Sonic 2014 Annual Report Download - page 41

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 customary accelerated repayment events and events of default. Although management does not anticipate
an event of default or any other event of noncompliance with the provisions of the debt, if such event occurred, the unpaid amounts
outstanding could become immediately due and payable.
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.
The Company’s cash equivalents are carried at cost which approximates fair value and totaled $34.4 million and $39.1 million
at August 31, 2014 and 2013, respectively. This fair value is estimated using Level 1 methods.
At August 31, 2014, the fair value of the Company’s 2011 Fixed Rate Notes and 2013 Fixed Rate Notes approximated the carrying
value of $437.8 million, including accrued interest. At August 31, 2013, the fair value of the Company’s 2011 Fixed Rate Notes and
2013 Fixed Rate Notes approximated the carrying value of $447.6 million, including accrued interest. The fair value of the 2011
Fixed Rate Notes and the 2013 Fixed Rate Notes is estimated using Level 2 inputs from market information available for public debt
transactions for companies with ratings that are similar to the Company’s ratings and from information gathered from brokers who
trade in the Company’s notes.
Notes to Consolidated Financial Statements
August 31, 2014, 2013 and 2012 (In thousands, except per share data)
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