sets forth the number of Company-owned and franchised restaurants by core and developing markets as of August 31, 1998:
COMPANY-OWNED FRANCHISED CORE MARKET RESTAURANTS RESTAURANTS TOTAL ----------- ------------- ----------- ----- Texas 77 453 530 Oklahoma 22 175 197 Tennessee 28 122 150 Missouri 31 108 139 Arkansas 15 110 125 Kansas 8 91 99 Louisiana 16 87 103 Mississippi 0 92 92 New Mexico 0 56 56 ---- ---- ---- Total 197 1,294 1,491 ---- ---- ---- ---- ---- ---- COMPANY-OWNED FRANCHISED DEVELOPING MARKETS RESTAURANTS RESTAURANTS TOTAL ------------------ ------------- ----------- ----- Alabama 26 37 63 Arizona 0 48 48 California 0 5 5 Colorado 0 27 27 Florida 11 2 13 Georgia 4 29 33 Illinois 0 8 8 Indiana 3 4 7 Iowa 0 3 3 Kentucky 17 25 42 Nebraska 0 2 2 Nevada 0 8 8 North Carolina 22 19 41 Ohio 0 3 3 South Carolina 0 36 36 Utah 0 1 1 Virginia 12 3 15 West Virginia 0 1 1 ---- ---- ---- Total 95 261 356 ---- ---- ---- ---- ---- ---- Total System 292 1,555 1,847 ---- ---- ---- ---- ---- ----
2 EXPANSION During fiscal 1998, the Company opened 50 Company-owned restaurants and its franchisees opened 120 restaurants. During fiscal 1999, the Company plans to open at least 50 Company-owned restaurants and anticipates that its franchisees will open at least 120 restaurants. That expansion plan involves the opening of new restaurants by franchisees under existing area development agreements, single-store development by existing franchisees, and development by new franchisees. The Company believes that its existing core and developing markets offer a significant growth opportunity for both Company-owned and franchised restaurant expansion. However, the ability of the Company and its franchisees to open the anticipated number of Sonic drive-in restaurants during fiscal 1999 necessarily will depend on various factors. Those factors include (among others) the availability of suitable sites, the negotiation of acceptable lease or purchase terms for new locations, local permitting and regulatory compliance, the financial resources of the Company and the Company's franchisees, and the general economic and business conditions to be faced in fiscal 1999. The Company's expansion strategy for Company-owned restaurants involves two principal components: (1) the building-out of existing core markets and (2) the further penetration of developing markets. In addition, the Company may consider the acquisition of other similar concepts for conversion to Sonic restaurants. RESTAURANT DESIGN AND CONSTRUCTION GENERAL. The typical Sonic drive-in restaurant consists of a kitchen housed in a one-story building flanked by two canopy-covered rows of 24 to 36 parking spaces, with each space having its own intercom and menu board. In addition, since the first half of fiscal 1995, the Company has incorporated a drive-through window and patio seating area in most new Company-owned restaurants. Sonic restaurants generally do not provide an indoor seating area. RETROFIT PROGRAM. In fiscal 1997, the Company began implementing a program to retrofit all Sonic drive-in restaurants. The retrofit includes new signage, new menu and speaker housings, and significant trade dress modifications to the exterior of each restaurant's building. The Company currently estimates the cost to make a standard retrofit at approximately $58,000 to $70,000 per restaurant. The Company implemented the program on a market-by-market basis, beginning with the Houston, Texas market. In addition, all new restaurants being built in all markets now feature the new retrofit signage and trade dress style. As of August 31, 1998, the Company had retrofitted 137 Company-owned restaurants and had built 50 new Company-owned restaurants with the new retrofit signage and trade dress, and franchisees had retrofitted 148 restaurants and had built 96 new restaurants with the new retrofit signage and trade dress. MARKETING The Company has designed its marketing program to differentiate Sonic drive-in restaurants from the Company's competitors by emphasizing five key areas of customer satisfaction: (1) the personal manner of service by carhops, (2) made-to-order menu items, (3) speed of service, (4) quality, and (5) value. The marketing plan includes monthly promotions for use throughout the Sonic chain. The Company supports those promotions with television and radio commercials and point-of-sale materials. Those promotions center on a "meal deal" which highlights signature menu items of Sonic drive-in restaurants. Each year the Company and its advertising agency (with involvement of the Sonic Franchisee Advisory Council) develop a marketing plan. The Company requires the formation of advertising cooperatives among restaurant owners to pool and direct advertising expenditures in local markets. Under each of the Company's license agreements, the franchisee must contribute a minimum percentage of the franchisee's gross revenues to a national media production fund and spend an additional minimum percentage of gross revenues on local advertising, either directly or through the Company-required participation in advertising cooperatives. Depending on the type of license agreement, the minimum percentages of gross revenues contributed by franchisees for local advertising cooperative funds range from 1.125% to 3.25% and, for the Sonic Advertising Fund (the national fund directed by the Company), the franchisees contribute 3 a range of 0.375% to 0.75% of gross revenues. Franchisees may elect and frequently do elect to contribute more than the minimum percentage of gross revenues to their local advertising cooperative funds. For fiscal 1998, franchisees participating in cooperatives contributed an average of 3.26% of gross revenues to Sonic advertising cooperatives, exceeding the required 2.375% under most license agreements in effect during that period. As of August 31, 1998, 1,767 Sonic restaurants (approximately 96% of the chain) participated in advertising cooperatives. The Company estimates that the total amount spent on media and media production (principally television) exceeded $43 million for fiscal 1998 and is expected to exceed $52 million for fiscal 1999. PURCHASING The Company negotiates with suppliers for its primary food products (hamburger patties, dairy products, hot dogs, french fries, tater tots, cooking oil, fountain syrup, and other products) and packaging supplies to ensure adequate quantities of food and supplies and to obtain competitive prices. The Company seeks competitive bids from suppliers on many of its food products. The Company approves suppliers of those products and requires them to adhere to product specifications established by the Company. Suppliers manufacture several key products for the Company under private label and sell them to authorized distributors for resale to Company-owned and franchised restaurants. The Company and its franchisees purchase a majority of their food and beverage products from authorized local or national distributors. The Company requires its Company-owned and franchised restaurants to participate in purchasing cooperatives. Those cooperatives have achieved cost savings, improved food quality and consistency, and helped decrease the volatility of food and supply costs for Sonic restaurants. For fiscal 1998, the average cost of food and packaging for a Sonic restaurant, as reported to the Company by its franchisees, equaled approximately 29% of revenues. The Company believes that food purchasing cooperatives have allowed Sonic restaurants to avoid menu price increases that otherwise might have occurred. A planned reduction in the number of food and paper product distributors to the Sonic chain has improved the ability of the Company to negotiate more advantageous purchasing terms and to maintain more uniform products. COMPANY OPERATIONS RESTAURANT PERSONNEL. A typical Sonic restaurant employs a manager, an assistant manager, and approximately 23 hourly employees, most of whom work part-time. The manager has responsibility for the day-to-day operations of the restaurant. The Company initially forms a partnership (or limited liability company in some cases) with its supervising partners or members, each of whom on average has the responsibility of overseeing four to six Company-owned restaurants. Those supervising partners or members derive their income out of their share of the net profits of the restaurants they supervise. Supervising partners or members generally may own up to 20% of the restaurants they supervise. The Company also employs seven regional directors who oversee supervising partners or members within their respective regions and one regional vice president who oversees the regional directors. The Company employs a Vice President of Operations based in Oklahoma City who oversees the operations of all Company-owned restaurants. OWNERSHIP PROGRAM. The Sonic restaurant philosophy stresses an ownership relationship between restaurant owners and managers, in which most managers of Company-owned and franchised restaurants own an equity interest in the restaurant. The Company believes that its ownership structure provides a substantial incentive for restaurant managers to operate their restaurants profitably and efficiently. Under the ownership program, a separate general partnership or limited liability company owns and operates each Company-owned restaurant. The Company, as the general partner or managing member, owns a majority interest and the managers involved in the day-to-day management and operation of the restaurant own a minority interest in the 4 partnership or company. Ownership equity of a typical established Company-owned restaurant generally is distributed 60% to the Company, 20% to the manager, and 20% to the supervising partner or member. The Company records other partners' or members' interests as a minority interest in earnings of restaurant partnerships on its financial statements. Under the standard partnership or operating agreement, the Company has the right to purchase the interest of any other partner or member on short notice. Each supervising and managing partner or member contributes his or her pro rata portion of all start-up costs, which include the required franchise fee, opening inventory, advertising and promotion costs, initial training and insurance costs, and some amounts for working capital. The amount of capital contribution by a supervising and managing partner or member for a restaurant typically equals approximately $10,000 for a 20% interest. Each partnership or company usually purchases equipment with funds borrowed from the Company at competitive rates. In most cases, the Company alone guarantees any third-party lease entered into for the site. The partnerships and companies distribute available cash flow to the partners or members on a monthly basis pursuant to the terms of the partnership or operating agreements. POINT-OF-SALE SYSTEMS. The Company has completed its implementation of a new point-of-sale system in Company-owned restaurants. With the rollout complete, the Company is currently implementing a planned enhancement of the software for these systems to include added store management tools as well as expanded polling capabilities. The new polling features will allow the Company to distribute centrally maintained product and promotion information, thereby improving the integrity of store-level reporting. HOURS OF OPERATION. Sonic restaurants operate seven days a week, typically from 10:30 a.m. to 11:00 p.m. COMPANY-OWNED RESTAURANT DATA. The following table provides certain financial information relating to Company-owned restaurants and the number of Company-owned restaurants opened and closed during the past five fiscal years.
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Average Sales per Company-owned Restaurant (in thousands) $663 $649 $601 $577 $558 Number of Restaurants Total Open at Beginning of Year 256 231 178 142 120 Newly-opened and Re-opened 50 37 30 31 20 Purchased from Franchisees -- -- 28 6 13 Sold to Franchisees (14) (5) (4) (1) (10) Closed -- (7) (1) -- (1) ---- ---- ---- ---- ---- Total Open at Year End 292 256 231 178 142 ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
FRANCHISE PROGRAM GENERAL. During its more than 40 years in operation, the Sonic system has produced a large number of successful multi-unit franchisee groups. Those franchisees continue to develop new restaurants in their franchise territories either through area development agreements or single site development. The Company considers its franchisees a vital part of the Company's continued growth and believes its relationship with its franchisees is good. As of August 31, 1998, the Company had 1,555 franchised restaurants operating in 27 states and the Company had entered into development agreements which contemplate the opening of 78 additional restaurants during fiscal 1999. However, the Company cannot give any assurance that the Company's franchisees will achieve that number of new restaurants for fiscal 1999. During fiscal 1998, the Company's franchisees opened 120 Sonic drive-in restaurants. 5 FRANCHISE AGREEMENTS. Each Sonic restaurant, including each Company-owned restaurant, operates under a franchise agreement that provides for payments to the Company of an initial franchise fee and a royalty fee based on a graduated percentage of the gross revenues of the restaurant. In September of 1994, the Company began offering a Number 6 License Agreement, which provides for a franchise fee of $30,000 and an ascending royalty rate beginning at 1.0% of gross revenues and increasing to 5.0% as the level of gross revenues increases. Approximately 55% of all Sonic restaurants opening in fiscal year 1999 are expected to open under the Number 6 License Agreement. Pursuant to the terms of existing area development agreements and the outstanding license option agreements described below, approximately 43% of all Sonic restaurants opening in fiscal 1999 will open under either the Number 5 License Agreement or the Number 5.1 License Agreement. Those agreements each provide for a franchisee fee of $15,000 and an ascending royalty rate beginning at 1.0% of gross revenues and increasing to 4.0% as the level of gross revenues increases. For fiscal 1998, the Company's average royalty rate equaled 2.81%. The Number 5 License Agreement provides for a term of 15 years, with an option to renew pursuant to the terms of the then current license agreement. The Number 5.1 License Agreement and the Number 6 License Agreement provide for a term of 20 years, with one 10-year renewal option. In September of 1998, the Company began offering a Number 6A License Agreement, which provides for the same fees and other general terms of the Number 6 License Agreement, but also provides for mutual rights and obligations between the Company and the franchisees in the event the Company acquires operating restaurants or development sites within a franchisee's protected territory or desires to develop non-traditional restaurant locations within a protected territory. The Number 6A License Agreement requires the Company to offer the franchisee a right of first refusal to acquire the restaurant or site from the Company at its cost with the requirement to convert the restaurant or develop the site into a Sonic restaurant pursuant to the terms of the then current license agreement. The Company has the right to terminate any franchise agreement for a variety of reasons, including a franchisee's failure to make payments when due or failure to adhere to the Company's policies and standards. Many state franchise laws limit the ability of the Company to terminate or refuse to renew a franchise. Beginning in fiscal year 1999 and continuing through fiscal year 2010, a total of 886 franchised restaurants currently operating under the Number 4.2 License Agreement will have their royalty rates increase to the same rate as the Number 5 License Agreement rate. In addition, beginning in fiscal year 2000 and continuing through fiscal year 2010, the terms of the remaining Number 4 License Agreements will expire and the licensed restaurants either will cease operations or renew their licenses pursuant to the terms of the then current license agreement (currently the Number 6A License Agreement). The Company expects that the automatic conversion of the Number 4.2 License Agreements and the renewals of the expiring Number 4 License Agreements will result in an incremental increase in the Company's royalty revenues attributable to the change in royalty rate. For the five-year period beginning in fiscal year 2000, the Company expects that process to generate in excess of $10 million in incremental royalty revenue, which will build in a stair-stepped fashion. The actual amount of revenue will depend on a number of factors, including (among others) the average unit volumes of the affected restaurants and the extent to which the expiring Number 4 License Agreements in fact renew and convert to the Number 6A License Agreement. In July of 1998, the Company gave each franchisee operating under a Number 1, 4, 4.1 or 5 License Agreement an opportunity to convert the franchisee's agreement to a Number 5.2 License Agreement. The Number 5.2 License Agreement allows the franchisee with an expiring license agreement the opportunity to elect to renew prior to the actual expiration date and accept the terms of the current Number 6 License Agreement. The franchisee will pay a $1,000 conversion franchisee fee and a higher royalty rate from the time of conversion through the expiration date of the franchisee's original license agreement. Upon the expiration of the original term of the franchisee's license agreement, the Number 5.2 License Agreement will shift the royalty rate to the Number 6 License Agreement royalty schedule. DEVELOPMENT AGREEMENTS. The Company uses area development agreements to facilitate the planned expansion of the Sonic drive-in restaurant chain through multiple unit development. While existing franchisees continue to expand on a single restaurant basis, approximately 42% of the new franchised restaurants opened during fiscal 1998 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 restaurants within a defined area. In exchange, each developer agrees to open a minimum number of Sonic restaurants in the area within a prescribed time period. If the developer does not meet the minimum opening requirements, the Company has the right to terminate the area development agreement and grant a new area development agreement to other franchisees for the area previously covered by the terminated area development agreement. During fiscal 1998, the Company entered into 27 new area development agreements calling for the opening of 136 Sonic drive-in restaurants during the next 6 years. As of August 31, 1998, the Company had a total of 65 area 6 development agreements in effect, calling for the development of 301 additional Sonic drive-in restaurants during the next 6 years. Of the 68 restaurants scheduled to open during fiscal 1998 under area development agreements in place at the beginning of that fiscal year, 50 (or 74%) opened during the period. Realization by the Company of the expected benefits under various existing and future area development agreements currently depends and will continue to depend upon the ability of franchisees to open the minimum number of restaurants within the time periods required by the agreements. The financial resources of the developers, as well as their experience in managing quick-service restaurant franchises, represent critical factors in the success of area development agreements. Although the Company grants area development agreements only to those developers whom the Company believes possess those qualities, the Company cannot give any assurances that the future performance by developers will result in the opening of the minimum number of restaurants contemplated by the development agreements or reach the compliance rate previously experienced by the Company. OPTION AGREEMENTS. In connection with the Company's introduction of a new Number 6 License Agreement in fiscal 1995, the Company offered its existing franchisees the opportunity to acquire options to purchase the Number 5.1 License Agreement for new Sonic drive-in restaurants developed by the franchisee (the "Number 5.1 Options"). The Number 5.1 License Agreement has a lower initial franchise fee and royalty rate than the Number 6 License Agreement. All outstanding Number 5.1 Options have terms ending on December 31, 1998, with the right to renew for up to two additional years upon the payment of $1,000 on each anniversary date of the option. Unlike the area development agreements described above, the options do not cover any specific location. The Company currently is not offering additional option agreements to its franchisees and, as the options expire or the franchisees exercise them, the number of outstanding options will decrease over time. As of August 31, 1998, the Company had 123 Number 5.1 Options outstanding. FRANCHISED RESTAURANT DEVELOPMENT. The Company furnishes each franchisee with assistance in selecting sites and developing restaurants. Each franchisee has responsibility for selecting the franchisee's restaurant locations but must obtain Company approval of each restaurant design and each location based on accessibility and visibility of the site and targeted demographic factors, including population, density, income, age, and traffic. The Company provides its franchisees with the physical specifications for the typical Sonic drive-in restaurants. FRANCHISEE FINANCING. The Company has entered into an agreement with Franchise Finance Company of America ("FFCA"), pursuant to which FFCA may make loans to Sonic franchisees who meet certain underwriting criteria set by FFCA. Under the terms of the agreement with FFCA, the Company may provide a guaranty of 10% of the outstanding balance of a loan from FFCA to a Sonic franchisee. The Company retains the absolute right to determine which loans it will guarantee and to impose any conditions the Company may deem appropriate. The Company also has entered into agreements with Franchise Mortgage Acceptance Company, LLC ("FMAC"), NationsBank, N.A. ("NationsBank"), and STI Credit Corporation ("Sun Trust"), pursuant to which each of those lenders may provide financing for the Company's franchisees to implement the retrofit of their existing restaurants. Under the terms of those agreements, the Company has given FMAC a limited guaranty of up to $750,000 and NationsBank and Sun Trust limited guaranties of up to $250,000 with regard to all loans made pursuant to the terms of each agreement with the lenders. FRANCHISEE TRAINING. Each franchisee must have at least one individual working full time at the Sonic drive-in restaurant who has completed the Sonic Management Development Program before opening or operating the Sonic drive-in restaurant. The program consists of six weeks of on-the-job training and one week of classroom development. The program emphasizes food safety, quality food preparation, quick service, cleanliness of restaurants, and consistency of service. FRANCHISEE SUPPORT. In addition to training, advertising and food purchasing cooperatives, and marketing programs, the Company provides various other services to its franchisees. Those services include (1) assistance with quality control through area field representatives, to ensure that each franchisee consistently delivers high quality food and service; (2) assistance in selecting sites for new restaurants using demographic data and studies of traffic patterns; 7 (3) financing through third party sources to qualified franchisees for purchasing restaurant equipment; and (4) one-stop shopping for all equipment needed to open a new restaurant through N. Wasserstrom & Sons, Inc. in Columbus, Ohio. The Company's field services organization consists of 16 field representatives, five field marketing representatives, and four real estate directors and managers, all with responsibility for defined geographic areas. The field representatives provide operational services and support for the Company's franchisees, while the field marketing representatives assist the franchisees with point-of-sale and local marketing programs. The real estate directors and managers assist the franchisees with the identification of trade areas for new restaurants, the franchisees' selection of sites for their restaurants, and the approval of those sites by the Company. FRANCHISE OPERATIONS. All franchisees must operate their Sonic drive-in restaurants in compliance with the Company's policies, standards, and specifications, including matters such as menu items, materials, supplies, services, fixtures, furnishings, decor, and signs. Each franchisee has full discretion to determine the prices charged to its customers. All restaurants must display a Sonic drive-in restaurant sign manufactured in accordance with Company specifications. In most cases, the Company owns the sign and leases it to the franchisee and, if the franchisee breaches its franchise agreement, the Company may remove the sign. FRANCHISE ADVISORY COUNCIL. The Company has established a Franchise Advisory Council which provides advice, counsel, and input to the Company on important issues impacting the business, such as marketing and promotions, operations, purchasing, building design, human resources, and new products. The Franchise Advisory Council currently consists of 16 members selected by the Company. Seven executive committee members are selected at large. The remaining nine members are regional members who represent three defined regions of the country and serve two-year terms. The Franchise Advisory Council serves in an advisory capacity only and does not have decision-making power. As the franchisor of the Sonic drive-in restaurant chain, the Company has and reserves the power to change or dissolve the Franchise Advisory Council as it may deem in its best interest. REPORTING. The Company collects weekly and monthly sales and other operating information from its franchisees. The Company has agreements with 72 of its franchisees permitting the Company to debit electronically the franchisees' bank accounts for the payment of royalties and advertising fund contributions. That system significantly reduces the resources needed to process receivables, improves cash flow, and reduces past-due accounts receivable. FRANCHISED RESTAURANT DATA. The following table provides certain financial information relating to franchised restaurants and the number of franchised restaurants opened, purchased from or sold to the Company, and closed during the Company's last five fiscal years.
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Average Sales Per Franchised Restaurant $775 $720 $657 $620 $592 (in thousands) Number of Restaurants: Total Open at Beginning of Year 1,424 1,336 1,286 1,227 1,154 New Restaurants 120 92 81 80 80 Sold to the Company -- -- (28) (6) (13) Purchased from the Company 14 5 4 1 10 Closed and Terminated, Net of Re-openings (3) (9) (7) (16) (4) ---- ---- ---- ---- ---- Total Open at Year End 1,555 1,424 1,336 1,286 1,227 ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
EQUIPMENT SALES In fiscal 1996, the Company sold its restaurant equipment division and discontinued that operation. As a result, the Company had no revenues from equipment sales during fiscal 1998 and fiscal 1997, compared to approximately $3.7 million during fiscal 1996 (an amount equal to 2.5% of the Company's total consolidated revenues). 8 COMPETITION The Company competes in the quick-service restaurant industry, a highly competitive industry in terms of price, service, restaurant location, and food quality, and an industry often affected by changes in consumer trends, economic conditions, demographics, traffic patterns, and concerns about the nutritional content of quick-service foods. The Company competes on the basis of speed and quality of service, method of food preparation (made-to-order), food quality, signature food items, and monthly promotions. The quality of service, featuring the Sonic carhops, constitutes one of the Company's primary marketable points of difference with the competition. Several major chains, many of which have substantially greater financial resources than the Company, dominate the quick-service restaurant industry. A significant change in pricing or other marketing strategies by one or more of those competitors could have an adverse impact on the Company's sales, earnings, and growth. In selling franchises, the Company also competes with many franchisors of fast-food and other restaurants and other business opportunities. EMPLOYEES As of August 31, 1998, the Company had 209 full-time employees. No collective bargaining agreement covers any of its employees. Company-owned restaurants (operated as separate partnerships or limited liability companies) employed 975 full-time and 7,123 part-time employees as of August 31, 1998, none of whom constitute employees of the Company. The Company believes that it has good labor relations with its employees. TRADEMARKS AND SERVICE MARKS The Company, through a wholly-owned subsidiary, owns numerous trademarks and service marks. The Company has registered many of those marks, including the "Sonic" logo and trademark, with the United States Patent and Trademark Office. The Company believes that its trademarks and service marks have significant value and play an important role in its marketing efforts. GOVERNMENT REGULATION The Company must comply with regulations adopted by the Federal Trade Commission (the "FTC") and with several state laws that regulate the offer and sale of franchises. The Company also must comply with a number of state laws that regulate certain substantive aspects of the franchisor-franchisee relationship. The FTC's Trade Regulation Rule on Franchising (the "FTC Rule") requires that the Company furnish prospective franchisees with a franchise offering circular containing information prescribed by the FTC Rule. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states. Those laws regulate the franchise relationship, for example, by requiring the franchisor to deal with its franchisees in good faith, by prohibiting interference with the right of free association among franchisees, by regulating discrimination among franchisees with regard to charges, royalties or fees, and by restricting the development of other restaurants within certain proscribed distances from existing franchised restaurants. Those laws also restrict a franchisor's rights with regard to the termination of a franchise agreement (for example, by requiring "good cause" to exist as a basis for the termination), by requiring the franchisor to give advance notice and the opportunity to cure the default to the franchisee, and by requiring the franchisor to repurchase the franchisee's inventory or provide other compensation upon termination. To date, those laws have not precluded the Company from seeking franchisees in any given area and have not had a significant effect on the Company's operations. Each Sonic restaurant must comply with regulations adopted by federal agencies and with licensing and other regulations enforced by state and local health, sanitation, safety, fire, and other departments. Difficulties or failures in obtaining the required licenses or approvals can delay and sometimes prevent the opening of a new restaurant. Sonic restaurants must comply with federal and state environmental regulations, but those regulations have not had a material effect on their operations. More stringent and varied requirements of local governmental bodies with 9 respect to zoning, land use, and environmental factors can delay and sometimes prevent development of new restaurants in particular locations. The owners of Sonic restaurants must comply with the Fair Labor Standards Act and various state laws governing various matters, such as minimum wages, overtime, and other working conditions. Significant numbers of the food service personnel in Sonic restaurants receive compensation at rates related to the federal minimum wage and, accordingly, increases in the minimum wage will increase labor costs at those locations. The owners of Sonic restaurants also must comply with the provisions of the Americans with Disabilities Act (the "ADA"), which requires the owners to provide reasonable accommodation for employees with disabilities and to make their restaurants accessible to customers with disabilities. The Company has made certain modifications to the design and construction of its restaurants in order to comply with the ADA. However, the ADA has not had a material impact on the Company, primarily because of a drive-in restaurant's inherent accessibility to all customers through their motor vehicles. Many owners of Sonic restaurants also must comply with the Family Medical Leave Act (the "Family Leave Act"), which covers employers of 50 or more persons at locations within any 75-mile radius. The Family Leave Act requires covered employers to grant eligible employees up to 12 weeks of unpaid leave for family and medical reasons and to reinstate the employee to the same or an equivalent position at the end of the leave. An employee may take leave for the birth, adoption, or foster care of a child; for any serious health condition of a spouse, sibling, child or parent; or for an employee's own serious health condition. ITEM 2. PROPERTIES Of the 292 Company-owned restaurants operating as of August 31, 1998, the Company operated 115 of them on property leased from third parties and 177 of them on property owned by the Company. The leases expire on dates ranging from 1998 to 2018, with the majority of the leases providing for renewal options. All leases provide for specified periodic rental payments, and some leases call for additional rentals based on sales volume. Most leases require the Company to maintain the property and pay the cost of insurance and taxes. The Company has its principal office located in approximately 60,000 square feet of leased office space in Oklahoma City, Oklahoma, at an effective annual rental rate of $9.15 per square foot. The lease for that property expires in November of 2002. The Company also leases approximately 10,000 square feet of warehouse space in Oklahoma City, Oklahoma, at an annual rental rate of $3.75 per square foot. The lease for the warehouse space expires in December of 2001. The Company believes that its leased office and warehouse space provides an adequate amount of space and will meet the Company's needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company does not have any material legal proceedings pending against the Company, any of its subsidiaries, or any of their properties. In May of 1998, the Texas Supreme Court denied the Company's motion for rehearing of its application for a writ of certiorari in a case involving L & G Restaurants, Inc., Lucky Ott, and William Owen. That denial lets stand an earlier court of appeals ruling reinstating a jury verdict against the Company for actual and punitive damages of approximately $1.8 million, plus interest and court costs, in an action in which the plaintiffs claimed a subsidiary of the Company interfered with the contractual relations of the plaintiffs. In connection with the denial, the Company recorded a charge of $2.7 million for litigation. The Company paid the judgment in full as of August 31, 1998. 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter during the fourth quarter of the Company's last fiscal year to a vote of the Company's stockholders, through the solicitation of proxies or otherwise. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY IDENTIFICATION OF EXECUTIVE OFFICERS The following table identifies the executive officers of the Company.
NAME AGE POSITION OFFICER SINCE ---- --- -------- ------------- J. Clifford Hudson 44 President, Chief Executive Officer June of 1985 and Director Kenneth L. Keymer 50 Executive Vice President and August of 1996 Chief Operating Officer of the Company, President of Sonic Industries Inc. Pattye L. Moore 40 Senior Vice President of Marketing June of 1992 and Brand Development Ronald L. Matlock 47 Vice President, General Counsel April of 1996 and Secretary W. Scott McLain 36 Vice President of Finance, Treasurer April of 1996 and Chief Financial Officer Stephen C. Vaughan 32 Vice President and Controller January of 1996 Jill M. Hudson 35 Vice President of Administration and November of 1998 Human Resources Donald E. Foringer 46 Vice President of Information Technology August of 1997 Stanley S. Jeska 58 Vice President of Franchise Development September of 1993 of Sonic Industries Inc. Andrew G. Ritger, Jr. 41 Vice President of Purchasing of January of 1996 Sonic Industries Inc. Frank B. Young, Jr. 47 Vice President of Operations of Sonic October of 1994 Restaurants, Inc. Kris J. Miotke 39 Vice President of Advertising February of 1998 and Sales of Sonic Industries Inc. G. Michael Gent 50 Vice President of Corporate November of 1997 Development of Sonic Restaurants, Inc. Michael A. Perry 40 Vice President of Franchise Services March of 1998 of Sonic Industries Inc. David A. Vernon 40 Vice President of Franchise Sales September of 1998 of Sonic Industries Inc. Norman R. Kaufman 47 Vice President of Operations Services September of 1998 of Sonic Restaurants, Inc.
11 BUSINESS EXPERIENCE The following material 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 President and Chief Executive Officer of the Company since April of 1995 and has served as a director of the Company since August of 1993. He served as President and Chief Operating Officer of the Company from August of 1994 until April of 1995, and he served as Executive Vice President and Chief Operating Officer from August of 1993 until August of 1994. From August of 1992 until August of 1993, Mr. Hudson served as Senior Vice President and Chief Financial Officer of the Company. Since October of 1994, Mr. Hudson has served as Chairman of the Board of Securities Investor Protection Corporation, the federally-chartered organization which serves as the insurer of customer accounts with brokerage firms. Since May of 1998, Mr. Hudson has served as a director of BancFirst Corp. of Oklahoma City, Oklahoma. Kenneth L. Keymer has served as President and a director of Sonic Industries Inc., the Company's franchise operations subsidiary, since August of 1996, and as the Executive Vice President and Chief Operating Officer of the Company since January of 1998. From June of 1994 to August of 1996, Mr. Keymer served as Executive Vice President of Operations for the Memphis, Tennessee region of Perkins Family Restaurants, a subsidiary of Tennessee Restaurant Corporation of Itasca, Illinois. From March of 1993 to June of 1994, Mr. Keymer served as Senior Vice President of Operations for the then Chicago-based Boston Chicken, Inc. From August of 1990 to March of 1993, he served as the Zone Vice President in Chicago, Illinois, for Taco Bell. Pattye L. Moore has served as Senior Vice President of Marketing and Brand Development of the Company since April of 1996. From August of 1995 until April of 1996, Ms. Moore served as Senior Vice President of Marketing and Brand Development for Sonic Industries Inc. and served as Vice President of Marketing of Sonic Industries Inc. from June of 1992 to August of 1995. Ronald L. Matlock has served as Vice President, General Counsel and Secretary of the Company since April of 1996. Mr. Matlock has also served as a director of Sonic Restaurants, Inc. and as a director of Sonic Industries Inc. since April of 1996. Prior to joining the Company, Mr. Matlock practiced law from January of 1995 to April of 1996 with the Matlock Law Firm in Oklahoma City, Oklahoma, concentrating in corporate, securities and franchise law. From November of 1987 to December of 1994, Mr. Matlock was a shareholder and director of the law firm of Hastie & Kirschner in Oklahoma City, Oklahoma. W. Scott McLain has served as Vice President of Finance, Chief Financial Officer, and Treasurer of the Company since August of 1997. From April of 1996 to August of 1997, he served as Vice President of Finance and Treasurer of the Company. From August of 1993 until joining the Company, Mr. McLain served as Treasurer of Stevens International, Inc. in Fort Worth, Texas. From March of 1991 until August of 1993, he served as a Manager - Corporate Recovery for Price Waterhouse in Dallas, Texas. Stephen C. Vaughan has served as Vice President and Controller of the Company since August of 1997 and as Controller of the Company since January of 1996. Mr. Vaughan joined the Company in March of 1992 as an internal auditor and became Assistant Controller of the Company in March of 1993. Jill M. Hudson has served as Vice President of Administration and Human Resources of the Company since November of 1998. From June of 1996 until joining the Company, Ms. Hudson served as a Regional Human Resources Manager of McDonald's Corporation. From June of 1993 until June of 1996, she served as a Regional Human Resources Supervisor of McDonald's. Donald E. Foringer has served as Vice President of Information Technology since August of 1997. Prior to joining the Company, Mr. Foringer served as the Director of Information Services for Del Taco, Inc. of Laguna Hills, California. From May of 1992 until joining Del Taco, Inc. in January of 1993, Mr. Foringer served as a general partner of Novare Group of Newport Beach, California, a retail systems consulting firm. 12 Stanley S. Jeska has served as Vice President of Franchise Development of Sonic Industries Inc. since July of 1996 and also served in that capacity from September of 1993 until August of 1994. Mr. Jeska served as Vice President of Corporate Development for Sonic Restaurants, Inc. from August of 1994 until July of 1996. From April of 1990 until joining the Company, Mr. Jeska founded and served as President of Corporate Real Estate Advisors of Worthington, Ohio, a management consultant firm. Andrew G. Ritger, Jr. has served as Vice President of Purchasing of Sonic Industries Inc. since January of 1996. From May of 1993 until joining the Company, Mr. Ritger served as Vice President of Purchasing of Fast Food Merchandisers, Inc., a subsidiary of Hardees, Inc. of Rocky Mount, North Carolina. From August of 1987 until May of 1993, he served as General Manager of Logistics of H.J. Heinz, Inc. in Nashville, Tennessee. Frank B. Young, Jr. has served as Vice President of Operations of Sonic Restaurants, Inc. since October of 1994. From April of 1993 until joining the Company, Mr. Young served as the President and sole shareholder of Wendco, Inc. of Madison, Wisconsin, a business consulting firm. From October of 1989 through March of 1993, Mr. Young engaged in business as a franchisee for three Wendy's restaurants in the Madison area. Kris J. Miotke has served as Vice President of Advertising and Sales of Sonic Industries Inc. since February of 1998. From November of 1996 until joining the Company, Mr. Miotke served as Vice President, General Manager of Kragie/Newell, an advertising agency in St. Louis, Missouri. From November of 1993 until February of 1996, Mr. Miotke served as Director of Advertising and Promotions for Popeye's Chicken & Biscuits in Atlanta, Georgia. G. Michael Gent has served as Vice President of Corporate Development of Sonic Restaurants, Inc. since November of 1997. From May of 1996 until joining the Company, Mr. Gent served as Vice President of Business Development of Calido Chile Traders Systems, Inc. in Merriam, Kansas. A petition under the Federal bankruptcy laws was filed by Calido Chile Traders Systems, Inc. in October of 1997. A petition under the Federal bankruptcy laws was filed by Calido Chile Traders Systems, Inc. in October of 1997. From September of 1995 until May of 1996, Mr. Gent provided consulting services for multiple unit franchisors and franchisees. From March of 1992 until September of 1995, he served as Vice President for Franchise Development of Taco John's International, Inc., in Cheyenne, Wyoming. Michael A. Perry has served as Vice President of Franchise Services of Sonic Industries Inc. since September 1, 1998. Mr. Perry served as the Vice President of Operations Services of Sonic Restaurants, Inc. from March of 1998 until August of 1998. From October of 1994 until joining the Company, Mr. Perry was a Region Vice President for Au Bon Pain Co., Inc. in Chicago, Illinois. From February of 1993 until October of 1994, Mr. Perry served as the Senior Director of Operations for Taco Bell Corp., Division of Pepsico, in Elmhurst, Illinois. David A. Vernon has served as Vice President of Franchise Sales for Sonic Industries Inc. since September of 1998. Mr. Vernon served as the Director of Franchise Sales for Sonic Industries from December of 1996 until August of 1998. From January of 1996 until December of 1996, Mr. Vernon was the Franchise Development Manager for Brinker International, Inc., Dallas, Texas. From February of 1990 until January of 1996, Mr. Vernon was the Director of Franchise Sales for Pizza Inn, Inc., Dallas, Texas. Norman R. Kaufman has served as Vice President of Operations Services for Sonic Restaurants, Inc. since September of 1998. From July of 1997 to September of 1998, Mr. Kaufman served as a Regional Vice President of Sonic Industries, Inc. From June of 1993 until joining the Company, he served as the President, Chief Operating Officer, and Director of Sobik's Subs, Inc. in Orlando, Florida. 13 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's common stock trades on the Nasdaq National Market ("Nasdaq") under the symbol "SONC." The following table sets forth the high and low closing bids for the Company's common stock during each fiscal quarter within the two most recent fiscal years as reported on Nasdaq. The amounts have been adjusted to reflect a three-for-two stock split in the form of a stock dividend effective May 11, 1998.
QUARTER ENDED HIGH LOW QUARTER ENDED HIGH LOW ------------- ---- --- ------------- ---- --- November 30, 1996 $17.250 $14.000 November 30, 1997 $19.172 $14.672 February 28, 1997 $16.917 $11.750 February 28, 1998 $19.422 $17.328 May 31, 1997 $13.500 $8.417 May 31, 1998 $22.922 $19.328 August 31, 1997 $16.667 $11.583 August 31, 1998 $22.938 $16.938
STOCKHOLDERS As of November 10, 1998, the Company had 320 record holders of its common stock. As of that date, the Company had approximately 2,600 stockholders, including beneficial owners holding shares in street or nominee names. DIVIDENDS The Company did not pay any dividends on its common stock during its two most recent fiscal years and does not intend to pay any dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data regarding the financial condition and operating results of the Company. 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. 14 SELECTED FINANCIAL DATA (In thousands, except per share data)
Year ended August 31, - ------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Company-owned restaurant sales $ 182,011 $ 152,739 $ 120,700 $ 91,438 $ 72,629 Franchised restaurants: Franchise fees 2,564 1,702 1,453 1,409 1,144 Franchise royalties 32,391 26,764 23,315 20,392 14,703 Other 2,141 2,813 5,662 10,521 11,228 - ------------------------------------------------------------------------------------------------------------------------------- Total revenues 219,107 184,018 151,130 123,760 99,704 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Cost of restaurant sales 135,806 112,588 92,663 72,275 56,966 Selling, general and administrative 22,250 19,318 14,498 13,260 10,918 Depreciation and amortization 14,790 12,320 8,896 5,910 4,165 Minority interest in earnings of restaurant partnerships 7,904 7,558 4,806 3,259 2,723 Provision for impairment of long-lived assets 285 266 8,627 71 4,153 Special provision for litigation settlement 2,700 - - - - Other operating expenses - - 3,101 7,354 7,775 - ------------------------------------------------------------------------------------------------------------------------------- Total expenses 183,735 152,050 132,591 102,129 86,700 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Income from operations 35,372 31,968 18,539 21,631 13,004 Net interest expense 2,750 1,558 476 1,414 776 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting $ 32,622 $ 30,410 $ 18,063 $ 20,217 $ 12,228 - ------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting $ 20,470 $ 19,082 $ 11,244 $ 12,484 $ 7,643 Cumulative effect of change in accounting, net of taxes and minority interest 681 - - - - - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 19,789 $ 19,082 $ 11,244 $ 12,484 $ 7,643 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Income per share before cumulative effect of change in accounting (1): Basic $ 1.07 $ 0.96 $ 0.57 $ 0.71 $ 0.43 Diluted $ 1.03 $ 0.95 $ 0.56 $ 0.70 $ 0.43 BALANCE SHEET DATA: Working capital (deficit) $ (7,292) $ 3,509 $ 3,491 $ 4,249 $ 7,314 Property, equipment and capital leases, net 188,065 136,522 100,505 70,171 40,979 Total assets 233,180 184,841 147,444 105,331 76,982 Obligations under capital leases (including current portion) 8,379 9,183 9,808 6,274 6,823 Long-term debt (including current portion) 61,518 37,633 12,401 24,902 6,419 Stockholders' equity 132,011 118,174 109,683 63,357 54,377
(1) Adjusted for a 3-for-2 stock split in 1998 and 1995. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-K contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company's expectations or belief concerning future events, including the following: any statements regarding future sales or expenses, any statements regarding the continuation of historical trends, and any statements regarding the sufficiency of the Company's working capital and cash generated from operating and financing activities for the Company's future liquidity and capital resources needs. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. The Company cautions that those statements are further qualified by important economic and competitive factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, risks of the restaurant industry, including a highly competitive industry and the impact of changes in consumer tastes, local, regional, and national economic conditions, weather, demographic trends, traffic patterns, employee availability, and cost increases. In addition, the opening and success of new restaurants will depend on various factors, including the availability of suitable sites for new restaurants, the negotiation of acceptable lease or purchase terms for new locations, permitting and regulatory compliance, the ability of the Company to manage the anticipated expansion and hire and train personnel, the financial viability of the Company's franchisees, particularly multi-unit operators, and general economic and business conditions. Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized. RESULTS OF OPERATIONS The Company derives its revenues primarily from Company-owned restaurant sales and royalty fees from franchisees. The Company also receives revenues from initial franchise fees, area development fees, the selling and leasing of signs and real estate, and from minority ownership positions in certain franchised restaurants. Costs of Company-owned restaurant sales and minority interest in earnings of restaurant partnerships relate directly to Company-owned restaurant sales. Other expenses, such as depreciation, amortization, and general and administrative expenses, relate to both Company-owned restaurant operations, as well as the Company's franchising operations. The Company's revenues and expenses are directly affected by the number and sales volumes of Company-owned restaurants. The Company's revenues and, to a lesser extent, expenses are also affected by the number and sales volumes of franchised restaurants. Initial franchise fees are directly affected by the number of franchised restaurant openings. The following table sets forth the percentage relationship to total revenues, unless otherwise indicated, of certain items included in the Company's statements of income. The table also sets forth certain restaurant data for the periods indicated. 16 PERCENTAGE RESULTS OF OPERATIONS AND RESTAURANT DATA ($ IN THOUSANDS)
YEAR ENDED AUGUST 31, ------------------------------------------------- 1998 1997 1996 -------------- -------------- ------------- INCOME STATEMENT DATA: Revenues: Company-owned restaurant sales 83.0% 83.0% 79.9% Franchised restaurants: Franchise fees 1.2 0.9 1.0 Franchise royalties 14.8 14.6 15.4 Other 1.0 1.5 3.7 -------------- -------------- ------------- 100.0% 100.0% 100.0% -------------- -------------- ------------- -------------- -------------- ------------- Costs and expenses: Company-owned restaurants (1) 74.6% 73.7% 76.8% Selling, general and administrative 10.2 10.5 9.6 Depreciation and amortization 6.8 6.7 5.9 Minority interest in earnings of restaurant partnerships (1) 4.3 4.9 4.0 Provision for impairment of long-lived assets .1 .1 5.7 Other 1.2 - 2.1 Income from operations 16.1 17.4 12.3 Net interest expense 1.3 .8 .3 Income before cumulative effect of change in accounting 9.3 10.4 7.4 Net income 9.0% 10.4% 7.4% RESTAURANT OPERATING DATA: Company-owned restaurants: Core markets 185 165 158 Developing markets 107 91 73 -------------- -------------- ------------- All markets (2) 292 256 231 Franchised restaurants (2) 1,555 1,424 1,336 -------------- -------------- ------------- Total 1,847 1,680 1,567 -------------- -------------- ------------- -------------- -------------- ------------- System-wide sales $1,333,877 $1,142,636 $984,784 Percentage increase (3) 16.7% 16.0% 11.8% Average sales per restaurant: Company-owned $663 $649 $601 Franchise 775 720 657 System-wide 758 707 648 Change in comparable restaurant sales (4): Company-owned restaurants: Core markets 5.4% 8.7% 5.9% Developing markets (2.5) (2.1) (1.0) -------------- -------------- ------------- All markets 4.0% 6.3% 4.9% Franchise 6.9 8.5 5.1 System-wide 6.3 8.0 5.0
- --------------------------- (1) As a percentage of Company-owned restaurant sales. (2) Number of restaurants open at end of year (the allocation of Company-owned restaurants by core and developing markets differs from the table on page two because that table sets forth the numbers by state rather than by television market.) (3) Represents percentage increase from the comparable period in the prior year. (4) Represents percentage increase for restaurants open in both the reported and prior years. 17 COMPARISON OF FISCAL 1998 TO FISCAL 1997. Total revenues increased 19.1% to $219.1 million in fiscal 1998 from $184.0 million in fiscal 1997. Company-owned restaurant sales increased 19.2% to $182.0 million in fiscal 1998 from $152.7 million in fiscal 1997. Of the $29.3 million increase in Company-owned restaurant sales, $24.2 million was due to the net addition of 61 Company-owned restaurants since the beginning of fiscal 1997. Average sales increases of approximately 4.0% by stores open the full reporting periods of fiscal 1998 and fiscal 1997 accounted for $5.1 million of the increase. Franchise fee revenues increased to $2.6 million during fiscal 1998 as compared to $1.7 million during fiscal 1997, primarily resulting from the opening of 120 new franchise restaurants in fiscal 1998 compared to 92 in fiscal 1997. Franchise royalties increased 21.0% to $32.4 million in fiscal 1998 compared to $26.8 million in fiscal 1997. Increased sales by comparable franchised restaurants resulted in an increase in royalties of approximately $3.1 million and resulted from the franchise same store sales growth of 6.9% over fiscal 1997. Additional franchise restaurants in operation resulted in an increase in royalties of $2.5 million. The decrease in other revenues of approximately $0.7 million resulted primarily from the fiscal year 1997 gain on the sale of the Company's minority interest in 10 restaurants. Restaurant cost of operations, as a percentage of Company-owned restaurant sales, was 74.6% in fiscal 1998, compared to 73.7% in fiscal 1997. The reported decline in operating margins resulted primarily from the Company's adoption of a new accounting standard, SOP 98-5, which requires that pre-opening and other start-up costs be expensed as incurred. The Company previously capitalized such costs and amortized them over 12 months. Implementation of the standard resulted in the reclassification of expenses from depreciation and amortization into restaurant cost of operations. The following table sets out the pro forma operating margins for fiscal 1998 and 1997 as if the Company had adopted the new standard as of the beginning of fiscal 1997.
YEAR ENDED AUGUST 31, August 31, 1998 1997 ----------------------------------- Pro forma margin analysis: Company-owned restaurants: Food and packaging 27.6% 28.6% Payroll and other employee benefits 28.7 28.3 Other operating expenses 18.3 17.6 ----------------------------- 74.6% 74.5%
The following discussion is based on the pro forma margin analysis. Management believes the decrease in food and packaging costs resulted from the negotiation of more favorable contracts with suppliers, a reduction in promotional discounting from standard menu prices and a continued shift in product mix toward higher margin items such as drinks and ice cream. The increase in payroll and other employee benefit costs resulted primarily from an increase in the hourly wage rate related to a minimum wage increase which was effective September 1, 1997 without a corresponding increase in pricing. The increase in other operating expenses resulted primarily from increased marketing expenditures, which reflects the Company's commitment to increased media penetration through its system of advertising cooperatives. Minority interest in earnings of restaurant partnerships decreased, as a percentage of Company-owned restaurant sales, to 4.3% in fiscal 1998 versus 4.9% in fiscal 1997. This decrease reflected the minority partners' share of depreciation expense associated with the roll-out of a point-of-sale system. Selling, general and administrative expenses, as a percentage of total revenues, decreased to 10.2% in fiscal 1998 compared with 10.5% in fiscal 1997. Management expects selling, general and administrative expenses to decline in future periods, as a percentage of total revenues, because the Company plans to add fewer corporate employees, as a percentage of the existing corporate employee base, than in previous periods. This strategy is expected to result in revenues growing at a higher rate than selling, general and administrative expenses. Depreciation and amortization expense increased approximately $2.5 million due to the purchase of buildings and equipment for new restaurants, retrofit expenditures for existing restaurants, and information systems upgrades. Management expects this trend to continue due to a similar level of capital expenditures planned for fiscal 1999. The Company recorded a $2.7 million special provision for litigation settlement in the third fiscal quarter of 1998 as a result of the denial by the Supreme Court of the State of Texas of the Company's appeal of a decision by the 18 Texas Court of Appeals in a real estate related lawsuit that has been ongoing for several years. See Note 16 of the Notes to Consolidated Financial Statements. Income from operations increased to $35.4 million from $32.0 million in fiscal 1997. Excluding the special provision for litigation settlement discussed above, income from operations increased 19.1% to $38.1 million. Net interest expense increased to $2.8 million in fiscal 1998 from $1.6 million in fiscal 1997. This increase was the result of additional borrowings to partially fund the Company's capital additions of $67.0 million and stock repurchases of $10.0 million. The Company expects interest expense to continue to increase in fiscal 1999. Provision for income taxes reflects an effective federal and state tax rate of 37.25% for fiscal 1998 and 1997. Net income, excluding the special provision for litigation settlement and before the cumulative effect of the change in accounting for pre-opening costs, increased 16.2%. Net income per diluted share increased 17.9% over fiscal 1997, excluding the cumulative effect of the accounting change and the special provision for litigation settlement. COMPARISON OF FISCAL 1997 TO FISCAL 1996. Total revenues increased 21.8% to $184.0 million in fiscal 1997 from $151.1 million in fiscal 1996. Company-owned restaurant sales increased 26.5% to $152.7 million in fiscal 1997 from $120.7 million in fiscal 1996. Of the $32.0 million increase in Company-owned restaurant sales, $25.8 million was due to the net addition of 78 Company-owned restaurants since the beginning of fiscal 1996. Average sales increases of approximately 6.3% by stores open the full reporting periods of fiscal 1997 and fiscal 1996 accounted for $6.2 million of the increase. Franchise fee revenues increased to $1.7 million during fiscal 1997 as compared to $1.5 million during fiscal 1996, primarily resulting from the opening of 92 new franchise restaurants in fiscal 1997 vs. 81 in fiscal 1996. Franchise royalties increased 14.8% to $26.8 million in fiscal 1997 compared to $23.3 million in fiscal 1996. Increased sales by comparable franchised restaurants resulted in an increase in royalties of approximately $2.3 million and resulted from the franchise same store sales growth of 8.5% over fiscal 1996. Additional franchise restaurants in operation resulted in an increase in royalties of $1.1 million. The decrease in other revenues was due to the sale of the restaurant equipment division in fiscal 1996. This decrease was offset by the gain on the sale of the Company's minority interest in 10 restaurants. The sale of these interests is not expected to have a material impact on income in the future. Restaurant cost of operations, as a percentage of Company-owned restaurant sales, was 73.7% in fiscal 1997, compared to 76.8% in fiscal 1996. Management believes the improvement in restaurant operating margins resulted from (1) a 3.5% average price increase implemented October 1, 1996, along with a 2.5% average price increase implemented during the second quarter of fiscal 1996, (2) reductions in food and packaging costs due to consolidation of purchasing distribution functions and renegotiation of pricing terms, and (3) improved operational cost controls through the implementation of a standard ideal food cost program in fiscal 1996. The improvements mentioned above were partially offset by a minimum wage increase which was effective on October 1, 1996, and an increase in marketing expenditures, which reflects the Company's commitment to increased media penetration through its system of advertising cooperatives. Another minimum wage increase became effective September 1, 1997 and had a negative impact on payroll and employee benefits expense of approximately one percentage point, as a percentage of Company-owned restaurant sales. Minority interest in earnings of restaurant partnerships increased, as a percentage of Company-owned restaurant sales, to 4.9% in fiscal 1997 as compared to 4.0% in fiscal 1996. This increase occurred primarily due to the improvements in operating margins discussed above. Selling, general and administrative expenses, as a percentage of total revenues, increased to 10.5% in fiscal 1997 compared with 9.6% in fiscal 1996. This increase resulted primarily from a provision for expected litigation costs of approximately $1 million recorded in fiscal 1997. Management expects selling, general and administrative expenses to decline in future periods, as a percentage of total revenues, because the Company expects a significant portion of future revenue growth to be attributable to Company-owned restaurants. Company-owned restaurants require a lower level of selling, general and administrative expenses than the Company's franchising operations since most of these expenses are reflected in restaurant cost of operations and minority interest in restaurant operations. Many of the managers and supervisors of Company-owned restaurants own a minority interest in the restaurants, and their compensation flows through the minority interest in earnings of restaurant partnerships. Depreciation and amortization 19 expense increased approximately $3.4 million due to the purchase of buildings and equipment for new and existing restaurants and information systems upgrades. Management expects this trend to continue due to increased capital expenditures planned for fiscal 1998. Income from operations increased to $32.0 million from $18.5 million in fiscal 1996. Excluding the provision for adoption of a new accounting standard recorded in fiscal 1996, income from operations increased 18.1%. Net interest expense increased to $1.6 million in fiscal 1997 from $0.5 million in fiscal 1996. This increase was the result of additional borrowings to partially fund the Company's capital additions of $48.6 million and stock repurchases of $11.4 million. Provision for income taxes reflects an effective federal and state tax rate of 37.25% for fiscal 1997, compared to 37.75% for the comparable period in fiscal 1996. Net income for the period increased 15.2% to $19.1 million and earnings per diluted share increased 15.4% to $1.42, excluding the after-tax effect of the provision for adoption of a new accounting standard recorded in fiscal 1996. LIQUIDITY AND SOURCES OF CAPITAL During fiscal 1998, the Company opened 50 new restaurants and sold 14 restaurants to franchisees. The Company funded total capital additions for fiscal 1998 of $67.0 million, which included the cost of newly-opened restaurants, restaurants under construction, retrofits of existing restaurants, new equipment for existing restaurants and corporate use, internally from cash generated by operating activities and through borrowings under the Company's line of credit. During fiscal 1998, the Company elected to own the real estate on 47 of the 50 newly-constructed restaurants. The Company expects to own the land and building for approximately 90% of its future Company-owned newly- constructed restaurants. In addition to the capital expenditures mentioned above, the Company repurchased 482,000 shares (as adjusted for the 1998 stock split) of common stock for approximately $10.0 million during fiscal 1998. The Company has an agreement with a group of banks which provides the Company with a $60 million line of credit expiring in July 2001. The Company will use the line of credit to finance the opening of newly-constructed restaurants, retrofit of existing restaurants, acquisitions of existing restaurants, and for other general corporate purposes to the extent such cash requirements exceed cash provided by operations. As of August 31, 1998, the Company's outstanding borrowings under the line of credit were $11.0 million, exclusive of $0.3 million in outstanding letters of credit. The available line of credit on this facility as of August 31, 1998, was $48.7 million. Additionally, the Company completed a private placement of $50 million in Senior Unsecured Notes on April 23, 1998. These notes consist of $20 million of Series A notes which mature in 2003, and $30 million of Series B notes which mature in 2005. Interest on the notes will be payable semi-annually in arrears at an average annual rate of approximately 6.7%. The Company used the proceeds from the notes to pay down the outstanding borrowings under the line of credit (discussed above), to repurchase common stock of the Company and for general corporate purposes. The Company plans for capital expenditures of approximately $67 million in fiscal 1999, excluding potential acquisitions. These capital expenditures are primarily for the development of additional Company-owned stores, retrofit of Company-owned stores and enhancements to existing financial and operating information systems. In addition to the planned capital expenditures, the Company's board of directors has authorized the repurchase of up to $10 million of additional shares of the Company's common stock. The Company expects to fund these capital expenditures and share repurchases through borrowings under its existing unsecured revolving credit facility and cash flow from operations. The Company believes that existing cash and funds generated from internal operations, as well as borrowings under the line of credit, will be sufficient to meet the Company's needs for the foreseeable future. YEAR 2000 DESCRIPTION. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive 20 software or embedded computer chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations which could disrupt the Company's normal business activities. The Company has established a plan to prepare its systems for the Year 2000 issue as well as to reasonably assure that its critical business partners are prepared. The phases of the Company's plan to resolve the Year 2000 issue involve awareness, assessment, remediation, testing, and implementation. To date, the Company has completed its assessment of all internal systems that could be significantly affected by the Year 2000 issue. Based upon its assessment, the Company has determined that it will be required to modify or replace portions of its software primarily related to customized interfaces between its financial systems and other applications. The Company believes that with modifications or replacements of the identified software programs, the Year 2000 issue can be mitigated. However, if all additional phases of the Year 2000 plan are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company as set forth under RISKS AND CONTINGENCY PLANS. In addition, the Company is in the process of gathering information about the Year 2000 compliance status of its key third party business partners. STATUS. The Company's internal information technology exposures are primarily related to financial and management information systems. As of October 31, 1998, the Company is 60% complete on the remediation phase and expects to complete software reprogramming and replacement no later than February 28, 1999. Once the software is reprogrammed or replaced with a Year 2000 compliant version, the Company will test and implement the software. As of October 31, 1998, the Company had completed 25% of its testing and had implemented 30% of its remediated applications. Completion of the testing phase for all significant systems is expected by June 30, 1999 with all remediated systems fully tested and implemented by September 30, 1999. The Company's non-Information Technology systems consist primarily of restaurant operating equipment including its point-of-sale systems. The initial assessment of these systems has indicated that modification or replacement will not be necessary as a result of the Year 2000 issue. As such, the Company is not currently remediating this operating equipment. However, the existence of embedded technology is by nature more difficult to identify. While the Company believes that all significant non-Information Technology systems are Year 2000 compliant, the Company plans to continue testing its operating equipment and expects to complete the testing by March 31, 1999. SIGNIFICANT THIRD PARTIES. The Company's significant third party business partners consist of suppliers, banks, and its franchisees. The Company does not have any significant system interfaces with third parties. An initial inventory of significant suppliers and distributors has been completed and letters mailed requesting information regarding each parties' Year 2000 compliance status. Additionally, the Company has identified approximately 20 key suppliers and distributors which it intends to meet with and discuss their Year 2000 readiness. The Company intends to develop contingency plans by March 31, 1999 for suppliers that appear to have substantial Year 2000 operational risks which may include the change of suppliers to minimize such risks. Letters will be sent to all relationship banks by December 31, 1998 requesting an update on their Year 2000 compliance status. Review and evaluation of responses will be conducted through June 30, 1999. No later than September 30, 1999, the Company will discontinue relationships with banks that indicate compliance with Year 2000 has not been achieved. A Year 2000 information manual has been sent to all franchisees explaining the Year 2000 issue and associated business risks. This manual provided information and tools to assist the franchisees in assessing their Year 2000 risks. The Company will continue its efforts to raise awareness and inform franchisees of the risks posed by the Year 2000 throughout fiscal year 1999. COSTS. The Company's Year 2000 plan encompasses the use of both internal and external resources to identify, remediate, test, and implement systems for Year 2000 readiness. External resources include contract resources which will be used to supplement available internal resources. The total cost of the Year 2000 project, excluding internal personnel costs, is estimated at $650,000 and is being funded by operating cash flows. As of August 31, 1998, the Company had incurred approximately $75,000, which has all been expensed, related to the Year 2000 project. Of the total remaining project costs, approximately $300,000 is attributable to the purchase and implementation of new 21 software and will be capitalized. The remaining $275,000 relates to remediation and testing of software and will be expensed as incurred. RISKS AND CONTINGENCY PLANS. Management of the Company believes it has an effective plan in place to resolve the Year 2000 issue in a timely manner. However, due to the forward-looking nature and lack of historical experience with Year 2000 issues, it is difficult to predict with certainty what will happen after December 31, 1999. Despite the Year 2000 remediation efforts being made, it is likely that there will be disruptions and unexpected business problems during the early months of 2000. The Company plans to make diligent efforts to assess the Year 2000 readiness of its significant business partners and will develop contingency plans for critical areas where it believes its exposure to Year 2000 risk is the greatest. However, despite the Company's efforts, it may encounter unanticipated third party failures, more general public infrastructure failures or a failure to successfully conclude its remediation efforts as planned. If the remaining Year 2000 plan is not completed timely, in addition to the implications noted above, the Company may be required to utilize manual processing of certain otherwise automated processes primarily related to partner compensation and cash management. Any one of these unforeseen events could have a material adverse impact on the Company's results of operations, financial condition, or cash flows in 1999 and beyond. Additionally, the inability of franchisees to remit royalty payments on a timely basis could have a material adverse effect on the Company. The amount of potential loss cannot be reasonably estimated at this time. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates on debt and changes in commodity prices. The Company's exposure to interest rate risk currently consists of its Senior notes and outstanding line of credit. The Senior notes bear interest at fixed rates which average 6.7%. The aggregate balance outstanding under the Senior notes as of August 31, 1998 was $50.0 million. Should interest rates increase or decrease, the estimated fair value of these notes would decrease or increase, respectively. As of August 31, 1998, the estimated fair value of the Senior notes exceeded the carrying amount by approximately $1.2 million. The line of credit bears interest at a rate benchmarked to U.S. and European short-term interest rates. The balance outstanding under the line of credit was $11.0 million as of August 31, 1998. The impact on the Company's results of operations of a one-point interest rate change on the outstanding balances under the Senior notes and line of credit as of August 31, 1998 would be immaterial. 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. The Company does not use financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost and any commodity price aberrations are generally short term in nature. 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. IMPACT OF INFLATION Though increases in labor, food, or other operating costs could adversely affect the Company's operations, management does not believe that inflation has had a material effect on income during the past several years. During fiscal year 1997, however, Company-owned restaurants increased prices due primarily to higher labor costs resulting from increases in the federal minimum wage. SEASONALITY The Company does not expect seasonality to affect its operations in a materially adverse manner. The Company's results during its second quarter, comprising the months of December, January, and February, will generally be lower than its other quarters due to the climate of the locations of a number of its restaurants. 22 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 No disagreements between the Company and its accountants have occurred within the 24-month period prior to the date of the Company's most recent financial statements. PART III Except for the information on the Company's executive officers set forth under Item 4A of Part I of this report, the Company hereby incorporates by reference the information required by Part III of this report from the definitive proxy statement which the Company must file with the Securities and Exchange Commission in connection with the Company's annual meeting of stockholders following the fiscal year ended August 31, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS The following consolidated financial statements of the Company appear immediately following this Item 14:
Pages ----- Report of Independent Auditors F-1 Consolidated Balance Sheets at August 31, 1998 and 1997 F-2 Consolidated Statements of Income for each of the three years in the period ended August 31, 1998 F-4 Consolidated Statements of Stockholders' Equity for each of the the three years in the period ended August 31, 1998 F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1998 F-6 Notes to Consolidated Financial Statements F-8
FINANCIAL STATEMENT SCHEDULES The Company has included the following schedule immediately following this Item 14:
Page ---- Schedule II - Valuation and Qualifying Accounts F-30
The Company has omitted all other schedules because the conditions requiring their filing do not exist or because the required information appears in the Company'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 employment contracts and compensatory plans or arrangements with an asterisk (*). 23 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. 3.02. 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. 3.03. 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. 3.04. Rights Agreement, 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, 1995. 4.02. Specimen Certificate for Rights, which the Company hereby incorporates by reference from Exhibit 99.1 to the Company's Form 8-K filed on June 17, 1997. 10.01. Form of Sonic Industries Inc. License Agreement (the Number 4 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.1 to the Company's Form S-1 Registration Statement No. 33-37158. 10.02. Form of Sonic Industries Inc. License Agreement (the Number 5 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.2 to the Company's Form S-1 Registration Statement No. 33-37158. 10.03. Form of Sonic Industries Inc. License Agreement (the Number 4.2 License Agreement and Number 5.1 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.03 to the Company's Form 10-K for the fiscal year ended August 31, 1994. 10.04. Form of Sonic Industries Inc. License Agreement (the Number 6 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.04 to the Company's Form 10-K for the fiscal year ended August 31, 1994. 10.05. Form of Sonic Industries Inc. License Agreement (the Number 6A License Agreement). 10.06. Form of Sonic Industries Inc. License Agreement (the Number 5.2 License Agreement). 10.07. Form of Sonic Industries Inc. 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. 10.08. Form of Sonic Industries 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. 10.09. Form of General Partnership Agreement, Limited Liability Company Operating Agreement, Partnership Master Agreement, and Limited Liability Company Master Agreement, which the Company hereby incorporates by reference from Exhibit 10.07 to the Company's Form 10-K for the fiscal year ended August 31, 1997. 10.10. 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.* 10.11. 1991 Sonic Corp. Stock Purchase Plan, which the Company hereby incorporates by reference from Exhibit 10.6 to the Company's Form S-1 Registration Statement No. 33-37158.* 24 10.12. 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.* 10.13. 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.* 10.14. 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.* 10.15. 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.* 10.16. 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.* 10.17. Sonic Corp. 1995 Stock Incentive Plan, which the Company hereby incorporates by reference from Exhibit 10.15 to the Company's Form 10-K for the fiscal year ended August 31, 1996.* 10.18. Form of Employment Agreement and Schedule of Material Differences for the Executive Officers of the Company, which the Company hereby incorporates by reference form the Company's Form 10-K for the fiscal year ended August 31, 1997. 10.19. Loan Agreement with Texas Commerce Bank National Association dated July 31, 1995, which the Company hereby incorporates by reference from Exhibit 10.26 to the Company's Form 10-K for the fiscal year ended August 31, 1995. 10.20. First Amendment to Loan Agreement with Texas Commerce Bank National Association, which the Company hereby incorporates by reference from Exhibit 10.18 to the Company's Form 10-K for the fiscal year ended August 31, 1996. 10.21. Second Amendment to Loan Agreement with Texas Commerce Bank National Association, which the Company hereby incorporates by reference from Exhibit 10.19 to the Company's Form 10-K for the fiscal year ended August 31, 1996. 10.22. Third Amendment to Loan Agreement with Texas Commerce Bank National Association, which the Company hereby incorporates by reference from Exhibit 10.01 to the Company's Form 10-Q for the fiscal quarter ended May 31, 1997. 10.23. Fourth Amendment to the Loan Agreement with Chase Bank of Texas, N.A. (formerly known as Texas Commerce Bank National Association), which the Company hereby incorporates by reference from Exhibit 10.21 to the Company's 10-Q for the fiscal quarter ended May 31, 1998. 10.24. Fifth Amendment to the Loan Agreement with Chase Bank of Texas, N.A. (formerly known as Texas Commerce Bank National Association), which the Company hereby incorporates by reference from Exhibit 10.22 to the Company's 10-Q for the fiscal quarter ended May 31, 1998. 10.25. Note Purchase Agreement dated April 1, 1998, which the Company hereby incorporates by reference from Exhibit 10.23 to the Company's 10-Q for the fiscal quarter ended May 31, 1998. 10.26. Form of 6.652% Senior Notes, Series A, due April 1, 2003, which the Company hereby incorporates by reference from Exhibit 10.24 to the Company's 10-Q for the fiscal quarter ended May 31, 1998. 25 10.27. Form of 6.759% Senior Notes, Series B, due April 1, 2003, which the Company hereby incorporates by reference from Exhibit 10.24 to the Company's 10-Q for the fiscal quarter ended May 31, 1998. 21.01. Subsidiaries of the Company, which the Company hereby incorporates by reference from Exhibit 21.01 to the Company's Form 10-K for the fiscal year ended August 31, 1996. 23.01. Consent of Independent Auditors. 24.01. Power of Attorney. 27.01. Financial Data Schedule. REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during its last fiscal quarter ended August 31, 1998. 26 Report of Independent Auditors The Board of Directors and Stockholders Sonic Corp. We have audited the accompanying consolidated balance sheets of Sonic Corp. as of August 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14. 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 generally accepted auditing standards. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 1998, in conformity with 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. As discussed in Note 1 to the accompanying consolidated financial statements, in fiscal year 1998 Sonic Corp. changed its method of accounting for pre-opening and other start-up costs by adopting Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." ERNST & YOUNG LLP Oklahoma City, Oklahoma October 12, 1998 F-1 Sonic Corp. Consolidated Balance Sheets
AUGUST 31, 1998 1997 -------------------------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 2,602 $ 7,334 Accounts and notes receivable, net 7,587 5,890 Refundable income taxes 2,413 2,489 Net investment in direct financing and sales-type leases 1,092 856 Inventories 1,363 1,239 Deferred income taxes 506 100 Prepaid expenses and other 976 791 -------------------------------- Total current assets 16,539 18,699 Notes receivable, net 3,579 3,314 Net investment in direct financing and sales-type leases 3,494 3,361 Property, equipment and capital leases, net 188,065 136,522 Intangibles and other assets, net (NOTE 6) 21,503 22,945 -------------------------------- Total assets $ 233,180 $ 184,841 -------------------------------- --------------------------------
F-2 Sonic Corp. Consolidated Balance Sheets (continued)
AUGUST 31, 1998 1997 -------------------------------- (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,740 $ 4,635 Deposits from franchisees 883 780 Accrued liabilities 11,140 8,629 Obligations under capital leases due within one year 950 1,030 Long-term debt due within one year 118 116 -------------------------------- Total current liabilities 23,831 15,190 Obligations under capital leases due after one year 7,429 8,153 Long-term debt due after one year 61,400 37,517 Other noncurrent liabilities 4,704 5,051 Deferred income taxes 3,805 756 Commitments and contingencies (NOTES 4, 7, 15, AND 16) Stockholders' equity: Preferred stock, par value $.01; 1,000,000 shares authorized; none outstanding - - Common stock, par value $.01; 40,000,000 shares authorized; shares issued 20,554,213 in 1998 and 13,531,593 in 1997 206 135 Paid-in capital 63,866 59,891 Retained earnings 89,455 69,666 -------------------------------- 153,527 129,692 Treasury stock, at cost; 1,692,370 shares in 1998 and 807,080 shares in 1997 (21,516) (11,518) -------------------------------- Total stockholders' equity 132,011 118,174 -------------------------------- Total liabilities and stockholders' equity $ 233,180 $ 184,841 -------------------------------- --------------------------------
SEE ACCOMPANYING NOTES. F-3 Sonic Corp. Consolidated Statements of Income
YEAR ENDED AUGUST 31, 1998 1997 1996 ----------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Company-owned restaurant sales $ 182,011 $ 152,739 $ 120,700 Franchised restaurants: Franchise fees 2,564 1,702 1,453 Franchise royalties 32,391 26,764 23,315 Other 2,141 2,813 5,662 ----------------------------------------------- 219,107 184,018 151,130 Costs and expenses: Company-owned restaurants: Food and packaging 50,179 43,661 37,463 Payroll and other employee benefits 52,310 42,508 34,555 Other operating expenses 33,317 26,419 20,645 ----------------------------------------------- 135,806 112,588 92,663 Selling, general and administrative 22,250 19,318 14,498 Depreciation and amortization 14,790 12,320 8,896 Minority interest in earnings of restaurant partnerships 7,904 7,558 4,806 Provision for impairment of long-lived assets 285 266 8,627 Special provision for litigation settlement 2,700 - - Other operating expenses - - 3,101 ----------------------------------------------- 183,735 152,050 132,591 ----------------------------------------------- Income from operations 35,372 31,968 18,539 Interest expense 3,446 2,154 1,184 Interest income (696) (596) (708) ----------------------------------------------- Net interest expense 2,750 1,558 476 ----------------------------------------------- Income before income taxes and cumulative effect of change in accounting 32,622 30,410 18,063 Provision for income taxes 12,152 11,328 6,819 ----------------------------------------------- Income before cumulative effect of change in accounting 20,470 19,082 11,244 Cumulative effect of change in accounting, net of income taxes of $404 (NOTE 1) 681 - - ----------------------------------------------- Net income $ 19,789 $ 19,082 $ 11,244 ----------------------------------------------- ----------------------------------------------- Basic income per share: Income before cumulative effect of change in accounting $ 1.07 $ .96 $ .57 Cumulative effect of change in accounting (.04) - - ----------------------------------------------- Net income per share - basic $ 1.03 $ .96 $ .57 ----------------------------------------------- ----------------------------------------------- Diluted income per share: Income before cumulative effect of change in accounting $ 1.03 $ .95 $ .56 Cumulative effect of change in accounting (.03) - - ----------------------------------------------- Net income per share - diluted $ 1.00 $ .95 $ .56 ----------------------------------------------- -----------------------------------------------
SEE ACCOMPANYING NOTES. F-4 Sonic Corp. Consolidated Statements of Stockholders' Equity
COMMON STOCK TREASURY STOCK ------------ PAID IN RETAINED -------------- SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT -------------------------------------------------------------------------------- (IN THOUSANDS) Balance at August 31, 1995 12,080 $ 121 $ 30,355 $ 39,340 428 $ (6,459) Exercise of common stock options 154 2 2,037 - - - Purchase of treasury stock - - - - 8 (143) Sale of common stock 1,241 12 26,715 - (428) 6,459 Net income - - - 11,244 - - -------------------------------------------------------------------------------- Balance at August 31, 1996 13,475 135 59,107 50,584 8 (143) Exercise of common stock options 57 - 784 - - - Purchase of treasury stock - - - - 799 (11,375) Net income - - - 19,082 - - -------------------------------------------------------------------------------- Balance at August 31, 1997 13,532 135 59,891 69,666 807 (11,518) Exercise of common stock options 187 2 2,690 - - - Tax benefit related to employee stock options - - 1,356 - - - Purchase of treasury stock - - - - 414 (9,998) Three-for-two stock split, including $2 paid in cash for fractional shares 6,835 69 (71) - 471 - Net income - - - 19,789 - - -------------------------------------------------------------------------------- Balance at August 31, 1998 20,554 $ 206 $ 63,866 $ 89,455 1,692 $(21,516) -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. F-5 Sonic Corp. Consolidated Statements of Cash Flows
YEAR ENDED AUGUST 31, 1998 1997 1996 --------------------------------------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 19,789 $ 19,082 $ 11,244 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting 681 - - Depreciation 13,218 10,099 7,166 Amortization 1,572 2,221 1,730 Gains on dispositions of assets (282) (1,491) (309) Amortization of franchise and development fees (2,564) (1,702) (1,453) Franchise and development fees collected 2,771 1,768 1,460 Provision (credit) for deferred income taxes, net of $404 credit in 1998 2,643 2,950 (1,905) Provision for impairment of long-lived assets 285 266 8,627 Other 60 24 74 (Increase) decrease in operating assets: Accounts and notes receivable (632) (5) (380) Refundable income taxes 76 (2,489) - Inventories and prepaid expenses and other (309) 62 (766) Increase in operating liabilities: Accounts payable 6,105 1,709 1,213 Accrued and other liabilities 3,633 1,649 2,154 --------------------------------------------- Total adjustments 27,257 15,061 17,611 --------------------------------------------- Net cash provided by operating activities 47,046 34,143 28,855 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (66,982) (48,048) (41,107) Investments in direct financing leases (1,624) (935) (1,235) Collections on direct financing leases 1,244 922 987 Proceeds from dispositions of assets 1,745 3,025 2,450 Increase in intangibles and other assets: Goodwill resulting from acquisitions of restaurants - - (5,964) Other (1,697) (3,455) (1,721) --------------------------------------------- Net cash used in investing activities (67,314) (48,491) (46,590)
(CONTINUED ON FOLLOWING PAGE) F-6 Sonic Corp. Consolidated Statements of Cash Flows (continued)
YEAR ENDED AUGUST 31, 1998 1997 1996 ----------------------------------------------- (IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings $ 105,500 $ 59,750 $ 11,500 Payments on long-term debt (81,615) (34,542) (24,250) Purchases of treasury stock (9,998) (11,375) (4) Payments on capital lease obligations (1,041) (641) (669) Exercises of stock options 2,692 784 1,900 Other (2) - - Proceeds from sale of common stock - - 33,186 ----------------------------------------------- Net cash provided by financing activities 15,536 13,976 21,663 ----------------------------------------------- Net increase (decrease) in cash and cash equivalents (4,732) (372) 3,928 Cash and cash equivalents at beginning of the year 7,334 7,706 3,778 ----------------------------------------------- Cash and cash equivalents at end of the year $ 2,602 $ 7,334 $ 7,706 ----------------------------------------------- ----------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest $ 2,271 $ 2,254 $ 1,369 Income taxes (net of refunds) 8,030 11,942 8,192 Additions to capital lease obligations 249 569 4,203 Purchases of treasury stock in connection with exercises of stock options - - 139 Accounts and notes receivable from property and equipment sales 1,330 - - Tax benefit related to employee stock options 1,356 - -
SEE ACCOMPANYING NOTES. F-7 Sonic Corp. Notes to Consolidated Financial Statements August 31, 1998, 1997 and 1996 (In Thousands, Except Share Data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS Sonic Corp. (the "Company") operates and franchises a chain of quick-service drive-in restaurants in the United States. In addition, the Company leases restaurant signs. The Company grants credit to its operating partners and its franchisees, all of whom are in the restaurant business. Substantially all of the notes receivable and direct financing leases are collateralized by real estate or equipment. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned, Company-operated restaurants, organized principally as general partnerships. All significant intercompany accounts and transactions have been eliminated. Investments in minority-owned restaurants, organized principally as general partnerships, and other minority investments are accounted for under the equity method and are included in other assets. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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 inevitably will differ from those estimates, and such differences may be material to the financial statements. INVENTORIES Inventories consist principally of food and supplies which are carried at the lower of cost (first-in, first-out basis) or market and used restaurant equipment held for sale which is carried at the lower of weighted average cost or market. F-8 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except 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 amortization of capital leases are computed by the straight-line method over the estimated useful lives or initial terms of the leases, respectively. ACCOUNTING FOR LONG-LIVED ASSETS The Company reviews long-lived assets, identifiable intangibles, and goodwill related to those 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. The Company has determined that an individual restaurant is the level at which this review will be applied. 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. The fair value of the asset is measured by calculating the present value of estimated future cash flows using a discount rate equivalent to the rate of return the Company expects to achieve from its investment in newly-constructed restaurants. Long-lived assets and identifiable intangibles held for disposal are carried at the lower of depreciated cost or fair value less cost to sell. Fair values are estimated based upon appraisals or other independent assessments of the assets' estimated sales values. During the period in which assets are being held for disposal, depreciation and amortization of such assets are not recognized. F-9 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRE-OPENING COSTS Prior to fiscal year 1998, the Company capitalized certain direct costs associated with opening new restaurants and amortized these costs over the first twelve months of restaurant operations. Effective September 1, 1997, the Company adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that pre-opening and other start-up costs be expensed as incurred. The cumulative effect of adopting SOP 98-5 resulted in a charge to operations for the unamortized balance of pre-opening and other start-up costs as of August 31, 1997 of $681 or $.03 per share (diluted), net of income tax effects of $404 and minority interest of $248. TRADEMARKS, TRADE NAMES AND OTHER GOODWILL Trademarks, trade names and other goodwill are amortized on the straight-line method over periods not exceeding 40 years. OTHER INTANGIBLES Other intangibles and deferred costs included in other assets are amortized on the straight-line method over the expected period of benefit, not exceeding 15 years. FRANCHISE FEES AND ROYALTIES Initial franchise fees are nonrefundable and 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. Area development fees are nonrefundable and are recognized in income on a pro rata basis when the conditions for revenue recognition under the individual development agreements are met. Royalties from franchise operations are recognized in income as earned. ADVERTISING COSTS Costs incurred in connection with advertising and promotion of the Company's products are expensed as incurred. Such costs amounted to $9,340, $6,983, and $4,956 for fiscal years 1998, 1997 and 1996, respectively. F-10 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of stock options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share calculation. All earnings per share amounts for all periods have been presented and, where necessary, restated to conform to SFAS 128 requirements. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with a maturity of three months or less from date of purchase. 2. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
YEAR ENDED AUGUST 31, 1998 1997 1996 --------------------------------------------------- Numerator: Net income $19,789 $19,082 $11,244 Denominator: Weighted average shares outstanding - basic 19,107,369 19,851,970 19,789,012 Effect of dilutive employee stock options 631,048 304,083 384,480 --------------------------------------------------- Weighted average shares - diluted 19,738,417 20,156,053 20,173,492 --------------------------------------------------- --------------------------------------------------- Net income per share - basic $ 1.03 $ .96 $ .57 --------------------------------------------------- --------------------------------------------------- Net income per share - diluted $ 1.00 $ .95 $ .56 --------------------------------------------------- --------------------------------------------------- Anti-dilutive employee stock options excluded 86,828 310,913 62,455 --------------------------------------------------- ---------------------------------------------------
F-11 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 3. IMPAIRMENT OF LONG-LIVED ASSETS The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," at the beginning of the fourth quarter of fiscal year 1996. Based on an evaluation of all restaurants which had incurred operating losses through May 31, 1996, the Company determined that certain restaurants and other assets with then existing carrying amounts of $12,553 were impaired and wrote them down to their fair values. The initial charge upon adoption of SFAS 121 was $8,541 ($5,316 after-tax or $.26 per share) and included $5,720 ($3,560 after-tax or $.17 per share) related to restaurants and other assets held for disposal with an estimated sales value, net of related costs to sell of $2,651, and $2,821 ($1,756 after-tax or $.09 per share) related to restaurants to be held and used. Certain of these properties with carrying amounts of $857 and $1,207 were disposed of in fiscal years 1998 and 1997, respectively, with net proceeds to the Company of $870 and $1,258, respectively. The Company plans to dispose of the remaining assets during fiscal year 1999 and has estimated the sales value, net of related costs to sell, at approximately $240. The initial charge upon adoption primarily relates to the write-down of certain restaurants to fair value consistent with the earnings expectations of each restaurant using discounted estimated future cash flows. As of August 31, 1998, the Company had identified certain underperforming restaurants whose operating results indicated that certain assets of these restaurants might be impaired. The buildings and improvements of these restaurants had combined carrying amounts of $5,936. Management's estimate of undiscounted future cash flows indicates that such carrying amounts are expected to be recovered. However, it is reasonably possible that the estimate of undiscounted cash flows may change in the near future resulting in the need to write-down one or more of the identified assets to fair value. The evaluation for impairment is done for each individual restaurant, rather than all restaurants as a group. The initial charge resulted from the Company grouping assets at a lower level than under its previous accounting policy for evaluating and measuring impairment. The difference in the Company's previous policy and fair value under SFAS 121 for assets held for disposal at the beginning of the fourth quarter of fiscal year 1996 was not material. Prior to adoption of this new standard, a write-down of a restaurant only took place when a decision was made to close or dispose of the restaurant. 4. RESTAURANT TRANSACTIONS WITH RELATED PARTY In March 1994, the Company entered into an agreement with a director and former officer of the Company in connection with his leaving the Company and returning to his career as a Sonic franchisee. Under that agreement, the director exchanged certain rights under his employment agreement, including the right to purchase six existing Sonic restaurants, for the right to purchase F-12 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 4. RESTAURANT TRANSACTIONS WITH RELATED PARTY (CONTINUED) the Company's interest in two existing Sonic restaurants (with financing provided by the Company) and to acquire certain development rights for future Sonic restaurants. As part of the agreement, the Company also agreed to assist the director with obtaining development financing for up to six Sonic restaurants. Since March 1994, the Company has entered into certain agreements with the director and the director's lender which provide that in the event of a default by the director under the terms of the director's restaurant development loans (aggregating $3,197 as of August 31, 1998 and $3,556 as of August 31, 1997), the Company is required to purchase the collateral (shares of the Company's common stock and real estate related to Sonic restaurants) securing the director's loans at fair market value as specified in the repurchase agreements. At August 31, 1998, the Company's repurchase obligations under these agreements expire $1,325 in 1999, $35 in 2000, $736 in 2001, and $1,101 in 2002. 5. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable consist of the following at August 31, 1998 and 1997:
1998 1997 ---------------------------- Trade receivables $2,917 $3,208 Notes receivable--current 2,523 874 Other 2,370 1,907 ---------------------------- 7,810 5,989 Less allowance for doubtful accounts and notes receivable 223 99 ---------------------------- $7,587 $5,890 ---------------------------- ---------------------------- Notes receivable--noncurrent $3,701 $3,488 Less allowance for doubtful notes receivable 122 174 ---------------------------- $3,579 $3,314 ---------------------------- ----------------------------
F-13 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 6. INTANGIBLES AND OTHER ASSETS Intangibles and other assets consist of the following at August 31, 1998 and 1997:
1998 1997 ----------------------------- Trademarks, trade names, and other goodwill $21,985 $21,124 Franchise agreements 1,870 1,870 Other intangibles and other assets 5,545 6,547 ----------------------------- 29,400 29,541 Less accumulated amortization 7,897 6,596 ----------------------------- $21,503 $22,945 ----------------------------- -----------------------------
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 portions of these leases are classified as operating leases and expire over the next nineteen years. The buildings and equipment portions of these leases are classified principally as direct financing or sales-type leases and expire principally over the next ten years. These leases include provisions for contingent rentals which may be received on the basis of a percentage of sales in excess of 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. These options enable the Company to retain use of properties in desirable operating areas. Certain Company-owned restaurants lease land and buildings from third parties. These leases, which expire over the next twenty years, include provisions for contingent rentals which may be paid on the basis of a percentage of sales in excess of stipulated amounts. The land portions of these leases are classified as operating leases and the buildings portions are classified as capital leases. F-14 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 7. LEASES (CONTINUED) DIRECT FINANCING AND SALES-TYPE LEASES Components of net investment in direct financing and sales-type leases are as follows at August 31, 1998 and 1997:
1998 1997 ---------------------------- Minimum lease payments receivable $6,425 $5,441 Less unearned income 1,839 1,224 ---------------------------- Net investment in direct financing and sales-type leases 4,586 4,217 Less amount due within one year 1,092 856 ---------------------------- Amount due after one year $3,494 $3,361 ---------------------------- ----------------------------
Minimum lease payments receivable for each of the five years after August 31, 1998 are $1,635 in 1999, $1,166 in 2000, $987 in 2001, $802 in 2002, $634 in 2003 and $1,201 thereafter. Initial direct costs incurred in the negotiation and consummation of direct financing and sales-type lease transactions have not been material during fiscal years 1998 and 1997. Accordingly, no portion of unearned income has been recognized to offset those costs. Other revenues include $1,570, $768 and $1,340 for fiscal years 1998, 1997 and 1996, respectively, related to sign lease transactions that have been accounted for as sales-type leases. CAPITAL LEASES Components of obligations under capital leases are as follows at August 31, 1998 and 1997:
1998 1997 ----------------------------- Total minimum lease payments $13,434 $14,793 Less amount representing interest 5,055 5,610 ----------------------------- Present value of net minimum lease payments 8,379 9,183 Less amount due within one year 950 1,030 ----------------------------- Amount due after one year $ 7,429 $ 8,153 ----------------------------- -----------------------------
Maturities of these obligations under capital leases, including interest averaging 12% in fiscal years 1998 and 1997, and future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year are as follows: F-15 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 7. LEASES (CONTINUED)
OPERATING CAPITAL ------------------------------- Year ending August 31: 1999 $ 2,609 $1,777 2000 2,575 1,561 2001 2,537 1,383 2002 2,426 1,306 2003 1,833 1,233 Thereafter 11,870 6,174 ------------------------------- 23,850 13,434 Less amount representing interest - 5,055 ------------------------------- $ 23,850 $8,379 ------------------------------- -------------------------------
Total minimum lease payments do not include contingent rentals on capital leases which have not been material. Total rent expense for all operating leases consists of the following:
Year ended August 31, 1998 1997 1996 ---------------------------------------------- Minimum rentals $ 3,323 $ 3,035 $ 2,596 Contingent rentals 538 510 432 Less: Sublease rentals (134) (103) (56) ---------------------------------------------- $ 3,727 $ 3,442 $ 2,972 ---------------------------------------------- ----------------------------------------------
F-16 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 8. PROPERTY, EQUIPMENT AND CAPITAL LEASES Property, equipment and capital leases consist of the following at August 31, 1998 and 1997:
1998 1997 -------------------------------- Home office: Land and leasehold improvements $ 1,355 $ 1,262 Computer and other equipment 19,156 17,768 Restaurants, including those leased to others: Land 49,149 33,739 Buildings, including property held for disposition 85,928 53,582 Equipment 60,812 47,884 -------------------------------- Property and equipment, at cost 216,400 154,235 Less accumulated depreciation 34,496 24,335 -------------------------------- Property and equipment, net 181,904 129,900 Leased restaurant buildings and equipment under capital leases, including those held for sublease 10,035 10,101 Less accumulated amortization 3,874 3,479 -------------------------------- Capital leases, net 6,161 6,622 -------------------------------- Property, equipment and capital leases, net $188,065 $136,522 -------------------------------- --------------------------------
Property and equipment include land, buildings and equipment with a carrying amount of $10,181 at August 31, 1998 which were leased under operating leases to franchisees or other parties. The accumulated depreciation related to these buildings and equipment was $1,029 at August 31, 1998. Property, equipment and capital leases also include assets held for disposal or sublease with aggregate net carrying amounts, exclusive of certain carrying costs reflected in liabilities, of $265 at August 31, 1998 and $1,464 at August 31, 1997. F-17 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 9. ACCRUED LIABILITIES Accrued liabilities consist of the following at August 31, 1998 and 1997:
1998 1997 ----------------------------- Wages and other employee benefits $ 2,009 $ 1,383 Income taxes payable 1,201 1,560 Taxes, other than income taxes 4,002 3,487 Accrued carrying costs for restaurant closings and disposals 291 370 Accrued interest 1,243 68 Annual convention deposits 933 882 Other 1,461 879 ----------------------------- $11,140 $ 8,629 ----------------------------- -----------------------------
10. LONG-TERM DEBT Long-term debt consists of the following at August 31, 1998 and 1997:
1998 1997 -------------------------------- Senior unsecured notes (A) $ 50,000 $ - Borrowings under line of credit (B) 11,000 37,000 Other 518 633 -------------------------------- 61,518 37,633 Less long-term debt due within one year 118 116 -------------------------------- Long-term debt due after one year $ 61,400 $ 37,517 -------------------------------- --------------------------------
(A) In April 1998, the Company completed a private placement of $50,000 of senior unsecured notes with $20,000 of Series A notes maturing in 2003 and $30,000 of Series B notes maturing in 2005. Interest is payable semi-annually and accrues at 6.65% for the Series A notes and 6.76% for the Series B notes. The proceeds from the issuance were used to pay down the $43,000 balance then outstanding under the existing line of credit, to fund repurchases of common stock of the Company and for general corporate purposes. The related agreement requires, among other things, the Company to maintain equity of a specified amount, maintain ratios of debt to total capital and fixed charge coverage and limits additional borrowings. F-18 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 10. LONG-TERM DEBT (CONTINUED) (B) The Company has an agreement (as amended) with a group of banks which provides for a $60,000 line of credit, including a $2,000 sub-limit for letters of credit, expiring in July 2001. The agreement allows for annual renewal options, subject to approval by the banks. The Company uses the line of credit to finance the opening of newly-constructed restaurants, acquisition of existing restaurants and for general corporate purposes. Borrowings under the line of credit are unsecured and bear interest at a specified bank's prime rate or, at the Company's option, LIBOR plus 0.50% to 1.25%. In addition, the Company pays an annual commitment fee ranging from .125% to .25% on the unused portion of the line of credit. As of August 31, 1998, the Company's effective borrowing rate was 6.8%. As of August 31, 1998 there were $300 in letters of credit outstanding under the line of credit. The agreement requires, among other things, the Company to maintain equity of a specified amount, maintain ratios of debt to EBITDA and fixed charge coverage and limits additional borrowings and acquisitions of businesses. Maturities of long-term debt for each of the five years after August 31, 1998 are $118 in 1999, $69 in 2000, $11,021 in 2001, $23 in 2002, $20,025 in 2003 and $30,262 thereafter. 11. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities consist of the following at August 31, 1998 and 1997:
1998 1997 -------------------------------- Deferred area development fees $ 599 $ 495 Minority interest in consolidated restaurant partnerships 2,841 2,948 Accrued carrying costs for restaurant closings and disposals 971 756 Other 293 852 -------------------------------- $ 4,704 $ 5,051 -------------------------------- --------------------------------
F-19 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 12. INCOME TAXES The components of the provision (benefit) for income taxes related to income before cumulative effect of change in accounting principle consists of the following:
YEAR ENDED AUGUST 31, 1998 1997 1996 ------------------------------------------------- Current: Federal $ 9,010 $ 8,070 $ 8,371 State 95 308 353 ------------------------------------------------- 9,105 8,378 8,724 Deferred: Federal 2,614 2,847 (1,839) State 433 103 (66) ------------------------------------------------- 3,047 2,950 (1,905) ------------------------------------------------- Provision for income taxes $ 12,152 $ 11,328 $6,819 ------------------------------------------------- -------------------------------------------------
The provision for income taxes on income before cumulative effect of change in accounting principle differs from the amount computed by applying the statutory federal income tax rate due to the following:
YEAR ENDED AUGUST 31, 1998 1997 1996 ------------------------------------------------- Amount computed by applying a tax rate of 35% $ 11,418 $ 10,643 $ 6,322 State income taxes (net of federal income tax benefit) 343 267 187 Permanent differences in expenses for financial and income tax reporting purposes (69) (69) (283) Other 460 487 593 ------------------------------------------------- Provision for income taxes $ 12,152 $ 11,328 $ 6,819 ------------------------------------------------- -------------------------------------------------
F-20 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 12. INCOME TAXES (CONTINUED) Deferred tax assets and liabilities consist of the following at August 31, 1998 and 1997:
1998 1997 --------------------------------- Deferred tax assets: Allowance for doubtful accounts and notes receivable $132 $ 98 Property, equipment and capital leases - 499 Accrued litigation costs 332 343 Other 113 332 --------------------------------- 577 1,272 Valuation allowance - - --------------------------------- Deferred tax assets 577 1,272 Less deferred tax liabilities: Net investment in direct financing and sales-type leases, including differences related to capitalization and amortization 1,528 890 Investment in partnerships, including differences in capitalization and depreciation related to direct financing and sales-type leases and different year ends for financial and tax reporting purposes 1,563 299 Property, equipment and capital leases 360 - Accumulated amortization of license agreements, management contracts and other intangibles 422 736 Other 3 3 --------------------------------- Deferred tax liabilities 3,876 1,928 --------------------------------- Net deferred tax liabilities $ (3,299) $ (656) --------------------------------- ---------------------------------
F-21 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 13. STOCKHOLDERS' EQUITY On April 30, 1998, the Company's board of directors authorized a three-for-two stock split in the form of a stock dividend. A total of 6,835,095 shares of common stock were issued in connection with the split. The stated par value of each share was not changed from $.01. An aggregate amount equal to the par value of the common stock issued plus cash paid in lieu of fractional shares of $71 was reclassified from paid-in capital to common stock. This transfer has been reflected in the consolidated statement of stockholders' equity for fiscal year 1998. All references in the accompanying consolidated financial statements to weighted average numbers of shares outstanding, per share amounts and Stock Purchase Plan, Stock Options and Stock Incentive Plan share data have been adjusted to reflect the stock split on a retroactive basis. In October 1995, the Company completed a public offering of 1,668,826 shares of common stock, including 428,026 shares of treasury stock which had a cost of $6,459. The proceeds of the offering, after deducting the underwriting discount and offering expenses, were $33,186. A portion of the proceeds ($23,000) was used to repay the borrowings under the Company's line of credit. 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 each calendar year under this plan is limited to 225,000 shares. The purchase price will be between 85% and 100% of the stock's fair market value. Such price will be determined by the Company's board of directors. STOCK OPTIONS The Company has an Incentive Stock Option Plan (the "Incentive Plan") and a Directors' Stock Option Plan (the "Directors' Plan"). Under the Incentive Plan, the Company is authorized to grant options to purchase up to 2,805,000 shares of the Company's common stock to officers and key employees of the Company and its subsidiaries. Under the Directors' Plan, the Company is authorized to grant options to purchase up to 337,500 shares of the Company's common stock to the Company's outside directors. The exercise price of the options to be granted is equal to the fair market value of the Company's common stock on the date of grant. Unless otherwise provided by the Company's Stock Plan Committee, options under both plans become exercisable ratably over a three-year period or immediately upon change in control of the Company, as F-22 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 13. STOCKHOLDERS' EQUITY (CONTINUED) defined by the plans. All options expire at the earlier of termination of employment or ten years after the date of grant. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing such stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and net income per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its stock options granted subsequent to August 31, 1995 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal years 1998, 1997, and 1996, respectively: risk-free interest rates of 5.7%, 6.3%, and 6.0%; a dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of 40.0%, 39.9%, and 29.5%; and a weighted average expected life of the options of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the years ended August 31 follows:
1998 1997 1996 -------------------------------------------------------- Pro forma net income $ 18,394 $ 18,026 $ 10,946 Pro forma net income per share-diluted $ .93 $ .89 $ .54
F-23 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 13. STOCKHOLDERS' EQUITY (CONTINUED) Because Statement 123 is appplicable only to options granted subsequent to fiscal year 1995, its pro forma effect was not fully reflected until fiscal year 1998. A summary of the Company's stock option activity (adjusted for the stock split), and related information for the years ended August 31 follows:
1998 1997 1996 --------------------------- --------------------------- ----------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------------------------------------------------------------------------------------- Outstanding--beginning of year 1,795,287 $ 11.40 1,522,375 $ 11.13 1,477,071 $ 9.91 Granted 388,332 20.26 531,272 11.90 567,681 13.11 Exercised (256,910) 10.48 (84,776) 9.24 (258,015) 8.79 Forfeited (161,982) 12.69 (173,584) 11.64 (264,362) 10.83 ------------- ------------- ------------- Outstanding--end of year 1,764,727 $ 13.37 1,795,287 $ 11.40 1,522,375 $ 11.13 ------------- ------------- ------------- ------------- ------------- ------------- Exercisable at end of year 970,851 $ 11.13 883,877 $ 10.50 610,898 $ 9.92 ------------- ------------- ------------- ------------- ------------- ------------- Weighted average fair value of options granted during the year $ 8.87 $ 5.31 $ 4.89
A summary of the Company's options as of August 31, 1998 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ ---------------------------------- Weighted Average Weighted Weighted Remaining Average Average Number of Contractual Exercise Number of Exercise Range of Exercise Prices Options Life (Yrs.) Price Options Price - ------------------------------------------------------------------------------ ---------------------------------- $6.67 to $9.78 318,323 4.6 $ 8.72 318,323 $ 8.72 $10.08 to $14.67 931,904 7.4 11.90 593,949 12.02 $15.00 to $21.50 514,500 9.3 18.90 58,579 15.17 --------------- --------------- ------------- --------------- --------------- $6.67 to $21.50 1,764,727 7.5 $13.37 970,851 $11.13 --------------- --------------- ------------- --------------- --------------- --------------- --------------- ------------- --------------- ---------------
F-24 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 13. STOCKHOLDERS' EQUITY (CONTINUED) STOCKHOLDER RIGHTS PLAN In June 1997, the Company's board of directors adopted a stockholder rights plan (the "Rights Plan"). The Rights Plan is designed to deter coercive takeover tactics and to prevent a potential acquirer from gaining control of the Company without offering a fair price to all of the Company's stockholders. The rights were issued to stockholders of record as of June 27, 1997 and expire on June 16, 2007. The plan provided for the issuance of one common stock purchase right for each outstanding share of the Company's common stock. Each right initially entitles stockholders to buy one unit of a share of preferred stock for $85. The rights will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of the Company's common stock. At August 31, 1998, 50,000 shares of preferred stock have been reserved for issuance upon exercise of these rights. If any person becomes the beneficial owner of 15% or more of the Company's common stock, other than pursuant to a tender or exchange offer for all outstanding shares of the Company approved by a majority of the independent directors not affiliated with a 15%-or-more stockholder, then each right not owned by a 15%-or-more stockholder or related parties will then entitle its holder to purchase, at the right's then current exercise price, shares of the Company's common stock having a value of twice the right's then current exercise price. In addition, if, after any person has become a 15%-or-more stockholder, the Company is involved in a merger or other business combination transaction with another person in which the Company does not survive or in which its common stock is changed or exchanged, or sells 50% or more of its assets or earning power to another person, each right will entitle its holder to purchase, at the right's then current exercise price, shares of common stock of such other person having a value of twice the right's then current exercise price. Unless a triggering event occurs, the rights will not trade separately from the common stock. The Company will generally be entitled to redeem the rights at $0.01 per right at any time until 10 days (subject to extension) following a public announcement that a 15% position has been acquired. STOCK INCENTIVE PLAN In November 1995, the Company adopted the Sonic Corp. 1995 Stock Incentive Plan (the "Stock Incentive Plan") whereby the Company may issue up to 180,000 shares of common stock to F-25 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 13. STOCKHOLDERS' EQUITY (CONTINUED) certain key employees. Participants in the Stock Incentive Plan receive awards of shares of restricted common stock (the "Restricted Stock"), subject to vesting only if the Company meets certain annual performance criteria. If the Company meets the performance criteria, the portion of the award tied to the criteria will vest. Until the Restricted Stock vests, an escrow agent holds the Restricted Stock. If the Company does not meet the performance criteria, the portion of the award tied to that criteria will not vest and the related shares are available for future awards. Upon vesting, the participant will have the right to receive certificates representing the shares of vested Restricted Stock. During fiscal year 1996, the Company awarded 130,500 shares of Restricted Stock which vest over a three-year period if specified performance goals are met (no shares were awarded in fiscal years 1998 and 1997). The Company did not meet the specified performance criteria in fiscal years 1998, 1997, and 1996 which resulted, or will result, in 28,500 shares, 36,000 shares and 30,000 shares, respectively, not vesting. In addition, 7,500 shares and 15,000 shares were forfeited in fiscal years 1998 and 1997, respectively, due to termination of employment. Shares applicable to awards which have not vested are not reflected as shares issued in the accompanying financial statements. 14. EMPLOYEE BENEFIT PLANS SAVINGS AND PROFIT SHARING PLAN The Company has a Savings and Profit Sharing Plan (the "Plan"), as amended, for eligible employees. Employees who have completed one year of service with the Company are eligible to participate in the Plan. Under the Plan, participating employees may authorize payroll deductions up to 11% of their earnings. The Company may elect to contribute a percentage of participants' contributions to the Plan. Additional amounts may be contributed at the option of the Company's board of directors. Company contributions are subject to vesting at the rate of 20% each year upon completion of two years of service, with 100% vesting after six years. Matching contributions of $184, $142 and $114 were made by the Company during fiscal years 1998, 1997 and 1996, respectively. For fiscal year 1998, a discretionary contribution of $100 was recognized as expense ($75 and $35 for fiscal years 1997 and 1996, respectively). 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 F-26 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 14. EMPLOYEE BENEFIT PLANS (CONTINUED) 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 $1,137, $804 and $341 during fiscal years 1998, 1997 and 1996, respectively. 15. EMPLOYMENT AGREEMENTS The Company has employment contracts with its President 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 $3,092 at August 31, 1998 due to loss of employment in the event of a change in control (as defined in the contracts). 16. CONTINGENCIES During fiscal year 1998, the Texas Supreme Court (the "Court") denied the Company's motion for rehearing of the application for a writ of error regarding the Texas Court of Appeals' reversal of the district court's judgment notwithstanding the verdict which reinstated the jury's verdict of $782 of actual damages, $1,000 of punitive damages, and interest in an action in which the plaintiffs claimed a subsidiary of the Company interfered with the contractual relations of the plaintiffs. The Court refused to exercise its discretionary jurisdiction to consider the decision of the Texas Court of Appeals. In connection with the denial, the Company recorded a $2,700 provision for litigation. The judgment was paid in full as of August 31, 1998. The Company has contingent liabilities for taxes, lawsuits and various other matters occurring in the ordinary course of business. Management of the Company believes that the ultimate resolution of these contingencies will not have a material adverse effect on the Company's financial position or results of operations. The Company has entered into agreements with several lenders pursuant to which such lenders may make loans to qualified franchisees. Under the terms of these agreements, the Company provides certain guarantees of a portion of the outstanding balances of the loans to franchisees. At August 31, 1998, these guarantees totaled $2,397. F-27 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST QUARTER SECOND QUARTER THIRD QUARTER 1998 1997 1998 1997 1998 1997 --------------------------------------------------------------------------------- Income statement data: Company-owned restaurant sales $ 41,235 $ 33,586 $ 37,198 $ 30,664 $ 49,927 $ 41,411 Franchised restaurants fees and royalties 8,342 6,827 7,005 5,945 8,691 7,080 Other 295 560 623 1,524 600 327 --------------------------------------------------------------------------------- Total revenues 49,872 40,973 44,826 38,133 59,218 48,818 Company-owned restaurants operating expenses 31,109 25,675 28,269 23,460 36,073 29,609 Selling, general and administrative 5,048 3,886 5,274 5,264 5,977 4,960 Depreciation and amortization 3,463 2,815 3,566 2,955 3,739 3,074 Minority interest in earnings of restaurant partnerships 1,583 1,357 1,392 1,084 2,730 2,437 Provision for impairment of long-lived assets 15 23 14 15 166 15 Special provision for litigation - - - - 2,700 - --------------------------------------------------------------------------------- Total expenses 41,218 33,756 38,515 32,778 51,385 40,095 --------------------------------------------------------------------------------- Income from operations 8,654 7,217 6,311 5,355 7,833 8,723 Interest expense, net 619 191 631 322 665 451 --------------------------------------------------------------------------------- Income before income taxes and cumulative effect 8,035 7,026 5,680 5,033 7,168 8,272 Provision for income taxes 2,992 2,617 2,116 1,875 2,670 3,081 --------------------------------------------------------------------------------- Income before cumulative effect 5,043 4,409 3,564 3,158 4,498 5,191 Cumulative effect of change in accounting 681 - - - - - --------------------------------------------------------------------------------- Net income $ 4,362 $ 4,409 $ 3,564 $ 3,158 $ 4,498 $ 5,191 --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- Income before cumulative effect per share: Basic $ .26 $ .22 $ .19 $ .16 $ .23 $ .26 Diluted $ .25 $ .21 $ .18 $ .15 $ .23 $ .26 Net income per share: Basic $ .23 $ .22 $ .19 $ .16 $ .23 $ .26 Diluted $ .22 $ .21 $ .18 $ .15 $ .23 $ .26 Weighted average shares outstanding: Basic 19,113 20,212 19,179 20,247 19,231 19,859 Diluted 19,701 20,649 19,824 20,582 19,913 19,949 FOURTH QUARTER FULL YEAR 1998 1997 1998 1997 ----------------------------------------------------- Income statement data: Company-owned restaurant sales $ 53,651 $ 47,078 $182,011 $152,739 Franchised restaurants fees and royalties 10,917 8,614 34,955 28,466 Other 623 402 2,141 2,813 --------------------------------------------------- Total revenues 65,191 56,094 219,107 184,018 Company-owned restaurants operating expenses 40,355 33,844 135,806 112,588 Selling, general and administrative 5,951 5,208 22,250 19,318 Depreciation and amortization 4,022 3,476 14,790 12,320 Minority interest in earnings of restaurant partnerships 2,199 2,680 7,904 7,558 Provision for impairment of long-lived assets 90 213 285 266 Special provision for litigation - - 2,700 - --------------------------------------------------- Total expenses 52,617 45,421 183,735 152,050 --------------------------------------------------- Income from operations 12,574 10,673 35,372 31,968 Interest expense, net 835 594 2,750 1,558 --------------------------------------------------- Income before income taxes and cumulative effect 11,739 10,079 32,622 30,410 Provision for income taxes 4,374 3,755 12,152 11,328 --------------------------------------------------- Income before cumulative effect 7,365 6,324 20,470 19,082 Cumulative effect of change in accounting - - 681 - --------------------------------------------------- Net income $ 7,365 $ 6,324 $ 19,789 $ 19,082 --------------------------------------------------- --------------------------------------------------- Income before cumulative effect per share: Basic $ .39 $ .33 $ 1.07 $ .96 Diluted $ .38 $ .33 $ 1.03 $ .95 Net income per share: Basic $ .39 $ .33 $ 1.03 $ .96 Diluted $ .38 $ .33 $ 1.00 $ .95 Weighted average shares outstanding: Basic 18,907 19,086 19,107 19,852 Diluted 19,517 19,441 19,738 20,156
F-28 Sonic Corp. Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data) 18. 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. 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 which 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, 1998 and 1997, carrying values approximate their estimated fair values. BORROWED FUNDS--Fair values for fixed rate borrowings are estimated using a discounted cash flow analysis that applies interest rates currently being offered on borrowings of similar amounts and terms to those currently outstanding. Carrying values for variable rate borrowings approximate their fair values. The carrying amounts and estimated fair values of the Company's fixed rate borrowings at August 31, 1998 were $51,203 and $52,442, respectively, and at August 31, 1997 the carrying amounts approximate their estimated fair values. F-29 Sonic Corp. Schedule II - Valuation and Qaulifying Accounts
ADDITIONS AMOUNTS WRITTEN BALANCE AT CHARGED TO WRITTEN OFF BALANCE BEGINNING COSTS AND AGAINST THE AT END DESCRIPTION OF YEAR EXPENSES ALLOWANCE RECOVERIES OF YEAR - -------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE Year ended: August 31, 1998 $ 273 $ 72 $ - $ - $ 345 August 31, 1997 $ 263 $ 125 $ 115 $ - $ 273 August 31, 1996 $ 177 $ 124 $ 93 $ 55 $ 263 ACCRUED CARRYING COSTS FOR RESTAURANT CLOSINGS AND DISPOSALS Year ended: August 31, 1998 $1,126 $ 285 $ 149 $ - $1,262 August 31, 1997 $1,462 $ 71 $ 407 $ - $1,126 August 31, 1996 $ 370 $1,354 $ 262 $ - $1,462
F-30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has caused the undersigned, duly-authorized, to sign this report on its behalf on this 24th day of November, 1998. Sonic Corp. By: /s/ J. Clifford Hudson ----------------------------------- J. Clifford Hudson President 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 Company, in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ J. Clifford Hudson President, Chief Executive November 24, 1998 - ------------------------------ Officer and Director J. Clifford Hudson, Principal Executive Officer /s/ W. Scott McLain Vice President, Chief Financial November 24, 1998 - ------------------------------ Officer and Treasurer W. Scott McLain, Principal Financial Officer /s/ Stephen C. Vaughan Vice President November 24, 1998 - ------------------------------ and Controller Stephen C. Vaughan, Principal Accounting Officer /s/ E. Dean Werries Chairman of the Board November 24, 1998 - ------------------------------ and Director E. Dean Werries /s/ Dennis H. Clark Director November 24, 1998 - ------------------------------ Dennis H. Clark /s/ Leonard Lieberman Director November 24, 1998 - ------------------------------ Leonard Lieberman /s/ H. E. Rainbolt Director November 24, 1998 - ------------------------------ H. E. Rainbolt /s/ Frank E. Richardson Director November 24, 1998 - ------------------------------ Frank E. Richardson Director November __, 1998 - ------------------------------ Robert M. Rosenberg
EXHIBIT INDEX EXHIBIT NUMBER AND DESCRIPTION 10.05. Form of Sonic Industries Inc. License Agreement (the Number 6A License Agreement) 10.06. Form of Sonic Industries Inc. License Agreement (the Number 5.2 License Agreement) 23.01. Consent of Independent Auditors 24.01. Power of Attorney 27.01. Financial Data Schedule EX-10.05 2 EXHIBIT 10.05 Exhibit 10.05 Form of Sonic Industries Inc. License Agreement (the Number 6A License Agreement) SONIC INDUSTRIES INC. NUMBER 6A LICENSE AGREEMENT BY AND BETWEEN SONIC INDUSTRIES INC., LICENSOR, AND _____________________________________ _____________________________________ _____________________________, LICENSEE SONIC DRIVE-IN OF _______________________________________, LOCATED AT ____________________________________________ ____________________________________________________. DATED: _______________________, 19_______. STORE NO. _________ CIF NO. __________ Store No._________ CIF No. __________ LICENSE AGREEMENT THIS AGREEMENT made this ____ day of _________________, 19___, by and between SONIC INDUSTRIES INC., an Oklahoma corporation ("Licensor"), and __________________________ ("Principal") __________________________ __________________________ (all of whom shall be jointly referred to herein as the "Licensee"). RECITALS Licensor is the developer and the sole and exclusive owner of the right to license the distinctive and proprietary drive-in, food service system under which food is sold to the public from drive-in restaurants operated under the trade name and federally registered trademark and service mark "Sonic". The Sonic System so developed now includes, among other things, the following elements, all or some of which may be deleted, changed, improved or further developed by Licensor from time to time: A. Methods and procedures for the preparation and serving of food and beverage products. B. Confidential recipes for food products and distinctive service accessories (including, but not limited to, uniforms, menus, packages, containers and additional paper or plastic items). C. Plans and specifications for distinctive standardized premises featuring characteristic exterior style, colors, and design (including angled parking stalls equipped with menu housings, speakers and tray supports), interior furnishings, equipment layout, exterior signage, and marketing techniques and materials. D. A uniform method of operating which is described in the Sonic Operations Manual. E. Distinctive and characteristic trade names, trade dress, trademarks and service marks, including, but not limited to: "Sonic", "Sonic Happy Eating," "America's Favorite Drive-In Sonic," signs, menu housings, designs, color schemes, standardized premises featuring characteristic exterior style, canopies, colors, and design (including angled parking stalls equipped with menu housings, speakers and tray supports), interior furnishings and equipment layout, and emblems as Licensor designates in the SONIC OPERATIONS MANUAL or otherwise in writing or through usage as prescribed for use with the Sonic System and as may from time to time be developed. F. Such exclusive and trade secrets as have been and may from time to time be developed, which are owned by Licensor and which are disclosed to its licensees in confidence in connection with the construction and operation of a Sonic drive-in restaurant. Licensee wishes to obtain a license from Licensor to operate a Sonic drive-in restaurant pursuant to the Sonic System and to be afforded the assistance provided by Licensor in connection therewith, and understands and accepts the terms, conditions and covenants set forth herein as those which are reasonably necessary to maintain Licensor's high and uniform standards of quality and service designed to protect the goodwill and enhance the public image of the Proprietary Marks and the Sonic System, and recognizes the necessity of operating the licensed Sonic drive-in restaurant in faithful compliance therewith, and with Licensor's standards and specifications. 1. DEFINITIONS. Unless the context of their use in this Agreement requires otherwise, the following words and phrases shall have the following meanings when used in initially-capitalized form in this Agreement. 1.01. AFFILIATE. The word "Affiliate" shall mean (a) any stockholder, director or officer of a specified Person (if the specified Person is a corporation), (b) any partner of a specified Person (if the specified Person is a partnership), (c) any member of a specified Person (if the specified Person is a limited liability company), (d) any employee of a specified Person, and (e) any Person which directly or indirectly through one or more intermediaries Controls the specified Person, the specified Person Controls, or shares a common Control with the specified Person. 1.02. CONTROL. The word "Control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person or entity, whether through the ownership of voting securities, by contract, or otherwise. 1.03. DMA. The term "DMA" shall mean a Designated Market Area as defined by A.C. Nielsen Company from time to time. 1.04. GROSS SALES. The phrase "Gross Sales" shall mean all revenues from sales resulting from all business conducted upon or from the Sonic Restaurant, whether evidenced by check, cash, credit, charge account, exchange or otherwise, and shall include (without limitation) the amounts received from the sale of goods, wares and merchandise, including sales of food, beverages and tangible property of every kind and nature, promotional or otherwise (excluding restaurant equipment) and for services performed from or at the Sonic Restaurant, whether the Licensee fills the orders from the Sonic Restaurant or elsewhere. Each charge or sale upon credit shall constitute a sale for the full price in the month during which the charge or sale occurs, regardless of the time when the Licensee receives payment (in whole or in part) for the charge or sale. The phrase "Gross Sales" shall not include (a) sales of merchandise for which the Licensee makes a cash refund, if 2 previously included in Gross Sales; (b) the price of merchandise returned by customers for exchange, if the Licensee previously included the sales price of the merchandise returned by the customer in Gross Sales and includes the sales price of merchandise delivered to the customer in exchange in Gross Sales; (c) amounts received from the sale of tobacco products; (d) the amount of any sales tax imposed by any governmental authority directly on sales and collected from customers, if the Licensee adds the amount of the tax to the sales price or absorbs the amount of the sales tax in the sales price and the Licensee actually pays the tax to the governmental authority; and (e) amounts not received for menu items because of discounts or coupons, if properly documented. The phrase "Gross Sales" also shall not include any proceeds received by the Licensee pursuant to an assignment made in accordance with the provisions of Section 13. 1.05. LICENSE. The word "License" shall mean the rights granted the Licensee pursuant to Section 2 of this Agreement. 1.06. MSA. The term "MSA" shall mean a Metropolitan Statistical Area as defined by the United States Census Bureau from time to time. An MSA shall not include any city or town otherwise falling within the MSA which has at least 10 miles of continuous undeveloped and sparsely populated rural land between every portion of its boundary and the boundary of the city which serves as the primary metropolitan area for the MSA. 1.07. PERSON. The word "Person" shall mean any individual or business entity, including (without limitation) corporation, joint venture, general partnership, limited partnership, limited liability company, or trust. 1.08. PROPRIETARY MARKS. The phrase "Proprietary Marks" shall mean the distinctive and characteristic trade names, trademarks, service marks, and trade dress which the Licensor designates in writing or through usage from time to time as prescribed for use with the Sonic System, including (without limitation) the terms "Sonic," "Happy Eating," and "America's Favorite Drive-In"; signs; emblems; menu housings; designs; color schemes; standardized premises featuring characteristic exterior style, canopies, colors and design (including angled parking stalls equipped with menu housings, speakers and tray supports); interior furnishings; and equipment layout. 1.09. PROTECTED AREA. The phrase "Protected Area" shall mean the area defined by Sections 2.02 and 2.03 of this Agreement. 1.10. SONIC RESTAURANT. The phrase "Sonic Restaurant" shall mean the Sonic drive-in restaurant licensed by this Agreement. 1.11. SONIC SYSTEM. The phrase "Sonic System" shall mean the unique, proprietary and confidential information of the Licensor, including (without limitation) the Sonic Operations Manual and consisting of (a) methods and procedures for the preparation of food and beverage products; (b) confidential recipes for food products; (c) distinctive service and accessories; (d) plans and specifications for interior and exterior signs, designs, layouts and color schemes (whether copyrighted or not); (e) methods, techniques, formats, systems, specifications, procedures, 3 information, trade secrets, sales and marketing programs; (f) methods of business operations and management; and (g) knowledge and experience regarding the operation and franchising of Sonic drive-in restaurants. 1.12. NON-TRADITIONAL LOCATIONS. The phrase "Non-traditional Locations" shall mean permanent or temporary food service facilities operating under one or more of the Proprietary Marks at locations featuring facilities other than free-standing buildings with canopies devoted solely to the operation of a Sonic drive-in restaurant and accessible to the general public by automobile from public thoroughfares. Non-traditional Locations shall include (without limitation) (a) military bases and other governmental facilities; (b) universities and schools; (c) airports and other transportation facilities; (d) stadiums, arenas and other sports and entertainment venues; (e) amusement and theme parks; (f) cafeterias and food courts in shopping centers, shopping malls, office buildings, and industrial buildings; (g) hotels and convention centers; (h) hospitals and nursing facilities; (i) museums, zoos and other public facilities; and (j) highway travel plazas, convenience stores, and gasoline filling stations. 2. LICENSE GRANT. Licensor grants to Licensee for the following stated term the right, license and privilege: 2.01. (a) To adopt and use the Sonic System at the Sonic Restaurant located at __________________________, ______________________, ________________. (b) To have the exclusive rights to adopt and use the Sonic System for a Sonic drive-in restaurant to be constructed within the current boundaries of the town or city of __________, __________, for a period of six months from the date hereof, with the obligation of selecting and having such site approved within such six month period and completing Section 2.01(a), above, within such six month period. 2.02. Subject to the provisions of paragraphs (c) and (d), below, the Licensor shall not own or operate a Sonic drive-in restaurant and shall not franchise any other Person to own or operate a Sonic drive-in restaurant (other than a Sonic drive-in restaurant licensed prior to the date of this Agreement) within the area determined by the following provisions: (a) (i) An area defined by a radius extending one and one-half miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of 75,000 or more. (ii) An area defined by a radius extending two miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of less than 75,000 but more than 25,000. 4 (iii) An area defined by a radius extending three miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of 25,000 or less. (iv) An area defined by a radius extending three miles from the front door of the Sonic Restaurant if located outside a city, town or MSA. (b) The foregoing radius shall not extend into the contractually-granted protected radius of any Sonic drive-in restaurant in existence as of the date of this Agreement and shall not extend into the franchised area of any developer under an existing area development agreement with the Licensor. The Licensor shall determine the population of an MSA from time to time after the date of this Agreement according to the latest published federal census. (c) The Licensor shall not own, operate or license any other Person to own or operate a Non-traditional Location (other than a Non-traditional Location owned, operated or licensed prior to the date of this Agreement) within the Protected Area without the Licensee's prior written consent. Simultaneously with the request for that written consent, the Licensor shall offer the Licensee a right of first refusal to develop the Non-traditional Location. The Licensee must notify the Licensor in writing of its decision regarding the right of first refusal to license and operate the Non-traditional Location within 30 days after the Licensor notifies the Licensee of the Licensor's request for the Licensee's written consent to own, operate and/or license the Non-traditional Location. If the Licensee chooses to exercise its right of first refusal, the Licensee must sign the Licensor's then current form of license agreement for a Non-traditional Location for the applicable jurisdiction within 30 days after the Licensee notifies the Licensor of its decision. The Licensee then must open the Non-traditional Location within the time period specified in the license agreement (if specified) or within 12 months after the date of the license agreement (if not specified). If the Licensee does not execute that agreement within the foregoing 30-day period or does not exercise its right of first refusal within the foregoing 30-day period, the Licensor shall have the right to proceed with the ownership, operation and/or licensing of the Non-traditional Location as disclosed to the Licensee only if the Licensee has given its written consent to the Licensor. If the Licensee elects, in its sole and absolute discretion, not to give its written consent, the Licensor shall not own, operate or license any other Person to own or operate the Non-traditional Location. (d) The Licensor has and hereby further reserves the right, in its sole discretion, to acquire the assets or controlling ownership of an existing restaurant within the Protected Area. However, prior to converting an acquired restaurant to a Sonic drive-in restaurant or a Non-traditional Location within the Protected Area, the Licensor shall offer the Licensee a right of first refusal to acquire the restaurant at a price equal to the Licensor's cost of acquiring the restaurant. If the restaurant represents a part of an acquisition of multiple restaurants, the Licensor shall make a reasonable allocation of its cost to acquire the restaurant. The Licensee must notify the Licensor of its decision regarding the right of first refusal within 30 days after the Licensor gives the Licensee written notice of its intention to convert the restaurant to a Sonic drive-in restaurant or Non- 5 traditional Location. If the Licensee chooses to exercise its right of first refusal, the Licensee must sign the Licensor's then current form of license agreement for a Sonic drive-in restaurant or Non-traditional Location, and pay the required license fee, as applicable, within 20 days after the Licensee notifies the Licensor of its decision. In the event the Licensee fails to convert the restaurant to a Sonic drive-in restaurant or Non-traditional Location pursuant to the terms of the applicable license agreement, the Licensor shall have the right to repurchase the restaurant from the Licensee at the same purchase price. If the Licensee does not exercise its right of first refusal, the Licensor shall have the right to own, operate and/or license other Persons to operate the restaurant in any manner which does not violate the provisions of this Agreement or the Licensor may sell or otherwise dispose of the restaurant to any person or entity under any terms or conditions the Licensor deems appropriate. The Licensor shall not own, operate or license any Person to operate the restaurant if the ownership or operation of the restaurant otherwise would violate the non-compete provisions of 16.01 of this Agreement if owned or operated by a Sonic licensee. 2.03. EFFICIENT MARKET DEVELOPMENT AND SALES DILUTION. The following additional provisions shall apply to the Sonic Restaurant: (a) In utilizing its best efforts to reduce the dilution of sales and profitability, in the event the Licensor develops or licenses another Person to develop a Sonic drive-in restaurant on the same street as the Sonic Restaurant (according to the Sonic Restaurant's designated street address) and no traffic barrier or break (such as a river or other waterway, interceding roadway, unpaved landmass, or other similar structure blocking through traffic) exists between the Sonic Restaurant and the proposed new site, notwithstanding the provisions of Section 2.02, above, the Protected Area provided by Section 2.02 shall equal two and one-half miles (each way) on that street and an additional 500 feet (each way from the center of the intersection) on any street crossing that street within the foregoing 2 1/2-mile distance. (b) In order to achieve efficient market development and in utilizing its best efforts to reduce the dilution of sales and profitability, in the event the Licensor develops or licenses another Person to develop a Sonic drive-in restaurant within two miles of the Sonic Restaurant (if permitted under Section 2.02, above), the Licensor shall apply at least the level of demographic analysis, market impact analysis, and site and market review used by the Licensor as of the date of this Agreement in considering the additional site for the development of a Sonic drive-in restaurant. 2.04. To advertise to the public as a Licensee of Licensor. 2.05. To adopt and use, but only in connection with the sale of those food and beverage products which have been designated in the Sonic menu as specified in the Sonic Operations Manual, the trade names, trademarks and service marks which the Licensor shall designate from time to time to be part of the Sonic System. 2.06. In the event the Licensee receives this license pursuant to Section 2.01(b), above, the selection of a site by Licensee shall be subject to the approval of Licensor in accordance with the standard site approval procedures required by this Agreement and the standard practices of Licensor. In the event a site for the Sonic Restaurant has not been approved by Licensor before the expiration 6 of the six month period provided for by Section 2.01(b), above, then this Agreement shall expire and be of no further force or effect. 2.07. If the Licensee relocates the Sonic Restaurant during the term of this Agreement with the written consent of the Licensor (which consent the Licensor shall not withhold unreasonably), this Agreement shall continue to apply to the Sonic Restaurant in accordance with the terms contained in this Agreement, except that the Licensor and the Licensee shall enter into an amendment to this Agreement to change the address of the Sonic Restaurant accordingly. 3. TERM. 3.01. INITIAL TERM. Unless sooner terminated as hereafter provided, the term of this License shall end 20 years from the effective date of this Agreement as set forth on the cover page to this Agreement. 3.02. OPENING OF RESTAURANT. Licensee expressly acknowledges and agrees that a pre-condition to opening the Sonic Restaurant shall be Licensor's written authorization to open, which authorization shall be given only upon Licensee's completing, to Licensor's satisfaction, (i) construction of the Sonic Restaurant, (ii) preparation of the Sonic Restaurant for commencement of operations, and (iii) training as required by Section 6.04 of this Agreement. 3.03. OPTION. At the end of the term, if Licensee desires, Licensee may renew the License to adopt and use the Sonic System at the Sonic Restaurant for an additional 10-year term, provided that prior to the expiration of the initial term: (a) Licensee gives Licensor written notice of Licensee's election to renew not less than six (6) months nor more than twelve (12) months prior to the end of the initial term. (b) Licensee is not, when notice is given, in material default of any provision of this Agreement or any amendment hereof or successor agreement hereto or in material default of any other agreement between Licensee and Licensor or Licensor's Affiliates involving any other License Agreement and has substantially complied with the terms and conditions of this Agreement and all other such agreements, during the term thereof. (c) All monetary obligations owed by Licensee to Licensor or Licensor's Affiliates from any source whatsoever (whether under this Agreement or otherwise) have been satisfied prior to renewal. (d) The Licensee executes a license agreement containing the same terms and conditions as this Agreement, except that the license agreement shall provide for a term of 10 years and shall contain the then current royalty rate and the then current national and local advertising expenditure requirements; provided, however, that in lieu of an initial license fee, a renewal fee shall be paid to Licensor in the amount of: (i) $3,000.00, or (ii) 20% of the then current initial license fee, whichever is greater. However, the renewal fee shall not exceed $6,000 as adjusted for inflation on 7 September 1 of each year in accordance with the consumer price index and using August of 1994 as the base amount. (e) Licensee performs such remodeling, repairs, replacements and redecorations as Licensor may reasonably require to cause the restaurant equipment and fixtures to conform to the plans and specifications being used for new or remodeled Sonic drive-in restaurants on the renewal date, provided Licensor notifies Licensee of such requirements within 30 days after receipt of Licensee's notice of renewal. (f) The Licensor and the Licensee execute a general release of each other, in a form satisfactory to the Licensor, of any and all claims the Licensee may have against the Licensor and its Affiliates, including (without limitation) all claims arising under any federal, state or local law, rule or ordinance, but excluding (as to the Licensor) any claims against the Licensee for (a) unpaid moneys due the Licensor or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of the Licensor's legal rights regarding the Proprietary Marks. The Licensor may waive the requirements of this paragraph (f) at the Licensor's election. (g) Licensee principal and/or manager at their expense attend and satisfactorily complete such retraining program as Licensor may require at its sole discretion. (h) Licensee meets the remodeling requirements set forth in Section 6.02(d) herein. 4. DUTIES OF LICENSOR. Licensor agrees to regularly advise and consult with Licensee in connection with the operation of the Sonic Restaurant and to provide to Licensee: 4.01. PLANS. Standard Sonic Plans and Specifications for a free standing building, equipment layout and signs (See Subsection 6.03), together with advice and consultation. Any modifications for nonstandard buildings, whether required by local zoning or building laws or otherwise, must be approved in writing by Licensor and are to be paid by Licensee. 4.02. OPERATIONS MANUAL. The Sonic Operations Manual containing the standards, specifications, procedures and methods for operating a Sonic drive-in restaurant, a copy of which will be loaned to Licensee for the term of this Agreement. 4.03. MARKETING ASSISTANCE. Certain marketing materials and such merchandising, marketing and advertising research data and advice as may be developed from time to time by Licensor and deemed to be helpful in the operation of a Sonic drive-in restaurant. 4.04. COMMUNICATION. Certain management development and motivational seminars and periodic newsletters which communicate to Licensee available advertising materials and new 8 developments, techniques and improvements in areas of restaurant equipment, management, food preparation and service which are pertinent to the operation of a restaurant using the Sonic System. 4.05. EVALUATION PROGRAM. A field evaluation program for the mutual benefit of both Licensor and Licensee to promote uniform standards of operation and quality control. 5. FEES. 5.01. LICENSE FEE. The Licensee acknowledges that: (a) the initial grant of this License constitutes the sole consideration for the payment of a license fee of $30,000 paid by Licensee to Licensor concurrently with the execution hereof; and (b) the fee has been earned by Licensor (except where the construction of the Restaurant has not been completed within one year from the date of this License). Licensor reserves the right, in case construction of the Restaurant should be abandoned, the lease assigned, or other interest in the premises be relinquished, and Licensee shall have the right, if Licensee does not consummate a lease for the Restaurant within one year from the date of this Agreement, to terminate this License upon written request to Licensor, after which Licensor will immediately refund to Licensee the license fee less the sum of $10,000 which shall be fully earned by Licensor upon execution and delivery of this contract. At such time as the Restaurant is completed and ready for occupancy, the license fee shall be deemed to be earned. 5.02. ROYALTY FEES. On or before the 20th day of each calendar month, the Licensee shall pay a royalty fee determined by the following scale based on the gross sales:
Gross Sales But Not Royalty Greater Than More Than Rate $ 0.00 $ 5,000.00 1.00% $ 5,000.00 $10,000.00 2.00% $10,000.00 $15,000.00 3.00% $15,000.00 $30,000.00 4.00% $30,000.00 $40,000.00 4.25% $40,000.00 $50,000.00 4.50% $50,000.00 $60,000.00 4.75% $60,000.00 N/A 5.00%
The calculation of Gross Sales and the corresponding royalty fees shall take place on a cumulative basis. For example, the following formula results in the calculation of the royalty fee on $50,000 of gross sales: Royalty Fee = ($5,000 x .01) + ($5,000 x .02) + ($5,000 x .03) + ($15,000 x .04) + ($10,000 x .0425) + ($10,000 x .0450). 5.03. ADVERTISING FEE. (a) On or before the 20th day of each calendar month throughout the term of this Agreement, Licensee shall pay to Sonic Advertising Fund, which is administered by Licensor, an advertising contribution fee in an amount equal to .75% of the Gross Sales received by Licensee 9 from the operation of the Sonic Restaurant during the calendar month next preceding the date of such payment. Such payment shall be forwarded with the profit and loss statement required to be provided pursuant to Section 10.01 herein. (b) The amount due to Licensor by Licensee pursuant to Section 5.03, above, shall be in addition to and separate from that which Licensee is obligated to spend pursuant to Section 11.01(a) of this agreement. 5.04. TRANSFER FEE. (a) A transfer fee in the amount of Five Hundred Dollars ($500) shall be paid by Licensee in the event of a transfer or assignment of this agreement (resulting in a change in Control of the License) to a licensee then-currently qualified as a licensee, excluding assignments under Subsections 13.02 and 13.03. (b) A transfer fee in the amount of One Thousand Five Hundred Dollars ($1,500.00) shall be paid by Licensee in the event of a transfer or assignment of this agreement (resulting in a change in Control of this license) to a new licensee not then-currently qualified as a licensee, excluding assignments under Subsections 13.02 and 13.03. 5.05. LATE CHARGES. In the event any payments required by Sections 5.02, 5.03 or 5.04, above, are not paid on or before the date on which they are due, a late charge in an amount equal to 1.75% per month shall be levied against such amounts due and shall be owing to Licensor by the Licensee from the date on which such obligations were due until any such obligations are paid in full. In the event the interest rate set out in this Section 5.05 exceeds that amount permitted by Oklahoma law, then the maximum interest rate permitted by Oklahoma law shall be charged. 6. DUTIES OF LICENSEE. 6.01. SONIC RESTAURANT SITE. (a) The site at which Licensee shall operate the Sonic Restaurant is more fully described in paragraph (a) of Section 2.01. During the term of this agreement, the site shall be used exclusively for the purpose of operating a franchised Sonic drive-in restaurant. (b) In the event the Sonic Restaurant premises suffers some physical casualty, the minimum acceptable quality and appearance for the restored restaurant will be that which existed just prior to the casualty, unless the Sonic Restaurant was below minimum acceptable standards for Licensor at the time of casualty in which event the Sonic Restaurant will be restored to a condition which meets the minimum acceptable standard according to the Licensor. However, Licensee agrees to make all reasonable effort to have the restored Sonic Restaurant reflect the then current image, design and specifications of Sonic drive-in restaurants. If the Sonic Restaurant is substantially destroyed by fire or other casualty, Licensee may, with the written consent of Licensor elect to terminate this agreement in lieu of Licensee reconstructing the restaurant, provided that for a period 10 of 18 months after said election, Licensee shall not enter into, become landlord of or loan money to any restaurant business within a three (3) mile radius of the drive-in site which is similar in nature to, or competitive with a Sonic drive-in restaurant or considered a fast food establishment. 6.02. CONSTRUCTION. (a) Licensee agrees to complete the construction of the Sonic Restaurant within a minimum of 365 days from the effective date of this agreement. Unless Licensee is remodeling an existing building, Licensee shall construct the Sonic Restaurant in accordance with the site plan approved by Licensor for such site and with Licensor's standard construction plans and specifications ("Sonic Plans and Specifications") and layout subject, however, to any alterations thereto that may be required by any applicable law, regulation or ordinance. If alterations of any kind are required to be made to the site plan, as approved by Licensor, or to the Sonic Plans and Specifications or layouts for any reason, such alterations must be approved by Licensor in writing before any work is begun on the Sonic Restaurant. The Licensee shall submit the final site layout and construction plans for the Sonic Restaurant to the Licensor for its written approval. Any costs including engineering and architectural fees incurred in obtaining approvals by the appropriate governmental authorities of the construction plans, specifications and layouts shall be paid by Licensee. (b) If Licensee is remodeling the existing restaurant, Licensor shall have the right to inspect and approve all plans and specifications prior to the commencement of any work. The Licensee shall submit the final remodeling plans and specifications for the Sonic Restaurant to the Licensor for its written approval. Nothing in this section shall be construed as an endorsement or guarantee of the conformity of such plans to applicable local, state or federal building or safety codes, or a guarantee that construction will be done in conformity with such approved plans. In any event, Licensee shall obtain written approval of such plans or written notice of Licensor's waiver of the rights reserved hereunder prior to the commencement of construction. (c) Licensee shall not deviate from the approved plans and specifications in any manner in the construction or remodeling of the restaurant without the prior written approval of Licensor. If at any time Licensor determines (prior to opening date) that Licensee has not constructed or remodeled the Sonic Restaurant in accordance with the plans and specifications approved by Licensor, Licensor shall, in addition to any other remedies, have the right to obtain an injunction from a court of competent authority against the continued construction and opening of the Sonic Restaurant, and Licensee hereby consents to any such injunction. (d) The Licensor may require the Licensee to undertake extensive remodeling and renovation and substantial modifications to existing buildings necessary for the Licensee's restaurant to conform with Licensor's then existing system image. The Licensor may exercise the foregoing right at any time during the term of this Agreement, but may not require (1) the remodeling of the restaurant more than once every seven years or (2) the remodeling of a restaurant built within the preceding three years, unless the required remodeling will not exceed 15% of the original cost of the building, equipment and land improvements (as adjusted for increases in the consumer price index 11 after the construction date of the restaurant). Notwithstanding the foregoing, the Licensor shall have the right to require the Licensee to modify or replace the large Sonic sign for the restaurant at any time during the term of this Agreement. If the Licensor exercises its right to require the Licensee to undertake extensive remodeling or renovation or substantial modification within five years of the end of the term of this Agreement, the Licensee may exercise any right to renew the term of this Agreement at that point in time in accordance with the applicable provisions of this Agreement, which renewal then shall take effect as of the expiration the then current term of this Agreement. 6.03. EQUIPMENT AND SIGN. (a) Licensee shall only install in and about the Sonic Restaurant such equipment, fixtures, furnishings and other personal property as are required and which strictly conform to the appearance, uniform standards and specifications of Licensor existing from time to time, which shall be communicated to Licensee in the Sonic Operations Manual or otherwise in writing. Licensee may purchase the equipment from Licensor if Licensor at that time is offering such equipment for sale on a regular basis, but is not required by this or any other agreement to do so. (b) In order to provide maximum exposure of the Sonic name and marks, Licensee shall prominently display and maintain at Licensee's own expense one (1) Sonic drive-in sign ("Sign") which complies with the specifications required by Licensor from time to time and in such location as Licensor may approve. Licensee shall not display any other sign or advertising at the Sonic Restaurant without Licensor's prior written approval. (c) Licensee may lease the required Sign from Licensor or may acquire or lease the Sign from any other source approved by Licensor. Licensee agrees to require in any lease agreement with Licensor or other suppliers a clause giving Licensor the right to remove the Sign from the Sonic Restaurant upon termination of this agreement. (d) Licensee hereby agrees that it shall, upon Licensor's request, obtain from the landlord of the property at which the Sonic Restaurant is located, a landlord's lien and waiver releasing all claims against any equipment or sign which belongs to Licensor. (e) If Licensee is or becomes a lessee of the Sonic Restaurant premises, he shall provide Licensor with a true and correct, complete copy of any such lease, and shall have included therein provisions, in form satisfactory to Licensor, expressly permitting both the Licensee and Licensor to take all actions and make all alterations referred to under subsection 15.01(c). Any such lease shall also require the lessor thereunder to give Licensor reasonable notice of any contemplated termination and a reasonable time in which to take and make the above actions and alterations and provide that the Licensee has the unrestricted right to assign such lease to Licensor. 6.04. TRAINING. (a) Licensee acknowledges the importance of the quality of business operations among all restaurants in the Sonic System and, agrees that it will not allow any of its licensed 12 establishments to be opened or operated without having at least one individual working full time at the Sonic Restaurant who has completed the Sonic Management Development Program. If the trained individual ceases to work full time at the Sonic Restaurant for whatever reason, the Licensee shall have 120 days in which to replace the individual with a person who has completed the Sonic Management Development Program. (b) Licensee shall pay all traveling expenses, living expenses, and any other personal expenses for themselves and managers while enrolled in the training program. As part of the initial franchise fee paid pursuant to Section 5.01 herein, Licensee shall have the right to have one principal and one manager of the Sonic Restaurant attend the Sonic Management Development Program for no cost other than those set out in the preceding sentence. Any additional parties attending the Sonic Management Development Program shall bear the cost, including any fees and tuition due for such training program. 6.05. COMPLIANCE WITH ENTIRE SYSTEM. (a) Licensee acknowledges that every component of the Sonic System is important to Licensor and to the operation of the Sonic Restaurant as a Sonic drive-in restaurant, including a designated menu of food and beverage products; uniformity of food specifications, preparation methods, quality and appearance; and uniformity of facilities and service. (b) Licensor shall have the right to inspect the Sonic Restaurant at all reasonable times to ensure that Licensee's operation thereof is in compliance with the standards and policies of the Sonic System. In the event that such inspection reveals any deficiency or unsatisfactory condition with respect to any aspect of the drive-in operation, Licensee shall, within 72 hours of Licensee's receipt of notice of such condition or such other time as Licensor in its sole discretion may provide, correct or repair such deficiency or unsatisfactory condition if it is correctable or repairable within such time period, and, if not, shall within such time commence such correction or repair and thereafter diligently pursue same to completion. The preceding sentence notwithstanding, the Licensee shall take immediate action to correct or repair any deficiency or unsatisfactory condition which poses a risk to public health or safety. In the event Licensee fails to comply with the foregoing obligations to correct and repair, Licensor, upon 24 hours' notice to Licensee, shall have the right, without being guilty of trespass or tort, to forthwith make or cause to be made such corrections or repairs, and the expense thereof, including board, wages, lodging and transportation of Licensor personnel, if utilized, shall be paid by Licensee upon billing by Licensor. The foregoing shall be in addition to any other right or remedies the Licensor may have. (c) Licensee shall comply with the entire Sonic System as described herein and in the Sonic Operations Manual, including but not limited to the following: (i) Operate the Sonic Restaurant in a clean, wholesome manner in compliance with prescribed standards of quality, service and cleanliness; comply with all business policies, practices and procedures imposed by Licensor; and maintain the building, equipment and parking area in a good, 13 clean, wholesome condition and repair, well lighted and in compliance with designated standards as may be prescribed from time to time by Licensor. (ii) Purchase and install kitchen fixtures, lighting and other equipment and signs in accordance with the equipment specifications and layout initially designated by Licensor. (iii) Licensee shall not, without prior written consent of Licensor: (a) make any building design conversion or (b) make any alterations, conversions or additions to the building or parking area. (iv) Make repairs or replacements required because of damage, wear and tear or in order to maintain the Sonic Restaurant building and parking area in good condition and in conformity with blueprints and plans. (v) Maintain the parking stalls, as required in the standard Sonic Plans and Specifications, for the exclusive use of Sonic Restaurant customers. (vi) Operate the Sonic Restaurant everyday of the year (except Easter, Thanksgiving and Christmas), and at least ten (10) hours per day or such other hours as may from time to time be reasonably prescribed by Licensor (except when the Sonic Restaurant is untenantable as a result of fire or other casualty), maintain sufficient supplies of food and paper products and employ adequate personnel so as to operate the Sonic Restaurant at its maximum capacity and efficiency. (vii) Cause all employees of Licensee, while working in the Sonic Restaurant, to: (a) wear uniforms of such color, design and other specifications as Licensor may designate from time to time, (b) present a neat and clean appearance and (c) render competent and courteous service to Sonic Restaurant customers. (viii) All menu items which Licensor may deem appropriate to take fullest advantage of the potential market and achieve standardization in the Sonic System will be served, and no items which are not set forth in the Sonic Operations Manual or otherwise authorized and approved in writing by Licensor will be served. (ix) In the dispensing and sale of food products: (a) use only containers, cartons, bags, napkins and other paper goods and packaging bearing the approved trademarks and which meet the Sonic System specifications and quality standards, (b) use only those flavorings, garnishments and food and beverage ingredients which meet the Sonic 14 System specifications and quality standards, which Licensor may designate from time to time and (c) employ only those methods of food handling, preparation, and serving which Licensor may designate from time to time. (x) Make prompt payment in accordance with the terms of invoices rendered to Licensee including but not limited to, his purchase of fixtures, equipment and food and paper supplies. (xi) At his own expense, comply with all federal, state, and local laws, ordinances and regulations affecting the operation of the Sonic Restaurant. (xii) Licensee shall not install any electronic games or other games of chance at the Sonic Restaurant without the express prior written consent of Licensor. (xiii) Furnish Licensor with current changes in home addresses and phone number of its owners and manager and, upon the Licensor's reasonable request, provide updates of personal financial statements or other credit information. (xiv) The Licensee shall notify the Licensor's Director of Corporate Communications or, if not available, the most senior executive officer of the Licensor as soon as possible and, in any event, within 12 hours after the occurrence at the Sonic Restaurant of any event which could have an adverse impact on the Sonic Restaurant and/or the Sonic System, including (without limitation) the death or serious bodily injury of any employee or customer for any reason or the risk of infection by a contagious disease. 6.06. APPROVED SUPPLIERS AND ADVERTISING AGENCIES. (a) The Licensor may require the Licensee (i) to purchase food, beverages, signs and equipment which meet the specifications established by the Licensor, (ii) to participate in the Licensor's approved purchasing cooperative for the area in which the Sonic Restaurant is located, and (iii) to retain and utilize exclusively the marketing and advertising services of the Licensor approved advertising agency of record. In addition, the Licensee immediately shall use the Licensee's vote or votes in all advertising cooperatives in which the Licensee participates to support the use of the advertising agency of record for the Sonic drive-in restaurant chain. (b) The Licensor may require the Licensee to support the use of and to use the products and programs of the cola syrup supplier approved by the Licensor and used by a majority of all Sonic drive-in restaurants, to the exclusion of any other supplier of cola syrup. 15 (c) The Licensor may require the Licensee to comply with the foregoing provisions not only for the Sonic Restaurant, but also (to the extent the Licensee exercises Control) for all other Sonic drive-in restaurants for which the Licensee serves as a licensee. With regard to such existing Sonic drive-in restaurants, the Licensee shall use the Licensee's best efforts to accomplish the foregoing, including (in the event of any contracts in place prior to August 1, 1994) negotiating in good faith and assisting and supporting the agency of record or new supplier with the assumption, purchase or mutual termination of the contract. (d) The Licensor hereby explicitly retains the exclusive right to consider, review or approve any and all distributors which may hold, sell or distribute Sonic-labeled goods or products, except that the Licensor shall not withhold unreasonably its approval of a supplier approved for use by a duly constituted purchasing cooperative. (e) The terms of this Section 6.06 shall continue in effect for as long as the Licensee serves as a licensee for a Sonic drive-in restaurant and shall survive the expiration or termination of this Agreement. (f) If at least 95% of all Sonic drive-in restaurants are in compliance with paragraphs (a) and (b) of Section 6.06, the Licensor periodically shall submit the approved advertising agency or cola syrup supplier to competitive bid or review, but shall not be obligated to do so more often than once every three (3) years. 6.07. BEST EFFORTS. Licensee shall diligently and fully exploit his rights in this License by personally devoting his best efforts and, in case more than one (1) individual has executed this License as the Licensee, at least one (1) individual Licensee shall devote his full time and best efforts to the operation of the Sonic Restaurant. Licensee shall keep free from any activities which would be detrimental to or interfere with the business of the Sonic Restaurant, the Sonic System, or Licensor. 6.08. INTERFERENCE WITH EMPLOYMENT RELATIONS OF OTHERS. During the term of this License, Licensee shall not employ or seek to employ any person who is at the time employed by Licensor or any of its subsidiaries in a management level position. In addition, during the term of this License, Licensor agrees not to employ or seek to employ any person who is at the time employed by Licensee in a management level position. This Subsection 6.08 shall not be violated if such person has left the employ of any of the foregoing parties for a period in excess of six (6) months. 6.09. LICENSOR'S STANDARDS. Licensee shall operate the Sonic Restaurant specified in this License in conformity with the Sonic System and the obligations set forth in this agreement and shall strictly adhere to Licensor's standards and policies as they exist now and as they may be from time to time modified. 6.10. MAJORITY INTEREST OWNER. Licensee represents, warrants and agrees that Licensee actually owns the majority interest in the legal and equity ownership and Control of the operation of the Sonic Restaurant, and that Licensee shall maintain such interest during the term of this 16 License except only as otherwise permitted pursuant to the terms and conditions of this License. Licensee shall furnish Licensor with such evidence as Licensor may request from time to time for the purpose of assuring Licensor that Licensee's interest remains as represented herein. 7. PROPRIETARY MARKS. 7.01. LICENSOR'S REPRESENTATIONS. Licensor represents with respect to the Proprietary Marks that Licensor will use and permit Licensee and other licensees to use the Proprietary Marks only in accordance with the Sonic System and the standards and specifications attendant thereto which underlie the goodwill associated with and symbolized by the Proprietary Marks. 7.02. USE OF MARKS. With respect to Licensee's licensed use of the Proprietary Marks pursuant to this agreement, Licensee agrees that: (a) Licensee shall use only the Proprietary Marks designated by Licensor and shall use them only in the manner authorized and permitted by Licensor. (b) Licensee shall use the Proprietary Marks only for the operation of the Sonic Restaurant. (c) During the term of this agreement and any renewal hereof, Licensee shall identify itself as the owner of the Sonic Restaurant in conjunction with any use of the Proprietary Marks, including, but not limited to, invoices, order forms, receipts, and contracts, as well as at such conspicuous locations on the premises of the Sonic Restaurant as Licensor shall designate in writing. The identification shall be in the form which specifies Licensee's name, followed by the term "Licensed Proprietor", or such other identification as shall be approved by Licensor. (d) Licensee's rights to use the Proprietary Marks is limited to such uses as are authorized under this agreement, and any unauthorized use thereof shall constitute an infringement of Licensor's rights. (e) Licensee shall not use the Proprietary Marks to incur any obligation or indebtedness on behalf of Licensor. (f) Licensee shall not use the Proprietary Marks as part of its corporate or other legal name if not already in existence prior to the effective date of this agreement. (g) Licensee shall comply with Licensor's instructions in filing and maintaining the requisite trade name or fictitious name registrations, and shall execute any documents deemed necessary by Licensor or its counsel to obtain protection for the Proprietary Marks or to maintain their continued validity and enforceability. 17 (h) In the event that litigation involving the Proprietary Marks is instituted or threatened against Licensee, Licensee shall promptly notify Licensor and shall cooperate fully in defending or settling such litigation. 7.03. LICENSEE'S UNDERSTANDING. Licensee expressly understands and acknowledges that: (a) As between the parties hereto, Licensor has the exclusive right and interest in and to the Proprietary Marks and the goodwill associated with and symbolized by them, and any and all use thereof by Licensee inures to the benefit of Licensor. (b) The Proprietary Marks are valid and serve to identify the Sonic System and those who are licensed under the Sonic System. (c) Licensee shall not directly or indirectly contest the validity or the ownership of the Proprietary Marks. (d) Licensee's use of the Proprietary Marks pursuant to this agreement does not give Licensee any ownership interest or other interest in or to the Proprietary Marks, except the nonexclusive license granted herein. (e) Any and all goodwill arising from Licensee's use of the Proprietary Marks in its licensed operations under the Sonic System shall inure solely and exclusively to Licensor's benefit, and upon expiration or termination of this agreement and the License herein granted, no monetary amount shall be assigned as attributable to any goodwill associated with Licensee's use of the Sonic System or the Proprietary Marks. (f) The right and license of the Proprietary Marks granted hereunder to Licensee is nonexclusive except as provided in subsection 2.01(a) of this agreement, and Licensor thus has and retains the right among others: (i) To grant other licenses for the Proprietary Marks, in addition to those licenses already granted to existing licensees. (ii) To use the Proprietary Marks in connection with selling products and services. (iii) To develop and establish other systems for the same or similar Proprietary Marks, or any other Proprietary Marks, and grant licenses or franchises thereto without providing any rights therein to Licensee. (g) Licensor reserves the right to substitute different Proprietary Marks for use in identifying the Sonic System and the businesses operating thereunder if Licensor's currently owned Proprietary Marks no longer can be used. 18 8. MANUAL. Licensor shall loan to Licensee for use at the Sonic Restaurant the SONIC OPERATIONS MANUAL prepared by Licensor for use by licensees of Sonic drive-in restaurants similar to the Sonic Restaurant to be operated by Licensee. Licensee recognizes that the SONIC OPERATIONS MANUAL contains detailed information relating to operation of the Sonic Restaurant including: (a) food formulas and specifications for designated food and beverage products; (b) methods of inventory control; (c) bookkeeping and accounting procedures; (d) business practices and policies; and (e) other management, advertising, and personnel policies. Licensee agrees to promptly adopt and use exclusively the formulas, methods and policies contained in the SONIC OPERATIONS MANUAL, now and as they may be modified by Licensor from time to time and to return said manual to Licensor at the expiration or earlier termination of this License. 9. CONFIDENTIAL INFORMATION. 9.01. Licensor possesses certain unique, proprietary and confidential information, consisting of methods and procedures for preparation of food and beverage products, confidential recipes for food products, distinctive service and accessories, plans and specifications for interior and exterior signs, designs, layouts and color schemes, and methods, techniques, formats, systems, specifications, procedures, information, trade secrets, sales and marketing programs, methods of business operations and management, and knowledge of and experience in the operation and franchising of Sonic drive-in restaurants and the Sonic System (collectively, the "Confidential Information"). Licensor will disclose the Confidential Information to Licensee in furnishing Licensee the Sonic Plans and Specifications for a Sonic drive-in restaurant, the training program, and the SONIC OPERATIONS MANUAL, and in providing guidance and assistance to Licensee during the term of this agreement. The SONIC OPERATIONS MANUAL, as modified by Licensor from time to time, and the policies contained therein, are incorporated in this agreement by reference. 9.02 Licensee acknowledges and agrees that Licensee shall not acquire any interest in the Confidential Information, other than the right to utilize it in the development and operation of the Sonic Restaurant (and other Sonic drive-in restaurants under license agreements with Licensor) during the term of this agreement, and that the use or duplication of the Confidential Information in any other business would constitute an unfair method of competition. Licensee acknowledges and agrees that the Confidential Information is proprietary to Licensor, may constitute trade secrets of Licensor and is disclosed to Licensee solely on the condition that Licensee agrees, and Licensee does hereby agree, that Licensee: (i) shall not use the Confidential Information in any other business or capacity, or for the benefit of any other Person or entity; (ii) shall maintain the absolute confidentiality of the Confidential Information, and shall not disclose or divulge the Confidential Information to any unauthorized Person or entity, during and after the term of the License; 19 (iii) shall not make unauthorized copies of any portion of the Confidential Information disclosed in printed, audio, or video form (except in connection with instruction of employees in the operation of the Sonic Restaurant); and (iv) shall adopt and implement all procedures prescribed from time to time by Licensor to prevent unauthorized use or disclosure of the Confidential Information, including, without limitation, restrictions on disclosure thereof to employees of the Sonic Restaurant and the use of nondisclosure and non-competition clauses in employment agreements with employees (including all owners, shareholders and partners of Licensee) who have access to the Confidential Information. 9.03. Licensee may not at any time, in any manner, directly or indirectly, and whether or not intentionally, copy any part of the SONIC OPERATIONS MANUAL, permit any part of it to be copied, disclose any part of it except to employees or other having a need to know its contents for purposes of operating the Sonic Restaurant, or permit its removal from the Sonic Restaurant without prior written consent from Licensor. Notwithstanding anything to the contrary contained in this agreement and provided Licensee shall have obtained Licensor's prior written consent, the restrictions on Licensee's disclosure and use of the Confidential Information shall not apply to the following: (a) information, processes or techniques which are or become generally known in the food service industry, other than through disclosure (whether deliberate or inadvertent) by Licensee; and (b) disclosure of the Confidential Information in judicial or administrative proceedings to the extent that Licensee is legally compelled to disclose such information, provided Licensee shall have used its best efforts, and shall have afforded Licensor the opportunity, to obtain an appropriate protective order or other assurance satisfactory to Licensor of confidential treatment for the information required to be so disclosed. 10. ACCOUNTING AND RECORDS. 10.01. On or before the 20th day of each month, Licensee shall submit to Licensor a complete profit and loss statement in a form prescribed by Licensor and such statistical reports in such form as Licensor shall reasonably require from time to time, for the previous month immediately ended. 10.02. Licensee shall keep and preserve full and complete records of the Sonic Restaurant business for at least three (3) years in a manner and form satisfactory to Licensor and shall also deliver such additional financial, operating and other information and reports as Licensor may reasonably request on the forms and in the manner prescribed by Licensor; provided, however, that Licensee shall maintain, at a minimum, those books and records required to be kept by the Internal 20 Revenue Service under the Internal Revenue Code for purposes of its regulation of Licensee's business and make the same books available to Licensor. 10.03. In meeting the requirements set forth in Sections 10.01 and 10.02 above, Licensee shall keep records substantiating and enter as a line item on its financial statements amounts representing the valuation for goods (whether food, paper or otherwise) which constitute charitable contributions to third parties from the same goods out of the Sonic Restaurant. Likewise, the Licensee shall maintain records and enter on its financial statements (particularly a line item on its profit and loss statement) information representing the value or amount of sales represented by coupons traded with and discounts granted by the Licensee at the Sonic Restaurant. 10.04. Licensee further agrees to submit, within 90 days following the close of each fiscal year of the Sonic Restaurant's operation, a profit and loss statement covering operations during such fiscal year and the balance sheet taken as of the close of such fiscal year. 10.05. Licensor shall have the right to inspect and audit Licensee's accounts, books, records and tax returns at all times during and after the term of this agreement. If such inspection discloses that Gross Sales actually exceeded the amount reported by Licensee or that Licensee failed to make advertising expenditures required by Sections 11.01(a) or 11.01(b), Licensee shall immediately pay Licensor: (i) the additional royalty fee, advertising fee and advertising expenditures; (ii) interest on all unpaid amounts (from the original due date) at a rate equal to that provided by Section 5.05 herein; and (iii) a ten percent (10%) surcharge on all unpaid amounts. If such inspection discloses that Gross Sales actually exceeded the amount reported by Licensee as Licensee's Gross Sales by an amount equal to three percent (3%) or more of the Gross Sales originally reported to Licensor or, in the case of failing to make required advertising expenditures, that such unpaid expenditures exceeded three percent (3%) of the amount required to be expended, Licensee shall bear the cost of such inspection and audit at rates and fees customarily charged by Licensor for such auditing and inspecting services and duties. Unpaid advertising expenditures, including interest and surcharges collected by Licensor pursuant to this section, shall be used in accordance with the expenditures authorized by Section 5.03; nevertheless, Licensor may, on a case by case basis, at Licensor's sole discretion, use such collected amounts in accordance with the expenditures authorized by Sections 11.01(a) and 11.01(b). Licensor shall have the right to bring an action in its own name to collect unpaid advertising expenditures required by Section 11 herein. 10.06. If the Licensor has reason to believe that the Licensee may not have reported all of its Gross Sales, the Licensor may require the Licensee to have its profit and loss statement and balance sheet certified by an independent public accountant. Licensee shall at his expense cause a Certified Public Accountant to consult with Licensor concerning such statement and balance sheet. The original of each such reports required by this Section 10.06 shall be mailed to Licensor's business office at the address designated in Section 19 below. 10.07. If Licensee fails to timely provide Licensor with complete profit and loss statements, accounts, books, records and tax returns pertaining to the Sonic Restaurant business, or fails to fully cooperate with Licensor's audit of the Sonic Restaurant business, Licensor shall have the right to 21 estimate Licensee's Gross Sales for the Sonic Restaurant using information available on the Sonic Restaurant or other Sonic drive-in restaurants. Licensee agrees to accept Licensor's estimates as conclusively correct until Licensee fully complies with Licensor's accounting and disclosure requirements under this agreement. However, if the Licensee's subsequent accounting and disclosures reveal that Licensee under-reported Gross Sales or underpaid fees due under this agreement, Licensor may recover all deficiencies and may litigate claims of fraud even though Licensor may have already obtained a judgment using Licensor's estimates. Furthermore, nothing in this agreement or any judgment using estimates shall prevent or hinder Licensor's further efforts and rights to obtain the accounting and disclosures which Licensee is required to give to Licensor under this agreement. 10.08. The Licensor shall have the right to assemble and disseminate to third parties financial and other information regarding the Licensee and other licensees of the Licensor to the extent required by law or to the extent necessary or appropriate to further the interests of the Sonic System as a whole. The Licensor shall have the right to disclose the business name, address and telephone number of the Licensee as they appear in the Licensor's records to any Person making inquiry as to the ownership of the Sonic Restaurant. The Licensor shall not disclose specific financial information regarding the Licensee or the Sonic Restaurant to any Person without (a) the Licensee's prior, written consent or (b) being directed to disclose the information pursuant to the order of a court or other governmental agency. 11. ADVERTISING EXPENDITURES. 11.01. STANDARD PROGRAM. Recognizing the value of advertising and the importance of the standardization of advertising programs to the furtherance of the goodwill and public image of the System, the parties agree as follows: (a) In the event the Sonic Restaurant lies within a DMA for which a Licensor-approved advertising cooperative has been formed, Licensee shall contribute to such advertising cooperative an amount required by such advertising cooperative on a schedule required by such advertising cooperative, provided that such contributions shall occur no less often than each calendar quarter and shall be of an amount not less than 3.25% of Licensee's Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month. (b) In the event there exists no Licensor-approved advertising cooperative in the DMA in which the Sonic Restaurant is located, during each calendar quarter of the term of this agreement, Licensee shall spend for approved advertising and promotion of the Sonic Restaurant (including, but not limited to, television time, radio time, newspaper display space, distributed promotional materials, but not including any amount spent on sign rent, paper products, candy or other foods which evidence the Licensor's trademarks or color patterns and the like) an amount equal to but not less than 3.25% of Licensee's Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month. 22 (c) For purposes of determining the amount which the Licensee is required to spend pursuant to Sections 11.01(a), 11.01(b) and 5.03, above, for each calendar quarter which is the subject of review, the parties hereto agree that the first two months of such calendar quarter and last month of the preceding calendar quarter shall be used in determining the Gross Sales of the Sonic Restaurant to determine the expenditures required hereunder. For example, to determine the expenditures required for January, February and March, the parties hereto agree that they will look to December, January, and February's sales in order to determine the Gross Sales to determine the amount which must be expended by the Licensee under these Sections 11.01(a), 11.01(b) and 5.03. In the event the amounts required by Section 11.01(a) or 11.01(b) are not spent in a timely fashion, Licensee shall pay Licensor in accordance with Section 10.05. (d) All advertising by Licensee in any medium which utilizes the Proprietary Marks or refers in any way to the Sonic Restaurant shall be conducted in a dignified manner and shall conform to such standards and requirements as Licensor may specify from time to time in writing. Licensee shall submit to Licensor (in accordance with the notice provisions contained herein), for Licensor's prior approval (except with respect to prices to be charged), samples of all advertising and promotional plans and materials that Licensee desires to use, that use the Proprietary Marks or refer to the Sonic Restaurant and that have not been prepared or previously approved by Licensor. If written disapproval thereof is not received by Licensee within fifteen (15) days from the date of receipt by Licensor of such materials, Licensor shall be deemed to have given the required approval. Upon notice from Licensor, Licensee shall discontinue and/or remove any objectionable advertising material, whether or not same was previously approved by Franchisor. If said materials are not discontinued and/or removed within five (5) days after notice, Franchisor or its authorized agents, may, at any time, enter upon Franchisor's premises, or elsewhere, and remove any objectionable signs or advertising media and may keep or destroy such signs or other media without paying therefore, and without being guilty of trespass or other tort. (e) Licensor may offer from time to time to provide, upon terms subject to the discretion of Licensor, approved local advertising and promotional plans and materials, including, without limitation, newspaper display space, distributed promotional materials. (f) Licensor or its designee shall maintain and administer an advertising fund for the System as follows: (i) As provided in Subsection 5.03 hereof, Licensee shall pay an advertising contribution fee to Sonic Advertising Fund, which shall be administered by Licensor, and shall be deposited in a separate bank account denoted as the Sonic Advertising Fund (the "Fund"). (ii) Licensor shall direct all advertising programs with sole discretion over the creative concepts, materials, and media used in such programs. The Fund is intended to maximize general public recognition and acceptance of the Proprietary Marks for the benefit of the System and the Licensee acknowledges that Licensor and its designees undertake no 23 obligation in administering the Fund to make expenditures for Licensee which are equivalent or proportionate to Licensee's contribution, and nothing in this Subsection shall contravene the intent in Subparagraph (iv) of Paragraph (f) of this Subsection 11.01. (iii) The Fund and all earnings thereof shall be used exclusively to meet any and all costs of maintaining, administering, directing and preparing advertising (including, without limitation, the cost of preparing and conducting television, radio, magazine and newspaper advertising campaigns and other public relations activities; employing advertising agencies to assist therein; and providing promotional brochures and other marketing materials to licensees in the Sonic System). All sums paid by licensees to the Fund shall be maintained in a separate account from the other funds of Licensor. The Fund shall pay the Licensor monthly an amount equal to 15% of the Fund's receipts during the preceding month, but not to exceed the Licensor's actual administrative costs and overhead, if any, as Licensor may incur in activities reasonably related to the administration or direction of the Fund and advertising programs for the licensees and the Sonic System, including without limitation, conducting market research, preparing marketing and advertising materials, and collecting and accounting for assessments for the Fund. The Fund and its earnings shall not inure to the benefit of Licensor. (iv) All materials produced by the Fund shall be made available to all licensees without cost on a regular basis, excluding distribution costs. This Subparagraph (iv) of Paragraph (f) of Subsection 11.01 shall not preclude Licensor from offering other materials not produced by the Fund upon terms subject to the discretion of Licensor. (See Paragraph (e) of this Subsection 11.01.) (v) The Fund is not an asset of Licensor, and an independent certified public accountant designated by Licensor shall review the operation of the Fund annually, and the report shall be made available to Licensee upon request. Notwithstanding the foregoing, the body approved and designated by the Licensor as the body to consult with regarding the Licensor's maintenance and administration of the Fund (such as the current Franchise Advisory Council or its successor) may designate the independent public accountant to conduct the required review of the operation of the Fund, if requested in writing at least 30 but not more than 60 days prior to the end of each fiscal year. (vi) It is anticipated that most contributions to the Fund shall be expended for advertising and/or promotional purposes during the year within which the contributions are made. If, however, excess amounts remain in the Fund at the end of such year, all expenditures in the following year(s) shall 24 be made first out of accumulated earnings, next out of current earnings, and finally from contributions. (vii) Although Licensor intends the Fund to be of perpetual duration, Licensor maintains the right to terminate the Fund. Such Fund shall not be terminated, however, until all monies in the Fund have been expended for advertising and promotional purposes as aforesaid. (g) On at least a quarterly basis, the Licensor shall consult with the body approved and designated by Sonic (such as the current Franchise Advisory Council or its successor) regarding the Licensor's maintenance and administration of the Fund and shall report to that body on the Fund's operation. 11.02. PUBLICITY. Licensor shall have the right to photograph the Sonic Restaurant's exterior and/or interior, and the various foods served, and to use any such photographs in any of its publicity or advertising, and Licensee shall cooperate in securing such photographs and consent of Persons pictured. 12. INSURANCE. 12.01. INSURANCE AMOUNTS. Prior to opening or taking possession of the Sonic Restaurant, the Licensee shall acquire and thereafter maintain insurance from insurance companies acceptable to the Licensor. The Licensee shall determine the appropriate limits of liability insurance but the Licensor shall require the following minimum amounts and policy forms of insurance: (a) The Licensee shall maintain statutory worker's compensation insurance and employer's liability insurance having a minimum limit of liability of the greater of $500,000 or the minimum amount otherwise required by applicable state law. The Licensor shall accept participation in the Texas Sonic Employee Accident Program ("TSEAP") or in the non-subscriber program for Sonic drive-in restaurants located in Texas as long as Texas law does not require statutory worker's compensation insurance. (b) The Licensee shall maintain commercial general liability insurance, including bodily injury, property damage, products, personal and advertising injury coverage on an occurrence policy form having a minimum per occurrence and general aggregate limits of at least $1,000,000 per location. (c) The Licensee shall maintain non-owned automobile liability insurance having a minimum limit of $1,000,000. The automobile policy also shall provide coverage for owned automobiles if owned or leased in the name of the Licensee. (d) The Licensor shall have the right to require the Licensee to increase the insurance specified above by giving the Licensee 60 days' written notice in accordance with the 25 notice provisions of this Agreement, and the Licensee shall comply no later than the first policy renewal date after that 60-day period. 12.02. LICENSOR AS ADDITIONAL INSURED. The Licensee shall name the Licensor and the Licensor's subsidiaries and Affiliates as additional insureds under the insurance policies specified in paragraphs (a), (b) and (c) of Section 12.01, above. The Licensee's policies shall constitute primary policies of insurance with regard to other insurance, shall contain a waiver of subrogation provision in favor of the Licensor as it relates to the operation of the Sonic Restaurant, and shall provide for at least 30 days' written notice to the Licensor prior to their cancellation or amendment. 12.03. GENERAL CONDITIONS. Prior to opening or taking possession of the Sonic Restaurant, the Licensee shall furnish the Licensor with certificates of insurance evidencing that the Licensee has obtained the required insurance in the form and amounts as specified above. In addition, the Licensee shall deliver evidence of the continuation of the required insurance policies at least 30 days prior to the expiration dates of each existing insurance policy. If the Licensee at any time fails to acquire and maintain the required insurance coverage, the Licensor shall have the right, at the Licensee's expense, to acquire and administer the required minimum insurance coverage on behalf of the Licensee. However, the Licensor shall not have any obligation to assume the premium expense and nothing in this Agreement shall constitute a guaranty by the Licensor against any losses sustained by the Licensee. The Licensor may relieve itself of all duties with respect to the administration of any required insurance policies by giving 10 days' written notice to the Licensee. 13. TRANSFER OF INTEREST. 13.01. ASSIGNMENT. The rights and duties created by this agreement are personal to Licensee and Licensor has granted the License in reliance on the collective character, skill, aptitude and business and financial capacity of Licensee and Licensee's principals. Accordingly, except as may be otherwise permitted by this Section 13, neither Licensee nor any Person or entity with an interest in Licensee shall directly or indirectly, through one or more intermediaries, without Licensor's prior written consent, sell, assign, transfer, convey, give away, pledge, mortgage or otherwise encumber any direct or indirect interest in the License; any interest in Licensee, if Licensee is a partnership, joint venture or closely held corporation; or any interest which, together with other related previous simultaneous or proposed transfers, constitutes a transfer of Control of Licensee where Licensee is registered under the Securities Exchange Act of 1934. Any such purported assignment occurring by operation of law or without Licensor's prior written consent and pursuant to the terms of this Section 13, shall constitute a default of this agreement by Licensee and such purported assignment shall be null and void. 13.02. DEATH OR PERMANENT INCAPACITY OF LICENSEE. Upon the death or permanent incapacity of Licensee, the interest of Licensee in the License may be assigned either pursuant to the terms of Subsection 13.04 herein or to one or more of the following Persons: Licensee's spouse, heirs or nearest relatives by blood or marriage, subject to the following conditions: (1) If, in the sole discretion of Licensor, such persons shall be capable of conducting the Sonic Restaurant business in accordance with the terms and conditions of the License, and (2) if such persons shall also execute 26 an agreement by which they personally assume full and unconditional liability for and agree to perform all the terms and conditions of the License to the same extent as the original Licensee. In the event that Licensee's heirs do not obtain the consent of Licensor as assignees of the License, the personal representative of Licensee shall have the greater of 120 days or the completion of the probate of the Licensee's estate to dispose of Licensee's interest hereunder, which disposition shall be subject to all the terms and conditions for assignments under Subsection 13.04. 13.03. ASSIGNMENT TO LICENSEE'S CORPORATION. Licensor may, upon Licensee's compliance with the following requirements, consent to an assignment of the License to a corporation whose shares are owned and Controlled by Licensee. Such written materials shall be supplied to Licensor within 15 days after the request by Licensor. (a) Licensee's corporation shall be newly organized, and its charter shall provide that its activities are confined exclusively to operating the Sonic Restaurant. (b) Licensee and Licensee's corporation shall maintain stop transfer instructions against the transfer on Licensee's corporation's records of any securities with any voting rights subject to the restrictions of Section 13 hereof, and shall issue no securities upon the face of which the following printed legend does not legibly and conspicuously appear. The transfer of this stock is subject to terms and conditions of one or more license agreements with Sonic Industries Inc. Reference is made to said license agreement(s) and the restrictive provisions of the Articles and By-Laws of this corporation. By agreeing to receive these securities, the transferee hereby agrees to be bound by the terms of such agreements, articles and by-laws. (c) At any time upon the Licensor's request, Licensee and Licensee's corporation shall furnish company with a list of all shareholders having an interest in Licensee's corporation, the percentage interest of such shareholder and a list of all officers and directors in such form as Licensor may require. (d) The corporate name of Licensee's corporation shall not include any of the Proprietary Marks granted by the License. Licensee and Licensee's corporation shall not use any mark nor any name deceptively similar thereto in a public or private offering of its securities, except to reflect Licensee's corporation's franchise relationship with Licensor. Any prospectus or registration Licensee or Licensee's corporation would propose to use in such a public or private offering shall be submitted to Licensor within a reasonable time prior to the effective date thereof for the purpose of permitting Licensor to verify compliance with this requirement by Licensee and Licensee's corporation. (e) Articles of Incorporation, By-Laws and all other documents governing Licensee's corporation shall be forwarded to Licensor for approval. The Articles of Incorporation, 27 By-Laws and other organization and governing documents shall recite that the issuance and transfer of any interest in Licensee's corporation are restricted by the terms of Section 13 of this agreement. (f) Each shareholder of the Licensee's corporation shall personally guarantee performance under this agreement and shall be personally bound by the terms thereof. (g) Any breach of this agreement by Licensee's corporation shall be deemed a breach of this agreement by each shareholder of Licensee's corporation and each shareholder shall be personally and fully liable and obligated by any and all such breaches. (h) Licensee and Licensee's corporation shall submit to Licensor, prior to any assignment hereunder, a shareholders agreement executed by the Board of Directors and ratified by all shareholders, which states that, except as may be permitted by Section 13 of this agreement, no shares of stock or other interest in Licensee's corporation shall be issued, transferred, or assigned to any Person or entity without Licensor's prior written consent. (i) Each and every shareholder of Licensee's corporation or any party owning a security issued by, or owning any legal or equitable interest in Licensee's corporation or in any security convertible to a legal or equitable interest in Licensee's corporation shall meet those same standards of approval as an individual licensee shall be required to meet prior to being included as a licensee on a standard license agreement with Licensor. 13.04. OTHER ASSIGNMENT. (a) In addition to any assignments or contingent assignments contemplated by the terms of Subsections 13.02 and 13.03 of this Section 13, Licensee shall not sell, transfer or assign the License to any Person or Persons without Licensor's prior written consent. Such consent shall not be unreasonably withheld. (b) In determining whether to grant or to withhold such consent, the following requirements must be met by Licensee: (i) All of Licensee's accrued monetary obligations shall have been satisfied whether due under this agreement or otherwise. (ii) The Licensor and the Licensee execute a general release of each other, in a form satisfactory to the Licensor, of any and all claims the Licensee may have against the Licensor and its Affiliates, including (without limitation) all claims arising under any federal, state or local law, rule or ordinance, but excluding (as to the Licensor) any claims against the Licensee for (a) unpaid moneys due the Licensor or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of the Licensor's legal rights regarding the Proprietary Marks. 28 The Licensor may waive the requirements of this subparagraph (ii) at the Licensor's election. (iii) Licensee shall not be in material breach of this agreement or any other agreement between Licensor and Licensee. (iv) Assignee (or the assignee's management, as the case may be) shall at Licensor's sole discretion, enroll in and successfully complete such training programs as Licensor shall at that time designate according to Section 6.04 hereof. (v) Licensor shall consider of each prospective transferee, by way of illustration, the following: (a) work experience and aptitude, (b) financial background, (c) character, (d) ability to personally devote full time and best efforts to managing the Sonic Restaurant, (e) residence in the locality of the Sonic Restaurant, (f) equity interest in the Sonic Restaurant, (g) conflicting interests and (h) such other criteria and conditions as Licensor shall apply in the case of an application for a new license to operate a Sonic drive-in restaurant. Licensor's consent shall also be conditioned each upon such transferee's execution of an agreement by which transferee personally assumes full and unconditional liability for and agrees to perform from the date of such transfer all obligations, covenants and agreements contained in the License to the same extent as if transferee had been an original party to the License. 13.05. LICENSOR'S RIGHT OF FIRST REFUSAL. (a) If Licensee or any Person or entity with an interest in Licensee has received and desires to accept any bona fide offer to purchase all or any part of Licensee's interest in this agreement or in Licensee and the transfer of such interest would: (1) result in a change of Control of Licensee of this agreement or (2) constitute a transfer of interest held by a Controlling Person of Licensee or of the License, Licensee or such Person shall notify Licensor in writing of each such offer, with such notice including the name and address of the proposed purchaser, the amount and terms of the proposed purchase price, a copy of the proposed purchase contract (signed by the parties, but expressly subject to the Licensor's right of first refusal), and all other terms and conditions of such offer. Licensor shall have the right and option, exercisable within twenty (20) days after Licensor's receipt of such written notification, to send written notice to Licensee or such Person or entity that Licensor or its designee intends to purchase the interest which is proposed to be transferred on the same terms and conditions offered by the third party. Any material change in the terms of an offer prior to closing shall cause it to be deemed a new offer, subject to the same right of first refusal by Licensor or its designee as in the initial offer. Licensor's failure to exercise such option shall not constitute a waiver of any other provision of this agreement, including any of the requirements of this Section with respect to the proposed transfer. Silence on the part of Licensor shall constitute rejection. If the proposed sale includes assets of Licensee not related to the 29 operation of a licensed Sonic drive-in restaurant, Licensor may purchase not only the assets related to the operation of a licensed Sonic drive-in restaurant, but may also purchase the other assets. An equitable purchase price shall be allocated to each asset included in the proposed sale. (b) The election by Licensor not to exercise its right of first refusal as to any offer shall not affect its right of first refusal as to any subsequent offer. (c) Any sale or attempted sale effected without first giving Licensor the right of first refusal described above shall be void and of no force and effect. (d) If Licensor does not accept the offer to purchase the Sonic Restaurant, Licensee may conclude the sale to the purchaser who made the offer so long as the terms and conditions of such sale are identical to those originally offered to Licensor; provided, however, that Licensor's approval of the assignee be first obtained, which consent shall not be unreasonably withheld upon compliance with the conditions on assignment imposed by this agreement. (e) The provisions of this Section 13.05 shall not apply to any proposed transfers to members of the Licensee's immediate family. For the purposes of this Section 13.05, a member of the Licensee's immediate family shall mean the Licensee's spouse and children (by birth or adoption). In addition, the provisions of this Section 13.05 shall not apply to any proposed transfers to Person who already own an interest (directly or indirectly) in this Agreement or the License as long as the transfer will not result in a change in Control of the Licensee or the License. 13.06. CONSENT TO ASSIGNMENTS. With regard to any transfer, assignment or pledge of any interest in this Agreement or in the Licensee pursuant to the foregoing provisions of this Section 13, the Licensor shall not withhold its consent unreasonably as long as the proposed transfer, assignment or pledge otherwise complies with the other requirements set forth in this Section 13. 14. DEFAULT AND TERMINATION. 14.01. AUTOMATIC TERMINATION. Licensee shall be deemed to be in breach of this agreement and all rights granted herein shall automatically terminate with notice from Licensor if any of the following events occur: (a) Licensee shall become insolvent. (b) Licensee, either personally, through an equity owner, or through Licensee's attorney, shall give oral or written notice to Licensor of Licensee's intent to file a voluntary petition under any bankruptcy law. (c) A final judgment aggregating in excess of $5,000 against the Sonic Restaurant or property connected with the Sonic Restaurant which remains unpaid for thirty days. (d) Suit to foreclose any lien against any assets of the Sonic Restaurant is instituted against Licensee and (i) is not dismissed within 30 days, (ii) such lien is not contested and 30 challenged through the applicable administrative agencies or courts, or (iii) a bond is not posted (if such remedy is available) to delay any such foreclosure and guarantee performance. (e) The assets of the Sonic Restaurant are sold after being levied thereupon by sheriff, marshal or a constable. (f) Transfer of this agreement, in whole or in part, is effected in any manner inconsistent with Section 13 hereof. 14.02. OPTIONAL TERMINATION. Licensee shall be deemed to be in breach of this agreement and Licensor may, at its option, terminate this agreement and all rights granted herein at any time during the term hereof without affording Licensee any opportunity to cure the breach, effective immediately upon Licensee's receipt of a notice of termination, upon the occurrence of any of the following events: (a) If Licensee ceases to operate the Sonic Restaurant or otherwise abandons the Sonic Restaurant (other than closure permitted pursuant to Section 6.05(c)(vi) herein) or forfeits the legal right to do or transact business at the location licensed herein. (b) If Licensee is convicted of a felony, a crime involving moral turpitude, or any other crime or offense that is reasonably likely, in the sole opinion of Licensor, to adversely affect the Sonic System, the Proprietary Marks, the goodwill associated therewith or Licensor's rights therein. (c) If Licensee misuses or makes any unauthorized use of any of the Proprietary Marks or any other identifying characteristic of the Sonic System or otherwise materially impairs the goodwill associated therewith or Licensor's rights therein and the Licensee cannot cure the default within 30 days. (d) If Licensee improperly discloses trade secrets or confidential information and the Licensee cannot cure the default within 30 days. (e) If continued operation of the Sonic Restaurant might endanger public health or safety. (f) If Licensee knowingly or through gross negligence maintains false books or records or knowingly or through gross negligence submits any false report to Licensor. 14.03. PERIOD TO CURE. Except as provided in Subsections 14.01 and 14.02, Licensee shall have thirty (30) days after receipt from Licensor of a written notice of breach of this agreement or such notice period as is required by the law of the state where the Sonic Restaurant is located, within which to remedy any breach hereunder. However, this period to cure will not be available to Licensee, and Licensor will not be required to delay termination of this agreement, where the breach involved is one which Licensee cannot cure within the prescribed cure period or is one which is 31 impossible to cure. The Licensor shall have the right to terminate this Agreement and the License upon written notice to the Licensee and without any opportunity to cure after three willful and material breaches of the same provision of this Agreement within any 12-month period for which the Licensee has received written notice and an opportunity to cure. If any such breach is not cured within that time, Licensor may, at its option, terminate this agreement and all rights granted hereunder effective immediately on the date of receipt by Licensee of written notice of termination. Licensee shall be in breach hereunder for any failure to comply with any of the terms of this agreement or to carry out the terms of this agreement in good faith. Such breach shall include, but shall not be limited to, the occurrence of any of the following illustrative events: (a) If the Licensee fails to pay any past due amounts owed to the Licensor after the Licensor has mailed the Licensee two or more statements at least 20 days apart. (b) If Licensee fails to promptly pay, or repeatedly delays the prompt payment of undisputed invoices from his suppliers or in the remittance of rent and property tax as required in Licensee's lease. (c) If Licensee fails to maintain and operate the Sonic Restaurant in a good, clean, and wholesome manner or otherwise is not in compliance with the standards prescribed by the Sonic System. (d) If Licensee attempts to assign or transfer any interest in this agreement in violation of Section 13 herein. (e) If Licensee denies Licensor the right to inspect the Sonic Restaurant at reasonable times, which includes the right to photograph the interior and exterior of the Sonic Restaurant in its entirety. (f) If Licensee fails, refuses, or neglects to obtain Licensor's prior written approval or consent as required by this agreement. (g) If Licensee acquires any interest in another business in violation of Section 16. (h) If Licensee fails, refuses or neglects to provide Licensor with Licensee's home address and home telephone number. (i) If Licensee breaches any other requirement set forth in this agreement. (j) If Licensee, upon the destruction of the Sonic Restaurant, fails to rebuild the franchise premises and resume operation within a reasonable time (cessation of the business from a franchise premises shall not constitute default of this agreement if caused by condemnation, expiration of a location lease pursuant to its terms at execution or when failure to rebuild following destruction of the franchised premises is prohibited by law or the location lease). 32 14.04. RESOLUTION OF DISPUTES. The following provisions shall apply to any controversy between the Licensee and the Licensor (including an Affiliate of the Licensor) and relating (a) to this Agreement (including any claim that any part of this Agreement is invalid, illegal or otherwise void or voidable), (b) to the parties' business activities conducted as a result of this Agreement, or (c) the parties' relationship or business dealings with one another generally, including all disputes and litigation pending or in existence as of the date of this Agreement. (a) NEGOTIATION. The parties first shall use their best efforts to discuss and negotiate a resolution of the controversy. (b) MEDIATION. If the efforts to negotiate a resolution do not succeed, the parties shall submit the controversy to mediation by a mediation firm agreeable to the parties or by the American Arbitration Association, if the parties cannot agree. (c) ARBITRATION. If the efforts to negotiate and mediate a resolution do not succeed, the parties shall resolve the controversy by final and binding arbitration in accordance with the Rules for Commercial Arbitration (the "Rules") of the American Arbitration Association in effect at the time of the execution of this Agreement and pursuant to the following additional provisions: (i) APPLICABLE LAW. The Federal Arbitration Act (the "Federal Act"), as supplemented by the Oklahoma Arbitration Act (to the extent not inconsistent with the Federal Act), shall apply to the arbitration. (ii) SELECTION OF ARBITRATORS. The parties shall select three arbitrators within 10 days after the filing of a demand and submission in accordance with the Rules. If the parties fail to agree on three arbitrators within that 10-day period or fail to agree to an extension of that period, the arbitration shall take place before three arbitrators selected in accordance the Rules. At least one of the arbitrators shall constitute an individual selected by Sonic (or its Affiliate) who has experience with franchise law or franchise relations. A decision or award by a majority of the arbitrators shall constitute the decision or award of the arbitrators. (iii) LOCATION OF ARBITRATION. The arbitration shall take place in Oklahoma City, Oklahoma, and the arbitrators shall issue any award at the place of arbitration. The arbitrators may conduct hearings and meetings at any other place agreeable to the parties or, upon the motion of a party, determined by the arbitrators as necessary to obtain significant testimony or evidence. (iv) DISCOVERY. The arbitrators shall have the power to authorize all forms of discovery (including depositions, interrogatories and document production) upon the showing of (a) a specific need for the discovery, (b) that the discovery likely will lead to material evidence needed to resolve the 33 controversy, and (c) that the scope, timing and cost of the discovery is not excessive. (v) AUTHORITY OF ARBITRATORS. The arbitrators shall not have the power (a) to alter, modify, amend, add to, or subtract from any term or provision of this Agreement; (b) to rule upon or grant any extension, renewal or continuance of this Agreement; (c) to award damages or other remedies expressly prohibited by this Agreement; or (d) to grant interim injunctive relief prior to the award. (vi) SCOPE OF PROCEEDING. The parties shall conduct any arbitration proceeding and resolve any controversy on an individual basis only and not on a class-wide, multiple-party, or similar basis. (vii) ENFORCEMENT OF AWARD. The prevailing party shall have the right to enter the award of the arbitrators in any court having jurisdiction over one or more of the parties or their assets. The parties specifically waive any right they may have to apply to any court for relief from the provisions of this Agreement or from any decision of the arbitrators made prior to the award. The award of the arbitrators shall not have any precedential or collateral estoppel effect on any other controversy involving the Licensor or its Affiliates. (d) EXCLUDED CONTROVERSIES. At the election of the Licensor or its Affiliate, the provisions of this Section 14.04 shall not apply to any controversies relating to any fee due the Licensor or its Affiliate; any promissory note payments due the Licensor or its Affiliate; or any trade payables due the Licensor or its Affiliate as a result of the purchase of equipment, goods or supplies. The provisions of this Section 14.04 also shall not apply to any controversies relating to the use and protection of the Proprietary Marks or the Sonic System, including (without limitation) the Licensor's right to apply to any court of competent jurisdiction for appropriate injunctive relief for the infringement of the Proprietary Marks or the Sonic System. (e) ATTORNEYS' FEES AND COSTS. The prevailing party to the arbitration shall have the right to an award of its reasonable attorneys' fees and costs incurred after the filing of the demand and submission, including a portion of the direct costs of any in-house legal staff reasonably allocable to the time devoted to the arbitration. 15. OBLIGATIONS UPON TERMINATION. 15.01. EFFECT OF TERMINATION, CANCELLATION OR EXPIRATION OF THIS AGREEMENT. Except as otherwise authorized pursuant to the terms of any other license agreement between the Licensor and the Licensee, the Licensee shall comply with the following provisions after the expiration or termination of this Agreement and the License: 34 (a) Licensee, upon any termination, cancellation or expiration of this agreement, shall promptly pay to Licensor and Licensor's subsidiaries any and all sums owed to them. In the event of termination for any breach by Licensee, such sums shall include all damages, costs and expenses, including reasonable attorneys' fees, incurred by Licensor as a result of the breach, which obligation shall give rise to and remain, until paid in full, a lien in favor of Licensor against any and all of the assets of the Sonic Restaurant owned by Licensee at the time of default. (b) Upon termination, cancellation or expiration hereof for any reason, all Licensee's rights hereunder shall terminate. Licensee shall not thereafter use or adopt any trade secrets disclosed to Licensee hereunder or any paper goods, emblems, signs, displays, menu housings or other property on which Licensor's name or Proprietary Marks are imprinted or otherwise form a part thereof or any confusing simulations thereof. Licensee shall not otherwise use or duplicate the Sonic System or any portion thereof or assist others to do so. Licensee shall remove from the premises all signs, emblems and displays identifying it as associated with Licensor or the Sonic System. Licensee shall cease to use and shall return to Licensor all copies of the Sonic Operations Manual, instructions or materials delivered to Licensee hereunder. (c) Upon termination, cancellation or expiration of this agreement, unless otherwise directed in writing by Licensor, Licensee shall change the exterior and interior design and the decor of said premises, including, but not limited to, changing the color scheme, and shall make or cause to be made such changes in signs, buildings and structures (excluding major structural changes) as Licensor shall reasonably direct so as to effectively distinguish the same from its former appearance and from any other Sonic drive-in restaurant unit, and if Licensee fails or refuses to comply herewith, then Licensor shall have the right to enter upon the premises where said business is being conducted without being guilty of trespass or any other tort for the purpose of making or causing to be made such changes at the expense of Licensee which expense Licensee agrees to pay on demand. (d) Upon termination, cancellation or expiration of this agreement, in the event Licensee is the owner of the Sign, Licensor shall have an irrevocable option to purchase the Sign for its fair market value. In any event, Licensee shall not thereafter use any sign panels displaying Licensor's name or Proprietary Marks or which primarily display the colors used in any other such sign at any other Sonic drive-in restaurant unit (See Subsection 15.04 for determining fair market value). Any agent, servant or employee of Licensor may remove the Sign or any objectionable signs or advertising from the Sonic Restaurant without being guilty of trespass or other tort, and Licensee shall be liable for Licensor's costs plus attorneys' fees for any interference therewith. (e) Upon termination, cancellation or expiration of this agreement, Licensee shall cease to hold Licensee out in any way as a licensee of Licensor or to do anything which would indicate any relationship between Licensee and Licensor. (f) The covenants set forth in Paragraphs (a), (b), (c), (d) and (e) of this Subsection 15.01 shall survive the termination, cancellation or expiration of this agreement. 35 (g) All rights, claims and indebtedness which may accrue to Licensor prior to termination, cancellation or expiration of this agreement shall survive termination, cancellation or expiration and be enforceable by Licensor. (h) Licensee shall complete all such modifications within thirty (30) days after this agreement has been terminated or canceled or has expired. Licensee and Licensor agree that Licensor's damages resulting from a breach of the provisions of this Subsection are difficult to estimate or determine accurately. In the event of a breach by Licensee of the provisions of this Subsection, Licensee, in addition to any and all other remedies available to Licensor herein and elsewhere, will pay Licensor double the royalty and advertising fees prescribed in this agreement until Licensee satisfactorily de-identifies the restaurant premises in the manner prescribed by this Section. This payment shall constitute liquidated damages and shall not be construed as a penalty since such payment has been agreed to by Licensee and Licensor as reasonably representative of the actual damage sustained by Licensor in the event of such a breach. The liquidated damages shall start on the 31st day after this agreement has been terminated or canceled or has expired. These liquidated damages shall not constitute either a waiver of Licensee's obligation to de-identify or a license to use the Sonic System. These remedies will be in addition to any other remedies Licensor may have hereunder or under federal or state law. 15.02. LICENSOR'S OPTION TO PURCHASE. (a) Upon termination, cancellation or expiration hereof, Licensor shall have the right and option to purchase all or any patented, special or unique Sonic restaurant equipment, menu housings, signs, menus and supplies of Licensee at their fair market value (See Subsection 15.04 for determining fair market value). Such right or option of Licensor shall be exercised as provided in Paragraph (b) of this Subsection 15.02. If Licensor elects to exercise any option to purchase herein provided, it shall have the right to set off all amounts due from Licensee to Licensor and one-half of the cost of any appraisals against any payment therefor. (b) In the case of termination by expiration, Licensor shall exercise Licensor's option contained in this Subsection 15.02 by giving Licensee written notice at least thirty (30) days prior to expiration. In the case of termination for any other reason, Licensor shall exercise its option by giving Licensee written notice within thirty (30) days after termination. (c) Licensor's option hereunder is without prejudice to Licensor's rights under any security agreement held by Licensor or with respect to which Licensor may have a guarantor's or surety's subrogation interest. If Licensor exercises this option, Licensor may pay any debt which Licensee owes to Licensor and shall remit any balance of the purchase price to Licensee. There shall be no allowance for goodwill. 36 15.03. LICENSOR'S OBLIGATION TO PURCHASE. (a) Upon termination, cancellation or expiration of this agreement, if Licensee desires to sell Licensee's unbroken inventory packages of approved imprinted items and supplies with Proprietary Marks to Licensor, excluding all food items, Licensor shall have the obligation to repurchase such items at Licensee's cost. (b) If Licensee desires to sell such items to Licensor, Licensee shall, not later than ten (10) days after termination, cancellation or expiration of this agreement, give Licensor ten (10) days written notice of Licensee's election and, at the expiration of the ten (10) days notice period, deliver such items at Licensee's expense with an itemized inventory to the nearest Sonic drive-in restaurant owned by Licensor or other unit designated by Licensor. Licensor agrees to pay Licensee or credit Licensee's account within seven (7) days after said delivery. 15.04. FAIR MARKET VALUE DETERMINATION. If the parties cannot agree on the fair market value of any item subject to an option to purchase in this agreement within a reasonable time, one appraiser shall be designated by Licensor, one by Licensee and the two appraisers shall designate an independent appraiser, and the valuation of such third appraiser alone shall be binding. The Licensor and the Licensee each shall pay one-half of the cost of any appraisals required pursuant to this Section 15.04. 16. COVENANTS. 16.01. RESTRICTIONS ON LICENSEE. Licensee agrees and covenants as follows: (a) During the term of this License, Licensee shall not directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, partnerships, trusts, unincorporated associations or joint ventures) in, (iii) loan money to or (iv) become landlord of any restaurant business which has a menu similar to that of a Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by Sonic drive-in restaurants) or which has an appearance similar to that of a Sonic drive-in restaurant (such as color pattern, use of canopies, use of speakers and menu housings for ordering food, or other items that are customarily used by a Sonic drive-in restaurant). (b) Licensee shall not, for a period of eighteen (18) months after termination of this License for any reason, directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, partnerships, trusts, unincorporated associations or joint ventures) in, (iii) loan money to or (iv) become a landlord of any restaurant business which has a menu similar to that of a Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by Sonic drive-in restaurants) or which has an appearance similar to that of a Sonic drive-in restaurants (such as color pattern, use of canopies, use of speakers and menu housings for ordering food, or other items that are customarily used by a Sonic drive-in restaurants), and which (i) is within a three (3) mile radius of the Sonic Restaurant formerly licensed by this agreement, (ii) is within a twenty (20) mile radius of a Sonic 37 drive-in restaurant in operation or under construction, or (iii) is located within the MSA of the Sonic Restaurant. (c) Licensee shall not appropriate, use or duplicate the Sonic System, or any portion thereof, for use at any other restaurant business. (d) During the term of this agreement, Licensee shall (i) use Licensee's best efforts to promote the business of the Sonic Restaurant, (ii) devote Licensee's full time, energies and attention to the operation and management of the Sonic Restaurant, and (iii) not engage in any other business or activity that might detract from, interfere with or be detrimental to the Sonic System or Licensee's full and timely performance under this agreement (except the ownership and operation of other Sonic drive-in restaurants under license agreements with Licensor). (e) During the term of this agreement, Licensee shall not perform or provide services as a director, officer, employee, agent, representative, consultant or in any other capacity for any other restaurant business which has a menu or appearance similar to that of a Sonic drive-in restaurant. (f) During the term of this agreement, Licensee shall not directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest in, (iii) loan money, or (iv) become landlord of any operation which has granted or is granting franchises or licenses (except for those granted by Licensor) to others to operate any other restaurant business which has a menu or appearance similar to that of a Sonic drive-in restaurant. (g) Paragraphs (a), (b) and (f) of this Subsection 16.01 shall not apply to ownership by Licensee of less than two percent (2%) beneficial interest in the outstanding equity securities of any corporation which is registered under the Securities Exchange Act of 1934; however, this Subsection 16.01(g) shall apply to all shareholders or partners of Licensee (in the event Licensee is a corporation or partnership) and all members of Licensees' and their immediate families, and all Persons or entities guaranteeing this agreement. (h) The parties agree that each of the foregoing covenants shall be construed as independent of any covenant or provision of this agreement. If all or any portion of a covenant in this Section 16 is held unreasonable or unenforceable by a court or agency having valid jurisdiction in an unappealed final decision to which Licensor is a party, Licensee expressly agrees to be bound by any lesser covenant subsumed with the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this Section 16. (i) Licensee understands and acknowledges that Licensor shall have the right, in Licensor's sole discretion, to reduce the scope of any covenant set forth in Paragraphs (a), (b) and (f) of this Subsection 16.01, or any portion thereof, without Licensee's consent effective immediately upon receipt by Licensee of written notice thereof, and Licensee agrees that it shall comply forthwith 38 with any covenant as so modified, which shall be fully enforceable notwithstanding the provisions of Paragraph (k) of this Subsection 16.01. (j) Licensee expressly agrees that the existence of any claims Licensee may have against Licensor, whether or not arising from this agreement, shall not constitute a defense to the enforcement by Licensor of the covenants in this Section 16. (k) Licensee acknowledges that Licensee's violation of the terms of this Section 16 would result in irreparable injury to Licensor for which no adequate remedy at law is available, and Licensee accordingly consents to the ex parte issuance of restraining orders, temporary and permanent injunctions and cease and desist orders prohibiting any conduct by Licensee in violation of the terms of this Section 16. (l) Licensee shall utilize at the Sonic Restaurant a cash register previously approved by Licensor, which such cash register shall at all times during the term of this agreement have a non-alterable grand total function so that each item entered in such register and each day's totals may not be altered once entered. 16.02. COVENANTS BY OTHERS. At the time of execution of this agreement, Licensee shall provide Licensor with covenants similar in substance to those set forth in this Section 16 (including covenants applicable upon the termination of a Person's relationship with Licensee) from the following persons: (1) all persons employed by Licensee; and (2) all officers, directors, and holders of a direct or indirect beneficial ownership interest Licensee. With respect to each Person who becomes associated with Licensee in one of the capacities enumerated above subsequent to execution of this agreement, Licensee shall require and obtain such covenants and promptly provide Licensor with executed copies of such covenants. In no event shall any Person enumerated be granted access to any confidential aspect of the Sonic System or the Sonic Restaurant prior to execution of such a covenant. All covenants required by this Section 16 shall be furnished by Licensor to Licensee and shall include, without limitation, specific identification of Licensor as a third party beneficiary of such covenants with the independent right to enforce them. Failure by Licensee to obtain execution of a covenant required by this Section 16 shall constitute a breach of this agreement. 17. INDEPENDENT CONTRACTOR & INDEMNIFICATION. 17.01. LICENSEE NOT AN AGENT OF LICENSOR. It is understood and agreed that this agreement does not create a fiduciary relationship between Licensor and Licensee, and that nothing herein contained shall constitute Licensee as the agent, legal representative, partner, joint venturer or employee of Licensor. Licensee is, and shall remain, an independent contractor responsible for all obligations and liabilities of, and for all loss or damage to, the Sonic Restaurant and its business, including any personal property, equipment, fixtures or real property connected therewith and for all claims or demands based on damage or destruction of property or based on injury, illness or death of any person or persons, directly or indirectly, resulting from the operation of the Sonic Restaurant. 39 17.02. COST OF ENFORCEMENT. If Licensor or Licensor's subsidiaries becomes involved in any action at law or in equity or in any proceeding opposing Licensee to secure, enforce, protect, or defend Licensor's rights and remedies under this License, in addition to any judgment entered in Licensor's favor, Licensor shall be entitled to demand of and (in the event Licensor prevails in such actions or proceedings) recover from Licensee the reasonable costs, expenses and attorneys' fees incurred by Licensor. If, in such applicable final judgment Licensor does not prevail, Licensee shall be entitled to recover from Licensor in any such action or proceeding the reasonable costs, expenses and attorneys' fees incurred by Licensee. 17.03. INDEMNIFICATION. If Licensor or Licensor's subsidiaries shall be subject to any claim, demand or penalty or become a party to any suit or other judicial or administrative proceeding by reason of any claimed act or omission by Licensee, Licensee's employees or agents, or by reason of any act occurring on the Sonic Restaurant premises, or by reason of any act or omission with respect to the business or operation of the Sonic Restaurant, Licensee shall indemnify and hold Licensor and Licensor's subsidiaries harmless against all judgments, settlements, penalties and expenses, including attorneys' fees, court costs and other expenses of litigation or administrative proceeding, incurred by or imposed on Licensor in connection with the investigation or defense relating to such claim or litigation or administrative proceeding and, at the election of Licensor, Licensee shall also defend Licensor and Licensor's subsidiaries. The Licensee shall not have any obligation to indemnify, defend or hold harmless the Licensor or any other Person pursuant to the provisions of this Section 17.03 to extent the obligation arises predominantly as a proximate result of the Licensor's act or failure to act when under a duty to act. 18. EFFECT OF WAIVERS. No waiver by Licensor or any breach or series of breaches of this agreement shall constitute a waiver of any subsequent breach or waiver of the terms of this agreement. 19. NOTICES. 19.01. Any notice required hereunder, if not specified, shall be in writing and shall be delivered by (i) personal service, (ii) by overnight, receipted delivery service, or (iii) by United States certified or registered mail, with postage prepaid, addressed to Licensee at the Sonic Restaurant or at such other address of Licensee then appearing on the records of Licensor or to Licensor at The Sonic Center, 101 Park Avenue, Oklahoma City, Oklahoma 73102, or at the subsequent address of Licensor's corporate headquarters. Either party, by a similar written notice, may change the address to which notices shall be sent. 19.02. If Licensor is unable to give actual notice of any breach or termination of this agreement because Licensee has failed to provide Licensor with a current address, because Licensee fails to accept or pick up this mailed notice, or due to any reason which is not the fault of Licensor, then such notice shall be deemed as given when Licensor sends such notice by overnight receipted delivery service or registered or certified mail, postage prepaid. 40 19.03. Licensee has designated on the first page of this agreement a Principal to serve as the party receiving primary notice on behalf of the parties hereto. Each Licensee hereby agrees that Licensor may send its notices and communications under this agreement to the Principal provided for herein, that each Licensor may use the Principal as its primary contact for purposes of communications and notices permitted or required hereunder, and that all communications and notices given by Licensor to the Principal will be just as effective on each Licensee as though the same had been given to each Licensee. 20. ENTIRE AGREEMENT. 20.01. NO ORAL AGREEMENTS. This agreement and all addenda, appendices and amendments hereto constitute the entire agreement between the parties and supersede all prior and contemporaneous, oral or written agreements or understandings of the parties. 20.02. SCOPE AND MODIFICATION OF LICENSE. No interpretation, change, termination or waiver of any of the provisions hereof shall be binding upon Licensor unless in writing signed by an officer of Licensor. No modification, waiver, termination, rescission, discharge or cancellation of this agreement shall affect the right of any party hereto to enforce any claim or right hereunder, whether or not liquidated, which occurred prior to the date of such modification, waiver, termination, rescission, discharge or cancellation. 21. CONSTRUCTION AND SEVERABILITY. 21.01. INTERPRETATION. The recitals shall be considered a part of this agreement. Section and Subsection captions are used only for convenience and are in no way to be construed as part of this agreement or as a limitation of the scope of the particular Sections, Subsections, Paragraphs and Subparagraphs to which they refer. Words of any gender used in this agreement shall include any other gender, and words in the singular shall include the plural where the context requires. 21.02. SCOPE OF PROTECTED AREA. Neither party to this Agreement intends to expand the scope of any covenants or commitments contained in Section 2 beyond the terms and provisions expressly stated in Section 2, and the parties to this Agreement agree that no Person, court or arbitrator may interpret any of the foregoing covenants or commitments in Section 2 in that manner. 21.03. INVALIDITY. If any part of this agreement for any reason shall be declared invalid, such decision shall not affect the validity of any remaining portion, which shall remain in full force and effect. In the event any material provision of this agreement shall be stricken or declared invalid, Licensor reserves the right to terminate this agreement. 21.04. BINDING EFFECT. This agreement shall be binding upon the parties, their heirs, executors, personal representatives, successors or assigns. 41 21.05. SURVIVAL. Any provisions of this agreement which impose an obligation after termination or expiration of this agreement shall survive the termination or expiration of this agreement and be binding on the parties. 21.06. LIABILITY OF MULTIPLE LICENSEES. If Licensee consists of more than one Person or entity, each such Person and entity, and each proprietor, partner or shareholder of each such entity shall be jointly and severally liable for any and all of Licensee's obligations and prohibitions under this agreement. Consequently, if and when a Person or entity as Licensee is in breach of this agreement and fails or is unable to cure such breach in a timely manner, Licensor may terminate the rights of the so-affected Person or entity under this agreement whereby this agreement is terminated as to only such Person or entity while remaining fully effective as to all other Persons and entities remaining as Licensee on this agreement. This Person or entity removed as Licensee shall remain jointly and severally obligated with the Persons and entities remaining as Licensee for any and all obligations and liabilities of Licensee which occurred or accrued through the date of removal of said Person or entity. 22. BUSINESS ENTITY LICENSEES 22.01. CORPORATE LICENSEE. If the Licensee is a corporation, the Licensee shall comply with the following provisions: (a) PURPOSE. The certificate of incorporation of the Licensee, if incorporated after August 31, 1994, shall provide that the purpose of the corporation shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants. (b) TRANSFER RESTRICTIONS. The certificate of incorporation of the Licensee shall provide that the Licensee shall not issue any additional capital stock of the Licensee and that no stockholder may transfer, assign or pledge any issued capital stock of the Licensee without the prior, written consent of the Licensor, and each stock certificate issued to evidence the capital stock of the Licensee shall contain a legend disclosing the foregoing restriction. The Licensor shall not withhold its consent to the issuance of additional capital stock or a transfer, assignment or pledge without a reasonable basis. In giving its consent, The Licensor shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the capital stock execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement. (c) STOCKHOLDER GUARANTY. Each stockholder of the Licensee shall execute the Guaranty and Restriction Agreement attached as Attachment I to this Agreement. (d) DOCUMENTS. Prior to the Licensor's execution of this Agreement, the Licensee shall deliver to the Licensor photocopies of its certificate of incorporation and issued stock certificates reflecting compliance with the provisions of this Section 22.01. 42 22.02. PARTNERSHIP LICENSEE. If the Licensee is a partnership, the Licensee shall comply with the following provisions: (a) PURPOSE. The partnership agreement and certificate of limited partnership (if applicable) of the Licensee, if formed after August 31, 1994, shall provide that the purpose of the partnership shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants. (b) TRANSFER RESTRICTIONS. The partnership agreement and certificate of limited partnership (if applicable) of the Licensee shall provide that the Licensee shall not issue any additional partnership interests in the Licensee and that no partner may transfer, assign or pledge a partnership interest in the Licensee without the prior, written consent of the Licensor. The Licensor shall not withhold its consent to the issuance of additional partnership interests or a transfer, assignment or pledge without a reasonable basis. In giving its consent, the Licensor shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the partnership interest execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement. (c) PARTNER GUARANTY. Each partner of the Licensee shall execute the Guaranty and Restriction Agreement appearing as Attachment I to this Agreement. (d) DOCUMENTS. Prior to the Licensor's execution of this Agreement, the Licensee shall deliver to the Licensor photocopies of its partnership agreement and certificate of limited partnership (if applicable) reflecting compliance with the provisions of this Section 22.02. 22.03. LIMITED LIABILITY COMPANY LICENSEE. If the Licensee is a limited liability company, the Licensee shall comply with the following provisions: (a) PURPOSE. The articles of organization and operating agreement of the Licensee, if organized after August 31, 1994, shall provide that the purpose of the limited liability company shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants. (b) TRANSFER RESTRICTIONS. The articles of organization and operating agreement of the Licensee shall provide that the Licensee shall not issue any additional membership interests in the Licensee and that no member may transfer, assign or pledge any membership interests in the Licensee without the prior, written consent of the Licensor. The Licensor shall not withhold its consent to the issuance of additional membership interests or a transfer, assignment or pledge without a reasonable basis. In giving its consent, the Licensor shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the membership interest execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement. 43 (c) MEMBER GUARANTY. Each member of the Licensee shall execute the Guaranty and Restriction Agreement appearing as Attachment I to this Agreement. (d) DOCUMENTS. Prior to the Licensor's execution of this Agreement, the Licensee shall deliver to the Licensor photocopies of its articles of organization and operating agreement reflecting compliance with the provisions of this Section 22.03. 22.04. OTHER ENTITY LICENSEE. If the Licensee is any other form of business entity, the Licensee shall deliver to the Licensor photocopies of its organizational documents containing provisions substantially similar to those required by Sections 22.01 through 22.03. 22.05. EMPLOYEE STOCK PURCHASE PLANS. The Licensee shall have the right to transfer up to 49% of its outstanding capital stock or other equity interests to an employee stock purchase plan as long as one individual who qualifies as a licensee of the Licensor continues to own and Control, directly or indirectly, at least 51% of the Licensee's outstanding capital stock or other equity interests. 23. APPLICABLE LAWS. The terms and provisions of this agreement shall be interpreted in accordance with and governed by the laws of the State of Oklahoma, provided that if the laws of the State of Oklahoma would not permit full enforcement of Section 16 of this agreement, then the laws of the state in which the Sonic Restaurant is located or Licensee is domiciled shall apply to the extent that any or all of such laws more fully permit enforcement of Section 16 of this agreement. Notwithstanding the foregoing, the franchise laws or regulations of the state in which the Sonic Restaurant is located, in effect on the original date of this Agreement, shall apply to this Agreement. Licensee agrees that jurisdiction over Licensee and venue exist and are proper within the same federal judicial district where the corporate headquarters of Licensor are located and within any and all other courts, whether federal, state, or local, located within that district. Licensee waives any and all defenses and objections, and Licensee agrees not to assert any defense or objection to jurisdiction over Licensee and to venue as described hereinabove regarding any action, proceeding or litigation instituted by Licensor against Licensee. Licensor and Licensee agree that any and all breaches of this agreement, including breaches occurring after termination, cancellation, or expiration of this agreement, shall be deemed to have occurred where the corporate headquarters of Licensor are located. 24. ACKNOWLEDGEMENT. Licensee acknowledges that: 24.01. INITIAL TERM. The term of this agreement is for a single 20-year term with no promise or representation as to the renewal of this agreement or the grant of a new license except as provided herein. 44 24.02. CONSULTATION WITH COUNSEL. Licensee hereby represents that Licensee has received a copy of this agreement and has had an opportunity to consult with Licensee's attorney with respect thereto at least 10 days prior to Licensee's execution hereof. Licensee further represents that Licensee has had this agreement in hand for review at least five (5) business days prior to Licensee's execution hereof. 24.03. PROFITABILITY. No representation has been made by Licensor as to the future profitability of the Sonic Restaurant. 24.04. LICENSEE'S INVESTIGATION. Prior to the execution of this agreement, Licensee has had ample opportunity to contact existing licensees of Licensor and to investigate all representations made by Licensor relating to the Sonic System. The Licensee has conducted an independent investigation of the business contemplated by this Agreement and recognizes that it involves substantial business risks making the success of the venture largely dependent on the business abilities of the Licensee. The Licensor disclaims and the Licensee has not received from the Licensor or its Affiliates any express or implied warranty or guaranty from regarding the potential volume, profits or success of the business venture contemplated by this Agreement. The Licensee has not relied on any express or implied warranty or guaranty from the Licensor or its Affiliates regarding the potential volume, profits or success of the business venture contemplated by this Agreement. 24.05. CONTRARY REPRESENTATIONS. The Licensee knows of no representations by the Licensor or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement. The Licensee has not relied on any representations from the Licensor or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement or the disclosures set forth in the Franchise Offering Circular delivered to the Licensee in connection with the issuance of this Agreement. 24.06. VARIANCES TO OTHER LICENSEES. The Licensee understands that other developers and licensees may operate under different forms of agreements and, consequently, that the Licensor's rights and obligations with regard to its various licensees may differ materially in certain circumstances. 24.07. COMPLETE AGREEMENT. This agreement supersedes any and all other agreements or representations respecting the Sonic Restaurant and contains all the terms, conditions and obligations of the parties with respect to the grant of this agreement. 25. INPUT AND ADVICE FROM LICENSEES. In connection with the implementation of or significant changes in the programs or policies referred to in Sections 6.04, 6.05(c), 6.06, 8, and 11.01(f) of this Agreement, the Licensor shall solicit input and advice from a group of licensees gathered together for such purpose (whether established ongoing for such purpose or gathered on an ad hoc basis from time-to-time). The Licensor further shall use its best efforts to ensure that such groups are balanced in terms of 45 geographic base, size of operating group, and period of tenure within the Sonic system. Notwithstanding the foregoing, this Section 25 shall not have any effect unless the license agreements in effect for at least one-third of all Sonic drive-in restaurants contain this provision or a substantially similar provision. 26. INJUNCTIVE RELIEF. The Licensee acknowledges that the Licensor's remedy at law for any breach of any of the Licensee's covenants under this Agreement (other than involving only the payment of money) would not constitute an adequate remedy at law and, therefore, the Licensor shall have the right to obtain temporary and permanent injunctive relief in any proceeding brought to enforce any of those provisions, without the necessity of proof of actual damages. However, nothing in this Section 26 shall prevent the Licensor from pursuing separately or concurrently one or more of any other remedies available at law, subject to the provisions of Section 14.04 of this Agreement. 27. GENERAL RELEASE AND COVENANT NOT TO SUE. The Licensee hereby releases Sonic Corp., its subsidiaries, and the officers, directors, employees and agents of Sonic Corp. and its subsidiaries from any and all claims and causes of action, known or unknown, which may exist in favor of the Licensee as of the date of this Agreement. In addition, the Licensee covenants that the Licensee shall not file or pursue any legal action or complaint against any of the foregoing entities or Persons with regard to any of the foregoing claims or causes of action released pursuant to this Section 27. The Licensor hereby releases the Licensee and its officers, directors, employees and agents from any and all claims and causes of action, known or unknown, which may exist in favor of the Licensor as of the date of this Agreement, except for any claims for (a) unpaid moneys due the Licensor or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of the Licensor's legal rights regarding the Proprietary Marks. In addition, the Licensor covenants that the Licensor shall not file or pursue any legal action or complaint against any of the foregoing entities or Persons with regard to any of the claims or causes of action released by the Licensor pursuant to this Section 27. Executed on the dates set forth below, to have effect as of ______, 1998. Licensor: Sonic Industries Inc. By: _____________________________ (Vice) President Attest: Date: ___________________, 1998 _________________________________ (Assistant) Secretary Licensee: ___________________________________ Name: Date:_______________________, 1998 ____________________________________ Name: Date:______________________, 1998 46 SCHEDULE I GUARANTY AND RESTRICTION AGREEMENT GUARANTY AND RESTRICTION AGREEMENT The undersigned (the "Guarantor"), Sonic Industries Inc. ("Sonic"), and __________ (the "Licensee") enter into this Guaranty and Restriction Agreement (this "Guaranty") as of the ____ day of __________, 199_. W I T N E S S E T H: Whereas, Sonic is entering into a License Agreement (the "License Agreement") dated the same date as this Agreement with the Licensee for the Sonic drive-in located at ____________________________; and Whereas, as a condition to entering into the License Agreement, Sonic has asked that the Guarantor provide a personal guaranty of certain of the obligations of the Licensee set forth in the License Agreement; and Whereas, Sonic also has asked that the Guarantor and the Licensee agree to a restriction on the transfer of the equity interests in the Licensee; and Whereas, the Guarantor and Licensee are willing to enter into those agreements in accordance with the terms and conditions of this Agreement. Now, therefore, in consideration of the mutual covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties agree as follows: 1. PERSONAL GUARANTY OF PAYMENTS. The Guarantor hereby guarantees the prompt and full payment of the following obligations under the License Agreement: (a) All royalties due Sonic pursuant to the License Agreement. (b) All advertising contribution fees to the Sonic Advertising Fund pursuant to the License Agreement. (c) All contributions to approved advertising cooperatives pursuant to the License Agreement. (d) Any other miscellaneous obligations owing to Sonic or its Affiliates relating to the Sonic drive-in restaurant covered by the License Agreement, including any sign lease agreements. 2. NATURE OF GUARANTY. This guaranty shall constitute an absolute, unconditional, irrevocable and continuing guaranty. Sonic shall not have any obligation to take any action against any other person or entity for collection of any payments prior to making any demand for payment or bringing any action against the Guarantor. 3. PERMITTED ACTIONS. From time to time, Sonic shall have the right to take, permit or suffer to occur any "Permitted Action," as defined below, without modifying, reducing, waiving, releasing, impairing or otherwise affecting the obligations of the Guarantor under this Agreement, without giving notice to the Guarantor or obtaining the Guarantor's consent, without the necessity of any reservations of rights against the Guarantor, and without liability on the part of Sonic. As used in this Section 3, the phrase "Permitted Action" shall mean (a) an agreed extension of time for payment of any sum due under the License Agreement, (b) an agreed change in the manner or place of payment of any sums due under the License Agreement, (c) any waiver by Sonic of any defaults under the provisions of the License Agreement, (d) any delay or failure by Sonic to exercise any right or remedy Sonic may have under the License Agreement, (e) the granting by Sonic of any leniencies, waivers, extensions and indulgences under the License Agreement, and (f) any agreed amendments to the License Agreement. 4. WAIVER OF NOTICE OF ACCEPTANCE. The Guarantor acknowledges and waives notice of Sonic's acceptance of the Guarantor's guaranty pursuant to the terms of this Agreement. 5. RESTRICTIONS ON TRANSFER. The Licensee shall not issue any additional shares of capital stock without the prior, written consent of Sonic. The Guarantor shall not transfer, assign or pledge any of its shares of capital stock in the Licensee to any person without the prior, written consent of Sonic. 6. DISPUTES. If Sonic files suit to enforce the provisions of this Agreement, the federal and state courts in Oklahoma shall have personal jurisdiction over the Guarantor. The Guarantor expressly waives any and all objections as to venue in any of those courts and agrees that Sonic may serve process by mailing a copy of the summons by certified mail, return receipt requested, with sufficient postage prepaid, to the address of the Guarantor as specified in this Agreement. 7. ATTORNEYS' FEES, COSTS AND EXPENSES. In any action brought by Sonic to enforce the obligations of the Guarantor, Sonic also shall have the right to collect its reasonable attorneys' fees, court costs, and expenses incurred in the action. 8. HEADINGS. The headings used in this Agreement appear strictly for the parties' convenience in identifying the provisions of this Agreement and shall not affect the construction or interpretation of the provisions of this Agreement. 9. BINDING EFFECT. This Agreement binds and inures to the benefit of the parties and their respective successors, legal representatives, heirs and permitted assigns. 10. WAIVER. The failure of a party to insist in any one or more instances on the performance of any term or condition of this Agreement shall not operate as a waiver of any future performance of that term or condition. 2 11. GOVERNING LAW. Notwithstanding the place where the parties execute this Agreement, the internal laws of Oklahoma shall govern the construction of the terms and the application of the provisions of this Agreement. 12. AMENDMENTS. No amendments to this Agreement shall become effective or binding on the parties, unless agreed to in writing by all of the parties. 13. TIME. Time constitutes an essential part of each and every part of this Agreement. 14. NOTICE. Except as otherwise provided in this Agreement, when this Agreement makes provision for notice or concurrence of any kind, the sending party shall deliver or address the notice to the other party by certified mail, telecopy, or nationally-recognized overnight delivery service to the following address or telecopy number: Sonic: 101 Park Avenue Oklahoma City, Oklahoma 73102 (405) 280-7516 Guarantor: ______________________________ ______________________________ (___) ___-____ Licensee: ______________________________ ______________________________ (___) ___-____ All notices pursuant to the provisions of this Agreement shall run from the date that the other party receives the notice or three business days after the party places the notice in the United States mail. Each party may change the party's address by giving written notice to the other parties. 15. RELEASE AND COVENANT NOT TO SUE. The Guarantor and the Licensee each hereby release all claims and causes of action which the Guarantor or the Licensee, or both of them, may have against Sonic Corp., its subsidiaries, and the stockholders, directors, officers, employees and agents of Sonic Corp. and its subsidiaries. The Guarantor and the Licensee, and each of them, further covenant not to sue any of the foregoing persons or entities on account of any of the foregoing claims or causes of action. 3 Executed and delivered as of the day and year first set forth above. Sonic: Sonic Industries Inc. By: ________________________ Attest: (Vice) President ______________________________ (Assistant) Secretary Guarantor: _______________________________ Licensee: ______________________________ By: _______________________ Attest: Its: ________________ ______________________________ Its: ________________________ 4 EX-10.06 3 EXHIBIT 10.06 Exhibit 10.06 Form of Sonic Industries Inc. License Agreement (the Number 5.2 License Agreement) SONIC INDUSTRIES INC. NUMBER 5.2 LICENSE AGREEMENT BY AND BETWEEN SONIC INDUSTRIES INC., LICENSOR, AND _____________________________________ _____________________________________ ___________________________, LICENSEE SONIC DRIVE-IN OF _______________________________________, LOCATED AT ____________________________________________ ____________________________________________________. DATED: JANUARY 1, 1999 STORE NO. _________ CIF NO. __________ Store No. _________ CIF No. __________ NUMBER 5.2 LICENSE AGREEMENT THIS AGREEMENT made this 1st day of January, 1999 (this "Agreement") by and between SONIC INDUSTRIES INC., an Oklahoma corporation ("SONIC"), and __________________________ ("Principal") __________________________ __________________________ (all of whom shall be jointly referred to herein as the "Licensee"). RECITALS SONIC is the developer and the sole and exclusive owner of the right to license the distinctive and proprietary drive-in, food service system under which food is sold to the public from drive-in restaurants operated under the trade name and federally registered trademark and service mark "Sonic". The Sonic System so developed now includes, among other things, the following elements, all or some of which may be deleted, changed, improved or further developed by SONIC from time to time: A. Methods and procedures for the preparation and serving of food and beverage products. B. Confidential recipes for food products and distinctive service accessories (including, but not limited to, uniforms, menus, packages, containers and additional paper or plastic items). C. Plans and specifications for distinctive standardized premises featuring characteristic exterior style, colors, and design (including angled parking stalls equipped with menu housings, speakers and tray supports), interior furnishings, equipment layout, exterior signage, and marketing techniques and materials. D. A uniform method of operating which is described in the SONIC OPERATIONS MANUAL. E. Distinctive and characteristic trade names, trade dress, trademarks and service marks, including, but not limited to: "Sonic," "Sonic Happy Eating," "America's Favorite Drive-In Sonic," signs, menu housings, designs, color schemes, standardized premises featuring characteristic exterior style, canopies, colors, and design (including angled parking stalls equipped with menu housings, speakers and tray supports), interior furnishings and equipment layout, and emblems as SONIC designates in the SONIC OPERATIONS MANUAL or otherwise in writing or through usage as prescribed for use with the Sonic System and as may from time to time be developed. F. Such exclusive and trade secrets as have been and may from time to time be developed, which are owned by SONIC and which are disclosed to its licensees in confidence in connection with the construction and operation of a Sonic drive-in restaurant. Licensee wishes to obtain a license from SONIC to operate a Sonic drive-in restaurant pursuant to the Sonic System and to be afforded the assistance provided by SONIC in connection therewith, and understands and accepts the terms, conditions and covenants set forth herein as those which are reasonably necessary to maintain SONIC's high and uniform standards of quality and service designed to protect the goodwill and enhance the public image of the Proprietary Marks and the Sonic System, and recognizes the necessity of operating the licensed Sonic drive-in restaurant in faithful compliance therewith, and with SONIC's standards and specifications. 1. DEFINITIONS. Unless the context of their use in this Agreement requires otherwise, the following words and phrases shall have the following meanings when used in initially-capitalized form in this Agreement. 1.01. AFFILIATE. The word "Affiliate" shall mean (a) any stockholder, director or officer of a specified Person (if the specified Person is a corporation), (b) any partner of a specified Person (if the specified Person is a partnership), (c) any member of a specified Person (if the specified Person is a limited liability company), (d) any employee of a specified Person, and (e) any Person which directly or indirectly through one or more intermediaries Controls the specified Person, the specified Person Controls, or shares a common Control with the specified Person. 1.02. CONTROL. The word "Control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person or entity, whether through the ownership of voting securities, by contract, or otherwise. 1.03. DMA. The term "DMA" shall mean a Designated Market Area as defined by A.C. Nielsen Company from time to time. 1.04. GROSS SALES. The phrase "Gross Sales" shall mean all revenues from sales resulting from all business conducted upon or from the Sonic Restaurant, whether evidenced by check, cash, credit, charge account, exchange or otherwise, and shall include (without limitation) the amounts received from the sale of goods, wares and merchandise, including sales of food, beverages and tangible property of every kind and nature, promotional or otherwise (excluding restaurant equipment) and for services performed from or at the Sonic Restaurant, whether Licensee fills the orders from the Sonic Restaurant or elsewhere. Each charge or sale upon credit shall constitute a sale for the full price in the month during which the charge or sale occurs, regardless of the time when Licensee receives payment (in whole or in part) for the charge or sale. The phrase "Gross Sales" shall not include (a) sales of merchandise for which Licensee makes a cash refund, if 2 previously included in Gross Sales; (b) the price of merchandise returned by customers for exchange, if Licensee previously included the sales price of the merchandise returned by the customer in Gross Sales and includes the sales price of merchandise delivered to the customer in exchange in Gross Sales; (c) amounts received from the sale of tobacco products; (d) the amount of any sales tax imposed by any governmental authority directly on sales and collected from customers, if Licensee adds the amount of the tax to the sales price or absorbs the amount of the sales tax in the sales price and Licensee actually pays the tax to the governmental authority; and (e) amounts not received for menu items because of discounts or coupons, if properly documented. The phrase "Gross Sales" also shall not include any proceeds received by Licensee pursuant to an assignment made in accordance with the provisions of Section 13. 1.05. LICENSE. The word "License" shall mean the rights granted Licensee pursuant to Section 2 of this Agreement. 1.06. MSA. The term "MSA" shall mean a Metropolitan Statistical Area as defined by the United States Census Bureau from time to time. An MSA shall not include any city or town otherwise falling within the MSA which has at least 10 miles of continuous undeveloped and sparsely populated rural land between every portion of its boundary and the boundary of the city which serves as the primary metropolitan area for the MSA. 1.07. PERSON. The word "Person" shall mean any individual or business entity, including (without limitation) corporation, joint venture, general partnership, limited partnership, limited liability company, or trust. 1.08. PROPRIETARY MARKS. The phrase "Proprietary Marks" shall mean the distinctive and characteristic trade names, trademarks, service marks, and trade dress which SONIC designates in writing or through usage from time to time as prescribed for use with the Sonic System, including (without limitation) the terms "Sonic," "Happy Eating," and "America's Favorite Drive-In"; signs; emblems; menu housings; designs; color schemes; standardized premises featuring characteristic exterior style, canopies, colors and design (including angled parking stalls equipped with menu housings, speakers and tray supports); interior furnishings; and equipment layout. 1.09. PROTECTED AREA. The phrase "Protected Area" shall mean the area defined by Sections 2.02 and 2.03 of this Agreement. 1.10. SONIC RESTAURANT. The phrase "Sonic Restaurant" shall mean the Sonic drive-in restaurant licensed by this Agreement. 1.11. SONIC SYSTEM. The phrase "Sonic System" shall mean the unique, proprietary and confidential information of SONIC, including (without limitation) the SONIC OPERATIONS MANUAL and consisting of (a) methods and procedures for the preparation of food and beverage products; (b) confidential recipes for food products; (c) distinctive service and accessories; (d) plans and specifications for interior and exterior signs, designs, layouts and color schemes (whether copyrighted or not); (e) methods, techniques, formats, systems, specifications, procedures, 3 information, trade secrets, sales and marketing programs; (f) methods of business operations and management; and (g) knowledge and experience regarding the operation and franchising of Sonic drive-in restaurants. 1.12. ORIGINAL EXPIRATION DATE. The phrase "Original Expiration Date" shall mean the original expiration date of the license agreement renewing to this Agreement, as set forth on the Signature Page of this Agreement. 2. LICENSE GRANT. 2.01 SONIC grants to Licensee for the following stated term the right, license and privilege to adopt and use the Sonic System at the Sonic Restaurant located at __________________________, _____________________, ______________________. 2.02. SONIC shall not own or operate a Sonic drive-in restaurant and shall not franchise any other Person to own or operate a Sonic drive-in restaurant (other than a Sonic drive-in restaurant licensed prior to the date of this Agreement) within the area determined by the following provisions: (a) (i) An area defined by a radius extending one and one-half miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of 75,000 or more. (ii) An area defined by a radius extending two miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of less than 75,000 but more than 25,000. (iii) An area defined by a radius extending three miles from the front door of the Sonic Restaurant if located within a city, town or MSA having a population of 25,000 or less. (iv) An area defined by a radius extending three miles from the front door of the Sonic Restaurant if located outside a city, town or MSA. (b) The foregoing radius shall not extend into the contractually-granted protected radius of any Sonic drive-in restaurant in existence as of the date of this Agreement and shall not extend into the franchised area of any developer under an existing area development agreement with SONIC. SONIC shall determine the population of an MSA from time to time after the date of this Agreement according to the latest published federal census. 2.03. EFFICIENT MARKET DEVELOPMENT AND SALES DILUTION. The following additional provisions shall apply to the Sonic Restaurant: (a) In utilizing its best efforts to reduce the dilution of sales and profitability, in the event SONIC develops or licenses another Person to develop a Sonic drive-in restaurant 4 on the same street as the Sonic Restaurant (according to the Sonic Restaurant's designated street address) and no traffic barrier or break (such as a river or other waterway, interceding roadway, unpaved landmass, or other similar structure blocking through traffic) exists between the Sonic Restaurant and the proposed new site, notwithstanding the provisions of Section 2.02, above, the Protected Area provided by Section 2.02 shall equal two and one-half miles (each way) on that street and an additional 500 feet (each way from the center of the intersection) on any street crossing that street within the foregoing 2 1/2-mile distance. (b) In order to achieve efficient market development and in utilizing its best efforts to reduce the dilution of sales and profitability, in the event SONIC develops or licenses another Person to develop a Sonic drive-in restaurant within two miles of the Sonic Restaurant (if permitted under Section 2.02, above), SONIC shall apply at least the level of demographic analysis, market impact analysis, and site and market review used by SONIC as of the date of this Agreement in considering the additional site for the development of a Sonic drive-in restaurant. 2.04. To advertise to the public as a Licensee of SONIC. 2.05. To adopt and use, but only in connection with the sale of those food and beverage products which have been designated in the Sonic menu as specified in the SONIC OPERATIONS MANUAL, the trade names, trademarks and service marks which SONIC shall designate from time to time to be part of the Sonic System. 2.06. If Licensee relocates the Sonic Restaurant during the term of this Agreement with the written consent of SONIC (which consent SONIC shall not withhold unreasonably), this Agreement shall continue to apply to the Sonic Restaurant in accordance with the terms contained in this Agreement, except that SONIC and Licensee shall enter into an amendment to this Agreement to change the address of the Sonic Restaurant accordingly. 3. TERM. 3.01. INITIAL TERM. Unless sooner terminated as hereafter provided, the term of this License shall end on December 31, 2018. 3.02. OPTION. At the end of the term, if Licensee desires, Licensee may renew the License to adopt and use the Sonic System at the Sonic Restaurant for an additional 10-year term, provided that prior to the expiration of the initial term: (a) Licensee gives SONIC written notice of Licensee's election to renew not less than six months nor more than 12 months prior to the end of the initial term. (b) Licensee is not, when notice is given, in material default of any provision of this Agreement or any amendment hereof or successor agreement hereto or in material default of any other agreement between Licensee and SONIC or SONIC's Affiliates 5 involving any other license agreement and has substantially complied with the terms and conditions of this Agreement and all other such agreements, during the term thereof. (c) All monetary obligations owed by Licensee to SONIC or SONIC's Affiliates from any source whatsoever (whether under this Agreement or otherwise) have been satisfied prior to renewal. (d) The Licensee executes a license agreement containing the same terms and conditions as this Agreement, except that the license agreement shall provide for a term of 10 years and shall contain the then current royalty rate and the then current national and local advertising expenditure requirements; provided, however, that in lieu of an initial license fee, a renewal fee shall be paid to SONIC in the amount of: (i) $3,000.00, or (ii) 20% of the then current initial license fee, whichever is greater. However, the renewal fee shall not exceed $6,000 as adjusted for inflation on September 1 of each year in accordance with the consumer price index and using August of 1994 as the base amount. (e) Licensee performs such remodeling, repairs, replacements and redecorations as SONIC may reasonably require to cause the restaurant equipment and fixtures to conform to the plans and specifications being used for new or remodeled Sonic drive-in restaurants on the renewal date, provided SONIC notifies Licensee of such requirements within 30 days after receipt of Licensee's notice of renewal. (f) SONIC and Licensee execute a general release of each other, in a form satisfactory to SONIC, of any and all claims Licensee may have against SONIC and its Affiliates, including (without limitation) all claims arising under any federal, state or local law, rule or ordinance, but excluding (as to SONIC) any claims against Licensee for (a) unpaid moneys due SONIC or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of SONIC's legal rights regarding the Proprietary Marks. SONIC may waive the requirements of this paragraph (f) at SONIC's election. (g) Licensee principal and/or manager at their expense attend and satisfactorily complete such retraining program as SONIC may require at its sole discretion. (h) Licensee meets the remodeling requirements set forth in Section 6.02(d) herein. 4. DUTIES OF SONIC. SONIC agrees to regularly advise and consult with Licensee in connection with the operation of the Sonic Restaurant and to provide to Licensee: 4.01. PLANS. Standard Sonic Plans and Specifications for a free standing building, equipment layout and signs (See Subsection 6.03), together with advice and consultation. Any 6 modifications for nonstandard buildings, whether required by local zoning or building laws or otherwise, must be approved in writing by SONIC and are to be paid by Licensee. 4.02. OPERATIONS MANUAL. The SONIC OPERATIONS MANUAL containing the standards, specifications, procedures and methods for operating a Sonic drive-in restaurant, a copy of which will be loaned to Licensee for the term of this Agreement. 4.03. MARKETING ASSISTANCE. Certain marketing materials and such merchandising, marketing and advertising research data and advice as may be developed from time to time by SONIC and deemed to be helpful in the operation of a Sonic drive-in restaurant. 4.04. COMMUNICATION. Certain management development and motivational seminars and periodic newsletters which communicate to Licensee available advertising materials and new developments, techniques and improvements in areas of restaurant equipment, management, food preparation and service which are pertinent to the operation of a restaurant using the Sonic System. 4.05. EVALUATION PROGRAM. A field evaluation program for the mutual benefit of both SONIC and Licensee to promote uniform standards of operation and quality control. 5. FEES. 5.01. LICENSE FEE. The Licensee acknowledges that: (a) the initial grant of this License constitutes the sole consideration for the payment of a renewal license fee of $1,000 paid by Licensee to SONIC concurrently with the execution hereof; and (b) the fee has been earned by SONIC. 5.02. ROYALTY FEES. On or before the 20th day of each calendar month, Licensee shall pay a royalty fee determined by the following provisions: (a) NUMBER 1 LICENSE AGREEMENTS, NUMBER 4 LICENSE AGREEMENTS AND NUMBER 4.1 LICENSE AGREEMENTS. For all Number 1 License Agreements, Number 4 License Agreements and Number 4.1 License Agreements renewing with this Agreement, the Licensee shall choose either the royalty rate under Option 1 or Option 2, below. The Licensee shall make his selection on the signature page of this Agreement. If the Licensee does not indicate a preference, SONIC shall deem the Licensee to have chosen Option 2. 7 OPTION 1 Prior to the Original Expiration Date, the Licensee shall pay a royalty fee determined by the following scale based on Gross Sales:
Gross Sales But Not Royalty Greater Than More Than Rate ------------ --------- ------- $ 0.00 $ 5,000.00 1.00% $ 5,000.00 $10,000.00 1.50% $10,000.00 $15,000.00 2.00% $15,000.00 $20,000.00 2.50% $20,000.00 $30,000.00 3.00% $30,000.00 $40,000.00 3.50% $40,000.00 N/A 4.00%
Commencing upon the Original Expiration Date and thereafter, Licensee shall pay a royalty fee determined by the following scale based on Gross Sales:
Gross Sales But Not Royalty Greater Than More Than Rate ------------ --------- ------- $ 0.00 $ 5,000.00 1.00% $ 5,000.00 $10,000.00 2.00% $10,000.00 $15,000.00 3.00% $15,000.00 $30,000.00 4.00% $30,000.00 $40,000.00 4.25% $40,000.00 $50,000.00 4.50% $50,000.00 $60,000.00 4.75% $60,000.00 N/A 5.00%
OPTION 2 During the term of this Agreement, the Licensee shall pay a royalty fee determined by the following scale based on Gross Sales:
Gross Sales But Not Royalty Greater Than More Than Rate ------------ --------- ------- $ 0.00 $ 5,000.00 1.00% $ 5,000.00 $10,000.00 2.00% $10,000.00 $15,000.00 3.00% $15,000.00 $30,000.00 4.00% $30,000.00 $40,000.00 4.25% $40,000.00 $50,000.00 4.50% $50,000.00 $60,000.00 4.75% $60,000.00 N/A 5.00%
8 (b) NUMBER 5 LICENSE AGREEMENTS. For all Number 5 License Agreements renewing with this Agreement, the Licensee shall pay a royalty fee determined by the following scale based on Gross Sales:
Gross Sales But Not Royalty Greater Than More Than Rate ------------ --------- ------- $ 0.00 $ 5,000.00 1.00% $ 5,000.00 $10,000.00 2.00% $10,000.00 $15,000.00 3.00% $15,000.00 $30,000.00 4.00% $30,000.00 $40,000.00 4.25% $40,000.00 $50,000.00 4.50% $50,000.00 $60,000.00 4.75% $60,000.00 N/A 5.00%
(c) The calculation of Gross Sales and the corresponding royalty fees shall take place on a cumulative basis. For example, the following formula results in the calculation of the royalty fee under Option 2 above on $50,000 of Gross Sales: Royalty Fee = ($5,000 x .01) + ($5,000 x .02) + ($5,000 x .03) + ($15,000 x .4) + ($10,000 x .0425) + ($10,000 x .0450). ADVERTISING FEE. On or before the 20th day of each calendar month throughout the term of this Agreement, Licensee shall pay to the Sonic Advertising Fund, which is administered by SONIC, an advertising contribution fee (the "SAF Contribution") in an amount equal to .75% of the Gross Sales received by Licensee from the operation of the Sonic Restaurant during the calendar month next preceding the date of such payment. Such payment shall be forwarded with the profit and loss statement required to be provided pursuant to Section 10.01 herein. (b) The amount due to Licensor by Licensee pursuant to this Section 5.03, shall be in addition to and separate from that which Licensee is obligated to spend pursuant to Section 11.01 of this Agreement. 5.04. TRANSFER FEE. (a) A transfer fee in the amount of $500 shall be paid by Licensee in the event of a transfer or assignment of this Agreement (resulting in a change in Control of the License) to a licensee then-currently qualified as a licensee, excluding assignments under Subsections 13.02 and 13.03. 9 (b) A transfer fee in the amount of $1,500.00 shall be paid by Licensee in the event of a transfer or assignment of this Agreement (resulting in a change in Control of this license) to a new licensee not then-currently qualified as a licensee, excluding assignments under Subsections 13.02 and 13.03. 5.05. LATE CHARGES. In the event any payments required by Sections 5.02, 5.03 or 5.04, above, are not paid on or before the date on which they are due, a late charge in an amount equal to 1.75% per month shall be levied against such amounts due and shall be owing to SONIC by Licensee from the date on which such obligations were due until any such obligations are paid in full. In the event the interest rate set out in this Section 5.05 exceeds that amount permitted by Oklahoma law, then the maximum interest rate permitted by Oklahoma law shall be charged. 6. DUTIES OF LICENSEE. 6.01. SONIC RESTAURANT SITE. (a) The site at which Licensee shall operate the Sonic Restaurant is more fully described in Section 2.01. During the term of this Agreement, the site shall be used exclusively for the purpose of operating a franchised Sonic drive-in restaurant. (b) In the event the Sonic Restaurant premises suffers some physical casualty, the minimum acceptable quality and appearance for the restored restaurant will be that which existed just prior to the casualty, unless the Sonic Restaurant was below minimum acceptable standards for SONIC at the time of casualty in which event the Sonic Restaurant will be restored to a condition which meets the minimum acceptable standard according to SONIC. However, Licensee agrees to make all reasonable effort to have the restored Sonic Restaurant reflect the then current image, design and specifications of Sonic drive-in restaurants. If the Sonic Restaurant is substantially destroyed by fire or other casualty, Licensee may, with the written consent of SONIC elect to terminate this Agreement in lieu of Licensee reconstructing the restaurant, provided that for a period of 18 months after said election, Licensee shall not enter into, become landlord of or loan money to any restaurant business within a three mile radius of the drive-in site which is similar in nature to, or competitive with a Sonic drive-in restaurant or considered a fast food establishment. 6.02. CONSTRUCTION. (a) If Licensee is remodeling the existing restaurant, SONIC shall have the right to inspect and approve all plans and specifications prior to the commencement of any work. The Licensee shall submit the final remodeling plans and specifications for the Sonic Restaurant to SONIC for its written approval. Nothing in this section shall be construed as an endorsement or guarantee of the 10 conformity of such plans to applicable local, state or federal building or safety codes, or a guarantee that construction will be done in conformity with such approved plans. In any event, Licensee shall obtain written approval of such plans or written notice of SONIC's waiver of the rights reserved hereunder prior to the commencement of construction. (b) Licensee shall not deviate from the approved plans and specifications in any manner in the construction or remodeling of the restaurant without the prior written approval of SONIC. If at any time SONIC determines (prior to opening date) that Licensee has not constructed or remodeled the Sonic Restaurant in accordance with the plans and specifications approved by SONIC, SONIC shall, in addition to any other remedies, have the right to obtain an injunction from a court of competent authority against the continued construction and opening of the Sonic Restaurant, and Licensee hereby consents to any such injunction. (c) SONIC may require Licensee to undertake extensive remodeling and renovation and substantial modifications to existing buildings necessary for Licensee's restaurant to conform with SONIC's then existing system image. SONIC may exercise the foregoing right at any time during the term of this Agreement, but may not require (1) the remodeling of the restaurant more than once every seven years or (2) the remodeling of a restaurant built within the preceding three years, unless the required remodeling will not exceed 15% of the original cost of the building, equipment and land improvements (as adjusted for increases in the consumer price index after the construction date of the restaurant). Notwithstanding the foregoing, SONIC shall have the right to require Licensee to modify or replace the large Sonic sign for the restaurant at any time during the term of this Agreement. If SONIC exercises its right to require Licensee to undertake extensive remodeling or renovation or substantial modification within five years of the end of the term of this Agreement, Licensee may exercise any right to renew the term of this Agreement at that point in time in accordance with the applicable provisions of this Agreement, which renewal then shall take effect as of the expiration the then current term of this Agreement. 6.03. EQUIPMENT AND SIGN. (a) Licensee shall only install in and about the Sonic Restaurant such equipment, fixtures, furnishings and other personal property as are required and which strictly conform to the appearance, uniform standards and specifications of SONIC existing from time to time, which shall be communicated to Licensee in the SONIC OPERATIONS MANUAL or otherwise in writing. Licensee may purchase the equipment from SONIC if SONIC at that time is offering such equipment for sale on a regular basis, but is not required by this or any other agreement to do so. 11 (b) In order to provide maximum exposure of the Sonic name and marks, Licensee shall prominently display and maintain at Licensee's own expense at least one Sonic drive-in sign ("Sign") which complies with the specifications required by SONIC from time to time and in such location as SONIC may approve. Licensee shall not display any other sign or advertising at the Sonic Restaurant without SONIC's prior written approval. (c) Licensee may lease the required Sign from SONIC or may acquire or lease the Sign from any other source approved by SONIC. Licensee agrees to require in any lease agreement with SONIC or other suppliers a clause giving SONIC the right to remove the Sign from the Sonic Restaurant upon termination of this Agreement. (d) Licensee hereby agrees that it shall, upon SONIC's request, obtain from the landlord of the property at which the Sonic Restaurant is located, a landlord's lien and waiver releasing all claims against any equipment or sign which belongs to SONIC. (e) If Licensee is or becomes a lessee of the Sonic Restaurant premises, he shall provide SONIC with a true and correct, complete copy of any such lease, and shall have included therein provisions, in form satisfactory to SONIC, expressly permitting both Licensee and SONIC to take all actions and make all alterations referred to under subsection 15.01(c). Any such lease shall also require the lessor thereunder to give SONIC reasonable notice of any contemplated termination and a reasonable time in which to take and make the above actions and alterations and provide that Licensee has the unrestricted right to assign such lease to SONIC. 6.04. TRAINING. (a) Licensee acknowledges the importance of the quality of business operations among all restaurants in the Sonic System and, agrees that it will not allow any of its licensed establishments to be opened or operated without having at least one individual working full time at the Sonic Restaurant who has completed the Sonic Management Development Program. If the trained individual ceases to work full time at the Sonic Restaurant for whatever reason, Licensee shall have 120 days in which to replace the individual with a person who has completed the Sonic Management Development Program. (b) Licensee shall pay all traveling expenses, living expenses, and any other personal expenses for themselves and managers while enrolled in the training program. As part of the initial franchise fee paid pursuant to Section 5.01 herein, Licensee shall have the right to have one principal and one manager of the Sonic Restaurant attend the Sonic Management Development Program for no cost other than those set out in the preceding sentence. Any additional parties attending the 12 Sonic Management Development Program shall bear the cost, including any fees and tuition due for such training program. 6.05. COMPLIANCE WITH ENTIRE SYSTEM. (a) Licensee acknowledges that every component of the Sonic System is important to SONIC and to the operation of the Sonic Restaurant as a Sonic drive-in restaurant, including a designated menu of food and beverage products; uniformity of food specifications, preparation methods, quality and appearance; and uniformity of facilities and service. (b) SONIC shall have the right to inspect the Sonic Restaurant at all reasonable times to ensure that Licensee's operation thereof is in compliance with the standards and policies of the Sonic System. In the event that such inspection reveals any deficiency or unsatisfactory condition with respect to any aspect of the drive-in operation, Licensee shall, within 72 hours of Licensee's receipt of notice of such condition or such other time as SONIC in its sole discretion may provide, correct or repair such deficiency or unsatisfactory condition if it is correctable or repairable within such time period, and, if not, shall within such time commence such correction or repair and thereafter diligently pursue same to completion. The preceding sentence notwithstanding, Licensee shall take immediate action to correct or repair any deficiency or unsatisfactory condition which poses a risk to public health or safety. In the event Licensee fails to comply with the foregoing obligations to correct and repair, SONIC, upon 24 hours' notice to Licensee, shall have the right, without being guilty of trespass or tort, to forthwith make or cause to be made such corrections or repairs, and the expense thereof, including board, wages, lodging and transportation of SONIC personnel, if utilized, shall be paid by Licensee upon billing by SONIC. The foregoing shall be in addition to any other right or remedies SONIC may have. (c) Licensee shall comply with the entire Sonic System as described herein and in the SONIC OPERATIONS MANUAL, including but not limited to the following: (i) Operate the Sonic Restaurant in a clean, wholesome manner in compliance with prescribed standards of quality, service and cleanliness; comply with all business policies, practices and procedures imposed by SONIC; and maintain the building, equipment and parking area in a good, clean, wholesome condition and repair, well lighted and in compliance with designated standards as may be prescribed from time to time by SONIC. (ii) Purchase and install kitchen fixtures, lighting and other equipment and signs in accordance with the equipment specifications and layout initially designated by SONIC. 13 (iii) Licensee shall not, without prior written consent of SONIC: (a) make any building design conversion or (b) make any alterations, conversions or additions to the building or parking area. (iv) Make repairs or replacements required because of damage, wear and tear or in order to maintain the Sonic Restaurant building and parking area in good condition and in conformity with blueprints and plans. (v) Maintain the parking stalls, as required in the standard Sonic Plans and Specifications, for the exclusive use of Sonic Restaurant customers. (vi) Operate the Sonic Restaurant everyday of the year (except Easter, Thanksgiving and Christmas), and at least 10 hours per day or such other hours as may from time to time be reasonably prescribed by SONIC (except when the Sonic Restaurant is untenantable as a result of fire or other casualty), maintain sufficient supplies of food and paper products and employ adequate personnel so as to operate the Sonic Restaurant at its maximum capacity and efficiency. (vii) Cause all employees of Licensee, while working in the Sonic Restaurant, to: (a) wear uniforms of such color, design and other specifications as SONIC may designate from time to time, (b) present a neat and clean appearance and (c) render competent and courteous service to Sonic Restaurant customers. (viii) All menu items which SONIC may deem appropriate to take fullest advantage of the potential market and achieve standardization in the Sonic System will be served, and no items which are not set forth in the SONIC OPERATIONS MANUAL or otherwise authorized and approved in writing by SONIC will be served. (ix) In the dispensing and sale of food products: (a) use only containers, cartons, bags, napkins and other paper goods and packaging bearing the approved trademarks and which meet the Sonic System specifications and quality standards, (b) use only those flavorings, garnishments and food and beverage ingredients which meet the Sonic System specifications and quality standards, which SONIC may designate from time to time and (c) employ only those methods of food handling, preparation, and serving which SONIC may designate from time to time. 14 (x) Make prompt payment in accordance with the terms of invoices rendered to Licensee including but not limited to, his purchase of fixtures, equipment and food and paper supplies. (xi) At his own expense, comply with all federal, state, and local laws, ordinances and regulations affecting the operation of the Sonic Restaurant. (xii) Licensee shall not install any electronic games or other games of chance at the Sonic Restaurant without the express prior written consent of SONIC. (xiii) Furnish SONIC with current changes in home addresses and phone number of its owners and manager and, upon SONIC's reasonable request, provide updates of personal financial statements or other credit information. (xiv) The Licensee shall notify SONIC's Director of Corporate Communications or, if not available, the most senior executive officer of SONIC as soon as possible and, in any event, within 12 hours after the occurrence at the Sonic Restaurant of any event which could have an adverse impact on the Sonic Restaurant and/or the Sonic System, including (without limitation) the death or serious bodily injury of any employee or customer for any reason or the risk of infection by a contagious disease. 6.06. APPROVED SUPPLIERS AND ADVERTISING AGENCIES. (a) SONIC may require Licensee (i) to purchase food, beverages, signs and equipment which meet the specifications established by SONIC, (ii) to participate in SONIC's approved purchasing cooperative for the area in which the Sonic Restaurant is located, and (iii) to retain and utilize exclusively the marketing and advertising services of SONIC approved advertising agency of record. In addition, Licensee immediately shall use Licensee's vote or votes in all advertising cooperatives in which Licensee participates to support the use of the advertising agency of record for the Sonic drive-in restaurant chain. (b) SONIC may require Licensee to support the use of and to use the products and programs of the cola syrup supplier approved by SONIC and used by a majority of all Sonic drive-in restaurants, to the exclusion of any other supplier of cola syrup. (c) SONIC may require Licensee to comply with the foregoing provisions not only for the Sonic Restaurant, but also (to the extent Licensee exercises Control) for all other Sonic drive-in restaurants for which Licensee serves as a licensee. With 15 regard to such existing Sonic drive-in restaurants, Licensee shall use Licensee's best efforts to accomplish the foregoing, including (in the event of any contracts in place prior to August 1, 1994) negotiating in good faith and assisting and supporting the agency of record or new supplier with the assumption, purchase or mutual termination of the contract. (d) SONIC hereby explicitly retains the exclusive right to consider, review or approve any and all distributors which may hold, sell or distribute Sonic-labeled goods or products, except that SONIC shall not withhold unreasonably its approval of a supplier approved for use by a duly constituted purchasing cooperative. (e) The terms of this Section 6.06 shall continue in effect for as long as Licensee serves as a licensee for a Sonic drive-in restaurant and shall survive the expiration or termination of this Agreement. (f) If at least 95% of all Sonic drive-in restaurants are in compliance with paragraphs (a) and (b) of Section 6.06, SONIC periodically shall submit the approved advertising agency or cola syrup supplier to competitive bid or review, but shall not be obligated to do so more often than once every three years. 6.07. BEST EFFORTS. Licensee shall diligently and fully exploit his rights in this License by personally devoting his best efforts and, in case more than one (1) individual has executed this License as Licensee, at least one (1) individual Licensee shall devote his full time and best efforts to the operation of the Sonic Restaurant. Licensee shall keep free from any activities which would be detrimental to or interfere with the business of the Sonic Restaurant, the Sonic System, or SONIC. 6.08. INTERFERENCE WITH EMPLOYMENT RELATIONS OF OTHERS. During the term of this License, Licensee shall not employ or seek to employ any person who is at the time employed by SONIC or any of its subsidiaries in a management level position. In addition, during the term of this License, SONIC agrees not to employ or seek to employ any person who is at the time employed by Licensee in a management level position. This Subsection 6.08 shall not be violated if such person has left the employ of any of the foregoing parties for a period in excess of six months. 6.09. SONIC'S STANDARDS. Licensee shall operate the Sonic Restaurant specified in this License in conformity with the Sonic System and the obligations set forth in this Agreement and shall strictly adhere to SONIC's standards and policies as they exist now and as they may be from time to time modified. 6.10. MAJORITY INTEREST OWNER. Licensee represents, warrants and agrees that Licensee actually owns the majority interest in the legal and equity ownership and Control of the operation of the Sonic Restaurant, and that Licensee shall maintain such interest during the term of this License except only as otherwise permitted pursuant to the terms and 16 conditions of this License. Licensee shall furnish SONIC with such evidence as SONIC may request from time to time for the purpose of assuring SONIC that Licensee's interest remains as represented herein. 7. PROPRIETARY MARKS. 7.01. SONIC'S REPRESENTATIONS. SONIC represents with respect to the Proprietary Marks that SONIC will use and permit Licensee and other licensees to use the Proprietary Marks only in accordance with the Sonic System and the standards and specifications attendant thereto which underlie the goodwill associated with and symbolized by the Proprietary Marks. 7.02. USE OF MARKS. With respect to Licensee's licensed use of the Proprietary Marks pursuant to this Agreement, Licensee agrees that: (a) Licensee shall use only the Proprietary Marks designated by SONIC and shall use them only in the manner authorized and permitted by SONIC. (b) Licensee shall use the Proprietary Marks only for the operation of the Sonic Restaurant. (c) During the term of this Agreement and any renewal hereof, Licensee shall identify itself as the owner of the Sonic Restaurant in conjunction with any use of the Proprietary Marks, including, but not limited to, invoices, order forms, receipts, and contracts, as well as at such conspicuous locations on the premises of the Sonic Restaurant as SONIC shall designate in writing. The identification shall be in the form which specifies Licensee's name, followed by the term "Licensed Proprietor," or such other identification as shall be approved by SONIC. (d) Licensee's rights to use the Proprietary Marks is limited to such uses as are authorized under this Agreement, and any unauthorized use thereof shall constitute an infringement of SONIC's rights. (e) Licensee shall not use the Proprietary Marks to incur any obligation or indebtedness on behalf of SONIC. (f) Licensee shall not use the Proprietary Marks as part of its corporate or other legal name if not already in existence prior to the effective date of this Agreement. (g) Licensee shall comply with SONIC's instructions in filing and maintaining the requisite trade name or fictitious name registrations, and shall execute any documents deemed necessary by SONIC or its counsel to obtain 17 protection for the Proprietary Marks or to maintain their continued validity and enforceability. (h) In the event that litigation involving the Proprietary Marks is instituted or threatened against Licensee, Licensee shall promptly notify SONIC and shall cooperate fully in defending or settling such litigation. 7.03. LICENSEE'S UNDERSTANDING. Licensee expressly understands and acknowledges that: (a) As between the parties hereto, SONIC has the exclusive right and interest in and to the Proprietary Marks and the goodwill associated with and symbolized by them, and any and all use thereof by Licensee inures to the benefit of SONIC. (b) The Proprietary Marks are valid and serve to identify the Sonic System and those who are licensed under the Sonic System. (c) Licensee shall not directly or indirectly contest the validity or the ownership of the Proprietary Marks. (d) Licensee's use of the Proprietary Marks pursuant to this Agreement does not give Licensee any ownership interest or other interest in or to the Proprietary Marks, except the nonexclusive license granted herein. (e) Any and all goodwill arising from Licensee's use of the Proprietary Marks in its licensed operations under the Sonic System shall inure solely and exclusively to SONIC's benefit, and upon expiration or termination of this Agreement and the License herein granted, no monetary amount shall be assigned as attributable to any goodwill associated with Licensee's use of the Sonic System or the Proprietary Marks. (f) The right and license of the Proprietary Marks granted hereunder to Licensee is nonexclusive except as provided in section 2.01 of this Agreement, and SONIC thus has and retains the right among others: (i) To grant other licenses for the Proprietary Marks, in addition to those licenses already granted to existing licensees. (ii) To use the Proprietary Marks in connection with selling products and services. (iii) To develop and establish other systems for the same or similar Proprietary Marks, or any other Proprietary Marks, and 18 grant licenses or franchises thereto without providing any rights therein to Licensee. (g) SONIC reserves the right to substitute different Proprietary Marks for use in identifying the Sonic System and the businesses operating thereunder if SONIC's currently owned Proprietary Marks no longer can be used. 8. MANUAL. SONIC shall loan to Licensee for use at the Sonic Restaurant the SONIC OPERATIONS MANUAL prepared by SONIC for use by licensees of Sonic drive-in restaurants similar to the Sonic Restaurant to be operated by Licensee. Licensee recognizes that the SONIC OPERATIONS MANUAL contains detailed information relating to operation of the Sonic Restaurant including: (a) food formulas and specifications for designated food and beverage products; (b) methods of inventory control; (c) bookkeeping and accounting procedures; (d) business practices and policies; and (e) other management, advertising, and personnel policies. Licensee agrees to promptly adopt and use exclusively the formulas, methods and policies contained in the SONIC OPERATIONS MANUAL, now and as they may be modified by SONIC from time to time and to return said manual to SONIC at the expiration or earlier termination of this License. 9. CONFIDENTIAL INFORMATION. 9.01. SONIC possesses certain unique, proprietary and confidential information, consisting of methods and procedures for preparation of food and beverage products, confidential recipes for food products, distinctive service and accessories, plans and specifications for interior and exterior signs, designs, layouts and color schemes, and methods, techniques, formats, systems, specifications, procedures, information, trade secrets, sales and marketing programs, methods of business operations and management, and knowledge of and experience in the operation and franchising of Sonic drive-in restaurants and the Sonic System (collectively, the "Confidential Information"). SONIC will disclose the Confidential Information to Licensee in furnishing Licensee the Sonic Plans and Specifications for a Sonic drive-in restaurant, the training program, and the SONIC OPERATIONS MANUAL, and in providing guidance and assistance to Licensee during the term of this Agreement. The SONIC OPERATIONS MANUAL, as modified by SONIC from time to time, and the policies contained therein, are incorporated in this Agreement by reference. 9.02. Licensee acknowledges and agrees that Licensee shall not acquire any interest in the Confidential Information, other than the right to utilize it in the development and operation of the Sonic Restaurant (and other Sonic drive-in restaurants under license agreements with SONIC) during the term of this Agreement, and that the use or duplication of the Confidential Information in any other business would constitute an unfair method of competition. Licensee acknowledges and agrees that the Confidential Information is proprietary to SONIC, may constitute trade secrets of SONIC and is disclosed to Licensee solely on the condition that Licensee agrees, and Licensee does hereby agree, that Licensee: 19 (i) shall not use the Confidential Information in any other business or capacity, or for the benefit of any other Person or entity; (ii) shall maintain the absolute confidentiality of the Confidential Information, and shall not disclose or divulge the Confidential Information to any unauthorized Person or entity, during and after the term of the License; (iii) shall not make unauthorized copies of any portion of the Confidential Information disclosed in printed, audio, or video form (except in connection with instruction of employees in the operation of the Sonic Restaurant); and (iv) shall adopt and implement all procedures prescribed from time to time by SONIC to prevent unauthorized use or disclosure of the Confidential Information, including, without limitation, restrictions on disclosure thereof to employees of the Sonic Restaurant and the use of nondisclosure and non-competition clauses in employment agreements with employees (including all owners, shareholders and partners of Licensee) who have access to the Confidential Information. 9.03. Licensee may not at any time, in any manner, directly or indirectly, and whether or not intentionally, copy any part of the SONIC OPERATIONS MANUAL, permit any part of it to be copied, disclose any part of it except to employees or other having a need to know its contents for purposes of operating the Sonic Restaurant, or permit its removal from the Sonic Restaurant without prior written consent from SONIC. Notwithstanding anything to the contrary contained in this Agreement and provided Licensee shall have obtained SONIC's prior written consent, the restrictions on Licensee's disclosure and use of the Confidential Information shall not apply to the following: (a) information, processes or techniques which are or become generally known in the food service industry, other than through disclosure (whether deliberate or inadvertent) by Licensee; and (b) disclosure of the Confidential Information in judicial or administrative proceedings to the extent that Licensee is legally compelled to disclose such information, provided Licensee shall have used its best efforts, and shall have afforded SONIC the opportunity, to obtain an appropriate protective order or other assurance satisfactory to SONIC of confidential treatment for the information required to be so disclosed. 10. ACCOUNTING AND RECORDS. 20 10.01. On or before the 20th day of each month, Licensee shall submit to SONIC a complete profit and loss statement in a form prescribed by SONIC and such statistical reports in such form as SONIC shall reasonably require from time to time, for the previous month immediately ended. 10.02. Licensee shall keep and preserve full and complete records of the Sonic Restaurant business for at least three years in a manner and form satisfactory to SONIC and shall also deliver such additional financial, operating and other information and reports as SONIC may reasonably request on the forms and in the manner prescribed by SONIC; provided, however, that Licensee shall maintain, at a minimum, those books and records required to be kept by the Internal Revenue Service under the Internal Revenue Code for purposes of its regulation of Licensee's business and make the same books available to SONIC. 10.03. In meeting the requirements set forth in Sections 10.01 and 10.02 above, Licensee shall keep records substantiating and enter as a line item on its financial statements amounts representing the valuation for goods (whether food, paper or otherwise) which constitute charitable contributions to third parties from the same goods out of the Sonic Restaurant. Likewise, Licensee shall maintain records and enter on its financial statements (particularly a line item on its profit and loss statement) information representing the value or amount of sales represented by coupons traded with and discounts granted by Licensee at the Sonic Restaurant. 10.04. Licensee further agrees to submit, within 90 days following the close of each fiscal year of the Sonic Restaurant's operation, a profit and loss statement covering operations during such fiscal year and the balance sheet taken as of the close of such fiscal year. 10.05. SONIC shall have the right to inspect and audit Licensee's accounts, books, records and tax returns at all times during and after the term of this Agreement. If such inspection discloses that Gross Sales actually exceeded the amount reported by Licensee or that Licensee failed to make advertising expenditures required by Sections 11.01(a) or 11.01(b), Licensee shall immediately pay SONIC: (i) the additional royalty fee, advertising fee and advertising expenditures; (ii) interest on all unpaid amounts (from the original due date) at a rate equal to that provided by Section 5.05 herein; and (iii) a 10% surcharge on all unpaid amounts. If such inspection discloses that Gross Sales actually exceeded the amount reported by Licensee as Licensee's Gross Sales by an amount equal to three percent or more of the Gross Sales originally reported to SONIC or, in the case of failing to make required advertising expenditures, that such unpaid expenditures exceeded three percent of the amount required to be expended, Licensee shall bear the cost of such inspection and audit at rates and fees customarily charged by SONIC for such auditing and inspecting services and duties. Unpaid advertising expenditures, including interest and surcharges collected by SONIC pursuant to this section, shall be used in accordance with the expenditures authorized by Section 5.03; nevertheless, SONIC may, on a case by case basis, at SONIC's sole discretion, 21 use such collected amounts in accordance with the expenditures authorized by Sections 11.01(a) and 11.01(b). SONIC shall have the right to bring an action in its own name to collect unpaid advertising expenditures required by Section 11 herein. 10.06. If SONIC has reason to believe that Licensee may not have reported all of its Gross Sales, SONIC may require Licensee to have its profit and loss statement and balance sheet certified by an independent public accountant. Licensee shall at his expense cause a Certified Public Accountant to consult with SONIC concerning such statement and balance sheet. The original of each such reports required by this Section 10.06 shall be mailed to SONIC's business office at the address designated in Section 19 below. 10.07. If Licensee fails to timely provide SONIC with complete profit and loss statements, accounts, books, records and tax returns pertaining to the Sonic Restaurant business, or fails to fully cooperate with SONIC's audit of the Sonic Restaurant business, SONIC shall have the right to estimate Licensee's Gross Sales for the Sonic Restaurant using information available on the Sonic Restaurant or other Sonic drive-in restaurants. Licensee agrees to accept SONIC's estimates as conclusively correct until Licensee fully complies with SONIC's accounting and disclosure requirements under this Agreement. However, if Licensee's subsequent accounting and disclosures reveal that Licensee under-reported Gross Sales or underpaid fees due under this Agreement, SONIC may recover all deficiencies and may litigate claims of fraud even though SONIC may have already obtained a judgment using SONIC's estimates. Furthermore, nothing in this Agreement or any judgment using estimates shall prevent or hinder SONIC's further efforts and rights to obtain the accounting and disclosures which Licensee is required to give to SONIC under this Agreement. 10.08. SONIC shall have the right to assemble and disseminate to third parties financial and other information regarding Licensee and other licensees of SONIC to the extent required by law or to the extent necessary or appropriate to further the interests of the Sonic System as a whole. SONIC shall have the right to disclose the business name, address and telephone number of Licensee as they appear in SONIC's records to any Person making inquiry as to the ownership of the Sonic Restaurant. SONIC shall not disclose specific financial information regarding Licensee or the Sonic Restaurant to any Person without (a) Licensee's prior, written consent or (b) being directed to disclose the information pursuant to the order of a court or other governmental agency. 11. ADVERTISING EXPENDITURES. 11.01. STANDARD PROGRAM. Recognizing the value of advertising and the importance of the standardization of advertising programs to the furtherance of the goodwill and public image of the System, the parties agree as follows: (a) NUMBER 1 LICENSE AGREEMENTS, NUMBER 4 LICENSE AGREEMENTS AND NUMBER 4.1 LICENSE AGREEMENTS. For all Number 1 License Agreements, Number 4 License Agreements and Number 4.1 License Agreements renewing with this 22 Agreement, the Licensee shall choose either the advertising rate under Option 1 or Option 2, below. The Licensee shall make his selection on the signature page of this Agreement. If the Licensee does not indicate a preference, SONIC shall deem the Licensee to have chosen Option 2. 23 OPTION 1 Prior to the Original Expiration Date, the following provisions shall apply: (i) In the event the Sonic Restaurant lies within a DMA for which a SONIC-approved advertising cooperative has been formed, Licensee shall contribute to such advertising cooperative an amount required by such advertising cooperative on a schedule required by such advertising cooperative, provided that such contributions shall occur no less often than each calendar quarter and shall be of an amount not less than 2.25% of Licensee's Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month. (ii) In the event there exists no SONIC-approved advertising cooperative in the DMA in which the Sonic Restaurant is located, during each calendar quarter of the term of this Agreement, Licensee shall spend for approved advertising and promotion of the Sonic Restaurant (including, but not limited to, television time, radio time, newspaper display space, distributed promotional materials, but not including any amount spent on sign rent, paper products, candy or other foods which evidence SONIC's trademarks or color patterns and the like) an amount equal to but not less than 2.25% of Licensee's Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month. Commencing with the Original Expiration Date and thereafter, the following provisions shall apply: (iii) In the event the Sonic Restaurant lies within a DMA for which a SONIC-approved advertising cooperative has been formed, Licensee shall contribute to such advertising cooperative an amount required by such advertising cooperative on a schedule required by such advertising cooperative, provided that such contributions shall occur no less often than each calendar quarter and shall be of an amount not less than 3.25% of Licensee's Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month. (iv) In the event there exists no SONIC-approved advertising cooperative in the DMA in which the Sonic Restaurant is located, during each calendar quarter of the term of this Agreement, Licensee shall spend for approved advertising and promotion of the Sonic Restaurant (including, but not limited to, television time, radio time, newspaper display space, distributed promotional materials, but not including any amount spent on sign rent, paper products, candy or other foods which evidence SONIC's trademarks or color patterns and the like) an amount equal to but not less than 3.25% of Licensee's Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month. 24 OPTION 2 Commencing with the Original Expiration Date and thereafter, the following provisions shall apply: (i) In the event the Sonic Restaurant lies within a DMA for which a SONIC-approved advertising cooperative has been formed, Licensee shall contribute to such advertising cooperative an amount required by such advertising cooperative on a schedule required by such advertising cooperative, provided that such contributions shall occur no less often than each calendar quarter and shall be of an amount not less than 3.25% of Licensee's Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month. (ii) In the event there exists no SONIC-approved advertising cooperative in the DMA in which the Sonic Restaurant is located, during each calendar quarter of the term of this Agreement, Licensee shall spend for approved advertising and promotion of the Sonic Restaurant (including, but not limited to, television time, radio time, newspaper display space, distributed promotional materials, but not including any amount spent on sign rent, paper products, candy or other foods which evidence SONIC's trademarks or color patterns and the like) an amount equal to but not less than 3.25% of Licensee's Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month. (b) NUMBER 5 LICENSE AGREEMENTS. For all Number 5 License Agreements renewing with this Agreement, the following provisions shall apply: (i) In the event the Sonic Restaurant lies within a DMA for which a SONIC-approved advertising cooperative has been formed, Licensee shall contribute to such advertising cooperative an amount required by such advertising cooperative on a schedule required by such advertising cooperative, provided that such contributions shall occur no less often than each calendar quarter and shall be of an amount not less than 3.25% of Licensee's Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month. (ii) In the event there exists no SONIC-approved advertising cooperative in the DMA in which the Sonic Restaurant is located, during each calendar quarter of the term of this Agreement, Licensee shall spend for approved advertising and promotion of the Sonic Restaurant (including, but not limited to, television time, radio time, newspaper display space, distributed promotional materials, but not including any amount spent on sign rent, paper products, candy or other foods which evidence SONIC's trademarks or color patterns and the like) an amount equal to but not less than 3.25% of Licensee's Gross Sales from the operation of the Sonic Restaurant during each partial or full calendar month. 25 (c) For purposes of determining the amount which Licensee is required to spend pursuant to Sections 11.01(a), 11.01(b) and 5.03, above, for each calendar quarter which is the subject of review, the parties hereto agree that the first two months of such calendar quarter and last month of the preceding calendar quarter shall be used in determining the Gross Sales of the Sonic Restaurant to determine the expenditures required hereunder. For example, to determine the expenditures required for January, February and March, the parties hereto agree that they will look to December, January, and February's sales in order to determine the Gross Sales to determine the amount which must be expended by Licensee under these Sections 11.01(a), 11.01(b) and 5.03. In the event the amounts required by Section 11.01(a) or 11.01(b) are not spent in a timely fashion, Licensee shall pay SONIC in accordance with Section 10.05. (d) All advertising by Licensee in any medium which utilizes the Proprietary Marks or refers in any way to the Sonic Restaurant shall be conducted in a dignified manner and shall conform to such standards and requirements as SONIC may specify from time to time in writing. Licensee shall submit to SONIC (in accordance with the notice provisions contained herein), for SONIC's prior approval (except with respect to prices to be charged), samples of all advertising and promotional plans and materials that Licensee desires to use, that use the Proprietary Marks or refer to the Sonic Restaurant and that have not been prepared or previously approved by SONIC. If written disapproval thereof is not received by Licensee within 15 days from the date of receipt by SONIC of such materials, SONIC shall be deemed to have given the required approval. Upon notice from SONIC, Licensee shall discontinue and/or remove any objectionable advertising material, whether or not same was previously approved by Sonic. If said materials are not discontinued and/or removed within five days after notice, Sonic or its authorized agents, may, at any time, enter upon Licensee's premises, or elsewhere, and remove any objectionable signs or advertising media and may keep or destroy such signs or other media without paying therefore, and without being guilty of trespass or other tort. (e) SONIC may offer from time to time to provide, upon terms subject to the discretion of SONIC, approved local advertising and promotional plans and materials, including, without limitation, newspaper display space, distributed promotional materials. (f) SONIC or its designee shall maintain and administer an advertising fund for the System as follows: (i) As provided in Subsection 5.03 hereof, Licensee shall pay an advertising contribution fee to Sonic Advertising Fund, which shall be administered by SONIC, and shall be deposited in a separate bank account denoted as the Sonic Advertising Fund (the "Fund"). (ii) SONIC shall direct all advertising programs with sole discretion over the creative concepts, materials, and media used in such programs. The Fund is 26 intended to maximize general public recognition and acceptance of the Proprietary Marks for the benefit of the System and Licensee acknowledges that SONIC and its designees undertake no obligation in administering the Fund to make expenditures for Licensee which are equivalent or proportionate to Licensee's contribution, and nothing in this Subsection shall contravene the intent in Subparagraph (iv) of Paragraph (f) of this Subsection 11.01. (iii) The Fund and all earnings thereof shall be used exclusively to meet any and all costs of maintaining, administering, directing and preparing advertising (including, without limitation, the cost of preparing and conducting television, radio, magazine and newspaper advertising campaigns and other public relations activities; employing advertising agencies to assist therein; and providing promotional brochures and other marketing materials to licensees in the Sonic System). All sums paid by licensees to the Fund shall be maintained in a separate account from the other funds of SONIC. The Fund shall pay SONIC monthly an amount equal to 15% of the Fund's receipts during the preceding month, but not to exceed SONIC's actual administrative costs and overhead, if any, as SONIC may incur in activities reasonably related to the administration or direction of the Fund and advertising programs for the licensees and the Sonic System, including without limitation, conducting market research, preparing marketing and advertising materials, and collecting and accounting for assessments for the Fund. The Fund and its earnings shall not inure to the benefit of SONIC. (iv) All materials produced by the Fund shall be made available to all licensees without cost on a regular basis, excluding distribution costs. This Subparagraph (iv) shall not preclude SONIC from offering other materials not produced by the Fund upon terms subject to the discretion of SONIC. (See Paragraph (e) of this Subsection 11.01.) (v) The Fund is not an asset of SONIC, and an independent certified public accountant designated by SONIC shall review the operation of the Fund annually, and the report shall be made available to Licensee upon request. Notwithstanding the foregoing, the body approved and designated by SONIC as the body to consult with regarding SONIC's maintenance and administration of the Fund (such as the current Franchise Advisory Council or its successor) may designate the independent public accountant to conduct the required review of the operation of the Fund, if requested in writing at least 30 but not more than 60 days prior to the end of each fiscal year. (vi) It is anticipated that most contributions to the Fund shall be expended for advertising and/or promotional purposes during the year within which the contributions are made. If, however, excess amounts remain in the Fund at the end of such year, all expenditures in the following year(s) shall be made first out of accumulated earnings, next out of current earnings, and finally from contributions. 27 (vii) Although SONIC intends the Fund to be of perpetual duration, SONIC maintains the right to terminate the Fund. Such Fund shall not be terminated, however, until all monies in the Fund have been expended for advertising and promotional purposes as aforesaid. (g) On at least a quarterly basis, SONIC shall consult with the body approved and designated by Sonic (such as the current Franchise Advisory Council or its successor) regarding SONIC's maintenance and administration of the Fund and shall report to that body on the Fund's operation. 11.02. PUBLICITY. SONIC shall have the right to photograph the Sonic Restaurant's exterior and/or interior, and the various foods served, and to use any such photographs in any of its publicity or advertising, and Licensee shall cooperate in securing such photographs and consent of Persons pictured. 12. INSURANCE. 12.01. INSURANCE AMOUNTS. Prior to opening or taking possession of the Sonic Restaurant, Licensee shall acquire and thereafter maintain insurance from insurance companies acceptable to SONIC. The Licensee shall determine the appropriate limits of liability insurance but SONIC shall require the following minimum amounts and policy forms of insurance: (a) The Licensee shall maintain statutory worker's compensation insurance and employer's liability insurance having a minimum limit of liability of the greater of $500,000 or the minimum amount otherwise required by applicable state law. SONIC shall accept participation in the Texas Sonic Employers Trade Association, Inc. ("TSETA") or in the non-subscriber program for Sonic drive-in restaurants located in Texas as long as Texas law does not require statutory worker's compensation insurance. (b) The Licensee shall maintain commercial general liability insurance, including bodily injury, property damage, products, personal and advertising injury coverage on an occurrence policy form having a minimum per occurrence and general aggregate limits of at least $1,000,000 per location. (c) The Licensee shall maintain non-owned automobile liability insurance having a minimum limit of $1,000,000. The automobile policy also shall provide coverage for owned automobiles if owned or leased in the name of Licensee. (d) SONIC shall have the right to require Licensee to increase the insurance specified above by giving Licensee 60 days' written notice in accordance with the notice provisions of this Agreement, and Licensee shall comply no later than the first policy renewal date after that 60-day period. 28 12.02. SONIC AS ADDITIONAL INSURED. The Licensee shall name SONIC and SONIC's subsidiaries and Affiliates as additional insureds under the insurance policies specified in paragraphs (a), (b) and (c) of Section 12.01, above. The Licensee's policies shall constitute primary policies of insurance with regard to other insurance, shall contain a waiver of subrogation provision in favor of SONIC as it relates to the operation of the Sonic Restaurant, and shall provide for at least 30 days' written notice to SONIC prior to their cancellation or amendment. 12.03. GENERAL CONDITIONS. Prior to opening or taking possession of the Sonic Restaurant, Licensee shall furnish SONIC with certificates of insurance evidencing that Licensee has obtained the required insurance in the form and amounts as specified above. In addition, Licensee shall deliver evidence of the continuation of the required insurance policies at least 30 days prior to the expiration dates of each existing insurance policy. If Licensee at any time fails to acquire and maintain the required insurance coverage, SONIC shall have the right, at Licensee's expense, to acquire and administer the required minimum insurance coverage on behalf of Licensee. However, SONIC shall not have any obligation to assume the premium expense and nothing in this Agreement shall constitute a guaranty by SONIC against any losses sustained by Licensee. SONIC may relieve itself of all duties with respect to the administration of any required insurance policies by giving 10 days' written notice to Licensee. 13. TRANSFER OF INTEREST. 13.01. ASSIGNMENT. The rights and duties created by this Agreement are personal to Licensee and SONIC has granted the License in reliance on the collective character, skill, aptitude and business and financial capacity of Licensee and Licensee's principals. Accordingly, except as may be otherwise permitted by this Section 13, neither Licensee nor any Person or entity with an interest in Licensee shall directly or indirectly, through one or more intermediaries, without SONIC's prior written consent, sell, assign, transfer, convey, give away, pledge, mortgage or otherwise encumber any direct or indirect interest in the License; any interest in Licensee, if Licensee is a partnership, joint venture or closely held corporation; or any interest which, together with other related previous simultaneous or proposed transfers, constitutes a transfer of Control of Licensee where Licensee is registered under the Securities Exchange Act of 1934. Any such purported assignment occurring by operation of law or without SONIC's prior written consent and pursuant to the terms of this Section 13, shall constitute a default of this Agreement by Licensee and such purported assignment shall be null and void. 13.02. DEATH OR PERMANENT INCAPACITY OF LICENSEE. Upon the death or permanent incapacity of Licensee, the interest of Licensee in the License may be assigned either pursuant to the terms of Subsection 13.04 herein or to one or more of the following Persons: Licensee's spouse, heirs or nearest relatives by blood or marriage, subject to the following conditions: (1) If, in the sole discretion of SONIC, such persons shall be capable of conducting the Sonic Restaurant business in accordance with the terms and conditions of the License, and (2) if such persons shall also execute an agreement by which they personally assume full and unconditional liability for and agree to perform all the terms and conditions of the License to the same extent as the original Licensee. In the event that Licensee's heirs do not obtain the consent of SONIC as assignees of the License, the 29 personal representative of Licensee shall have the greater of 120 days or the completion of the probate of Licensee's estate to dispose of Licensee's interest hereunder, which disposition shall be subject to all the terms and conditions for assignments under Subsection 13.04. 13.03. ASSIGNMENT TO LICENSEE'S CORPORATION. SONIC may, upon Licensee's compliance with the following requirements, consent to an assignment of the License to a corporation whose shares are owned and Controlled by Licensee. Such written materials shall be supplied to SONIC within 15 days after the request by SONIC. (a) Licensee's corporation shall be newly organized, and its charter shall provide that its activities are confined exclusively to operating the Sonic Restaurant. (b) Licensee and Licensee's corporation shall maintain stop transfer instructions against the transfer on Licensee's corporation's records of any securities with any voting rights subject to the restrictions of Section 13 hereof, and shall issue no securities upon the face of which the following printed legend does not legibly and conspicuously appear. The transfer of this stock is subject to terms and conditions of one or more license agreements with Sonic Industries Inc. Reference is made to said license agreement(s) and the restrictive provisions of the Articles and By-Laws of this corporation. By agreeing to receive these securities, the transferee hereby agrees to be bound by the terms of such agreements, articles and by-laws. (c) At any time upon SONIC's request, Licensee and Licensee's corporation shall furnish company with a list of all shareholders having an interest in Licensee's corporation, the percentage interest of such shareholder and a list of all officers and directors in such form as SONIC may require. (d) The corporate name of Licensee's corporation shall not include any of the Proprietary Marks granted by the License. Licensee and Licensee's corporation shall not use any mark nor any name deceptively similar thereto in a public or private offering of its securities, except to reflect Licensee's corporation's franchise relationship with SONIC. Any prospectus or registration Licensee or Licensee's corporation would propose to use in such a public or private offering shall be submitted to SONIC within a reasonable time prior to the effective date thereof for the purpose of permitting SONIC to verify compliance with this requirement by Licensee and Licensee's corporation. (e) Articles of Incorporation, By-Laws and all other documents governing Licensee's corporation shall be forwarded to SONIC for approval. The Articles of Incorporation, By-Laws and other organization and governing documents shall recite that the issuance and transfer of any interest in Licensee's corporation are restricted by the terms of Section 13 of this Agreement. 30 (f) Each shareholder of Licensee's corporation shall personally guarantee performance under this Agreement and shall be personally bound by the terms thereof. (g) Any breach of this Agreement by Licensee's corporation shall be deemed a breach of this Agreement by each shareholder of Licensee's corporation and each shareholder shall be personally and fully liable and obligated by any and all such breaches. (h) Licensee and Licensee's corporation shall submit to SONIC, prior to any assignment hereunder, a shareholders agreement executed by the Board of Directors and ratified by all shareholders, which states that, except as may be permitted by Section 13 of this Agreement, no shares of stock or other interest in Licensee's corporation shall be issued, transferred, or assigned to any Person or entity without SONIC's prior written consent. (i) Each and every shareholder of Licensee's corporation or any party owning a security issued by, or owning any legal or equitable interest in Licensee's corporation or in any security convertible to a legal or equitable interest in Licensee's corporation shall meet those same standards of approval as an individual licensee shall be required to meet prior to being included as a licensee on a standard license agreement with SONIC. 13.04. OTHER ASSIGNMENT. (a) In addition to any assignments or contingent assignments contemplated by the terms of Subsections 13.02 and 13.03 of this Section 13, Licensee shall not sell, transfer or assign the License to any Person or Persons without SONIC's prior written consent. Such consent shall not be unreasonably withheld. (b) In determining whether to grant or to withhold such consent, the following requirements must be met by Licensee: (i) All of Licensee's accrued monetary obligations shall have been satisfied whether due under this Agreement or otherwise. (ii) SONIC and Licensee execute a general release of each other, in a form satisfactory to SONIC, of any and all claims Licensee may have against SONIC and its Affiliates, including (without limitation) all claims arising under any federal, state or local law, rule or ordinance, but excluding (as to SONIC) any claims against Licensee for (a) unpaid moneys due SONIC or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of SONIC's legal rights regarding the Proprietary Marks. SONIC may waive the requirements of this subparagraph (ii) at SONIC's election. (iii) Licensee shall not be in material breach of this Agreement or any other agreement between SONIC and Licensee. 31 (iv) Assignee (or the assignee's management, as the case may be) shall at SONIC's sole discretion, enroll in and successfully complete such training programs as SONIC shall at that time designate according to Section 6.04 hereof. (v) SONIC shall consider of each prospective transferee, by way of illustration, the following: (a) work experience and aptitude, (b) financial background, (c) character, (d) ability to personally devote full time and best efforts to managing the Sonic Restaurant, (e) residence in the locality of the Sonic Restaurant, (f) equity interest in the Sonic Restaurant, (g) conflicting interests and (h) such other criteria and conditions as SONIC shall apply in the case of an application for a new license to operate a Sonic drive-in restaurant. SONIC's consent shall also be conditioned each upon such transferee's execution of an agreement by which transferee personally assumes full and unconditional liability for and agrees to perform from the date of such transfer all obligations, covenants and agreements contained in the License to the same extent as if transferee had been an original party to the License. 13.05. SONIC'S RIGHT OF FIRST REFUSAL. (a) If Licensee or any Person or entity with an interest in Licensee has received and desires to accept any bona fide offer to purchase all or any part of Licensee's interest in this Agreement or in Licensee and the transfer of such interest would: (1) result in a change of Control of Licensee of this Agreement or (2) constitute a transfer of interest held by a Controlling Person of Licensee or of the License, Licensee or such Person shall notify SONIC in writing of each such offer, with such notice including the name and address of the proposed purchaser, the amount and terms of the proposed purchase price, a copy of the proposed purchase contract (signed by the parties, but expressly subject to SONIC's right of first refusal), and all other terms and conditions of such offer. SONIC shall have the right and option, exercisable within 20 days after SONIC's receipt of such written notification, to send written notice to Licensee or such Person or entity that SONIC or its designee intends to purchase the interest which is proposed to be transferred on the same terms and conditions offered by the third party. Any material change in the terms of an offer prior to closing shall cause it to be deemed a new offer, subject to the same right of first refusal by SONIC or its designee as in the initial offer. SONIC's failure to exercise such option shall not constitute a waiver of any other provision of this Agreement, including any of the requirements of this Section with respect to the proposed transfer. Silence on the part of SONIC shall constitute rejection. If the proposed sale includes assets of Licensee not related to the operation of a licensed Sonic drive-in restaurant, SONIC may purchase not only the assets related to the operation of a licensed Sonic drive-in restaurant, but may also purchase the other assets. An equitable purchase price shall be allocated to each asset included in the proposed sale. (b) The election by SONIC not to exercise its right of first refusal as to any offer shall not affect its right of first refusal as to any subsequent offer. 32 (c) Any sale or attempted sale effected without first giving SONIC the right of first refusal described above shall be void and of no force and effect. (d) If SONIC does not accept the offer to purchase the Sonic Restaurant, Licensee may conclude the sale to the purchaser who made the offer so long as the terms and conditions of such sale are identical to those originally offered to SONIC; provided, however, that SONIC's approval of the assignee be first obtained, which consent shall not be unreasonably withheld upon compliance with the conditions on assignment imposed by this Agreement. (e) The provisions of this Section 13.05 shall not apply to any proposed transfers to members of Licensee's immediate family. For the purposes of this Section 13.05, a member of Licensee's immediate family shall mean Licensee's spouse and children (by birth or adoption). In addition, the provisions of this Section 13.05 shall not apply to any proposed transfers to Person who already own an interest (directly or indirectly) in this Agreement or the License as long as the transfer will not result in a change in Control of Licensee or the License. 13.06. CONSENT TO ASSIGNMENTS. With regard to any transfer, assignment or pledge of any interest in this Agreement or in Licensee pursuant to the foregoing provisions of this Section 13, SONIC shall not withhold its consent unreasonably as long as the proposed transfer, assignment or pledge otherwise complies with the other requirements set forth in this Section 13. 14. DEFAULT AND TERMINATION. 14.01. AUTOMATIC TERMINATION. Licensee shall be deemed to be in breach of this Agreement and all rights granted herein shall automatically terminate with notice from SONIC if any of the following events occur: (a) Licensee shall become insolvent. (b) Licensee, either personally, through an equity owner, or through Licensee's attorney, shall give oral or written notice to SONIC of Licensee's intent to file a voluntary petition under any bankruptcy law. (c) A final judgment aggregating in excess of $5,000 against the Sonic Restaurant or property connected with the Sonic Restaurant which remains unpaid for thirty days. (d) Suit to foreclose any lien against any assets of the Sonic Restaurant is instituted against Licensee and (i) is not dismissed within 30 days, (ii) such lien is not contested and challenged through the applicable administrative agencies or courts, or (iii) a bond is not posted (if such remedy is available) to delay any such foreclosure and guarantee performance. 33 (e) The assets of the Sonic Restaurant are sold after being levied thereupon by sheriff, marshal or a constable. (f) Transfer of this Agreement, in whole or in part, is effected in any manner inconsistent with Section 13 hereof. 14.02. OPTIONAL TERMINATION. Licensee shall be deemed to be in breach of this Agreement and SONIC may, at its option, terminate this Agreement and all rights granted herein at any time during the term hereof without affording Licensee any opportunity to cure the breach, effective immediately upon Licensee's receipt of a notice of termination, upon the occurrence of any of the following events: (a) If Licensee ceases to operate the Sonic Restaurant or otherwise abandons the Sonic Restaurant (other than closure permitted pursuant to Section 6.05(c)(vi) herein) or forfeits the legal right to do or transact business at the location licensed herein. (b) If Licensee is convicted of a felony, a crime involving moral turpitude, or any other crime or offense that is reasonably likely, in the sole opinion of SONIC, to adversely affect the Sonic System, the Proprietary Marks, the goodwill associated therewith or SONIC's rights therein. (c) If Licensee misuses or makes any unauthorized use of any of the Proprietary Marks or any other identifying characteristic of the Sonic System or otherwise materially impairs the goodwill associated therewith or SONIC's rights therein and Licensee cannot cure the default within 30 days. (d) If Licensee improperly discloses trade secrets or confidential information and Licensee cannot cure the default within 30 days. (e) If continued operation of the Sonic Restaurant might endanger public health or safety. (f) If Licensee knowingly or through gross negligence maintains false books or records or knowingly or through gross negligence submits any false report to SONIC. 14.03. PERIOD TO CURE. Except as provided in Subsections 14.01 and 14.02, Licensee shall have 30 days after receipt from SONIC of a written notice of breach of this Agreement or such notice period as is required by the law of the state where the Sonic Restaurant is located, within which to remedy any breach hereunder. However, this period to cure will not be available to Licensee, and SONIC will not be required to delay termination of this Agreement, where the breach involved is one which Licensee cannot cure within the prescribed cure period or is one which is impossible to cure. SONIC shall have the right to terminate this Agreement and the License upon written notice to Licensee and without any opportunity to cure after three willful and material breaches of the same provision of this Agreement within any 12-month period for which Licensee has received written 34 notice and an opportunity to cure. If any such breach is not cured within that time, SONIC may, at its option, terminate this Agreement and all rights granted hereunder effective immediately on the date of receipt by Licensee of written notice of termination. Licensee shall be in breach hereunder for any failure to comply with any of the terms of this Agreement or to carry out the terms of this Agreement in good faith. Such breach shall include, but shall not be limited to, the occurrence of any of the following illustrative events: (a) If Licensee fails to pay any past due amounts owed to SONIC after SONIC has mailed Licensee two or more statements at least 20 days apart. (b) If Licensee fails to promptly pay, or repeatedly delays the prompt payment of undisputed invoices from his suppliers or in the remittance of rent and property tax as required in Licensee's lease. (c) If Licensee fails to maintain and operate the Sonic Restaurant in a good, clean, and wholesome manner or otherwise is not in compliance with the standards prescribed by the Sonic System. (d) If Licensee attempts to assign or transfer any interest in this Agreement in violation of Section 13 herein. (e) If Licensee denies SONIC the right to inspect the Sonic Restaurant at reasonable times, which includes the right to photograph the interior and exterior of the Sonic Restaurant in its entirety. (f) If Licensee fails, refuses, or neglects to obtain SONIC's prior written approval or consent as required by this Agreement. (g) If Licensee acquires any interest in another business in violation of Section 16. (h) If Licensee fails, refuses or neglects to provide SONIC with Licensee's home address and home telephone number. (i) If Licensee breaches any other requirement set forth in this Agreement. (j) If Licensee, upon the destruction of the Sonic Restaurant, fails to rebuild the franchise premises and resume operation within a reasonable time (cessation of the business from a franchise premises shall not constitute default of this Agreement if caused by condemnation, expiration of a location lease pursuant to its terms at execution or when failure to rebuild following destruction of the franchised premises is prohibited by law or the location lease). 35 14.04. RESOLUTION OF DISPUTES. The following provisions shall apply to any controversy between Licensee and SONIC (including an Affiliate of SONIC) and relating (a) to this Agreement (including any claim that any part of this Agreement is invalid, illegal or otherwise void or voidable), (b) to the parties' business activities conducted as a result of this Agreement, or (c) the parties' relationship or business dealings with one another generally, including all disputes and litigation pending or in existence as of the date of this Agreement. (a) NEGOTIATION. The parties first shall use their best efforts to discuss and negotiate a resolution of the controversy. (b) MEDIATION. If the efforts to negotiate a resolution do not succeed, the parties shall submit the controversy to mediation by a mediation firm agreeable to the parties or by the American Arbitration Association, if the parties cannot agree. (c) ARBITRATION. If the efforts to negotiate and mediate a resolution do not succeed, the parties shall resolve the controversy by final and binding arbitration in accordance with the Rules for Commercial Arbitration (the "Rules") of the American Arbitration Association in effect at the time of the execution of this Agreement and pursuant to the following additional provisions: (i) APPLICABLE LAW. The Federal Arbitration Act (the "Federal Act"), as supplemented by the Oklahoma Arbitration Act (to the extent not inconsistent with the Federal Act), shall apply to the arbitration. (ii) SELECTION OF ARBITRATORS. The parties shall select three arbitrators within 10 days after the filing of a demand and submission in accordance with the Rules. If the parties fail to agree on three arbitrators within that 10-day period or fail to agree to an extension of that period, the arbitration shall take place before three arbitrators selected in accordance the Rules. At least one of the arbitrators shall constitute an individual selected by Sonic (or its Affiliate) who has experience with franchise law or franchise relations. A decision or award by a majority of the arbitrators shall constitute the decision or award of the arbitrators. (iii) LOCATION OF ARBITRATION. The arbitration shall take place in Oklahoma City, Oklahoma, and the arbitrators shall issue any award at the place of arbitration. The arbitrators may conduct hearings and meetings at any other place agreeable to the parties or, upon the motion of a party, determined by the arbitrators as necessary to obtain significant testimony or evidence. (iv) DISCOVERY. The arbitrators shall have the power to authorize all forms of discovery (including depositions, interrogatories and document production) upon the showing of (a) a specific need for the discovery, (b) that the discovery likely will lead to material evidence needed to resolve the controversy, and (c) that the scope, timing and cost of the discovery is not excessive. 36 (v) AUTHORITY OF ARBITRATORS. The arbitrators shall not have the power (a) to alter, modify, amend, add to, or subtract from any term or provision of this Agreement; (b) to rule upon or grant any extension, renewal or continuance of this Agreement; (c) to award damages or other remedies expressly prohibited by this Agreement; or (d) to grant interim injunctive relief prior to the award. (vi) SCOPE OF PROCEEDING. The parties shall conduct any arbitration proceeding and resolve any controversy on an individual basis only and not on a class-wide, multiple-party, or similar basis. (vii) ENFORCEMENT OF AWARD. The prevailing party shall have the right to enter the award of the arbitrators in any court having jurisdiction over one or more of the parties or their assets. The parties specifically waive any right they may have to apply to any court for relief from the provisions of this Agreement or from any decision of the arbitrators made prior to the award. The award of the arbitrators shall not have any precedential or collateral estoppel effect on any other controversy involving SONIC or its Affiliates. (d) EXCLUDED CONTROVERSIES. At the election of SONIC or its Affiliate, the provisions of this Section 14.04 shall not apply to any controversies relating to any fee due SONIC or its Affiliate; any promissory note payments due SONIC or its Affiliate; or any trade payables due SONIC or its Affiliate as a result of the purchase of equipment, goods or supplies. The provisions of this Section 14.04 also shall not apply to any controversies relating to the use and protection of the Proprietary Marks or the Sonic System, including (without limitation) SONIC's right to apply to any court of competent jurisdiction for appropriate injunctive relief for the infringement of the Proprietary Marks or the Sonic System. (e) ATTORNEYS' FEES AND COSTS. The prevailing party to the arbitration shall have the right to an award of its reasonable attorneys' fees and costs incurred after the filing of the demand and submission, including a portion of the direct costs of any in-house legal staff reasonably allocable to the time devoted to the arbitration. 15. OBLIGATIONS UPON TERMINATION. 15.01. EFFECT OF TERMINATION, CANCELLATION OR EXPIRATION OF THIS AGREEMENT. Except as otherwise authorized pursuant to the terms of any other license agreement between SONIC and Licensee, Licensee shall comply with the following provisions after the expiration or termination of this Agreement and the License: (a) Licensee, upon any termination, cancellation or expiration of this Agreement, shall promptly pay to SONIC and SONIC's subsidiaries any and all sums owed to them. In the event of termination for any breach by Licensee, such sums shall include all damages, 37 costs and expenses, including reasonable attorneys' fees, incurred by SONIC as a result of the breach, which obligation shall give rise to and remain, until paid in full, a lien in favor of SONIC against any and all of the assets of the Sonic Restaurant owned by Licensee at the time of default. (b) Upon termination, cancellation or expiration hereof for any reason, all Licensee's rights hereunder shall terminate. Licensee shall not thereafter use or adopt any trade secrets disclosed to Licensee hereunder or any paper goods, emblems, signs, displays, menu housings or other property on which SONIC's name or Proprietary Marks are imprinted or otherwise form a part thereof or any confusing simulations thereof. Licensee shall not otherwise use or duplicate the Sonic System or any portion thereof or assist others to do so. Licensee shall remove from the premises all signs, emblems and displays identifying it as associated with SONIC or the Sonic System. Licensee shall cease to use and shall return to SONIC all copies of the SONIC OPERATIONS MANUAL, instructions or materials delivered to Licensee hereunder. (c) Upon termination, cancellation or expiration of this Agreement, unless otherwise directed in writing by SONIC, Licensee shall change the exterior and interior design and the decor of said premises, including, but not limited to, changing the color scheme, and shall make or cause to be made such changes in signs, buildings and structures (excluding major structural changes) as SONIC shall reasonably direct so as to effectively distinguish the same from its former appearance and from any other Sonic drive-in restaurant unit, and if Licensee fails or refuses to comply herewith, then SONIC shall have the right to enter upon the premises where said business is being conducted without being guilty of trespass or any other tort for the purpose of making or causing to be made such changes at the expense of Licensee which expense Licensee agrees to pay on demand. (d) Upon termination, cancellation or expiration of this Agreement, in the event Licensee is the owner of the Sign, SONIC shall have an irrevocable option to purchase the Sign for its fair market value. In any event, Licensee shall not thereafter use any sign panels displaying SONIC's name or Proprietary Marks or which primarily display the colors used in any other such sign at any other Sonic drive-in restaurant unit (See Subsection 15.04 for determining fair market value). Any agent, servant or employee of SONIC may remove the Sign or any objectionable signs or advertising from the Sonic Restaurant without being guilty of trespass or other tort, and Licensee shall be liable for SONIC's costs plus attorneys' fees for any interference therewith. (e) Upon termination, cancellation or expiration of this Agreement, Licensee shall cease to hold Licensee out in any way as a licensee of SONIC or to do anything which would indicate any relationship between Licensee and SONIC. (f) The covenants set forth in Paragraphs (a), (b), (c), (d) and (e) of this Subsection 15.01 shall survive the termination, cancellation or expiration of this Agreement. 38 (g) All rights, claims and indebtedness which may accrue to SONIC prior to termination, cancellation or expiration of this Agreement shall survive termination, cancellation or expiration and be enforceable by SONIC. (h) Licensee shall complete all such modifications within 30 days after this Agreement has been terminated or canceled or has expired. Licensee and SONIC agree that SONIC's damages resulting from a breach of the provisions of this Subsection are difficult to estimate or determine accurately. In the event of a breach by Licensee of the provisions of this Subsection, Licensee, in addition to any and all other remedies available to SONIC herein and elsewhere, will pay SONIC double the royalty and advertising fees prescribed in this Agreement until Licensee satisfactorily de-identifies the restaurant premises in the manner prescribed by this Section. This payment shall constitute liquidated damages and shall not be construed as a penalty since such payment has been agreed to by Licensee and SONIC as reasonably representative of the actual damage sustained by SONIC in the event of such a breach. The liquidated damages shall start on the 31st day after this Agreement has been terminated or canceled or has expired. These liquidated damages shall not constitute either a waiver of Licensee's obligation to de-identify or a license to use the Sonic System. These remedies will be in addition to any other remedies SONIC may have hereunder or under federal or state law. 15.02. SONIC'S OPTION TO PURCHASE. (a) Upon termination, cancellation or expiration hereof, SONIC shall have the right and option to purchase all or any patented, special or unique Sonic restaurant equipment, menu housings, signs, menus and supplies of Licensee at their fair market value (See Subsection 15.04 for determining fair market value). Such right or option of SONIC shall be exercised as provided in Paragraph (b) of this Subsection 15.02. If SONIC elects to exercise any option to purchase herein provided, it shall have the right to set off all amounts due from Licensee to SONIC and one-half of the cost of any appraisals against any payment therefor. (b) In the case of termination by expiration, SONIC shall exercise SONIC's option contained in this Subsection 15.02 by giving Licensee written notice at least 30 days prior to expiration. In the case of termination for any other reason, SONIC shall exercise its option by giving Licensee written notice within 30 days after termination. (c) SONIC's option hereunder is without prejudice to SONIC's rights under any security agreement held by SONIC or with respect to which SONIC may have a guarantor's or surety's subrogation interest. If SONIC exercises this option, SONIC may pay any debt which Licensee owes to SONIC and shall remit any balance of the purchase price to Licensee. There shall be no allowance for goodwill. 39 15.03. SONIC'S OBLIGATION TO PURCHASE. (a) Upon termination, cancellation or expiration of this Agreement, if Licensee desires to sell Licensee's unbroken inventory packages of approved imprinted items and supplies with Proprietary Marks to SONIC, excluding all food items, SONIC shall have the obligation to repurchase such items at Licensee's cost. (b) If Licensee desires to sell such items to SONIC, Licensee shall, not later than 10 days after termination, cancellation or expiration of this Agreement, give SONIC 10 days written notice of Licensee's election and, at the expiration of the 10 days notice period, deliver such items at Licensee's expense with an itemized inventory to the nearest Sonic drive-in restaurant owned by SONIC or other unit designated by SONIC. SONIC agrees to pay Licensee or credit Licensee's account within seven days after said delivery. 15.04. FAIR MARKET VALUE DETERMINATION. If the parties cannot agree on the fair market value of any item subject to an option to purchase in this Agreement within a reasonable time, one appraiser shall be designated by SONIC, one by Licensee and the two appraisers shall designate an independent appraiser, and the valuation of such third appraiser alone shall be binding. SONIC and Licensee each shall pay one-half of the cost of any appraisals required pursuant to this Section 15.04. 16. COVENANTS. 16.01. RESTRICTIONS ON LICENSEE. Licensee agrees and covenants as follows: (a) During the term of this License, Licensee shall not directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, partnerships, trusts, unincorporated associations or joint ventures) in, (iii) loan money to or (iv) become landlord of any restaurant business which has a menu similar to that of a Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by Sonic drive-in restaurants) or which has an appearance similar to that of a Sonic drive-in restaurant (such as color pattern, use of canopies, use of speakers and menu housings for ordering food, or other items that are customarily used by a Sonic drive-in restaurant). (b) Licensee shall not, for a period of 18 months after termination of this License for any reason, directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest (including interests in corporations, partnerships, trusts, unincorporated associations or joint ventures) in, (iii) loan money to or (iv) become a landlord of any restaurant business which has a menu similar to that of a Sonic drive-in restaurant (such as hamburgers, hot dogs, onion rings, and similar items customarily sold by Sonic drive-in restaurants) or which has an appearance similar to that of a Sonic drive-in restaurants (such as color pattern, use of canopies, use of speakers and menu housings for ordering food, or other items that are customarily used by a Sonic drive-in restaurants), and which (i) is within a three mile radius of the Sonic Restaurant formerly licensed by this 40 Agreement, (ii) is within a 20 mile radius of a Sonic drive-in restaurant in operation or under construction, or (iii) is located within the MSA of the Sonic Restaurant. (c) Licensee shall not appropriate, use or duplicate the Sonic System, or any portion thereof, for use at any other restaurant business. (d) During the term of this Agreement, Licensee shall (i) use Licensee's best efforts to promote the business of the Sonic Restaurant, (ii) devote Licensee's full time, energies and attention to the operation and management of the Sonic Restaurant, and (iii) not engage in any other business or activity that might detract from, interfere with or be detrimental to the Sonic System or Licensee's full and timely performance under this Agreement (except the ownership and operation of other Sonic drive-in restaurants under license agreements with SONIC). (e) During the term of this Agreement, Licensee shall not perform or provide services as a director, officer, employee, agent, representative, consultant or in any other capacity for any other restaurant business which has a menu or appearance similar to that of a Sonic drive-in restaurant. (f) During the term of this Agreement, Licensee shall not directly or indirectly through one or more intermediaries (i) engage in, (ii) acquire any financial or beneficial interest in, (iii) loan money, or (iv) become landlord of any operation which has granted or is granting franchises or licenses (except for those granted by SONIC) to others to operate any other restaurant business which has a menu or appearance similar to that of a Sonic drive-in restaurant. (g) Paragraphs (a), (b) and (f) of this Subsection 16.01 shall not apply to ownership by Licensee of less than two percent beneficial interest in the outstanding equity securities of any corporation which is registered under the Securities Exchange Act of 1934; however, this Subsection 16.01(g) shall apply to all shareholders or partners of Licensee (in the event Licensee is a corporation or partnership) and all members of Licensees' and their immediate families, and all Persons or entities guaranteeing this Agreement. (h) The parties agree that each of the foregoing covenants shall be construed as independent of any covenant or provision of this Agreement. If all or any portion of a covenant in this Section 16 is held unreasonable or unenforceable by a court or agency having valid jurisdiction in an unappealed final decision to which SONIC is a party, Licensee expressly agrees to be bound by any lesser covenant subsumed with the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this Section 16. (i) Licensee understands and acknowledges that SONIC shall have the right, in SONIC's sole discretion, to reduce the scope of any covenant set forth in Paragraphs (a), (b) and (f) of this Subsection 16.01, or any portion thereof, without Licensee's consent effective 41 immediately upon receipt by Licensee of written notice thereof, and Licensee agrees that it shall comply forthwith with any covenant as so modified, which shall be fully enforceable notwithstanding the provisions of Paragraph (k) of this Subsection 16.01. (j) Licensee expressly agrees that the existence of any claims Licensee may have against SONIC, whether or not arising from this Agreement, shall not constitute a defense to the enforcement by SONIC of the covenants in this Section 16. (k) Licensee acknowledges that Licensee's violation of the terms of this Section 16 would result in irreparable injury to SONIC for which no adequate remedy at law is available, and Licensee accordingly consents to the ex parte issuance of restraining orders, temporary and permanent injunctions and cease and desist orders prohibiting any conduct by Licensee in violation of the terms of this Section 16. (l) Licensee shall utilize at the Sonic Restaurant a cash register previously approved by SONIC, which such cash register shall at all times during the term of this Agreement have a non-alterable grand total function so that each item entered in such register and each day's totals may not be altered once entered. 16.02. COVENANTS BY OTHERS. At the time of execution of this Agreement, Licensee shall provide SONIC with covenants similar in substance to those set forth in this Section 16 (including covenants applicable upon the termination of a Person's relationship with Licensee) from the following persons: (1) all persons employed by Licensee; and (2) all officers, directors, and holders of a direct or indirect beneficial ownership interest Licensee. With respect to each Person who becomes associated with Licensee in one of the capacities enumerated above subsequent to execution of this Agreement, Licensee shall require and obtain such covenants and promptly provide SONIC with executed copies of such covenants. In no event shall any Person enumerated be granted access to any confidential aspect of the Sonic System or the Sonic Restaurant prior to execution of such a covenant. All covenants required by this Section 16 shall be furnished by SONIC to Licensee and shall include, without limitation, specific identification of SONIC as a third party beneficiary of such covenants with the independent right to enforce them. Failure by Licensee to obtain execution of a covenant required by this Section 16 shall constitute a breach of this Agreement. 17. INDEPENDENT CONTRACTOR & INDEMNIFICATION. 17.01. LICENSEE NOT AN AGENT OF SONIC. It is understood and agreed that this Agreement does not create a fiduciary relationship between SONIC and Licensee, and that nothing herein contained shall constitute Licensee as the agent, legal representative, partner, joint venturer or employee of SONIC. Licensee is, and shall remain, an independent contractor responsible for all obligations and liabilities of, and for all loss or damage to, the Sonic Restaurant and its business, including any personal property, equipment, fixtures or real property connected therewith and for all claims or demands based on damage or destruction of property or based on injury, illness or death of any person or persons, directly or indirectly, resulting from the operation of the Sonic Restaurant. 42 17.02. COST OF ENFORCEMENT. If SONIC or SONIC's subsidiaries becomes involved in any action at law or in equity or in any proceeding opposing Licensee to secure, enforce, protect, or defend SONIC's rights and remedies under this License, in addition to any judgment entered in SONIC's favor, SONIC shall be entitled to demand of and (in the event SONIC prevails in such actions or proceedings) recover from Licensee the reasonable costs, expenses and attorneys' fees incurred by SONIC. If, in such applicable final judgment SONIC does not prevail, Licensee shall be entitled to recover from SONIC in any such action or proceeding the reasonable costs, expenses and attorneys' fees incurred by Licensee. 17.03. INDEMNIFICATION. If SONIC or SONIC's subsidiaries shall be subject to any claim, demand or penalty or become a party to any suit or other judicial or administrative proceeding by reason of any claimed act or omission by Licensee, Licensee's employees or agents, or by reason of any act occurring on the Sonic Restaurant premises, or by reason of any act or omission with respect to the business or operation of the Sonic Restaurant, Licensee shall indemnify and hold SONIC and SONIC's subsidiaries harmless against all judgments, settlements, penalties and expenses, including attorneys' fees, court costs and other expenses of litigation or administrative proceeding, incurred by or imposed on SONIC in connection with the investigation or defense relating to such claim or litigation or administrative proceeding and, at the election of SONIC, Licensee shall also defend SONIC and SONIC's subsidiaries. The Licensee shall not have any obligation to indemnify, defend or hold harmless SONIC or any other Person pursuant to the provisions of this Section 17.03 to extent the obligation arises predominantly as a proximate result of SONIC's act or failure to act when under a duty to act. 18. EFFECT OF WAIVERS. No waiver by SONIC or any breach or series of breaches of this Agreement shall constitute a waiver of any subsequent breach or waiver of the terms of this Agreement. 19. NOTICES. 19.01. Any notice required hereunder, if not specified, shall be in writing and shall be delivered by (i) personal service, (ii) by overnight, receipted delivery service, or (iii) by United States certified or registered mail, with postage prepaid, addressed to Licensee at the Sonic Restaurant or at such other address of Licensee then appearing on the records of SONIC or to SONIC at 101 Park Avenue, Oklahoma City, Oklahoma 73102, or at the subsequent address of SONIC's corporate headquarters. Either party, by a similar written notice, may change the address to which notices shall be sent. 19.02. If SONIC is unable to give actual notice of any breach or termination of this Agreement because Licensee has failed to provide SONIC with a current address, because Licensee fails to accept or pick up this mailed notice, or due to any reason which is not the fault of SONIC, then such notice shall be deemed as given when SONIC sends such notice by overnight receipted delivery service or registered or certified mail, postage prepaid. 43 19.03. Licensee has designated on the first page of this Agreement a Principal to serve as the party receiving primary notice on behalf of the parties hereto. Each Licensee hereby agrees that SONIC may send its notices and communications under this Agreement to the Principal provided for herein, that each SONIC may use the Principal as its primary contact for purposes of communications and notices permitted or required hereunder, and that all communications and notices given by SONIC to the Principal will be just as effective on each Licensee as though the same had been given to each Licensee. 20. ENTIRE AGREEMENT. 20.01. NO ORAL AGREEMENTS. This Agreement and all addenda, appendices and amendments hereto constitute the entire agreement between the parties and supersede all prior and contemporaneous, oral or written agreements or understandings of the parties. 20.02. SCOPE AND MODIFICATION OF LICENSE. No interpretation, change, termination or waiver of any of the provisions hereof shall be binding upon SONIC unless in writing signed by an officer of SONIC. No modification, waiver, termination, rescission, discharge or cancellation of this Agreement shall affect the right of any party hereto to enforce any claim or right hereunder, whether or not liquidated, which occurred prior to the date of such modification, waiver, termination, rescission, discharge or cancellation. 21. CONSTRUCTION AND SEVERABILITY. 21.01. INTERPRETATION. The recitals shall be considered a part of this Agreement. Section and Subsection captions are used only for convenience and are in no way to be construed as part of this Agreement or as a limitation of the scope of the particular Sections, Subsections, Paragraphs and Subparagraphs to which they refer. Words of any gender used in this Agreement shall include any other gender, and words in the singular shall include the plural where the context requires. 21.02. SCOPE OF PROTECTED AREA. Neither party to this Agreement intends to expand the scope of any covenants or commitments contained in Section 2 beyond the terms and provisions expressly stated in Section 2, and the parties to this Agreement agree that no Person, court or arbitrator may interpret any of the foregoing covenants or commitments in Section 2 in that manner. 21.03. INVALIDITY. If any part of this Agreement for any reason shall be declared invalid, such decision shall not affect the validity of any remaining portion, which shall remain in full force and effect. In the event any material provision of this Agreement shall be stricken or declared invalid, SONIC reserves the right to terminate this Agreement. 21.04. BINDING EFFECT. This Agreement shall be binding upon the parties, their heirs, executors, personal representatives, successors or assigns. 44 21.05. SURVIVAL. Any provisions of this Agreement which impose an obligation after termination or expiration of this Agreement shall survive the termination or expiration of this Agreement and be binding on the parties. 21.06. LIABILITY OF MULTIPLE LICENSEES. If Licensee consists of more than one Person or entity, each such Person and entity, and each proprietor, partner or shareholder of each such entity shall be jointly and severally liable for any and all of Licensee's obligations and prohibitions under this Agreement. Consequently, if and when a Person or entity as Licensee is in breach of this Agreement and fails or is unable to cure such breach in a timely manner, SONIC may terminate the rights of the so-affected Person or entity under this Agreement whereby this Agreement is terminated as to only such Person or entity while remaining fully effective as to all other Persons and entities remaining as Licensee on this Agreement. This Person or entity removed as Licensee shall remain jointly and severally obligated with the Persons and entities remaining as Licensee for any and all obligations and liabilities of Licensee which occurred or accrued through the date of removal of said Person or entity. 22. BUSINESS ENTITY LICENSEES 22.01. CORPORATE LICENSEE. If Licensee is a corporation, Licensee shall comply with the following provisions: (a) PURPOSE. The certificate of incorporation of Licensee, if incorporated after August 31, 1994, shall provide that the purpose of the corporation shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants. (b) TRANSFER RESTRICTIONS. The certificate of incorporation of Licensee shall provide that Licensee shall not issue any additional capital stock of Licensee and that no stockholder may transfer, assign or pledge any issued capital stock of Licensee without the prior, written consent of SONIC, and each stock certificate issued to evidence the capital stock of Licensee shall contain a legend disclosing the foregoing restriction. SONIC shall not withhold its consent to the issuance of additional capital stock or a transfer, assignment or pledge without a reasonable basis. In giving its consent, SONIC shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the capital stock execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement. (c) STOCKHOLDER GUARANTY. Each stockholder of Licensee shall execute the Guaranty and Restriction Agreement attached as Attachment I to this Agreement. (d) DOCUMENTS. Prior to SONIC's execution of this Agreement, Licensee shall deliver to SONIC photocopies of its certificate of incorporation and issued stock certificates reflecting compliance with the provisions of this Section 22.01. 45 22.02. PARTNERSHIP LICENSEE. If Licensee is a partnership, Licensee shall comply with the following provisions: (a) PURPOSE. The partnership agreement and certificate of limited partnership (if applicable) of Licensee, if formed after August 31, 1994, shall provide that the purpose of the partnership shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants. (b) TRANSFER RESTRICTIONS. The partnership agreement and certificate of limited partnership (if applicable) of Licensee shall provide that Licensee shall not issue any additional partnership interests in Licensee and that no partner may transfer, assign or pledge a partnership interest in Licensee without the prior, written consent of SONIC. SONIC shall not withhold its consent to the issuance of additional partnership interests or a transfer, assignment or pledge without a reasonable basis. In giving its consent, SONIC shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the partnership interest execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement. (c) PARTNER GUARANTY. Each partner of Licensee shall execute the Guaranty and Restriction Agreement appearing as Attachment I to this Agreement. (d) DOCUMENTS. Prior to SONIC's execution of this Agreement, Licensee shall deliver to SONIC photocopies of its partnership agreement and certificate of limited partnership (if applicable) reflecting compliance with the provisions of this Section 22.02. 22.03. LIMITED LIABILITY COMPANY LICENSEE. If Licensee is a limited liability company, Licensee shall comply with the following provisions: (a) PURPOSE. The articles of organization and operating agreement of Licensee, if organized after August 31, 1994, shall provide that the purpose of the limited liability company shall consist only in the development, ownership, operation and maintenance of Sonic drive-in restaurants. (b) TRANSFER RESTRICTIONS. The articles of organization and operating agreement of Licensee shall provide that Licensee shall not issue any additional membership interests in Licensee and that no member may transfer, assign or pledge any membership interests in Licensee without the prior, written consent of SONIC. SONIC shall not withhold its consent to the issuance of additional membership interests or a transfer, assignment or pledge without a reasonable basis. In giving its consent, SONIC shall have the right (but not the obligation) to impose one or more reasonable conditions, including (without limitation) the requirement that the recipient of the membership interest execute an agreement substantially similar to the Guaranty and Restriction Agreement attached as Attachment I to this Agreement. 46 (c) MEMBER GUARANTY. Each member of Licensee shall execute the Guaranty and Restriction Agreement appearing as Attachment I to this Agreement. (d) DOCUMENTS. Prior to SONIC's execution of this Agreement, Licensee shall deliver to SONIC photocopies of its articles of organization and operating agreement reflecting compliance with the provisions of this Section 22.03. 22.04. OTHER ENTITY LICENSEE. If Licensee is any other form of business entity, Licensee shall deliver to SONIC photocopies of its organizational documents containing provisions substantially similar to those required by Sections 22.01 through 22.03. 22.05. EMPLOYEE STOCK PURCHASE PLANS. The Licensee shall have the right to transfer up to 49% of its outstanding capital stock or other equity interests to an employee stock purchase plan as long as one individual who qualifies as a licensee of SONIC continues to own and Control, directly or indirectly, at least 51% of Licensee's outstanding capital stock or other equity interests. 23. APPLICABLE LAWS. The terms and provisions of this Agreement shall be interpreted in accordance with and governed by the laws of the State of Oklahoma, provided that if the laws of the State of Oklahoma would not permit full enforcement of Section 16 of this Agreement, then the laws of the state in which the Sonic Restaurant is located or Licensee is domiciled shall apply to the extent that any or all of such laws more fully permit enforcement of Section 16 of this Agreement. Notwithstanding the foregoing, the franchise laws or regulations of the state in which the Sonic Restaurant is located, in effect on the original date of this Agreement, shall apply to this Agreement. Licensee agrees that jurisdiction over Licensee and venue exist and are proper within the same federal judicial district where the corporate headquarters of SONIC are located and within any and all other courts, whether federal, state, or local, located within that district. Licensee waives any and all defenses and objections, and Licensee agrees not to assert any defense or objection to jurisdiction over Licensee and to venue as described hereinabove regarding any action, proceeding or litigation instituted by SONIC against Licensee. SONIC and Licensee agree that any and all breaches of this Agreement, including breaches occurring after termination, cancellation, or expiration of this Agreement, shall be deemed to have occurred where the corporate headquarters of SONIC are located. 24. ACKNOWLEDGEMENT. Licensee acknowledges that: 24.01. INITIAL TERM. The term of this Agreement is for a single 20-year term with no promise or representation as to the renewal of this Agreement or the grant of a new license except as provided herein. 24.02. CONSULTATION WITH COUNSEL. Licensee hereby represents that Licensee has received a copy of this Agreement and has had an opportunity to consult with Licensee's attorney with respect thereto at least 10 days prior to Licensee's execution hereof. Licensee further represents that 47 Licensee has had this Agreement in hand for review at least five business days prior to Licensee's execution hereof. 24.03. PROFITABILITY. No representation has been made by SONIC as to the future profitability of the Sonic Restaurant. 24.04. LICENSEE'S INVESTIGATION. Prior to the execution of this Agreement, Licensee has had ample opportunity to contact existing licensees of SONIC and to investigate all representations made by SONIC relating to the Sonic System. The Licensee has conducted an independent investigation of the business contemplated by this Agreement and recognizes that it involves substantial business risks making the success of the venture largely dependent on the business abilities of Licensee. SONIC disclaims and Licensee has not received from SONIC or its Affiliates any express or implied warranty or guaranty from Sonic or its Affiliates regarding the potential volume, profits or success of the business venture contemplated by this Agreement. The Licensee has not relied on any express or implied warranty or guaranty from SONIC or its Affiliates regarding the potential volume, profits or success of the business venture contemplated by this Agreement. 24.05. CONTRARY REPRESENTATIONS. The Licensee knows of no representations by SONIC or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement. The Licensee has not relied on any representations from SONIC or its Affiliates about the business contemplated by this Agreement which contradict the terms of this Agreement or the disclosures set forth in the Franchise Offering Circular delivered to Licensee in connection with the issuance of this Agreement. 24.06. VARIANCES TO OTHER LICENSEES. The Licensee understands that other developers and licensees may operate under different forms of agreements and, consequently, that SONIC's rights and obligations with regard to its various licensees may differ materially in certain circumstances. 24.07. COMPLETE AGREEMENT. This Agreement supersedes any and all other agreements or representations respecting the Sonic Restaurant and contains all the terms, conditions and obligations of the parties with respect to the grant of this Agreement. 25. INPUT AND ADVICE FROM LICENSEES. In connection with the implementation of or significant changes in the programs or policies referred to in Sections 6.04, 6.05(c), 6.06, 8, and 11.01(f) of this Agreement, SONIC shall solicit input and advice from a group of licensees gathered together for such purpose (whether established ongoing for such purpose or gathered on an ad hoc basis from time-to-time). SONIC further shall use its best efforts to ensure that such groups are balanced in terms of geographic base, size of operating group, and period of tenure within the Sonic system. Notwithstanding the foregoing, this Section 25 shall not have any effect unless the license agreements in effect for at least one-third of all Sonic drive-in restaurants contain this provision or a substantially similar provision. 26. INJUNCTIVE RELIEF. 48 The Licensee acknowledges that SONIC's remedy at law for any breach of any of Licensee's covenants under this Agreement (other than involving only the payment of money) would not constitute an adequate remedy at law and, therefore, SONIC shall have the right to obtain temporary and permanent injunctive relief in any proceeding brought to enforce any of those provisions, without the necessity of proof of actual damages. However, nothing in this Section 26 shall prevent SONIC from pursuing separately or concurrently one or more of any other remedies available at law, subject to the provisions of Section 14.04 of this Agreement. 27. GENERAL RELEASE AND COVENANT NOT TO SUE. The Licensee hereby releases Sonic Corp., its subsidiaries, and the officers, directors, employees and agents of Sonic Corp. and its subsidiaries from any and all claims and causes of action, known or unknown, which may exist in favor of Licensee as of the date of this Agreement. In addition, Licensee covenants that Licensee shall not file or pursue any legal action or complaint against any of the foregoing entities or Persons with regard to any of the foregoing claims or causes of action released pursuant to this Section 27. SONIC hereby releases Licensee and its officers, directors, employees and agents from any and all claims and causes of action, known or unknown, which may exist in favor of SONIC as of the date of this Agreement, except for any claims for (a) unpaid moneys due SONIC or its Affiliates, (b) a material breach of the provisions of this Agreement regarding the Proprietary Marks, or (c) the violation of SONIC's legal rights regarding the Proprietary Marks. In addition, SONIC covenants that SONIC shall not file or pursue any legal action or complaint against any of the foregoing entities or Persons with regard to any of the claims or causes of action released by SONIC pursuant to this Section 27. 49 SIGNATURE PAGE Executed on the dates set forth below, to have effect as of January 1, 1999. The Sonic drive-in restaurant licensed to operate under this Agreement is located at ____________________________________________________________________ _______________________________________________________________________________. If the license agreement renewing to this Agreement is a Number 1 License Agreement, Number 4 License Agreement or Number 4.1 License Agreement, the Licensee hereby makes the following selection regarding the royalty rate and advertising rate for this Agreement as set forth on pages 7 to 9 and 21 to 24 of this Agreement: Option 1 ___________. Option 2 ___________. The Licensee understand that if the Licensee does not make any election, SONIC will apply Option 2 to calculate the Licensee's royalty fees and advertising fees. The Original Expiration Date of the license agreement renewing to this Number 5.2 License Agreement was ________________________, 19___. SONIC: Sonic Industries Inc. By: _____________________________ (Vice) President Attest: Date: ___________________, 1998 _________________________________ (Assistant) Secretary Licensee: ____________________________________ Name: Date: ___________________, 1998 ____________________________________ Name: Date: ___________________, 1998 50 SCHEDULE I GUARANTY AND RESTRICTION AGREEMENT GUARANTY AND RESTRICTION AGREEMENT The undersigned (the "Guarantor"), Sonic Industries Inc. ("SONIC"), and __________ (the "Licensee") enter into this Guaranty and Restriction Agreement (this "Agreement") as of the 1st day of January, 1999. W I T N E S S E T H: Whereas, Sonic is entering into a Number 5.2 License Agreement (the "License Agreement") dated the same date as this Agreement with Licensee for the Sonic drive-in located at ____________________________; and Whereas, as a condition to entering into the License Agreement, SONIC has asked that the Guarantor provide a personal guaranty of certain of the obligations of Licensee set forth in the License Agreement; and Whereas, SONIC also has asked that the Guarantor and Licensee agree to a restriction on the transfer of the equity interests in Licensee; and Whereas, the Guarantor and Licensee are willing to enter into those agreements in accordance with the terms and conditions of this Agreement. Now, therefore, in consideration of the mutual covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties agree as follows: 1. PERSONAL GUARANTY OF PAYMENTS. The Guarantor hereby guarantees the prompt and full payment of the following obligations under the License Agreement: (a) All royalties due SONIC pursuant to the License Agreement. (b) All advertising contribution fees to the Sonic Advertising Fund pursuant to the License Agreement. (c) All contributions to approved advertising cooperatives pursuant to the License Agreement. (d) Any other miscellaneous obligations owing to SONIC or its Affiliates relating to the Sonic drive-in restaurant covered by the License Agreement, including any sign lease agreements. 2. NATURE OF GUARANTY. This guaranty shall constitute an absolute, unconditional, irrevocable and continuing guaranty. SONIC shall not have any obligation to take any action against any other person or entity for collection of any payments prior to making any demand for payment or bringing any action against the Guarantor. 3. PERMITTED ACTIONS. From time to time, SONIC shall have the right to take, permit or suffer to occur any "Permitted Action," as defined below, without modifying, reducing, waiving, releasing, impairing or otherwise affecting the obligations of the Guarantor under this Agreement, without giving notice to the Guarantor or obtaining the Guarantor's consent, without the necessity of any reservations of rights against the Guarantor, and without liability on the part of SONIC. As used in this Section 3, the phrase "Permitted Action" shall mean (a) an agreed extension of time for payment of any sum due under the License Agreement, (b) an agreed change in the manner or place of payment of any sums due under the License Agreement, (c) any waiver by SONIC of any defaults under the provisions of the License Agreement, (d) any delay or failure by SONIC to exercise any right or remedy SONIC may have under the License Agreement, (e) the granting by SONIC of any leniencies, waivers, extensions and indulgences under the License Agreement, and (f) any agreed amendments to the License Agreement. 4. WAIVER OF NOTICE OF ACCEPTANCE. The Guarantor acknowledges and waives notice of SONIC's acceptance of the Guarantor's guaranty pursuant to the terms of this Agreement. 5. RESTRICTIONS ON TRANSFER. The Licensee shall not issue any additional shares of capital stock without the prior, written consent of SONIC. The Guarantor shall not transfer, assign or pledge any of its shares of capital stock in Licensee to any person without the prior, written consent of SONIC. 6. DISPUTES. If SONIC files suit to enforce the provisions of this Agreement, the federal and state courts in Oklahoma shall have personal jurisdiction over the Guarantor. The Guarantor expressly waives any and all objections as to venue in any of those courts and agrees that SONIC may serve process by mailing a copy of the summons by certified mail, return receipt requested, with sufficient postage prepaid, to the address of the Guarantor as specified in this Agreement. 7. ATTORNEYS' FEES, COSTS AND EXPENSES. In any action brought by SONIC to enforce the obligations of the Guarantor, SONIC also shall have the right to collect its reasonable attorneys' fees, court costs, and expenses incurred in the action. 8. HEADINGS. The headings used in this Agreement appear strictly for the parties' convenience in identifying the provisions of this Agreement and shall not affect the construction or interpretation of the provisions of this Agreement. 9. BINDING EFFECT. This Agreement binds and inures to the benefit of the parties and their respective successors, legal representatives, heirs and permitted assigns. 10. WAIVER. The failure of a party to insist in any one or more instances on the performance of any term or condition of this Agreement shall not operate as a waiver of any future performance of that term or condition. 11. GOVERNING LAW. Notwithstanding the place where the parties execute this Agreement, the internal laws of Oklahoma shall govern the construction of the terms and the application of the provisions of this Agreement. 2 12. AMENDMENTS. No amendments to this Agreement shall become effective or binding on the parties, unless agreed to in writing by all of the parties. 13. TIME. Time constitutes an essential part of each and every part of this Agreement. 14. NOTICE. Except as otherwise provided in this Agreement, when this Agreement makes provision for notice or concurrence of any kind, the sending party shall deliver or address the notice to the other party by certified mail, telecopy, or nationally-recognized overnight delivery service to the following address or telecopy number: SONIC: 101 Park Avenue Oklahoma City, Oklahoma 73102 (405) 280-7516 Guarantor: ____________________________________ ____________________________________ (_____) _____-________ Licensee: ____________________________________ ____________________________________ (_____) _____-________ All notices pursuant to the provisions of this Agreement shall run from the date that the other party receives the notice or three business days after the party places the notice in the United States mail. Each party may change the party's address by giving written notice to the other parties. 15. RELEASE AND COVENANT NOT TO SUE. The Guarantor and Licensee each hereby release all claims and causes of action which the Guarantor or Licensee, or both of them, may have against Sonic Corp., its subsidiaries, and the stockholders, directors, officers, employees and agents of Sonic Corp. and its subsidiaries. The Guarantor and Licensee, and each of them, further covenant not to sue any of the foregoing persons or entities on account of any of the foregoing claims or causes of action. Executed and delivered as of the day and year first set forth above. SONIC: Sonic Industries Inc. By:________________________________ Attest: (Vice) President ______________________________ (Assistant) Secretary 3 Guarantor: ___________________________________ Licensee: ___________________________________ By: _____________________________ Attest: Its: _____________________ ______________________________ Its: __________________________ 4 EX-23.01 4 EXHIBIT 23.01 Exhibit 23.01 Consent of Independent Auditors Exhibit 23.01 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-26359) pertaining to the Sonic Corp. Savings and Profit Sharing Plan, the Registration Statements (Forms S-8 No. 333-09373, No. 33-40989 and No. 33-78576) pertaining to the 1991 Sonic Corp. Stock Option Plan, the Registration Statement (Form S-8 No. 33-40988) pertaining to the 1991 Sonic Corp. Stock Purchase Plan, the Registration Statement (Form S-8 No. 33-40987) pertaining to the 1991 Sonic Corp. Directors' Stock Option Plan and the Registration Statement (Form S-3 No. 33-95716) for the registration of 1,420,000 shares of its common stock, and the related Prospectuses of our report dated October 12, 1998, with respect to the consolidated financial statements and schedule of Sonic Corp. included in the Annual Report (Form 10-K) for the year ended August 31, 1998. ERNST & YOUNG LLP Oklahoma City, Oklahoma November 19, 1998 EX-24.01 5 EXHIBIT 24.01 Exhibit 24.01 Power of Attorney POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below hereby constitutes and appoints Ronald L. Matlock and W. Scott McLain, and each of them, his true and lawful attorney-in-fact, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the Form 10-K Annual Report of Sonic Corp. for the fiscal year ended August 31, 1998, and to file the amendments, with exhibits, with the Securities and Exchange Commission, granting to the foregoing attorney-in-fact, and his substitutes, the full power and authority to do and perform each and every act and thing necessary or appropriate to file the amendments as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that the attorney-in-fact, or his substitutes, lawfully may do by virtue of this instrument. Executed as of the 17th day of November, 1998. /s/ Dennis H. Clark --------------------------------- Dennis H. Clark /s/ Leonard Lieberman --------------------------------- Leonard Lieberman /s/ H. E. Rainbolt --------------------------------- H. E. Rainbolt /s/ Frank E. Richardson --------------------------------- Frank E. Richardson --------------------------------- Robert M. Rosenberg /s/ E. Dean Werries --------------------------------- E. Dean Werries EX-27.01 6 EXHIBIT 27.01
5 1,000 12-MOS AUG-31-1998 SEP-01-1997 AUG-31-1998 2,602 0 7,587 0 0 16,539 226,438 (38,370) 233,180 23,831 61,400 0 0 206 131,805 233,180 182,011 219,107 135,806 183,735 0 0 2,750 32,622 12,152 20,470 0 0 681 19,789 1.03 1.00
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