Sonic 2013 Annual Report Download - page 45

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Notes are subject to an upward adjustment in the interest rate of at least 5% per annum. In addition, principal
payments will accelerate by applying all of the royalties, lease revenues and other fees securing the debt, after
deducting certain expenses, until the debt is paid in full. Also, any unfunded amount under the 2011 Variable
Funding Notes will become unavailable.
The Co-Issuers and Sonic Franchising LLC (the “Guarantor”) are existing special purpose, bankruptcy remote,
indirect subsidiaries of Sonic Corp. that hold substantially all of Sonic's franchising assets and real estate. As of
August 31, 2013, assets for these combined indirect subsidiaries totaled $322.3 million, including receivables for
royalties, certain Company and Franchise Drive-In real estate, intangible assets and restricted cash balances of
$18.6 million. The 2011 Notes and the 2013 Fixed Rate Notes are secured by franchise fees, royalty payments
and lease payments, and the repayment of the 2011 Notes and the 2013 Fixed Rate Notes is expected to be
made solely from the income derived from the Co-Issuer's assets. In addition, the Guarantor, a Sonic Corp.
subsidiary that acts as a franchisor, has guaranteed the obligations of the Co-Issuers under the 2011 Notes and
the 2013 Fixed Rate Notes and pledged substantially all of its assets to secure those obligations.
Neither Sonic Corp., the ultimate parent of the Co-Issuers and the Guarantor, nor any other subsidiary of Sonic,
guarantees or is in any way liable for the obligations of the Co-Issuers under the 2011 Notes and the 2013 Fixed
Rate Notes. The Company has, however, agreed to cause the performance of certain obligations of its subsidiaries,
principally related to managing the assets included as collateral for the 2011 Notes and the 2013 Fixed Rate Notes
and certain indemnity obligations relating to the transfer of the collateral assets to the Co-Issuers.
The 2011 Notes and the 2013 Fixed Rate Notes are subject to a series of covenants and restrictions customary
for transactions of this type, including (i) required actions to better secure collateral upon the occurrence of certain
performance-related events, (ii) application of certain disposition proceeds as note prepayments after a set time
is allowed for reinvestment, (iii) maintenance of specified reserve accounts, (iv) maintenance of certain debt service
coverage ratios, (v) optional and mandatory prepayments upon change in control, (vi) indemnification payments for
defective or ineffective collateral, and (vii) covenants relating to recordkeeping, access to information and similar
matters. If certain covenants or restrictions are not met, the 2011 Notes and the 2013 Fixed Rate Notes are
subject to customar y accelerated repayment events and events of default. Although management does not
anticipate an event of default or any other event of noncompliance with the provisions of the debt, if such event
occurred, the unpaid amounts outstanding could become immediately due and payable.
11. Fair Value of Financial Instruments
The fair value of financial instruments is the amount at which the instrument could be exchanged in a current
transaction between willing parties. The Company has no financial liabilities that are required to be measured at
fair value on a recurring basis.
The Company categorizes its assets and liabilities recorded at fair value based upon the following fair value
hierarchy established by FASB:
•Level 1 valuations use quoted prices in active markets for identical assets or liabilities that are accessible at
the measurement date. An active market is a market in which transactions for the asset or liability occur with
sufficient frequency and volume to provide pricing information on an ongoing basis.
•Level 2 valuations use inputs other than actively quoted market prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly. Level 2 inputs include: (a) quoted prices for
similar assets or liabilities in active markets, (b) quoted prices for identical or similar assets or liabilities in
markets that are not active, (c) inputs other than quoted prices that are observable for the asset or liability
such as interest rates and yield curves observable at commonly quoted intervals and (d) inputs that are derived
principally from or corroborated by observable market data by correlation or other means.
•Level 3 valuations use unobservable inputs for the asset or liability. Unobservable inputs are used to the extent
observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity
for the asset or liability at the measurement date.
Notes to Consolidated Financial Statements
August 31, 2013, 2012 and 2011 (In thousands, except per share data)