2017 annual report to shareholders an appetite for more · 2020-05-16 · 2017 annual report to...

An appetite for more

2 0 1 7 A n n u a l R e p o r t t o S h a r e h o l d e r s

Throughout its nearly 65-year history, Sonic has developed a reputation within the Quick-Service Restaurant (QSR) sector for innovation. Increasingly, this innovation has focused on technology, building on Sonic’s art for running a drive-in with the science that makes its service faster, more accurate and more efficient — all geared to steadily enhance customer satisfaction. The next phase of the company’s innovation is now on the horizon: leading-edge modifications to our mobile app that will speed order processing as never before, with capabilities that let customers order from anywhere, pay remotely and remain First in Line, Every Timesm. The real benefit of this approach to mobile ordering, however, is knowing when a customer is nearing a drive-in, so our food is always freshly prepared and ready for Carhop delivery on arrival. It’s one more way Sonic is working to take the queue out of QSR.

About SonicFounded in 1953 in Shawnee, Oklahoma, Sonic today franchises and operates the largest chain of drive-in restaurants in the country, with almost 3,600 Sonic Drive-Ins from coast to coast. Customers also enjoy drive-thru service and patio dining at many Sonic locations.

Sonic’s signature food items include specialty drinks (such as cherry limeades and slushes), ice cream desserts, made-to-order cheeseburgers, chicken entrees ranging from sandwiches to boneless wings, a variety of hot dogs including six-inch premium beef hot dogs and footlong quarter-pound coneys, hand-made onion rings and tots. Sonic Drive-Ins also offer breakfast items that include a variety of breakfast burritos and serve the full menu all day.

“We’re taking the queue out of QSR.”

Clifford HudsonChairman, Chief Executive Officer and President

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Throughout this past year, Sonic continued to make significant strides in many areas, with far-reaching initiatives that will enhance the way we engage with customers – and improve the way we operate – for years to come.

In looking back on the year, however, we also continued to experience an uncertain consumer environment and a slide in sales that began in calendar 2016, reflecting a number of issues, including heightened competitive and value-pricing options across the QSR landscape, as well as declining traffic that reflected an ongoing favorable tilt in the relative cost of meals prepared and available at grocery and convenience stores versus traditional dining out at restaurants. Also, in late August, Hurricane Harvey swept across Houston and other Texas cities, impacting our sales in these key markets. I am proud of the way our team responded to both the opportunities and adversities we faced last year and am grateful that our operators rebounded strongly from the storms with no lasting effects.

Our new store development pipeline continues to be a strong indicator of brand health, and 2017 provided the second-highest number of new commitments following the Great Recession. New development agreements in Washington, D.C., New York City, the Ohio River Valley, Alabama, Virginia and Washington, as well as additional development by franchisees in Denver, Houston and San Antonio bode well for future growth of the brand nationwide. With commitments for more than 550 drive-ins, it came as no surprise to us to see new drive-in openings ramp up to 66 this past year – the highest level in seven years. Combined with heightened interest in rebuilds and relocations totaling 69 during 2017, this development activity is a positive signal for Sonic’s future growth and underscores our franchisees’ enthusiasm for the brand.

You may recall that last year we told you of our plan to increase our franchised drive-in base, a move intended to improve our capital efficiency and allow our franchisees to optimize performance of the refranchised drive-ins while simultaneously committing to additional drive-in development in refranchised markets. I am pleased to note that we completed that initiative ahead of schedule in March 2017. As a result, franchised drive-ins represented almost 94% of the chain at year’s end. Drive-ins were purchased by both existing and new franchisees in markets across the country and in all cases included development agreements to continue to grow the brand.

The increasing relevance and importance of emerging technology in our business have been our focus for some time. During the past year, our Point of Personalized Service (POPS) digital menu boards – now in the final year of a four-year rollout and currently installed at nearly 90% of our drive-ins – give customers complete control over the pace of the order process and provide menu suggestions based on typical favorites and complementary add-on selections. POPS is the cornerstone of our Integrated Customer Engagement (ICE) strategy, which transforms the ways we communicate with customers and will deliver unparalleled personalization, including complete integration with current and planned features of our newly redesigned mobile app that was launched in 2017. The pursuit of these technology initiatives, together with spending for new drive-ins, relocations and rebuilds, comprises a capital investment by our franchisees of more than $800 million over the past four years.

In January 2017, we welcomed Steven A. Davis, former chairman and chief executive officer of Bob Evans Farms, Inc., to our board of directors. Steve brings 30 years of restaurant and retail experience to the board, having also served in a variety of executive and management positions with YUM! Brands and Kraft General Foods. His knowledge of the restaurant industry and with brand management brings a valuable perspective to our board.

66New drive-ins

opened last year – the strongest pace

in seven years

$800 Franchisee capital

(in millions) invested over the

last four years

550Drive-in

commitments in the pipeline

To Our Shareholders

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Also in January, Christina Vaughan assumed the position of president of Sonic Restaurants, Inc. (SRI), the company’s restaurant-operating subsidiary. With a career at Sonic spanning more than 15 years, Christina has worked in field marketing and operations, and led the implementation of the company’s 20/20 Drive-In initiative – our system conversion to our new point-of-sale and proprietary POPS technology. Most recently, she was responsible for overseeing franchisee relationships in our central region. With extensive and critical experience in working with our franchisees for so many years, Christina is immensely suited to take the reins of our company-owned operations.

Later in August, we were pleased to announce the appointment of Jose Dueñas as executive vice president and chief brand officer, a position responsible for the end-to-end customer experience including marketing, digital strategy, consumer insights, guest relations, concept development and overall evolution of the Sonic brand for the long-term, as well as our ICE initiative. Jose joins Sonic with more than 20 years of marketing and brand senior leadership in the restaurant and consumer packaged goods industries, most recently leading same-store sales growth and profitability improvement for Olive Garden, where he served as executive vice president and chief marketing officer.

Jose’s appointment aligns nicely with the recent promotion of Lori Abou Habib as chief marketing officer. Lori, a 10-year veteran of Sonic, is responsible for leading brand strategy, culinary innovation, brand management, creative, media and marketing technology. I am delighted to welcome Jose to Sonic and congratulate Lori on her rising responsibilities with the company. I know they both will provide the solid leadership needed to support the continued growth of our brand.

Despite recent headwinds, Sonic continues to generate significant free cash flow, which came in at $57 million last year. We have continued to use our free cash to support the growth of our brand as well as to return capital to our shareholders. In fiscal 2017, we paid more than $24 million in cash dividends to shareholders and repurchased more than 6.7 million shares of common stock, or 13% of shares outstanding, valued at $173 million. Together, these dividends and share repurchases were up 16% for the year compared with $170 million last year. As good as that sounds to our shareholders, next year is shaping up even better, with cash dividends per share set to increase 14% and a new authorization for the repurchase of up to $160 million of common stock through the end of fiscal 2018.

Looking ahead, as we always do, we anticipate near-term turbulence from industry trends, but Sonic is not a near-term player. Approaching age 65, the Sonic brand is built for the long term: thriving, evolving and improving, despite momentary pauses like we have seen in fiscal 2017. Considering the pipeline for new drive-in development, our distinctive brand position in the QSR space, and the consumer relevance of our menu choices across all dayparts – with complete order customization always possible and at the heart of our business – Sonic is ideally positioned for continued growth. And with the implementation of our new technology initiatives, including our upcoming and expanded mobile app, which links us to our customers in ways like never before, we continue to take the queue out of QSR.

Sincerely,

Clifford Hudson Chairman, Chief Executive Officer and President

3,593 Locations

Coast-to-Coast

94%FranchisedDrive-Ins

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Ordering made easy...

We remember your favorites.With our enhanced app, which captures ordering histories and past customizations, guests will be able to opt for “the usual” with one touch each time they return, or easily delve into new possibilities. Besides making things easier, the app reminds customers about additional items they might like to spice up their order.

First in Line, Every Time

Mobile ordering–

Sonic good and Sonic

fast

4

...for life on the go.In 1953, Sonic started at the forefront of “delivery” technology, offering great food and quick service in a way that was tailor-made for America’s burgeoning car culture. We’ve never looked back. Like no one else, we enable our guests to be First in Line, Every Time.

As fiscal 2017 ended, we neared the rollout of new features to the Sonic app that will take convenience and service – and always being first in line – to a whole new level. With this technology, which tightly integrates with our Point of Personal Service (POPS) digital menu boards, customers not only can view our menu remotely and decide what they want, they can place an order from anywhere and pay remotely. And their food will be hot and ready on arrival.

Our updated app will ensure improved accuracy of customers’ orders, and makes the entire process faster, distilling the order time down to that required for cooking. Mobile ordering made easy is a recipe for increased customer satisfaction, and that makes for more repeat business and provides a solid foundation for higher sales.

We tested these new features this fall, with plans for a comprehensive, nationwide rollout in 2018. The launch will mark yet another advance that plays to one of the core strengths of the Sonic brand: using technology in ways that make everything more convenient for our guests. That strength has long made Sonic a go-to place for Americans who live on the go.

5

Even on a screen, you can almost taste it.


Sonic’s chicken sales remain strong. Led by our Ultimate Chicken Sandwich, Sonic offers 23 grilled and crispy chicken selections.

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Full MenuAll Day

Technology and convenience are key advantages in the quick-service restaurant field. But we’ve always known that what drives people to Sonic – what turns first-time guests into brand loyalists – is our food.

So, even as we’re continually moving forward in every other way, we proudly stand our ground when it comes to the consistent great taste and quality of the items we serve, from premium beef hot dogs to our all-white meat chicken and Real Ice Cream and treats.

Along with exceptional quality, we also stand by the characteristics that have long made Sonic distinct (and distinctively appealing) like giving customers the ability – unmatched by any of our competitors – to order anything they wish from our diverse menu, at any time, all day long. Or the choice to customize their orders completely. A cheeseburger with jalapeños? For breakfast? No worries. It’s all good.

It’s a winning formula that our customers never seem to tire of – and that keeps them coming back for more. Notably, our chicken sales remained very strong last year, as did the demand for ice cream-related desserts and treats. Additionally, Sonic’s vast options for customized drink combinations, which now top 1.3 million possibilities, continue to earn it acclaim as the Ultimate Drink Stop®. The soon-to-be-expanded capabilities of our app, which will enhance our ability to recognize our customers’ favorites and engage with them, will provide increased data to better understand their cravings and help drive even stronger results.

Hungry guests know that, when they choose Sonic, there need never be disagreements in the car. There’s something on the menu for everybody, prepared any way they like it, enabling them to select their favorites or explore new tastes. However they go, they know it’s going to be great.

Select your favorites or explore new tastes. Sonic’s origin is steeped in great-tasting classic food. But it doesn’t stop there, the state-of-the-art Sonic test kitchen continues to unveil new tasty treats like the Frozen Limeade. Sweet.

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It’s like a Carhop in the carpool.

When you pull in, we’ll rush your order right out.


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It’s like a Carhop in the carpool.

When you pull in, we’ll rush your order right out.

Sonic is busily redefining what it means to be first in line – so much so that our curbside service can start well before customers ever reach our curb.

When mobile ordering goes live, the “line” at Sonic will be dramatically streamlined. Customers can order and pay from anywhere using a smartphone. Then, as they drive toward the restaurant, geo-fence location technology informs us when to begin preparing their order. That way, actual food preparation begins only when the customer is nearby. In the final step, the customer identifies which stall they pull into, so a smiling, skating Carhop can bring their order right to them.

And that creates wins for all involved. Customers enjoy more ways to select and receive their food, and it’s ready when they’re ready to enjoy it, giving them even more reasons to come to Sonic. Minimizing wait time means our drive-ins enjoy opportunities to serve more customers more quickly and increase sales in existing building footprints.

Sonic has always been known for its unique delivery system, from the slanted drive-in stalls to our iconic Carhops. It’s part of the classic drive-in experience that continues to set Sonic apart as one of the most distinctive concepts in QSR. True to our history, we continue to advance our service model, making it quicker and more convenient than ever by taking the queue out of QSR.

Geo-fence location technology will recognize when you are nearby and that it’s time to prepare your order.

More waysto get yourfood fast

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Customers can find great food fast .

Storelocations at an all-time

HIGH

Sonic’s store count reached an all-time high at 3,593 this past year.

The pipeline for new locations remains strong and new franchisees are developing Denver, Houston and

San Antonio to name a few.


And franchisees find opportunities.

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Our efforts to build on new infrastructure for the mobile app we launched in 2017 – the next evolutionary step in our Integrated Customer Experience (ICE) – isn’t just a big advantage for customers. It also offers appetizing opportunities for Sonic franchisees.

The app enables customers to find drive-ins easily, wherever they are. And thanks to our national (and cost-efficient) approach to advertising via cable TV and social media, even when we open locations in markets that are new to us, audiences already are sold on Sonic and captivated by its brand appeal.

In helping customers find great food fast (and be first in line even before they arrive), our app makes our brand even more attractive to franchisees. It also will enable Sonic to learn more than ever before about customers’ preferences and ordering history – information that can help increase sales and loyalty. This insight, in turn, will provide important advantages in the marketplace and help our franchisees, who operate nearly 95% of our drive-ins, strengthen relationships with their Sonic fans and gain new customers. Not surprisingly, these results increase our franchisees’ desire for more.

Last year, we reached an all-time high in the number of drive-ins in operation, with 3,593 locations open in 45 states, creating a three-year trend of net unit growth. Our development pipeline, which has been growing since 2012,

remains very strong at more than 550 drive-ins. Positioning for future growth, the number of drive-in relocations also increased last year as did rebuilds and conversions. Such numbers suggest that franchisees aren’t just investing in a concept; they’re reinvesting in a proven winner.

During fiscal 2017, we welcomed new franchisees in several important markets, including Denver, Houston and San Antonio. Importantly, the quality, skill level and experience of the new franchisees we are attracting continue to increase. Just as we offer exceptional flexibility to customers, we have developed versatile drive-in footprint options to meet the varied needs of our franchisees – a major advantage in many areas where real estate is at a premium and smaller markets where more compact drive-ins can enhance profitability.

It’s not difficult to understand, then, why franchisees are drawn to Sonic. As with our customers, we give them what they’re hungry for: a brand that’s highly appealing across different geographies and economic cycles, strong unit profitability and a healthy return on investment. They have a continuing appetite for more. So do we.

With 47 drive-ins across major markets in Texas, including six acquired in Sonic’s last round of refranchising, Cody is still growing his portfolio and definitely has an appetite for more. In his view, engaging with and remaining relevant to Sonic’s tech-savvy and increasingly mobile customers in the 21st century is critical to building his company and further enhancing the complete brand experience.

Cody BarnettCEO, The Barnett GroupOklahoma City, OklahomaSecond Generation Franchisee 11

12

106

7492

7380

99

107

20

47 20

9

14374

171

128

191

2824

90

43

276

16

25

77

3

225

963

22

53

16

5

6

194

5

1917

16

6

2

154

41

1

3

Net Income Per Diluted Share

1 Excludes $0.08, net, associated with early extinguishment of debt, a loss on closure of company drive-ins and an impairment charge for point-of-sale assets, all of which were partially offset by the benefit of a favorable resolution of tax matters.

2 Excludes $0.01, reflecting a tax benefit from the acceptance by the IRS of a federal tax method change.

3 Excludes $0.10, net, reflecting various changes in tax matters, including a benefit of prior-year statutory tax deduction and a change in the deferred tax valuation allowance.

4 A number of reductions in Reported GAAP net income per diluted share totaling $0.19 per diluted share, including a release of income tax credits, the tax impact on debt extinguishment and gains on sales of Company drive-ins and real estate, were exactly offset by additions totaling $0.19 per diluted share, including a loss from early extinguishment of debt.

5 Excludes $0.20, net, reflecting net gain on refranchising transactions and related other items, offset by certain tax impacts associated with those transactions as well as restructuring charges.

Reported Adjusted

20142013

A quick view at

2015

$0.6

4

$0.7

21 $0.8

5

$0.8

42

$1.2

0

$1.1

03

System Same-store Sales

20142013 2015

System Drive-Ins AverageSales Per Drive-In (in thousands)

2.3%

3.5%

7.3%

20142013 2015

$1,109$1,153

$1,244

System Drive-Ins

20142013 2015

3,522 3,518 3,526

2016

$1.2

9

$1.2

94

2016

2.6%

2016

3,557

2016

$1,284

3,593 Locations

Coast-to-Coast

94/6%Franchise/Company

Drive-Ins

in 2017

2017

$1.4

5

$1.2

55

2017 Business Mix

2017

-3.3%

2017

3,593

2017

$1,250

ThefollowingtablesetsforthselectedfinancialdataregardingthefinancialconditionandoperatingresultsofSonicCorp.andsubsidiaries(the“Company”).Oneshouldreadthefollowinginformationinconjunctionwith“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”below,andtheCompany’sConsolidatedFinancialStatements.

FiscalYearEndedAugust31,(Inthousands,exceptpersharedata) 2017 2016 2015 2014 2013IncomeStatementData: CompanyDrive-Insales $ 296,101 $ 425,795 $ 436,031 $ 405,363 $ 402,296 FranchiseDrive-Ins: Franchiseroyaltiesandfees 170,527 170,319 161,342 138,416 130,737 Leaserevenue 7,436 7,459 5,583 4,291 4,785 Other 3,203 2,747 3,133 4,279 4,767 Totalrevenues 477,267 606,320 606,089 552,349 542,585 CostofCompanyDrive-Insales 249,911 356,820 363,938 342,109 343,209 Selling,generalandadministrative 78,687 82,089 79,336 69,415 66,022 Depreciationandamortization 39,248 44,418 45,892 42,210 40,387 Provisionforimpairmentoflong-livedassets 1,140 232 1,440 114 1,776 Otheroperating(income)expense,net (14,994) (4,691) (945) (176) 1,943 Totalexpenses 353,992 478,868 489,661 453,672 453,337 Incomefromoperations 123,275 127,452 116,428 98,677 89,248 Interestexpense,net(1) 27,808 34,948 24,706 24,913 32,949 Incomebeforeincometaxes 95,467 92,504 91,722 73,764 56,299 Netincome $ 63,663 $ 64,067 $ 64,485 $ 47,916 $ 36,701

Incomepershare: Basic $ 1.47 $ 1.32 $ 1.23 $ 0.87 $ 0.65 Diluted $ 1.45 $ 1.29 $ 1.20 $ 0.85 $ 0.64 Weightedaveragesharesusedincalculation: Basic 43,306 48,703 52,572 55,164 56,384 Diluted 44,043 49,669 53,953 56,619 57,191

Cashdividendsdeclaredpercommonshare(2) $ 0.56 $ 0.44 $ 0.27 $ 0.09 $ –

BalanceSheetData: Workingcapital $ 30,568 $ 62,994 $ (2,383) $ 16,201 $ 67,792 Property,equipmentandcapitalleases,net 312,380 392,380 421,406 441,969 399,661 Totalassets 561,744 648,661 620,024 650,972 660,794 Obligationsundercapitalleases (includingcurrentportion) 19,631 21,064 24,440 26,743 26,864 Long-termdebt(includingcurrentportion) 637,521 578,938 438,028 437,318 447,294 Stockholders’equity(deficit) (201,758) (75,643) 17,433 62,675 77,464

(1) Includesnetlossfromearlyextinguishmentofdebtof$8.8millionand$4.4millionforfiscalyears2016and2013,respectively.(2) Thefirstquarterdividendforfiscalyear2015wasdeclaredinthefourthquarteroffiscalyear2014.

Selected Financial Data

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview DescriptionoftheBusiness.Sonicoperatesandfranchisesthelargestchainofdrive-inrestaurantsintheUnitedStates.AsofAugust31,2017,theSonicsystemwascomprisedof3,593drive-ins,ofwhich6%wereCompanyDrive-Insand94%wereFranchiseDrive-Ins.Sonic’ssignaturefooditemsincludespecialtydrinks(suchascherrylimeadesandslushes),icecreamdesserts,made-to-ordercheeseburgers,chickenentreesrangingfromsandwichestobonelesswings,avarietyofhotdogsincludingsix-inchpremiumbeefhotdogsandfootlongquarterpoundconeys,hand-madeonionringsandtatertots.SonicDrive-Insalsoofferbreakfastitemsthatincludeavarietyofbreakfastburritosandservethefullmenuallday.OurCompanyDrive-Inrevenuesandcostofsales,aswellasfranchiseroyaltiesandfees,aredirectlyaffectedbythenumberandsalesvolumeofdrive-insandnewdrive-inopenings. OverviewofBusinessPerformance.Systemsame-storesalesdecreased3.3%duringfiscalyear2017ascomparedtoanincreaseof2.6%forfiscalyear2016. Same-storesalesatCompanyDrive-Insdecreasedby4.7%duringfiscalyear2017ascomparedtoanincreaseof1.7%forfiscalyear2016.Thesame-storesalesdecreasesreflectadeclineintraffic,drivenbysluggishconsumerspendingintherestaurant industryandaggressivecompetitiveactivity. Wecontinuetoexecuteonourlong-termstrategies,includingnewtechnology,peopleinitiatives,productinnovation,personalizedservice,targetedvaluepromotionsandourfullyintegratedmediastrategy.AlloftheseinitiativesfuelSonic’sgrowthstrategy,whichincorporatessame-storesalesgrowth,newdrive-indevelopmentanddeploymentofcash.Same-storesalesgrowthisthemostimportantlayeranddrivesoperatingleverageandincreasedoperatingcashflows. Revenuesdecreasedto$477.3millionforfiscalyear2017from$606.3millionforfiscalyear2016,whichwasprimarilyduetoadecreaseinCompanyDrive-Insalesof$129.7million.ThedecreaseinCompanyDrive-Insaleswasprimarilyaresultofrefranchising110CompanyDrive-Ins.Toalesserextent,thedeclineinrevenuesisalsoattributedtodecreasedsame-storesales.RestaurantmarginsatCompanyDrive-Inswereunfavorableby60basispointsduringfiscalyear2017,reflectingthede-leveragingimpactofdecliningsame-storesalesandrisinglaborcosts,partiallyoffsetbymoderatecommoditycostimprovementandtheimpactofrefranchisingunderperformingdrive-ins. Netincomeanddilutedearningspershareforfiscalyear2017were$63.7millionand$1.45,respectively,ascomparedtonetincomeof$64.1millionor$1.29perdilutedshareforfiscalyear2016. InJune2016,theCompanyannouncedplanstorefranchiseCompanyDrive-Insaspartofarefranchisinginitiativetomovetowardanapproximately95%-franchisedsystem.Duringfiscalyear2016,theCompanyrefranchisedtheoperationsof38CompanyDrive-Ins.OftheCompanyDrive-Insrefranchisedinfiscalyear2016,29werecompletedaspartoftherefranchisinginitiativeannouncedinJune2016.TheCompanyretainedanon-controllingminorityinvestmentinthefranchiseoperationsof25oftheserefranchiseddrive-ins. Duringfiscalyear2017,theCompanycompletedtransactionstorefranchisetheoperationsof110CompanyDrive-Insandretainedanon-controllingminorityinvestmentin106oftheserefranchiseddrive-ins.TheCompanycompletedtherefranchisinginitiativeinthesecondquarteroffiscalyear2017.AllsubsequentsalesofCompanyDrive-Insareconsiderednormalcourseofbusiness. Incomefromminorityinvestmentsisincludedinotherrevenueontheconsolidatedstatementsofincome.Thegainsandlossesbelowassociatedwithrefranchiseddrive-insarerecordedinotheroperatingincome,net,ontheconsolidatedstatementofincome.Thefollowingisasummaryofthepretaxactivityrecordedasaresultoftherefranchisinginitiative(inthousands,exceptnumberofrefranchisedCompanyDrive-Ins):

FiscalYearEnded August31,($inthousands) 2017 2016NumberofrefranchisedCompanyDrive-Ins 110 29ProceedsfromsalesofCompanyDrive-Ins $ 20,036 $ 3,568Proceedsfromsaleofrealestate(1) 11,726 –Realestateassetssold(1) (12,095) (2,402)Assetssold,netofretainedminorityinvestment(2) (7,891) –Initialandsubsequentleasepaymentsforrealestateoption(1) (3,178) –GoodwillrelatedtosalesofCompanyDrive-Ins (966) (194)Deferredgainforrealestateoption(3) (809) –Lossonassetsheldforsale (65) –Refranchisinginitiativegains,net $ 6,758 $ 972

(1) Duringthefirstquarteroffiscalyear2017,aspartofa53drive-inrefranchisingtransaction,theCompanyenteredintoadirectfinancingleasewhichincludedanoptionforthefranchiseetopurchasetherealestatewithinthenext24months.Inaccordancewithleaseaccountingrequirements,becausetheexerciseofthisoptioncouldoccuratanytimewithin24months,theportionof

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theproceedsfromtherefranchisingattributabletothefairvalueoftheoptionwasappliedastheinitialminimumleasepaymentfortherealestate.Thefranchiseeexercisedtheoptioninthelastsixmonthsofthefiscalyear.Untiltheoptionwasfullyexercised,thefranchiseemademonthlyleasepaymentswhichareincludedinotheroperatingincome,netofsub-leaseexpense.

(2) Netassetssoldconsistedprimarilyofequipment.(3) Thedeferredgainof$0.8millionisrecordedinothernon-currentliabilitiesasaresultofarealestatepurchaseoptionextended

tothefranchiseeinthesecondquarteroffiscalyear2017.ThedeferredgainwillcontinuetobeamortizedintoincomethroughJanuary2020whentheoptionbecomesexercisable.

ThefollowingtableprovidesinformationregardingthenumberofCompanyDrive-InsandFranchiseDrive-Insoperatingasoftheendoftheyearsindicatedaswellasthesystemchangeinsalesandaverageunitvolume.SysteminformationincludesbothCompanyDrive-InandFranchiseDrive-Ininformation,whichwebelieveisusefulinanalyzingthegrowthofthebrandaswellastheCompany’srevenues,sincefranchiseespayroyaltiesbasedonapercentageofsales.

SystemPerformance FiscalYearEndedAugust31,($inthousands) 2017 2016 2015Increase(decrease)intotalsales (2.4)% 3.5% 8.3%Systemdrive-insinoperation(1): Totalatbeginningofyear 3,557 3,526 3,518 Opened 66 53 41 Closed(netofre-openings) (30) (22) (33) Totalatendofyear 3,593 3,557 3,526Averagesalesperdrive-in $ 1,250 $ 1,284 $ 1,244Changeinsame-storesales(2) (3.3)% 2.6% 7.3%

(1) Drive-insthataretemporarilyclosedforvariousreasons(repairs,remodeling,relocations,etc.)arenotconsideredclosedunlesstheCompanydeterminesthattheyareunlikelytoreopenwithinareasonabletime.

(2) Representspercentagechangefordrive-insopenforaminimumof15months.

ResultsofOperations Revenues.Thefollowingtablesetsforththecomponentsofrevenueforthereportedperiodsandtherelativechangebetweenthecomparableperiods.

Revenues Percent FiscalYearEndedAugust31, Increase Increase($inthousands) 2017 2016 (Decrease) (Decrease)CompanyDrive-Insales $ 296,101 $ 425,795 $ (129,694) (30.5)%FranchiseDrive-Ins: Franchiseroyalties 169,344 168,691 653 0.4% Franchisefees 1,183 1,628 (445) (27.3)% Leaserevenue 7,436 7,459 (23) (0.3)%Other 3,203 2,747 456 16.6% Totalrevenues $ 477,267 $ 606,320 $ (129,053) (21.3)%

Revenues Percent FiscalYearEndedAugust31, Increase Increase($inthousands) 2016 2015 (Decrease) (Decrease)CompanyDrive-Insales $ 425,795 $ 436,031 $ (10,236) (2.3)%FranchiseDrive-Ins: Franchiseroyalties 168,691 158,813 9,878 6.2% Franchisefees 1,628 2,529 (901) (35.6)% Leaserevenue 7,459 5,583 1,876 33.6%Other 2,747 3,133 (386) (12.3)% Totalrevenues $ 606,320 $ 606,089 $ 231 0.0%

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Thefollowingtablereflectsthechangesinsalesandsame-storesalesatCompanyDrive-Ins.ItalsopresentsinformationaboutaverageunitvolumesandthenumberofCompanyDrive-Ins,whichisusefulinanalyzingthegrowthofCompanyDrive-Insales.

CompanyDrive-InSales FiscalYearEndedAugust31,($inthousands) 2017 2016 2015CompanyDrive-Insales $ 296,101 $ 425,795 $ 436,031Percentageincrease(decrease) (30.5)% (2.3)% 7.6%CompanyDrive-Insinoperation(1): Totalatbeginningofyear 345 387 391 Opened 3 1 3 Soldtofranchisees (117) (38) (6) Closed(netofre-openings) (3) (5) (1) Totalatendofyear 228 345 387AveragesalesperCompanyDrive-In $ 1,134 $ 1,142 $ 1,116Changeinsame-storesales(2) (4.7)% 1.7% 6.9%


(2) Representspercentagechangefordrive-insopenforaminimumof15months.

Same-storesalesforCompanyDrive-Insdecreased4.7%forfiscalyear2017andincreased1.7%forfiscalyear2016.Thedecreaseinfiscalyear2017reflectsadecreaseintrafficduetosluggishconsumerspendingintherestaurantindustryandaggressivecompetitiveactivity.CompanyDrive-Insalesdecreased$129.7million,or30.5%,duringfiscalyear2017comparedtofiscalyear2016.Thechangewasdrivenbya$113.8milliondecreaserelatedtodrive-insthatwererefranchisedduringthefiscalyearandadecreaseof$14.3millioninsame-storesales. Forfiscalyear2016,CompanyDrive-Insalesdecreased$10.2million,or2.3%,ascomparedto2015.Thechangewasdrivenbya$17.3milliondecreaserelatedtodrive-insthatwererefranchisedduringthefiscalyear,partiallyoffsetbyanincreaseof$7.3millioninsame-storesales. Thefollowingtablereflectsthechangeinfranchisesales,thenumberofFranchiseDrive-Ins,averageunitvolumesandfranchisingrevenues.WhilewedonotrecordFranchiseDrive-Insalesasrevenues,webelievethisinformationisimportantinunderstandingourfinancialperformancesincethesesalesarethebasisonwhichwecalculateandrecordfranchiseroyalties.Thisinformationisalsoindicativeofthefinancialhealthofourfranchisees.

FranchiseInformation FiscalYearEndedAugust31,($inthousands) 2017 2016 2015FranchiseDrive-Insales $ 4,112,062 $4,092,303 $ 3,931,365Percentageincrease 0.5% 4.1% 8.4%FranchiseDrive-Insinoperation(1): Totalatbeginningofyear 3,212 3,139 3,127 Opened 63 52 38 AcquiredfromtheCompany 117 38 6 Closed(netofre-openings) (27) (17) (32) Totalatendofyear 3,365 3,212 3,139AveragesalesperFranchiseDrive-In $ 1,260 $ 1,301 $ 1,261Changeinsame-storesales(2) (3.2)% 2.7% 7.3%Franchisingrevenues(3) $ 177,963 $ 177,778 $ 166,925Percentageincrease 0.1% 6.5% 17.0%Effectiveroyaltyrate(4) 4.12% 4.12% 4.04%


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(2) Representspercentagechangefordrive-insopenforaminimumof15months.(3) Consistsofrevenuesderivedfromfranchisingactivities,includingroyalties,franchisefeesandleaserevenues.SeeRevenue

RecognitionintheCriticalAccountingPoliciesandEstimatessection.(4) RepresentsfranchiseroyaltiesasapercentageofFranchiseDrive-Insales.

Same-storesalesforFranchiseDrive-Insdecreased3.2%forfiscalyear2017andincreased2.7%forfiscalyear2016.Thecurrentfiscalyearreflectsadecreaseintrafficduetosluggishconsumerspendingintherestaurantindustryandaggressivecompetitiveactivity.Franchisingrevenuesincreased$0.2million,or0.1%,forfiscalyear2017comparedtofiscalyear2016,reflectinganincreaseinroyaltiesrelatedtofranchiseeacquisitionsofCompanyDrive-Ins,aswellasnetnewunitgrowth,offsetbythedeclineinroyaltiesrelatedtosame-storesales.Thesefactorsalsoimpactedtheeffectiveroyaltyratecomparedtofiscalyear2016.Leaserevenueswereflatcomparedtotheprioryear. Franchisingrevenuesincreased$10.9million,or6.5%,forfiscalyear2016comparedtofiscalyear2015,reflectinganincreaseinroyaltiesrelatedtopositivesame-storesalesatFranchiseDrive-InsaswellasnetnewunitgrowthandfranchiseeacquisitionsofCompanyDrive-Ins.Thesefactorsalsoimpactedtheincreaseintheeffectiveroyaltyratecomparedtofiscalyear2015.Leaserevenuesincreasedcomparedtotheprioryearduetoanincreaseinsame-storesalesandtheadditionofnewleases. Otherrevenuesincreased$0.5millionto$3.2millioninfiscalyear2017anddecreased$0.4millionto$2.7millioninfiscalyear2016ascomparedtotheprioryear.Theincreaseinfiscalyear2017wasprimarilyduetoincreasedminorityincome,drivenbynewinvestmentsinfranchiseoperationsrelatedtorefranchisedCompanyDrive-Ins,partiallyoffsetbythesaleofcertainminorityinvestmentsthatoccurredinthefirstquarteroffiscalyear2017.Thedecreasein2016wasprimarilyduetoadecreaseinminorityincomefrominvestmentsinfranchiseoperations. OperatingExpenses.Thefollowingtablepresentstheoverallcostsofdrive-inoperationsasapercentageofCompanyDrive-Insales.Otheroperatingexpensesincludedirectoperatingcostssuchasmarketing,telephoneandutilities,repairandmaintenance,rent,propertytaxandothercontrollableexpenses.

Percentage CompanyDrive-InMargins Points FiscalYearEndedAugust31, Increase 2017 2016 (Decrease)Costsandexpenses: CompanyDrive-Ins: Foodandpackaging 27.3% 27.7% (0.4)% Payrollandotheremployeebenefits 36.3% 35.3% 1.0% Otheroperatingexpenses 20.8% 20.8% 0.0% CostofCompanyDrive-Insales 84.4% 83.8% 0.6%

Percentage CompanyDrive-InMargins Points FiscalYearEndedAugust31, Increase 2016 2015 (Decrease)Costsandexpenses: CompanyDrive-Ins: Foodandpackaging 27.7% 27.9% (0.2)% Payrollandotheremployeebenefits 35.3% 34.8% 0.5% Otheroperatingexpenses 20.8% 20.8% 0.0% CostofCompanyDrive-Insales 83.8% 83.5% 0.3%

Drive-in level margins were unfavorable by 60 basis points during fiscal year 2017. Food and packaging costs werefavorableby40basispoints,whichreflectedafavorablecommoditycostenvironment.Payrollandotheremployeebenefitswereunfavorableby100basispointsreflectingthede-leveragingimpactofsame-storesalesandrisinglaborcosts,partiallyoffsetbylowervariablecompensation.Otheroperatingexpenseswereflatasaresultofthede-leveragingimpactofsame-storesales,offsetbythebenefitofrefranchisinglower-marginCompanyDrive-Ins.

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Drive-inlevelmarginswereunfavorableby30basispointsduringfiscalyear2016.Foodandpackagingcostswerefavorableby20basispoints,whichreflectedfavorablecommoditycostsoffsetbytheimpactofvendorcontributionsthatwerepreviouslycreditedagainstfoodandpapercostsforCompanyDrive-InsbutthatarenowbeingremittedtotheBrandTechnologyFund(“BTF”),whichwasestablishedinthethirdquarteroffiscalyear2016andadministerscybersecurityandothertechnologyprogramsfortheSonicsystem.Payrollandotheremployeebenefitswereunfavorableby50basispointsreflectinginvestmentsinimprovedemployeecompensationandbenefitstoattractandretainemployeesatthedrive-inlevel.OtheroperatingexpenseswereflatasaresultofleveragefromsalesgrowthoffsetbytheimpactofthefeespaidtothenewBTF. Selling,GeneralandAdministrative(“SG&A”). SG&Aexpensesdecreased4.1%to$78.7millionforfiscalyear2017ascomparedtofiscalyear2016,andincreased3.5%to$82.1millionduringfiscalyear2016ascomparedtofiscalyear2015.Thedecreaseforfiscalyear2017isprimarilyrelatedtolowervariablecompensationrelatedtooperatingperformance.TheincreaseinSG&Aexpenseforfiscalyear2016wasprimarilyrelatedtothecostsofadditionalheadcountinsupportoftheCompany’stechnologyandmarketinginitiatives. DepreciationandAmortization.Depreciationandamortizationexpensedecreased11.6%to$39.2millioninfiscalyear2017and3.2%to$44.4millioninfiscalyear2016.Thedecreasesduringfiscalyears2017and2016wereprimarilyattributabletoassetsthatfullydepreciatedinthepriorfiscalyearandadecreaseinCompanyassetsrelatedtotherefranchisingof110CompanyDrive-Ins. ProvisionforImpairmentofLong-LivedAssets.Provisionforimpairmentoflong-livedassetsincreased$0.9millionto$1.1millioninfiscalyear2017comparedto$0.2millionforfiscalyear2016and$1.4millionfor2015.Theincreasesinfiscalyear2017andinfiscalyear2015wereprimarilytheresultofimpairmentchargesforthewrite-offofassetsassociatedwithsomelowerperformingdrive-ins. OtherOperatingIncomeandExpense,Net.Fiscalyear2017reflected$15.0millioninotheroperatingincomecomparedto$4.7millionforfiscalyear2016and$0.9millionforfiscalyear2015.The$10.3millionchangeforfiscalyear2017wasprimarilytheresultofthenetrefranchisinggainsof$6.8million,againonsaleofrealestateof$4.7millionandagainonthesaleofminorityinvestmentsinfranchiseoperationsof$3.8million,partiallyoffsetby$1.8millioninseverancecostsrelatedtotheeliminationofcertaincorporatepositions.Thegaininfiscalyear2016wasprimarilytheresultofa$1.8milliongainrelatedtotherefranchisingofCompanyDrive-Insduringthefiscalyearaswellasagainof$1.9millionrelatedtothesaleofrealestate. NetInterestExpense.Netinterestexpensedecreased$7.1millioninfiscalyear2017comparedtoanincreaseof$10.2millioninfiscalyear2016andadecreaseof$0.2millioninfiscalyear2015.Thedecreaseinfiscalyear2017isdrivenbythe$8.8millionlossfromtheearlyextinguishmentofdebtrelatedtoourdebttransactioncompletedinthethirdquarteroffiscalyear2016andtherelatedincreaseinourlong-termdebtbalance.See“LiquidityandSourcesofCapital”and“QuantitativeandQualitativeDisclosuresAboutMarketRisk”belowforadditionalinformationonfactorsthatcouldimpactinterestexpense. IncomeTaxes.Theprovisionforincometaxesreflectsaneffectivetaxrateof33.3%forfiscalyear2017comparedwith30.7%forfiscalyear2016and29.7%forfiscalyear2015.Theeffectiveincometaxrateforfiscalyear2017wasfavorablyimpactedbytherecognitionofexcesstaxbenefitsrelatedtostockoptionexercisesduetotheearlyadoptionofAccountingStandardsUpdate(“ASU”)No.2016-09inthefirstquarterof2017.Pleaserefertothe“NewAccountingPronouncements”sectionofnote1-SummaryofSignificantAccountingPolicies,includedintheNotestoConsolidatedFinancialStatementsfordetailsregardingtheadoptionofASUNo.2016-09.Thelowereffectiveincometaxrateforfiscalyear2016wasprimarilyattributabletotherecognitionoftaxbenefitsrelatedtoachangeinuncertaintaxpositionsfromprioryearsandlegislationthatreinstatedandextendedtheWorkOpportunityTaxCredit(“WOTC”).Thelowereffectiveincometaxrateforfiscalyear2015wasprimarilyattributabletotherecognitionofprioryears’federaltaxdeductions,adecreaseinthevaluationallowanceforthedeferredtaxassetrelatedtostatenetoperatinglossesandlegislationthatreinstatedandextendedtheWOTC.Excludingthenonrecurringtaxbenefitsinfiscalyears2016and2015,theeffectivetaxrateswouldhavebeen34.7%and35.1%forfiscalyears2016and2015,respectively.Ourtaxratemaycontinuetovarysignificantlyfromquartertoquarterdependingonthetimingofstockoptionexercisesanddispositionsbyoptionholdersandascircumstancesonothertaxmatterschange. Non-GAAPAdjustments.Excludingthenon-GAAPadjustmentsfurtherdescribedbelow,netincomeperdilutedsharewas$1.25forfiscalyear2017,comparedto$1.29perdilutedshareinfiscalyear2016.

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Thefollowinganalysisofnon-GAAPadjustmentsisintendedtosupplementthepresentationoftheCompany’sfinancialresultsinaccordancewithGAAP.Webelievetheexclusionoftheseitemsinevaluatingthechangeinnetincomeanddilutedearningspersharefortheperiodsbelowprovidesusefulinformationtoinvestorsandmanagementregardingtheunderlyingbusinesstrendsandtheperformanceofourongoingoperationsandishelpfulforperiod-to-periodandcompany-to-companycomparisons,whichmanagementbelieveswillassistinvestorsinanalyzingthefinancialresultsfortheCompanyandpredictingfutureperformance.Numbersbelowarestatedinthousands,exceptpershareamounts.

FiscalYearEnded FiscalYearEnded August31,2017 August31,2016 Net Diluted Net Diluted Income EPS Income EPSReported–GAAP $ 63,663 $ 1.45 $ 64,067 $ 1.29 Netgainonrefranchisingtransactions(1) (6,758) (0.15) (972) (0.02) Taximpactonrefranchisingtransactions(2) 2,542 0.06 317 0.00 Gainonsaleofinvestmentinrefranchiseddrive-inoperations(3) (3,795) (0.09) – – Taximpactonsaleofinvestmentinrefranchiseddrive-inoperations(4) 1,350 0.03 – – Restructuringcharges(5) 1,819 0.04 – – Taximpactofrestructuringcharges(6) (672) (0.02) – – Gainonsaleofrealestate (4,702) (0.11) (1,875) (0.04) Taximpactonrealestatesale(7) 1,738 0.04 664 0.01 FIN48releaseofincometaxcreditsanddeductions – – (3,038) (0.06) Lossfromearlyextinguishmentofdebt – – 8,750 0.18 Taximpactondebtextinguishment(8) – – (3,027) (0.06) RetroactivebenefitofWorkOpportunityTaxCredit andresolutionoftaxmatters – – (585) (0.01)Adjusted-Non-GAAP $ 55,185 $ 1.25 $ 64,301 $ 1.29

(1) Duringthefirstquarteroffiscalyear2017,wecompletedtwotransactionstorefranchisetheoperationsof56CompanyDrive-Ins.Oftheproceeds,$3.8millionwasappliedastheinitialleasepaymentforanoptiontopurchasetherealestatewithin24months.Thefranchiseeexercisedtheoptioninthelastsixmonthsofthefiscalyear.Untiltheoptionwasfullyexercised,thefranchiseemademonthlyleasepaymentswhichtotaled$0.8millionforthefiscalyear-to-date,netofsub-leaseexpense.Duringthesecondquarteroffiscalyear2017,wecompletedtransactionstorefranchisetheoperationsof54CompanyDrive-Ins,oneofwhichresultedinagainof$7.8millionandanotherinalossof$1.4million.Thelosstransactionreflectsadeferredgainof$0.8millionasaresultofarealestatepurchaseoptionextendedtothefranchisee.ThedeferredgainisbeingamortizedintoincomethroughJanuary2020whentheoptionbecomesexercisable.

(2) Combinedtaximpactataneffectivetaxrateof35.6%duringthefirstquarteroffiscalyear2017andatadjustedeffectivetaxratesof36.0%,48.7%and37.0%duringthesecond,thirdandfourthquartersoffiscalyear2017,respectively;taximpactduringfiscalyear2016atanadjustedeffectivetaxrateof32.6%.

(3) Gainonsaleofinvestmentinrefranchiseddrive-inoperationsisrelatedtominorityinvestmentsinfranchiseoperationsretainedaspartofarefranchisingtransactionthatoccurredinfiscalyear2009.Incomefromminorityinvestmentsisincludedinotherrevenueontheconsolidatedstatementsofincome.

(4) Taximpactduringtheperiodataneffectivetaxrateof35.6%.(5) Duringthefourthquarteroffiscalyear2017,theCompanyincurredseverancecostsrelatedtotheeliminationofcertain

corporatepositions.(6) Taximpactduringtheperiodatanadjustedeffectivetaxrateof37.0%.(7) Taximpactduringfiscalyear2017atanadjustedeffectivetaxrateof37.0%;taximpactduringfiscalyear2016atanadjusted

effectivetaxrateof35.4%.(8) Taximpactduringtheperiodataneffectivetaxrateof34.6%.

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FiscalYearEnded FiscalYearEnded August31,2016 August31,2015 Net Diluted Net Diluted Income EPS Income EPSReported–GAAP $ 64,067 $ 1.29 $ 64,485 $ 1.20 NetgainonsaleofCompanyDrive-Ins (972) (0.02) – – TaximpactonCompanyDrive-Inssale(1) 317 0.00 – – FIN48releaseofincometaxcreditsanddeductions (3,038) (0.06) – – Lossfromearlyextinguishmentofdebt 8,750 0.18 – – Taximpactondebtextinguishment(2) (3,027) (0.06) – – Gainonsaleofrealestate (1,875) (0.04) – – Taximpactonrealestatesale(3) 664 0.01 – – RetroactivebenefitofWorkOpportunityTaxCredit andresolutionoftaxmatters (585) (0.01) (666) (0.01) Federaltaxbenefitofprior-yearstatutorytaxdeduction – – (3,199) (0.06) Changeindeferredtaxvaluationallowance – – (1,701) (0.04) Retroactiveeffectoffederaltaxlawchange – – 612 0.01Adjusted-Non-GAAP $ 64,301 $ 1.29 $ 59,531 $ 1.10

(1) Taximpactduringtheperiodatanadjustedeffectivetaxrateof32.6%.(2) Taximpactduringtheperiodataneffectivetaxrateof34.6%.(3) Taximpactduringtheperiodatanadjustedeffectivetaxrateof35.4%.FinancialPosition Totalassetsdecreased$86.9million,or13.4%,to$561.7millionduringfiscalyear2017from$648.7millionattheendoffiscalyear2016.Thedecreaseduringtheyearwasdrivenbyadecreaseinnetproperty,equipmentandcapitalleasesof$80.0million,primarilyrelatedtorefranchisingtransactionsandtherelateddepreciation,aswellasrealestatesoldduringthefiscalyear.Thesewerepartiallyoffsetbypurchasesofproperty,equipmentandtechnology. Totalliabilitiesincreased$39.2million,or5.4%,to$763.5millionduringfiscalyear2017from$724.3millionattheendoffiscalyear2016.Theincreasewasprimarilyattributabletothe$60.0millionbalancefromborrowingontheCompany’sSeries2016-1SeniorSecuredVariableFundingNotes,ClassA-1(the“2016VariableFundingNotes”).Thiswaspartiallyoffsetbyadecreaseof$7.1millioninaccruedliabilities,whichismainlyrelatedtopaymentofwagesandincentivecompensationandothertaxliabilitiesthatwereaccruedasofAugust31,2016,aswellaslowerincentivecompensationaccrualsatAugust31,2017relatedtooperatingperformance.Additionally,therewasadecreaseof$5.2millioninaccountspayable,primarilyrelatedtothetimingofpaymentsanddrive-insthatwereunderconstructionasofAugust31,2016. Totalstockholders’deficitincreased$126.1million,or166.7%,toadeficitof$201.8millionduringfiscalyear2017from$75.6millionattheendoffiscalyear2016.Thisincreasewasprimarilyattributableto$172.9millioninpurchasesofcommonstockunderourstockrepurchaseprogramandthepaymentof$24.1millionindividends,partiallyoffsetbycurrent-yearearningsof$63.6million.

LiquidityandSourcesofCapital OperatingCashFlows.Netcashprovidedbyoperatingactivitiesdecreased$41.3millionto$74.9millionforfiscalyear2017ascomparedto$116.2millioninfiscalyear2016.Thechangewasdrivenbyadecreaseof$19.5millioninnetincomeexcludingthenon-cashitemsforgainondispositionofassetsandlossfromearlyextinguishmentofdebt.Operatingcashflowwasalsoimpactedbythetimingofpaymentsforoperational,payrollandtaxtransactions,aswellashigherincentivecompensationpaidinfiscalyear2017comparedtotheprioryear. InvestingCashFlows.Cashprovidedbyinvestingactivitieswas$60.5millionforfiscalyear2017comparedtocashusedininvestingactivitiesof$34.1millionforfiscalyear2016.Theincreaseincashprovidedbyinvestingactivitieswasdrivenbyanincreaseof$75.5millioninproceedsfromthesaleofassets.Wereceived$41.3millioninproceedsfromthesaleofrealestaterelatedtopreviousrefranchisingtransactionsand$31.8millioninproceedsforstoreoperationsandrealestatesoldtofranchiseesaspartofthecurrentrefranchisinginitiative.Additionally,wereceived$8.4millioninproceedsfromthesaleofaminorityinvestmentrelatedtopreviousrefranchisingtransactions.Theincreaseinothercashflowsfrominvestingreflects$4.9millionfromfranchiseesonshort-termfinancingnotesand$2.5millioninrepaymentofnotesextendedinfiscalyear2016

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relatedtotheestablishmentoftheBrandTechnologyFund.Investmentsinpropertyandequipmentcomparedtothesameperiodlastyearsawanincreaseinadditionstorebuilds,relocationsandremodelsofexistingdrive-insandnewlyconstructeddrive-ins,offsetbyadeclineincashusedforthepurchaseandreplacementofequipmentandtechnology.

Brandtechnologyinvestments $ 16.9Rebuilds,relocationsandremodelsofexistingdrive-ins 15.3Newlyconstructeddrive-insleasedorsoldtofranchisees 5.9Purchaseandreplacementofequipmentandtechnology 4.8NewlyconstructedCompanyDrive-Ins 3.6 Totalinvestmentsinpropertyandequipment $ 46.5

FinancingCashFlows.Netcashusedinfinancingactivitiesincreased$147.9millionto$185.1millionforfiscalyear2017ascomparedto$37.2millioninfiscalyear2016.Theprior-yearperiodincludednetborrowingsof$140.9million,offsetbydebtextinguishmentcostsof$18.4millionrelatedtothedebtfinancingtransactionthatoccurredinthethirdquarteroffiscalyear2016,comparedtonetborrowingsof$58.6milliononthe2016VariableFundingNotesinthecurrent-yearperiod.Additionally,purchasesof treasurystock increasedby$21.1millionandrestrictedcash forsecuritizationobligations increased$53.3million.Theincreaseinrestrictedcashincludes$47.0millionofproceedsfromthesaleofsecuritizedassetswhicharesubjecttorestrictionsdescribedbelow.Foradditionalinformationonlong-termdebt,seenote10-Debt,includedintheNotestoConsolidatedFinancialStatementsfortheyearendedAugust31,2017. Duringfiscalyear2013,inaprivatetransaction,varioussubsidiariesofours(the“Co-Issuers”)refinancedandpaid$155.0millionoftheSeries2011SeniorSecuredFixedRateNotes,ClassA-2(the“2011FixedRateNotes”)withtheissuanceof$155.0millionofSeries2013-1SeniorSecuredFixedRateNotes,ClassA-2(the“2013FixedRateNotes”),whichbearinterestat3.75%perannum.The2013FixedRateNoteshaveanexpectedlifeofsevenyears,interestpayablemonthly,noscheduledprincipalamortizationandananticipatedrepaymentdateinJuly2020. OnMay17,2016,inaprivatetransaction,theCo-Issuersissued$425.0millionofSeries2016-1SeniorSecuredFixedRateNotes,ClassA-2(the“2016FixedRateNotes”),whichbearinterestat4.47%perannum.The2016FixedRateNoteshaveanexpectedlifeofsevenyearswithananticipatedrepaymentdateinMay2023. TheCo-Issuersalsoenteredintoasecuritizedfinancingfacilityof2016VariableFundingNotes(togetherwiththe2016FixedRateNotes,the“2016Notes”)toreplacetheSeries2011-1SeniorSecuredVariableFundingNotes,ClassA-1(the“2011VariableFundingNotes”).The2016revolvingcreditfacilityprovidesaccesstoamaximumof$150.0millionof2016VariableFundingNotesandcertainothercreditinstruments,includinglettersofcredit.Interestonthe2016VariableFundingNotesisbasedontheone-monthLondonInterbankOfferedRateorCommercialPaper,dependingonthefundingsource,plus2.0%,perannum.Anannualcommitmentfeeof0.5%ispayablemonthlyontheunusedportionofthe2016VariableFundingNotesfacility.The2016VariableFundingNoteshaveanexpectedlifeoffiveyearswithananticipatedrepaymentdateinMay2021withtwoone-yearextensionoptionsavailableuponcertainconditionsincludingmeetingaminimumdebtservicecoverageratiothreshold. Weusedaportionofthenetproceedsfromtheissuanceofthe2016FixedRateNotestorepayourexisting2011FixedRateNotesand2011VariableFundingNotesinfullandtopaythecostsassociatedwiththesecuritizedfinancingtransaction,includingprepaymentpremiums. AtAugust31,2017,thebalanceoutstandingunderthe2013FixedRateNotesandthe2016FixedRateNotes,includingaccruedinterest,was$155.2millionand$423.0million,respectively.AtAugust31,2017,thebalanceoutstandingunderthe2016VariableFundingNotes,includingaccruedinterest,was$60.1million.Theweighted-averageinterestcostofthe2013FixedRateNotesand2016FixedRateNoteswas4.1%and4.8%,respectively.Theweighted-averageinterestcostofthe2016VariableFundingNoteswas3.2%.Theweighted-averageinterestcostincludestheeffectoftheloanoriginationcosts. Inconnectionwiththe2016transactiondescribedabove,werecognizedan$8.8millionlossfromtheearlyextinguishmentofdebtduringthethirdquarteroffiscalyear2016,whichprimarilyconsistedofa$5.9millionprepaymentpremiumandthe$2.9millionwrite-offofunamortizeddeferredloanfeesremainingfromtherefinanceddebt.Thisisreflectedin“lossfromearlyextinguishmentofdebt”ontheConsolidatedStatementsofIncome.Loanoriginationcostsassociatedwiththe2016transactiontotaled$12.5millionandwereallocatedamongthe2016Notes.Loancostsarebeingamortizedovereachnote’sexpectedlife,andtheunamortizedbalancerelatedtothe2016VariableFundingNotesandthe2016FixedRateNotesisincludedinothercurrentassetsandlong-termdebt,net,respectively,ontheconsolidatedbalancesheets.Foradditionalinformationonour2013FixedRateNotesand2016Notes,seenote10–Debt,includedintheNotestoConsolidatedFinancialStatements.


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InAugust2014,ourBoardofDirectorsextendedoursharerepurchaseprogram,authorizingustopurchaseupto$105.0millionofouroutstandingsharesofcommonstockduringfiscalyear2015.InOctober2014,theCompanyenteredintoanacceleratedsharerepurchase(“ASR”)agreementwithafinancialinstitutiontopurchase$15.0millionoftheCompany’scommonstock.Inexchangefora$15.0millionup-frontpayment,thefinancialinstitutiondeliveredapproximately0.6millionshares.DuringJanuary2015,theASRpurchaseperiodconcluded.TheCompanypaidanadditional$0.1millionwithnoadditionalsharesdelivered,resultinginanaveragepricepershareof$26.32.InFebruary2015,theCompanyenteredintoadditionalASRagreementswithafinancialinstitutiontopurchase$75.0millionoftheCompany’scommonstock.Inexchangefora$75.0millionup-frontpayment,thefinancialinstitutiondeliveredapproximately2.1millionshares.TheASRtransactionscompletedinJuly2015with0.3millionadditionalsharesdelivered,resultinginanaveragepricepershareof$31.38.TheCompanyreflectedtheASRtransactionsasarepurchaseofcommonstockforpurposesofcalculatingearningspershareandasaforwardcontractindexedtoitsowncommonstock.Theforwardcontractmetalloftheapplicablecriteriaforequityclassification. InAugust2015,ourBoardofDirectorsextendedoursharerepurchaseprogram,authorizingustopurchaseupto$145.0millionofouroutstandingsharesofcommonstockthroughAugust31,2016.OurBoardofDirectorsfurtherextendedthesharerepurchaseprogrameffectiveMay2016,authorizingthepurchaseofuptoanadditional$155.0millionofouroutstandingsharesofcommonstockthroughAugust31,2017.Duringfiscalyear2016,approximately5.2millionshareswererepurchasedforatotalcostof$148.3million,resultinginanaveragepricepershareof$28.48. InOctober2016,ourBoardofDirectorsincreasedtheauthorizationunderthesharerepurchaseprogramby$40.0million.During fiscal year2017,approximately6.7millionshareswererepurchased fora totalcostof$172.9million, resulting inanaveragepricepershareof$25.71.InAugust2017,theBoardofDirectorsapprovedanincremental$160.0millionsharerepurchaseauthorizationofouroutstandingsharesofcommonstockthroughAugust31,2018.Thetotalremainingamountauthorizedunderthesharerepurchaseprogram,asofAugust31,2017,was$160.0million. Sharerepurchaseswillbemadefromtimetotimeintheopenmarketorotherwise,includingthroughanASRprogram,underthetermsofaRule10b5-1plan,inprivatelynegotiatedtransactionsorinroundlotorblocktransactions.Thesharerepurchaseprogrammaybeextended,modified,suspendedordiscontinuedatanytime. AsofAugust31,2017,ourtotalcashbalanceof$84.2million($22.3millionofunrestrictedand$61.9millionofrestrictedcashbalances)reflectedtheimpactofthecashgeneratedfromoperatingactivities,refranchisingproceeds,2016VariableFundingNotesborrowingproceeds,cashusedforsharerepurchases,dividends,debtpaymentsandcapitalexpendituresmentionedabove.Therestrictedcashbalanceincludes$47.0millioninproceedsfromthesaleofrealestate.UnderthesecuritizedfinancestructuretheCompanyhas12monthstoreinvesttheseproceedsineligiblecapitalexpenses.Iftheproceedsarenotreinvestedwithinayearallamountsabove$5millionmustbeusedtopaydownthefixed-ratedebtandmayrequireamake-wholepremium.TheCompanymayalsopaydowndebtpriortothat12-monthtimeperiodwhichcouldrequireamake-wholepremium.Themake-wholepremiumcalculationis,ingeneral,basedonthediscountedpresentvalueoftheamountofinterestthatwouldotherwisehavebeenpaidhadtheprepaymentnotbeenmade.Webelievethatexistingcash,fundsgeneratedfromoperationsandtheamountavailableunderour2016VariableFundingNoteswillmeetourneedsfortheforeseeablefuture. InAugust2014,theCompanyinitiatedaquarterlycashdividendprogramandpaidaquarterlydividendof$0.09pershareofcommonstock,totaling$18.8million,forfiscalyear2015andaquarterlydividendof$0.11pershareofcommonstock,totaling$21.3million,forfiscalyear2016.TheCompanypaidaquarterlydividendof$0.14pershareofcommonstock,totaling$24.1million,forfiscalyear2017.Subsequenttotheendoffiscalyear2017,theCompanydeclaredaquarterlydividendof$0.16pershareofcommonstocktobepaidtostockholdersofrecordasofthecloseofbusinessonNovember8,2017,withapaymentdateofNovember17,2017.ThefuturedeclarationofquarterlydividendsandtheestablishmentoffuturerecordandpaymentdatesaresubjecttothefinaldeterminationoftheCompany’sBoardofDirectors.Off-BalanceSheetArrangements TheCompanyhasobligationsforguaranteesoncertainfranchiseeloans,which intheaggregateare immaterial,andobligationsforguaranteesoncertainfranchiseeleaseagreements.Otherthansuchguaranteesandvariousoperatingleasesandpurchaseobligations,whicharedisclosedbelowin“ContractualObligationsandCommitments”andinnote7-Leasesandnote15–CommitmentsandContingencies,includedintheNotestoConsolidatedFinancialStatements,theCompanyhasnoothermaterialoff-balancesheetarrangements.

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ContractualObligationsandCommitments Inthenormalcourseofbusiness,Sonicentersintopurchasecontracts,leaseagreementsandborrowingarrangements.ThefollowingtablepresentsourcommitmentsandobligationsasofAugust31,2017(inthousands):

PaymentsDuebyFiscalYear Morethan Lessthan 1–3 3–5 5Years 1Year Years Years (2023and Total (2018) (2019to2020) (2021to2022) thereafter)Long-termdebt(1) $ 771,970 $ 27,280 $ 208,914 $ 99,609 $ 436,167Capitalleases 24,608 4,706 6,966 5,864 7,072Operatingleases 93,344 8,785 17,403 15,300 51,856Purchaseobligations(2) 151,848 19,185 29,209 31,439 72,015Other(3) 20,435 – – – – Total $1,062,205 $ 59,956 $ 262,492 $ 152,212 $ 567,110

(1) Includesscheduledprincipalandinterestpaymentsonour2016Notesand2013FixedRateNotesandassumesthesenoteswillbeoutstandingfortheexpectedseven-yearlifewithanticipatedrepaymentdatesinJuly2020andMay2023,respectively.

(2) PurchaseobligationsprimarilyrelatetotheCompany’sestimatedshareofsystemcommitmentstopurchasefoodproducts.Wehaveexcludedagreementsthatarecancelablewithoutpenalty.Theseamountsrequireestimatesandcouldvaryduetothetimingofvolumesandchangesinmarketpricing.

(3) Includes$0.6millionofunrecognizedtaxbenefitsrelatedtouncertaintaxpositionsand$19.8millionrelatedtoguaranteesoffranchiseeleasesandloanagreements.Aswearenotabletoreasonablyestimatethetimingoramountofthesepayments,ifany,therelatedbalanceshavenotbeenreflectedinthe“PaymentsDuebyFiscalYear”sectionofthetable.

ImpactofInflation Weare impactedby inflationwhichhascausedincreases inourfood, laborandbenefitscostsandhas increasedouroperatingexpenses.Totheextentpermittedbycompetitionandtheconsumerenvironment,increasedcostsarerecoveredthroughacombinationofmenupriceincreasesandalternativeproducts,efficienciesorprocesses,orbyimplementingothercostreductionprocedures.

CriticalAccountingPoliciesandEstimates TheConsolidatedFinancialStatementsandNotestoConsolidatedFinancialStatementsincludedinthisdocumentcontaininformationthatispertinenttomanagement’sdiscussionandanalysis.Thepreparationoffinancialstatementsinconformitywithgenerallyacceptedaccountingprinciplesrequiresmanagementtouseitsjudgmenttomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilities.Theseassumptionsandestimatescouldhaveamaterialeffectonourfinancialstatements.Weevaluateourassumptionsandestimatesonanongoingbasisusinghistoricalexperienceandvariousotherfactorsthatarebelievedtoberelevantunderthecircumstances.Actualresultsmaydifferfromtheseestimatesunderdifferentassumptionsorconditions. Weperformaperiodicreviewofourfinancialreportinganddisclosurepracticesandaccountingpoliciestoensurethatourfinancialreportinganddisclosuresprovideaccurateandtransparentinformationrelativetothecurrenteconomicandbusinessenvironment.Webelievethefollowingsignificantaccountingpoliciesandestimatesinvolveahighdegreeofrisk,judgmentand/orcomplexity. AccountingforLong-LivedAssets.CompanyDrive-InsareanalyzedquarterlyforimpairmentsinaccordancewithAccountingStandardsCodification(“ASC”)No.360-10.Wecompareanticipatedundiscountedcashflowsfromtherelatedlong-livedassetsofeachdrive-inwiththeirrespectivecarryingvaluestodetermineifthelong-livedassetsarerecoverable.Ifthesumoftheanticipatedundiscountedcashflowsislessthanthecarryingvalue,animpairmentlossisrecognized.Theimpairmentlossismeasuredbycomparingthefairvalueoftheassettoitscarryingvalue.Fairvalueistypicallydeterminedtobethevalueofthelandsincedrive-inbuildingsandimprovementsaresingle-purposeassetsandhavelittlevaluetomarketparticipants.Theequipmentassociatedwithadrive-incantypicallyberelocatedtoanotherdrive-inandthereforeisnotadjusted.Thebasisforourestimatesoffuturecashflowincludecertainassumptionsaboutexpectedfutureoperatingperformance,suchasrevenuegrowthrates,operatingmarginsandotherrelevantfactsandcircumstances.Ourestimatesofcashflowmaydifferfromactual

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cashflowdueto,amongotherthings,economicconditions,changestoourbusinessmodelorchangesinoperatingperformance.Ourestimatesofcashflowrepresentthebestestimateswehaveatthistime,andwebelievetheunderlyingassumptionsarereasonable;however,itispossiblethatourestimatesoffuturecashflowscouldchangeresultingintheneedtoimpaircertainCompanyDrive-Inassets. RevenueRecognition.Foradescriptionofourrevenuerecognitionpolicies,seethe“RevenueRecognition,FranchiseFeesandRoyalties”sectionofnote1-SummaryofSignificantAccountingPolicies,includedintheNotestoConsolidatedFinancialStatements. IncomeTaxes.Weestimatecertaincomponentsofourprovisionforincometaxes.Theseestimatesinclude,amongotheritems,depreciationandamortizationexpenseallowablefortaxpurposes,allowabletaxcreditsforitemssuchaswagespaidtocertainemployees,effectiveratesforstateandlocalincometaxesandthetaxdeductibilityofcertainotheritems. Althoughwebelievewehaveadequatelyaccountedforouruncertaintaxpositions,fromtimetotime,auditsresult inproposedassessmentswheretheultimateresolutionmaygiverisetousowingadditionaltaxes.Weadjustouruncertaintaxpositionsuntiltheyareresolvedinlightofchangingfactsandcircumstances,suchasthecompletionofataxaudit,expirationofastatuteoflimitations,therefinementofanestimateandpenaltyandinterestaccrualsassociatedwithuncertaintaxpositions.Webelievethatourtaxpositionscomplywithapplicabletaxlawandthatwehaveadequatelyprovidedforthesematters.However,totheextentthatthefinaltaxoutcomeofthesemattersisdifferentfromtheamountsrecorded,suchdifferenceswillimpacttheprovisionforincometaxesintheperiodinwhichsuchdeterminationismade. Ourestimatesarebasedonthebestavailableinformationatthetimethatwepreparetheprovision,includinglegislativeandjudicialdevelopments.Wegenerallyfileourannualincometaxreturnsseveralmonthsafterourfiscalyearend.Incometaxreturnsaresubjecttoauditbyfederal,stateandlocalgovernments,typicallyseveralyearsafterthereturnsarefiled.Thesereturnscouldbesubjecttomaterialadjustmentsordifferinginterpretationsofthetaxlaws.Adjustmentstotheseestimatesorreturnscanresultinsignificantvariabilityinthetaxratefromperiodtoperiod.

NewAccountingPronouncements Foradescriptionofnewaccountingpronouncements,seethe“NewAccountingPronouncements”sectionofnote1–SummaryofSignificantAccountingPolicies,includedintheNotestoConsolidatedFinancialStatements.

QuantitativeandQualitativeDisclosuresAboutMarketRisk Sonic’suseofdebtdirectlyexposestheCompanytointerestraterisk.Fixedratedebt,wheretheinterestrateisfixedoverthelifeoftheinstrument,exposestheCompanytochangesinmarketinterestratesreflectedinthefairvalueofthedebtandtotheriskthattheCompanymayneedtorefinancematuringdebtwithnewdebtatahigherrate.Sonicisalsoexposedtomarketriskfromchangesincommodityprices.TheCompanydoesnotutilizefinancialinstrumentsfortradingpurposes.Sonicmanagesitsdebtportfoliotoachieveanoveralldesiredpositionoffixedandfloatingrates. InterestRateRisk. Ourexposureto interestrateriskatAugust31,2017,wasprimarilybasedonthe2013FixedRateNotesand2016FixedRateNoteswithaneffectiverateof3.75%and4.47%,respectively,beforeamortizationofdebt-relatedcosts. Additionally, we have interest rate risk exposure on the 2016 Variable Funding Notes, with interest based on theone-monthLondonInterbankOfferedRateorCommercialPaper,dependingonthefundingsource,plus2.0%,perannum.AtAugust31,2017,thefairvalueofthe2013FixedRateNotesand2016FixedRateNotesapproximatedtheircarryingvalueof$578.2million, includingaccrued interest. AtAugust31,2017, the fair valueof the2016FixedVariableFundingNotesapproximatedtheircarryingvalueof$60.1million.Toderivethefairvalue,managementusedmarketinformationavailableforpublicdebttransactionsforcompanieswithratingsthataresimilartoourratingsandinformationgatheredfrombrokerswhotradeinournotes.Managementbelievesthisfairvalueisareasonableestimate.Shouldinterestratesand/orcreditspreadsincreaseordecreasebyonepercentagepoint,theestimatedfairvalueofthe2013FixedRateNotes,2016FixedRateNotesand2016VariableFundingNoteswoulddecreaseorincreasebyapproximately$29.1million,respectively.Thefairvalueestimaterequiredsignificantassumptionsbymanagement. CommodityPriceRisk.TheCompanyanditsfranchiseespurchasecertaincommoditiessuchasbeef,potatoes,chickenanddairyproducts.Thesecommoditiesaregenerallypurchasedbaseduponmarketpricesestablishedwithvendors.Thesepurchasearrangementsmaycontaincontractualfeaturesthatlimitthepricepaidbyestablishingpricefloorsorcaps;however,wegenerallydonotmakeanylong-termcommitmentstopurchaseanyminimumquantitiesunderthesearrangementsotherthanasdisclosedaboveinunder“ContractualObligationsandCommitments.”Wealsodonotusefinancialinstrumentstohedgecommoditypricesbecausethesepurchasearrangementshelpcontroltheultimatecost. Thismarketriskdiscussioncontainsforward-lookingstatements.Actualresultsmaydiffermateriallyfromthisdiscussionbasedupongeneralmarketconditionsandchangesinfinancialmarkets.

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Consolidated Balance Sheets

August31,(Inthousands,exceptpershareamounts) 2017 2016Assets Currentassets: Cashandcashequivalents $ 22,340 $ 72,092 Restrictedcash 19,736 15,873 Accountsandnotesreceivable,net 33,758 35,437 Inventories 2,343 3,321 Prepaidexpenses 5,455 4,713 Propertyheldforsale 5,150 5,299 Othercurrentassets 402 922 Totalcurrentassets 89,184 137,657Noncurrentrestrictedcash 42,120 140Investmentindirectfinancinglease 11,853 9,859Notesreceivable,net 9,801 12,562Property,equipmentandcapitalleases,net 312,380 392,380Goodwill 75,756 76,734Debtoriginationcosts,net 2,439 3,093Otherassets,net 18,211 16,236 Totalassets $ 561,744 $ 648,661 Liabilitiesandstockholders’equity(deficit) Currentliabilities: Accountspayable $ 9,213 $ 14,372 Franchiseedeposits 1,093 720 Accruedliabilities 44,846 51,913 Incometaxespayable – 2,568 Currentmaturitiesoflong-termdebtandcapitalleases 3,464 5,090 Totalcurrentliabilities 58,616 74,663Obligationsundercapitalleasesdueafteroneyear 16,167 17,391Long-termdebtdueafteroneyear 628,116 566,187Deferredincometaxes 40,101 42,530Othernon-currentliabilities 20,502 23,533Commitmentsandcontingencies(Notes7,8,14,15) Stockholders’deficit: Preferredstock,parvalue$.01;1,000sharesauthorized;noneoutstanding – – Commonstock,parvalue$.01;245,000sharesauthorized;118,309shares issuedin2017andin2016 1,183 1,183 Paid-incapital 236,895 234,956 Retainedearnings 934,017 894,442 Treasurystock,atcost;78,081sharesin2017and71,670sharesin2016 (1,373,853) (1,206,224) Totalstockholders’deficit (201,758) (75,643) Totalliabilitiesandstockholders’deficit $ 561,744 $ 648,661

Theaccompanyingnotesareanintegralpartoftheconsolidatedfinancialstatements.

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Consolidated Statements of Income

FiscalYearEndedAugust31,(Inthousands,exceptpershareamounts) 2017 2016 2015Revenues: CompanyDrive-Insales $ 296,101 $ 425,795 $ 436,031 FranchiseDrive-Ins: Franchiseroyaltiesandfees 170,527 170,319 161,342 Leaserevenue 7,436 7,459 5,583 Other 3,203 2,747 3,133 Totalrevenues 477,267 606,320 606,089

Costsandexpenses: CompanyDrive-Ins: Foodandpackaging 80,971 118,136 121,701 Payrollandotheremployeebenefits 107,477 150,260 151,801 Otheroperatingexpenses,exclusiveof depreciationandamortizationincludedbelow 61,463 88,424 90,436 TotalcostofCompanyDrive-Insales 249,911 356,820 363,938

Selling,generalandadministrative 78,687 82,089 79,336 Depreciationandamortization 39,248 44,418 45,892 Provisionforimpairmentoflong-livedassets 1,140 232 1,440 Otheroperatingincome,net (14,994) (4,691) (945) Totalcostsandexpenses 353,992 478,868 489,661Incomefromoperations 123,275 127,452 116,428

Interestexpense 29,206 26,714 25,114 Interestincome (1,398) (516) (408) Lossfromearlyextinguishmentofdebt – 8,750 – Netinterestexpense 27,808 34,948 24,706 Incomebeforeincometaxes 95,467 92,504 91,722 Provisionforincometaxes 31,804 28,437 27,237Netincome $ 63,663 $ 64,067 $ 64,485

Basicincomepershare $ 1.47 $ 1.32 $ 1.23Dilutedincomepershare $ 1.45 $ 1.29 $ 1.20

Cashdividendsdeclaredpercommonshare $ 0.56 $ 0.44 $ 0.27


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Consolidated Statements of Stockholders’ Equity (Deficit)

Total Common Paid-in RetainedTreasuryStock Stockholders’(Inthousands) Stock Capital Earnings Shares Amount Equity(Deficit)BalanceatAugust31,2014 $ 1,183 $ 225,004 $ 801,202 64,505 $ (964,714) $ 62,675Netincome – - 64,485 – – 64,485Cashdividends – - (13,972) – – (13,972)Stock-basedcompensationexpense – 3,520 – – – 3,520Purchaseoftreasurystock – - – 4,201 (123,786) (123,786)Exerciseofstockoptionsand issuanceofrestrictedstock – (1,458) – (1,438) 20,190 18,732Other – 5,484 – (19) 295 5,779BalanceatAugust31,2015 $ 1,183 $ 232,550 $ 851,715 67,249 $ (1,068,015) $ 17,433Netincome – – 64,067 – – 64,067Cashdividends – – (21,340) – – (21,340)Stock-basedcompensationexpense – 3,766 – – – 3,766Purchaseoftreasurystock – – – 5,209 (148,345) (148,345)Exerciseofstockoptionsand issuanceofrestrictedstock – (5,941) – (767) 9,783 3,842Other – 4,581 – (21) 353 4,934BalanceatAugust31,2016 $ 1,183 $ 234,956 $ 894,442 71,670 $ (1,206,224) $ (75,643)Netincome – – 63,663 – – 63,663Cashdividends – – (24,088) – – (24,088)Stock-basedcompensationexpense – 3,942 – – – 3,942Purchaseoftreasurystock – – – 6,726 (172,913) (172,913)Exerciseofstockoptionsand issuanceofrestrictedstock – (2,203) – (293) 4,885 2,682Other – 200 – (22) 399 599BalanceatAugust31,2017 $1,183 $ 236,895 $ 934,017 78,081 $ (1,373,853) $(201,758)


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Consolidated Statements of Cash Flows

FiscalYearEndedAugust31,(Inthousands) 2017 2016 2015Cashflowsfromoperatingactivities: Netincome $ 63,663 $ 64,067 $ 64,485 Adjustmentstoreconcilenetincome tonetcashprovidedbyoperatingactivities: Depreciationandamortization 39,248 44,418 45,892 Stock-basedcompensationexpense 3,942 3,766 3,520 Lossfromearlyextinguishmentofdebt – 8,750 – Gainondispositionofassets (14,994) (4,691) (945) Other (1,204) 4,961 10,311 (Increase)decreaseinoperatingassets: Restrictedcash 886 (2,829) (61) Accountsreceivableandotherassets 1,918 2,109 2,885 Increase(decrease)inoperatingliabilities: Accountspayable (4,404) 380 (1,288) Accruedandotherliabilities (10,884) 4,520 10,296 Incometaxes (3,299) (9,242) 1,267 Totaladjustments 11,209 52,142 71,877 Netcashprovidedbyoperatingactivities 74,872 116,209 136,362 Cashflowsfrominvestingactivities: Purchasesofpropertyandequipment (46,528) (46,553) (42,153) Proceedsfromsaleofassets 91,741 16,206 13,701 Proceedsfromthesaleofinvestmentsinrefranchiseddrive-inoperations 8,357 – – Other 6,918 (3,713) 3,132 Netcashprovidedby(usedin)investingactivities 60,488 (34,060) (25,320)

Cashflowsfromfinancingactivities: Paymentsondebt (24,416) (422,090) (90,290) Proceedsfromborrowings 83,000 563,000 91,000 Restrictedcashforsecuritizationobligations (46,730) 6,587 151 Purchasesoftreasurystock (171,562) (150,444) (120,463) Proceedsfromexerciseofstockoptions 2,682 3,842 18,732 Paymentofdividends (24,062) (21,309) (18,808) Debtissuanceandextinguishmentcosts (10) (18,420) (12) Other (4,014) 1,586 145 Netcashusedinfinancingactivities (185,112) (37,248) (119,545) Netincrease(decrease)incashandcashequivalents (49,752) 44,901 (8,503)Cashandcashequivalentsatbeginningofyear 72,092 27,191 35,694Cashandcashequivalentsatendofyear $ 22,340 $ 72,092 $ 27,191 Supplementalcashflowinformation Cashpaidduringtheyearfor: Interest $ 27,082 $ 24,883 $ 23,330 Incometaxes(netofrefunds) 37,642 27,821 11,360 Non-cashinvestingandfinancingactivities: Changeinobligationtoacquiretreasurystock 1,350 (2,099) 3,323 Stockoptionsexercisedbystockswap 451 6,396 3,385 AccruedPP&Eatperiodend 1,577 3,471 3,346

Theaccompanyingnotesareanintegralpartoftheconsolidatedfinancialstatements.28

1.SummaryofSignificantAccountingPoliciesOperations SonicCorp.(the“Company”),throughitssubsidiaries,operatesandfranchisesachainofquick-servicerestaurantsintheUnitedStates(“U.S.”).ItderivesitsrevenuesprimarilyfromCompanyDrive-Insalesandroyaltyfeesfromfranchisees.TheCompanyalsoleasesrealestateandreceivesequityearningsinnoncontrollingownershipinanumberofFranchiseDrive-Ins.

PrinciplesofConsolidation TheaccompanyingfinancialstatementsincludetheaccountsoftheCompany,itswhollyownedsubsidiariesandanumberofCompanyDrive-Insinwhichasubsidiaryhasacontrollingownershipinterest.Allintercompanyaccountsandtransactionshavebeeneliminated.

UseofEstimates Thepreparationofconsolidatedfinancialstatements inconformitywithU.S.generallyacceptedaccountingprinciples(“GAAP”)requiresmanagementtomakeestimatesandassumptionsthataffecttheamountsreportedandcontingentassetsandliabilitiesdisclosedinthefinancialstatementsandaccompanyingnotes.Actualresultsmaydifferfromthoseestimates,andsuchdifferencesmaybematerialtothefinancialstatements.

Reclassifications Certainamountsreportedinpreviousyears,whicharenotmaterial,havebeencombinedandreclassifiedtoconformtothecurrent-yearpresentation.

SegmentReporting InaccordancewithAccountingStandardsUpdate(“ASU”)No.280,“SegmentReporting,”theCompanyusesthemanagementapproachfordeterminingitsreportablesegments.Themanagementapproachisbaseduponthewaythatmanagementreviewsperformanceandallocatesresources. TheCompany’schiefoperatingdecisionmakerandhismanagement teamreviewoperatingresultsonaconsolidatedbasisforpurposesofallocatingresourcesandevaluatingthefinancialperformanceoftheSonicbrand.Accordingly,theCompanyhasdeterminedthatithasoneoperatingsegmentand,therefore,onereportingsegment.

CashEquivalents Cashequivalentsconsistofhighlyliquidinvestments,primarilymoneymarketaccountsthatmatureinthreemonthsorlessfromthedateofpurchase,anddepositoryaccounts.

RestrictedCash AsofAugust31,2017,theCompanyhadrestrictedcashbalancestotaling$61.9millionforfundsrequiredtobeheldintrustforthebenefitofseniornoteholdersundertheCompany’sdebtarrangements.Thecurrentportionofrestrictedcashof$19.7millionrepresentsamountstobereturnedtotheCompanyorpaidtoservicecurrentdebtobligations,including$5.0millioninproceedsfromthesaleofsecuritizedrealestate.Thenoncurrentportionof$42.1millionrepresents$42.0millioninproceedsfromthesaleofsecuritizedrealestate,aswellasinterestreservesrequiredtobesetasideforthedurationofthedebt.UndertheCompany’ssecuritizedfinancestructure,theCompanyhas12monthstoreinvesttheseproceedsineligiblecapitalexpenses.Iftheproceedsarenotreinvestedwithinayearallamountsabove$5millionmustbeusedtopaydownthefixed-ratedebtandmayrequireamake-wholepremium.TheCompanymayalsopaydowndebtpriortothat12-monthtimeperiodwhichcouldrequireamake-wholepremium.Themake-wholepremiumcalculationis,ingeneral,basedonthediscountedpresentvalueoftheamountofinterestthatwouldotherwisehavebeenpaidhadtheprepaymentnotbeenmade.

AccountsandNotesReceivable TheCompanychargesinterestonpastdueaccountsreceivableandrecognizesincomeasitiscollected.Interestaccruesonnotesreceivablebasedonthecontractualtermsoftherespectivenote.TheCompanymonitorsallaccountsandnotesreceivablefordelinquencyandprovidesforestimatedlossesforspecificreceivablesthatarenotlikelytobecollected. TheCompanyassessescreditriskforaccountsandnotesreceivableofspecificfranchiseesbasedonpaymenthistory,currentpaymentpatterns,thehealthofthefranchisee’sbusinessandanassessmentofthefranchisee’sabilitytopayoutstandingbalances.Inadditiontoallowancesforbaddebtforspecificfranchiseereceivables,ageneralprovisionforbaddebtisestimatedfortheCompany’saccountsreceivablebasedonhistoricaltrends.AccountbalancesgenerallyarechargedagainsttheallowancewhentheCompanybelievesthatthecollectionisnolongerreasonablyassured.TheCompanycontinuallyreviewsitsallowancefordoubtfulaccounts.

Notes to Consolidated Financial StatementsAugust 31, 2017, 2016 and 2015 (In thousands, except per share data)

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Inventories Inventoriesconsistprincipallyoffoodandsuppliesthatarecarriedatthelowerofcost(first-in,first-outbasis)ormarket.

Property,EquipmentandCapitalLeases Propertyandequipmentarerecordedatcost,andleasedassetsundercapitalleasesarerecordedatthepresentvalueoffutureminimumleasepayments.Depreciationofpropertyandequipmentandamortizationofcapitalleasesarecomputedbythestraight-linemethodovertheestimatedusefullivesortheleaseterm,includingcancelableoptionperiodswhenappropriate,andarecombinedforpresentationinthefinancialstatements.

AccountingforLong-LivedAssets TheCompanyreviewslong-livedassetsquarterlyorwheneverchangesincircumstancesindicatethatthecarryingamountofanassetmightnotberecoverable.Assetsaregroupedandevaluatedforimpairmentatthelowestlevelforwhichthereareidentifiablecashflowsthatarelargelyindependentofthecashflowsofothergroupsofassets,whichgenerallyrepresentstheindividualdrive-in.Earningsbeforeinterest,taxesanddepreciation(“EBITDA”)isthecashflowmeasuremonitoredatthedrive-inlevelforindicatorsofimpairment.Asthecashflowmeasurereacheslevelstoindicatepotentialimpairment,theCompanyestimatesthefuturecashflowsexpectedtobegeneratedfromtheuseoftheassetanditseventualdisposal.Ifthesumofundiscountedfuturecashflowsislessthanthecarryingamountoftheasset,animpairmentlossisrecognized.Theimpairmentlossismeasuredbycomparingthefairvalueoftheassettoitscarryingamount.Fairvalueistypicallydeterminedtobethevalueofthelandsincedrive-inbuildingsandimprovementsaresingle-purposeassetsandhavelittlevaluetomarketparticipants.Theequipmentassociatedwithadrive-incanbeeasilyrelocatedtoanotherdrive-inandthereforeisnotadjusted. Surpluspropertyassetsarecarriedatthelowerofdepreciatedcostorfairvaluelesscosttosell.Themajorityofthevalueinsurpluspropertyisland.Fairvaluesareestimatedbaseduponmanagement’sassessmentaswellasindependentmarketvalueassessmentsoftheassets’estimatedsalesvalues.

GoodwillandOtherIntangibleAssets Goodwillisdeterminedbasedonanacquisitionpurchasepriceinexcessofthefairvalueofidentifiedassets.Intangibleassetswithlivesrestrictedbycontractual,legalorothermeansareamortizedovertheirusefullives.TheCompanytestsgoodwillatleastannuallyforimpairmentusingthefairvalueapproachonareportingunitbasis. SincetheCompanyisonereportingunit,potentialgoodwillimpairmentisevaluatedbycomparingthefairvalueoftheCompanytoitscarryingvalue.ThefairvalueoftheCompanyisdeterminedusingamarketapproach.IfthecarryingvalueoftheCompanyexceedsfairvalue,acomparisonofthefairvalueofgoodwillagainstthecarryingvalueofgoodwillismadetodeterminewhethergoodwillhasbeenimpaired.Duringthefourthquartersoffiscalyears2017and2016,theannualassessmentoftherecoverabilityofgoodwillwasperformed,andnoimpairmentwasindicated. TheCompany’sintangibleassetssubjecttoamortizationconsistprimarilyofacquiredfranchiseagreements,intellectualpropertyandotherintangibles.Amortizationexpenseiscalculatedusingthestraight-linemethodovertheasset’sexpectedusefullife.Seenote4-GoodwillandOtherIntangiblesforadditionalrelateddisclosures.

RefranchisingandClosureofCompanyDrive-Ins GainsandlossesfromthesaleorclosureofCompanyDrive-Insarerecordedasotheroperating(income)expense,netontheconsolidatedstatementsofincome.

RevenueRecognition,FranchiseFeesandRoyalties RevenuefromCompanyDrive-Insalesisrecognizedwhenfoodandbeverageproductsaresold.CompanyDrive-Insalesarepresentednetofsalestaxandothersales-relatedtaxes. TheCompany’sgiftcardprogramservesallSonicDrive-Insand isadministeredby theCompanyonbehalfofasystemadvertisingfund.TheCompanyrecordsaliabilityintheperiodinwhichagiftcardissold.Thegiftcardsdonothaveexpirationdates.Asgiftcardsareredeemed,theliabilityisreducedwithrevenuerecognizedonredemptionsatCompanyDrive-Ins.BreakageistheamountonagiftcardthatisnotexpectedtoberedeemedandthattheCompanyisnotrequiredtoremittoastateunderunclaimedpropertylaws.TheCompanyestimatesbreakagebaseduponthehistoricaltrendinredemptionpatternsfrompreviouslysoldgiftcards.TheCompany’spolicyistorecognizethebreakage,usingthedelayedrecognitionmethod,whenitisapparentthatthereisaremotelikelihoodthegiftcardbalancewillberedeemed.TheCompanyreducesthegiftcardliabilityfortheestimatedbreakageandusesthatamounttodefraythecostsofoperatingthegiftcardprogram.Thereisnoincomerecognizedonunredeemedgiftcardbalances.Coststoadministerthegiftcardprogram,netofbreakage,areincludedinthereceivablesfromsystemfundsassetforthinnote3–AccountsandNotesReceivable.Suchcostswerenotmaterialinfiscalyears2017,2016or2015.


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FranchisefeesarerecognizedinincomewhentheCompanyhassubstantiallyperformedorsatisfiedallmaterialservicesorconditionsrelatingtothesaleofthefranchise,andthefeesaregenerallynonrefundable.Developmentfeesaregenerallynonrefundableandarerecognizedinincomeonapro-ratabasiswhentheconditionsforrevenuerecognitionundertheindividualdevelopmentagreementsaremet.BothfranchisefeesanddevelopmentfeesaregenerallyrecognizedupontheopeningofaFranchiseDrive-InoruponterminationoftheagreementbetweentheCompanyandthefranchisee. TheCompany’sfranchiseespayroyaltiesbasedonapercentageofsales.Royaltiesarerecognizedasrevenuewhentheyareearned.

AdvertisingCosts Costs incurred inconnectionwithadvertisingandpromotingtheCompany’sproductsare included inotheroperatingexpensesandareexpensedasincurred.Suchcostsamountedto$15.8million,$23.4millionand$24.5millioninfiscalyears2017,2016and2015,respectively. UndertheCompany’sfranchiseagreements,bothCompanyDrive-InsandFranchiseDrive-InsmustcontributeaminimumpercentageofrevenuestotheSonicBrandFund,anationalmediaproductionfund,andspendanadditionalminimumpercentageofrevenuesonadvertising,eitherdirectlyorthroughCompany-requiredparticipationinadvertisingcooperatives.AsignificantportionoftheadvertisingcooperativecontributionsisremittedtotheSystemMarketingFund,whichpurchasesadvertisingonnationalcableandbroadcastnetworksandlocalbroadcastnetworksandalsofundsothernationalmediaexpensesandsponsorshipopportunities.Asstatedinthetermsofexistingfranchiseagreements,thesefundsdonotconstituteassetsoftheCompany,andtheCompanyactswithlimitedagencyintheadministrationofthesefunds.Accordingly,neithertherevenuesandexpensesnortheassetsandliabilitiesoftheadvertisingcooperatives,theSonicBrandFundortheSystemMarketingFundareincludedintheCompany’sconsolidatedfinancialstatements.However,alladvertisingcontributionsbyCompanyDrive-InsarerecordedasanexpenseontheCompany’sfinancialstatements. UndertheCompany’sfranchiseagreements,theCompanyisreimbursedbytheSonicBrandFundforcostsincurredtoadministerthefundatanamountnottoexceed15%oftheSonicBrandFund’sgrossreceipts.ReimbursementsfromtheSonicBrandFundareoffsetagainstselling,generalandadministrativeexpensesandtotaled$5.1million,$5.2millionand$5.0millioninfiscalyears2017,2016and2015,respectively.

TechnologyCosts UndertheCompany’sfranchiseagreements,bothCompanyDrive-InsandFranchiseDrive-InsmustpayasettechnologyfeetotheBrandTechnologyFund(“BTF”),whichwasestablishedinthethirdquarteroffiscalyear2016.TheBTFadministerscybersecurityandothertechnologyprogramsfortheSonicsystem.Asstatedinthetermsofexistingfranchiseagreements,thesefundsdonotconstituteassetsoftheCompany,andtheCompanyactswithlimitedagencyintheadministrationofthesefunds.Accordingly,neithertherevenuesandexpensesnortheassetsandliabilitiesoftheBTFareincludedintheCompany’sconsolidatedfinancialstatements.However,technologyfeespaidbyCompanyDrive-InsarerecordedasanexpenseontheCompany’sfinancialstatements. UndertheCompany’sfranchiseagreements,theCompanyisreimbursedbytheBTFforcostsincurredtoadministerthefundatanamountnottoexceed15%oftheBTF’sgrossreceipts.ReimbursementsfromtheBTFareoffsetagainstselling,generalandadministrativeexpensesandtotaled$5.4millionand$2.5millioninfiscalyears2017and2016,respectively.

OperatingLeases Rentexpenseisrecognizedonastraight-linebasisovertheexpectedleaseterm,includingcancelableoptionperiodswhenitisdeemedtobereasonablyassuredthattheCompanywouldincuraneconomicpenaltyfornotexercisingtheoptions.Withinthetermsofsomeoftheleases,therearerentholidaysand/orescalationsinpaymentsoverthebaseleaseterm,aswellasrenewalperiods.Theeffectsoftheholidaysandescalationshavebeenreflectedinrentexpenseonastraight-linebasisovertheexpectedleaseterm,whichincludescancelableoptionperiodswhenappropriate.TheleasetermcommencesonthedatewhentheCompanyhastherighttocontroltheuseoftheleasedproperty,whichcanoccurbeforerentpaymentsaredueunderthetermsofthelease.Contingentrentisgenerallybasedonsaleslevelsandisaccruedatthepointintimeitisprobablethatsuchsaleslevelswillbeachieved.


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Stock-BasedCompensation TheCompanygrantsincentivestockoptions(“ISOs”),non-qualifiedstockoptions(“NQs”)andrestrictedstockunits(“RSUs”).ForgrantsofNQsandRSUs,theCompanyexpectstorecognizeataxbenefituponexerciseoftheoptionorvestingoftheRSU.Asaresult,ataxbenefitisrecognizedontherelatedstock-basedcompensationexpenseforthesetypesofawards.ForgrantsofISOs,ataxbenefitonlyresultsiftheoptionholderhasadisqualifyingdisposition.AsaresultofthelimitationonthetaxbenefitforISOs,thetaxbenefitforstock-basedcompensationwillgenerallybelessthantheCompany’soveralltaxrateandwillvarydependingonthetimingofemployees’exercisesandsalesofstock. Stock-basedcompensationismeasuredatthegrantdatebasedonthecalculatedfairvalueoftheawardandisrecognizedasanexpenseonastraight-linebasisovertherequisiteserviceperiodoftheaward,generallythevestingperiodofthegrant.Foradditionalinformationonstock-basedcompensation,seenote13-Stockholders’Equity(Deficit).

IncomeTaxes Deferredtaxassetsandliabilitiesarerecognizedforthefuturetaxconsequencesattributabletodifferencesbetweenthefinancialstatementcarryingamountsofexistingassetsandliabilitiesandtheirrespectivetaxbases.Deferredtaxassetsandliabilitiesaremeasuredusingenactedtaxratesexpectedtoapplytotaxableincomeintheyearsinwhichthosetemporarydifferencesareexpectedtoberecoveredorsettled.Theeffectondeferredtaxassetsandliabilitiesfromachangeintaxratesisrecognizedinincomeintheperiodthatincludestheenactmentdate. Incometaxbenefitscreditedtoequityrelatetotaxbenefitsassociatedwithamountsthataredeductibleforincometaxpurposesbutdonotaffectearnings.ThesebenefitsareprincipallygeneratedfromemployeeexercisesofNQs,thevestingofRSUsanddisqualifyingdispositionsofISOs. Thethresholdforrecognizingthefinancialstatementeffectsofataxpositioniswhenitismorelikelythannot,basedonthetechnicalmerits,thatthepositionwillbesustaineduponexaminationbyataxingauthority.Recognizedtaxpositionsareinitiallyandsubsequentlymeasuredasthelargestamountoftaxbenefitthatismorelikelythannottoberealizeduponultimatesettlementwithataxingauthority.Interestandpenaltiesrelatedtounrecognizedtaxbenefitsareincludedinincometaxexpense. AdditionalinformationregardingtheCompany’sunrecognizedtaxbenefitsisprovidedinnote12-IncomeTaxes.

FairValueMeasurements TheCompany’sfinancialassetsandliabilitiesconsistofcashandcashequivalents,accountsandnotesreceivable,accountspayableandlong-termdebt.Thefairvalueofcashandcashequivalents,accountsreceivableandaccountspayableapproximatestheircarryingamountsduetotheshort-termnatureoftheseassetsandliabilities. ThefollowingmethodsandassumptionswereusedbytheCompanyinestimatingfairvaluesofitsfinancialinstruments:

• Notesreceivable-AsofAugust31,2017and2016,thecarryingamountsofnotesreceivable(bothcurrentandnon-current)approximatefairvalueduetotheeffectoftherelatedallowancefordoubtfulaccounts.

• Long-termdebt-TheCompanypreparesadiscountedcashflowanalysisforitsfixedandvariablerateborrowingstoestimatefairvalueeachquarter.ThisanalysisusesLevel2inputsfrommarketinformationavailableforpublicdebttransactionsforcompanieswithratingsthataresimilartotheCompany’sratingsandfrominformationgatheredfrombrokerswhotradeintheCompany’snotes.Thefairvalueestimaterequiredsignificantassumptionsbymanagement.Managementbelievesthisfairvalueisareasonableestimate.FormoreinformationregardingtheCompany’slong-termdebt,seenote10-Debtandnote11-FairValueofFinancialInstruments.

Certainnonfinancialassetsandliabilitiesaremeasuredatfairvalueonanonrecurringbasis,whichmeanstheseassetsandliabilitiesarenotmeasuredatfairvalueonanongoingbasisbutaresubjecttoperiodicimpairmenttests.FortheCompany,theseitemsprimarilyincludelong-livedassets,goodwillandotherintangibleassets.Refertosections“AccountingforLong-LivedAssets”and“GoodwillandOtherIntangibleAssets,”discussedabove,forinputsandvaluationtechniquesusedtomeasurethefairvalueofthesenonfinancialassets.Thefairvaluewasbaseduponmanagement’sassessmentaswellasindependentmarketvalueassessmentswhichinvolvedLevel2andLevel3inputs.


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NewAccountingPronouncements InMay2014,theFinancialAccountingStandardsBoard(“FASB”)issuedASUNo.2014-09,“RevenuefromContractswithCustomers,”whichrequiresanentitytorecognizerevenueinanamountthatreflectstheconsiderationtowhichtheentityexpectstobeentitledforthetransferofpromisedgoodsorservicestocustomers.Thestandardalsorequiresadditionaldisclosureregardingthenature,amount,timinganduncertaintyofrevenueandcashflowsarisingfromcontractswithcustomers.TheASUwillreplacemostoftheexistingrevenuerecognitionrequirementsinU.S.GAAPwhenitbecomeseffective.Further,theFASBhasissuedclarifyingguidancewithASUNo.2016-08,“RevenuefromContractswithCustomers:PrincipalversusAgentConsiderations(ReportingRevenueGrossversusNet),”ASUNo.2016-10,“RevenuefromContractswithCustomers:IdentifyingPerformanceObligationsandLicensing,”andASUNo.2016-20,“TechnicalCorrectionsandImprovementstoTopic606,RevenuefromContractswithCustomers.”ASUNo.2016-08providesguidanceforevaluatingwhenanotherparty,alongwiththeentity,isinvolvedinprovidingagoodorservicetoacustomer.ASUNo.2016-10clarifiesassessingwhetherpromisestotransfergoodsorservicesaredistinct,andwhetheranentity’spromisetograntalicenseprovidesacustomerwitharighttouseorrighttoaccesstheentity’sintellectualproperty.ASUNo.2016-20providescorrectionsorimprovementstoissuesthataffectnarrowaspectsoftheguidance. TheCompanyplanstoadoptthestandardsinthefirstquarteroffiscalyear2019,whichalignswiththerequiredadoptiondate.Thestandardsaretobeappliedretrospectivelyorusingacumulativeeffecttransitionmethod.TheCompanydoesnotbelievethenewrevenuerecognitionstandardwillimpacttherecognitionofsalesfromCompanyDrive-Insortherecognitionofroyaltyfeesfromfranchisees,norwillithaveamaterialimpacttotherecognitionofgiftcardbreakage.TheCompanyexpectsthepronouncementwillimpacttherecognitionoftheinitialfranchisefee,whichiscurrentlyrecognizedupontheopeningofaFranchiseDrive-In.Theimpactonthesefeesisnotexpectedtobematerialtototalrevenue,andtheCompanyanticipateselectingthecumulativeeffecttransitionmethod.TheCompanycontinuestoevaluatetheeffectthatthispronouncementwillhaveonprincipalversusagentconsiderations,othertransactions,thefinancialstatementsandrelateddisclosures. InFebruary2016,theFASBissuedASUNo.2016-02,“Leases.”Thenewstandard,whichreplacesexistingleaseguidance,requireslesseestorecognizeonthebalancesheetaliabilitytomakeleasepaymentsandacorrespondingright-of-useasset.Theguidancealsorequirescertainqualitativeandquantitativedisclosuresdesignedtoassesstheamount,timinganduncertaintyofcashflowsarisingfromleases.Accountingguidanceforlessorsislargelyunchanged.Thestandardiseffectiveforfiscalyear2020,withearlyapplicationpermitted.Thisstandardrequiresadoptionbaseduponamodifiedretrospectivetransitionapproachforleasesexistingat,orenteredintoafter,thebeginningoftheearliestcomparativeperiodpresentedinthefinancialstatements,withoptionalpracticalexpedients.Basedonapreliminaryassessment,theCompanyexpectsthatmostofitsoperatingleasecommitmentswillbesubjecttothenewguidanceandrecognizedasoperatingleaseliabilitiesandright-of-useassetsuponadoption,resultinginasignificantincreaseintheassetsandliabilitiesontheconsolidatedbalancesheet.TheCompanyiscontinuingitsassessment,whichmayidentifyadditionalimpactsthisstandardwillhaveonitsconsolidatedfinancialstatementsandrelateddisclosures. InJune2016,theFASBissuedASUNo.2016-13,“FinancialInstruments–CreditLosses.”Theupdatewasissuedtoprovidemoredecision-usefulinformationabouttheexpectedcreditlossesonfinancialinstruments.TheupdatereplacestheincurredlossimpairmentmethodologyincurrentGAAPwithamethodologythatreflectsexpectedcreditlossesandrequiresconsiderationofabroaderrangeofreasonableandsupportableinformationtoinformcreditlossestimates.Theupdateiseffectiveforfiscalyear2021,withearlyadoptionpermittedforfiscalyearsbeginningafterDecember15,2018.Theupdateshouldbeadoptedusingamodified-retrospectiveapproach.TheCompanyiscurrentlyevaluatingtheeffectthatthisupdatewillhaveonitsfinancialstatementsandrelateddisclosures. InAugust2016,theFASBissuedASUNo.2016-15,“StatementofCashFlows–ClassificationofCertainCashReceiptsandCashPayments.”Theupdateisintendedtoreducediversityinpracticeinhowcertaintransactionsareclassifiedandwillmakeeighttargetedchangestohowcashreceiptsandcashpaymentsarepresentedinthestatementofcashflows.Theupdateiseffectiveforfiscalyear2019.Thenewstandardwillrequireadoptiononaretrospectivebasisunlessitisimpracticabletoapply,inwhichcasetheamendmentswillapplyprospectivelyasoftheearliestdatepracticable.TheCompanyiscurrentlyevaluatingtheeffectofthisupdatebutdoesnotbelieveitwillhaveamaterialimpactonitsfinancialstatementsandrelateddisclosures. InOctober2016,theFASBissuedASUNo.2016-16,“IncomeTaxes:Intra-EntityTransfersofAssetsOtherThanInventory,”aspartofitssimplificationinitiatives.Theupdaterequiresthatanentityrecognizetheincometaxconsequencesofanintra-entitytransferofanassetotherthaninventorywhenthetransferoccurs,ratherthandeferringtherecognitionuntiltheassethasbeensoldtoanoutsidepartyasisrequiredundercurrentGAAP.Theupdateiseffectiveforfiscalyear2019.Thenewstandardwillrequireadoptiononamodifiedretrospectivebasisthroughacumulative-effectadjustmenttoretainedearnings,andearlyadoptionispermitted.TheCompanyiscurrentlyevaluatingtheeffectthatthisupdatewillhaveonitsfinancialstatementsandrelateddisclosures.

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InNovember2016,theFASBissuedASUNo.2016-18,“StatementofCashFlows-RestrictedCash.”Theupdaterequiresthatrestrictedcashbeincludedwithcashandcashequivalentswhenreconcilingthebeginning-of-periodandend-of-periodtotalamountsshownonthestatementofcashflows.Theupdateiseffectiveforfiscalyear2019.Theamendmentsshouldbeadoptedonaretrospectivebasistoeachperiodpresented,andearlyadoptionispermitted.TheCompanyiscurrentlyevaluatingtheeffectthatthisupdatewillhaveonitsfinancialstatementsandrelateddisclosures. InMay2017,theFASBissuedASUNo.2017-09,“Compensation-StockCompensation:ScopeofModificationAccounting,”whichprovidesguidanceaboutwhichchangestothetermsorconditionsofashare-basedpaymentawardrequireanentitytoapplymodificationaccounting.Anentitywillaccountfortheeffectsofamodificationunlessthefairvalueofthemodifiedawardisthesameastheoriginalaward,thevestingconditionsofthemodifiedawardarethesameastheoriginalawardandtheclassificationofthemodifiedawardasanequityinstrumentorliabilityinstrumentisthesameastheoriginalaward.Theupdateiseffectiveforfiscalyear2019.Theupdateistobeadoptedprospectivelytoanawardmodifiedonoraftertheadoptiondate.Earlyadoptionispermitted.TheCompanyiscurrentlyevaluatingtheeffectofthisupdatebutdoesnotbelieveitwillhaveamaterialimpactonitsfinancialstatementsandrelateddisclosures. TheCompanyhasreviewedallotherrecentlyissuedaccountingpronouncementsandconcludedtheyarenotapplicableornotexpectedtobesignificanttoouroperations.

RecentlyAdoptedAccountingPronouncements InApril2015,theFASBissuedASUNo.2015-03,“SimplifyingthePresentationofDebtIssuanceCosts.”Thisupdaterequiresdebtissuancecoststobepresentedinthebalancesheetasareductionoftherelatedliabilityratherthanasanasset.Therecognitionandmeasurementguidancefordebtissuancecostsarenotaffectedbythisupdate.ThisupdateiseffectiveforfiscalyearsbeginningafterDecember15,2015,includinginterimperiodswithinthatreportingperiod,andistobeappliedretrospectively;earlyadoptionispermitted.InAugust2015,theFASBissuedASUNo.2015-15,whichaddressestheSEC’scommentsrelatedtotheabsenceofauthoritativeguidancewithinASUNo.2015-03relatedtoline-of-creditarrangements.TheSECwouldnotobjecttoanentitydeferringandpresentingdebtissuancecostsasanassetandsubsequentlyamortizingthedeferreddebtissuancecostsratablyoverthetermoftheline-of-creditarrangement,regardlessofwhetherthereareanyoutstandingborrowingsontheline-of-creditarrangement.TheCompanyretrospectivelyadoptedthisguidanceinthefirstquarteroffiscalyear2017,whichresultedinareclassificationofunamortizeddebtissuancecostsof$11.3millionrelatedtotheCompany’sfixedratenotesfromnon-currentassetstolong-termdebt,net,withintheCompany’sconsolidatedbalancesheet,resultinginacorrespondingreductionintotalassetsandtotallong-termliabilitiesasofAugust31,2016.Otherthanthisreclassification,theadoptionofthisASUdidnothaveanyotherimpactontheCompany’sconsolidatedfinancialstatements.AsofAugust31,2017,therewere$9.4millionofunamortizeddebtissuancecostsrelatedtotheCompany’sfixedratenotesincludedwithinlong-termdebt,net,ontheCompany’sconsolidatedbalancesheet. InApril2015,theFASBissuedASUNo.2015-05,“Customer’sAccountingforFeesPaidinaCloudComputingArrangement.”Theupdateprovidesclarificationonwhetheracloudcomputingarrangementincludesasoftwarelicense.Ifasoftwarelicenseisincluded,thecustomershouldaccountforthelicenseconsistentwithitsaccountingofothersoftwarelicenses.Ifasoftwarelicenseisnotincluded,thearrangementshouldbeaccountedforasaservicecontract.TheupdateiseffectiveforfiscalyearsbeginningafterDecember15,2015.TheCompanyadoptedthisstandardinthefirstquarteroffiscalyear2017onaprospectivebasis.TheadoptiondidnothaveamaterialimpactontheCompany’sconsolidatedfinancialstatements. Duringthefirstquarteroffiscalyear2017,theCompanyearlyadoptedASUNo.2016-09,“Compensation-StockCompensation:ImprovementstoEmployeeShare-BasedPaymentAccounting,”whichsimplifiesseveralaspectsofaccountingforshare-basedpaymenttransactions,includingexcesstaxbenefits,anaccountingpolicyelectionforforfeitures,statutorytaxwithholdingrequirementsandclassificationinthestatementsofcashflows.Asrequiredbytheupdate,onaprospectivebasis,theCompanyrecognizedexcesstaxbenefitsrelatedtoshare-basedpaymentsintheprovisionforincometaxesinthecondensedconsolidatedstatementsofincome.Theseitemswerehistoricallyrecordedinadditionalpaid-incapital.Asallowedbytheupdate,onaprospectivebasis,cashflowsrelatedtoexcesstaxbenefitsrecognizedonstock-basedcompensationexpenseareclassifiedasanoperatingactivityintheCompany’scondensedconsolidatedstatementsofcashflows.TheadoptionofthisstandardresultedinareductionoftheCompany’sincometaxrateby107basispointsforfiscalyear2017.Cashpaidonemployees’behalfrelatedtoshareswithheldfortaxpurposescontinuestobeclassifiedasafinancingactivity.Thestockcompensationexpensecontinuestoreflectestimatedforfeitures.

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InJanuary2017,theFASBissuedASUNo.2017-04,“Intangibles-GoodwillandOther:SimplifyingtheTestforGoodwillImpairment.”Tosimplifythesubsequentmeasurementofgoodwill,theupdaterequiresonlyasingle-stepquantitativetesttoidentifyandmeasureimpairmentbasedontheexcessofareportingunit’scarryingamountoveritsfairvalue.Aqualitativeassessmentmaystillbecompletedfirstforanentitytodetermineifaquantitativeimpairmenttestisnecessary.Theupdateiseffectiveforfiscalyear2021andistobeadoptedonaprospectivebasis.EarlyadoptionispermittedforinterimorannualgoodwillimpairmenttestsperformedontestingdatesafterJanuary1,2017.TheCompanyadoptedthisstandardinthefourthquarteroffiscalyear2017.TheadoptionofthisstandarddidnothaveanimpactontheCompany’sconsolidatedfinancialstatements.

2.EarningsPerShare Thefollowingtablesetsforththecomputationofbasicanddilutedearningspershare: FiscalYearEndedAugust31, 2017 2016 2015Numerator: Netincome $ 63,663 $ 64,067 $ 64,485 Denominator: Weightedaveragecommonsharesoutstanding–basic 43,306 48,703 52,572 EffectofdilutiveemployeestockoptionsandunvestedRSUs 737 966 1,381 Weightedaveragecommonsharesoutstanding–diluted 44,043 49,669 53,953 Netincomepercommonshare–basic $ 1.47 $ 1.32 $ 1.23Netincomepercommonshare–diluted $ 1.45 $ 1.29 $ 1.20 Anti-dilutivesecuritiesexcluded(1) 1,154 615 342

(1) Anti-dilutivesecuritiesconsistofstockoptionsandunvestedRSUsthatwerenotincludedinthecomputationofdilutedearningspersharebecauseeithertheexercisepriceoftheoptionswasgreaterthantheaveragemarketpriceofthecommonstockorthetotalassumedproceedsunderthetreasurystockmethodresultedinnegativeincrementalshares,andthustheinclusionwouldhavebeenanti-dilutive.

3.AccountsandNotesReceivable Accountsandnotesreceivableconsistofthefollowing: August31, 2017 2016CurrentAccountsandNotesReceivable: Royaltiesandothertradereceivables $ 19,571 $ 19,994 Notesreceivablefromfranchisees 1,441 5,531 Receivablesfromsystemfunds 6,360 4,372 Other 7,475 6,507 Accountsandnotesreceivable,gross 34,847 36,404 Allowancefordoubtfulaccountsandnotesreceivable (1,089) (967) Currentaccountsandnotesreceivable,net $ 33,758 $ 35,437

NoncurrentNotesReceivable: Receivablesfromfranchisees $ 6,810 $ 7,170 Receivablesfromsystemfunds 3,033 5,466 Allowancefordoubtfulnotesreceivable (42) (74) Noncurrentnotesreceivable,net $ 9,801 $ 12,562


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TheCompany’sreceivablesareprimarilyduefromfranchisees,allofwhomareintherestaurantbusiness.Substantiallyallofthenotesreceivablefromfranchiseesarecollateralizedbyrealestateorequipment.Thedecreaseincurrentnotesreceivablefromfranchiseesisduetoshort-termfinancinginitiatedinfiscalyear2016forrefranchiseddrive-insandnewlyconstructeddrive-inssoldtofranchiseesthatwererepaidinthefirstandthirdquartersoffiscalyear2017.Thereceivablesfromsystemfundsrepresenttransactionsinthenormalcourseofbusiness.Thedecreaseinnoncurrentreceivablesfromsystemfundsisduetopaymentonnotesextendedinfiscalyear2016relatedtotheestablishmentoftheBTF.

4.GoodwillandOtherIntangibles AsofAugust31,2017,theCompanyhad$75.8millionofgoodwill. Thechangesinthecarryingamountofgoodwillwereasfollows: August31, 2017 2016Balanceatbeginningofyear $ 76,734 $ 77,076 GoodwilldisposedofrelatedtothesaleofCompanyDrive-Ins (978) (342)Balanceatendofyear $ 75,756 $ 76,734

Thegrosscarryingamountoffranchiseagreements,intellectualproperty,franchisefeesandotherintangiblessubjecttoamortizationwas$9.3millionand$9.2millionatAugust31,2017and2016,respectively.Accumulatedamortizationrelatedtotheseintangibleassetswas$6.6millionand$5.7millionatAugust31,2017and2016,respectively.Intangibleassetsamortizationexpensewas$1.0millionfiscalyearendedAugust31,2017and$0.9millionforeachofthefiscalyearsendedAugust31,2016and2015.AtAugust31,2017,theremainingweighted-averagelifeofamortizableintangibleassetswasapproximately11.5years.Estimatedintangibleassetsamortizationexpenseis$0.3millionannuallyforfiscalyears2018,2019,2020,2021and2022.

5.OtherOperatingIncome Duringthefirstquarteroffiscalyear2017,theCompanyrecordedagainof$3.8milliononthesaleofminorityinvestmentsinfranchiseoperationsretainedaspartofarefranchisingtransactionthatoccurredinfiscalyear2009.TheCompanyalsorecorded$6.8millioninrefranchisinginitiativegainsasdescribedbelowinnote6-RefranchisingofCompanyDrive-Ins.Duringthefourthquarter,theCompanyrecordedagainof$4.7milliononthesaleofrealestate.Inaddition,theCompanyrecordedoffsettingseverancecostsof$1.8millionrelatedtotheeliminationofcertaincorporatepositions.

6.RefranchisingofCompanyDrive-Ins InJune2016,theCompanyannouncedplanstorefranchiseCompanyDrive-Insaspartofarefranchisinginitiativetomovetowardanapproximately95%franchisedsystem. Duringfiscalyear2016,theCompanyrefranchisedtheoperationsof38CompanyDrive-Ins.OftheCompanyDrive-Insrefranchisedinfiscalyear2016,29werecompletedaspartoftherefranchisinginitiativeannouncedinJune2016.TheCompanyretainedanon-controllingminorityinvestmentinthefranchiseoperationsof25oftheserefranchiseddrive-ins. Duringfiscalyear2017,theCompanycompletedtransactionstorefranchisetheoperationsof110CompanyDrive-Insandretainedanon-controllingminorityinvestmentin106oftheserefranchiseddrive-ins.TheCompanycompletedtherefranchisinginitiativeinthesecondquarteroffiscalyear2017.AllsubsequentsalesofCompanyDrive-Insareconsideredsalesinthenormalcourseofbusiness. Incomefromminorityinvestmentsisincludedinotherrevenueontheconsolidatedstatementsofincome.Thegainsandlossesbelowassociatedwithrefranchiseddrive-insarerecordedinotheroperatingincome,net,ontheconsolidatedstatementofincome.Thefollowingisasummaryofthepretaxactivityrecordedasaresultoftherefranchisinginitiative(inthousands,exceptnumberofrefranchisedCompanyDrive-Ins):


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FiscalYearEndedAugust31, 2017 2016NumberofrefranchisedCompanyDrive-Ins 110 29

ProceedsfromsalesofCompanyDrive-Ins $ 20,036 $ 3,568Proceedsfromsaleofrealestate(1) 11,726 –

Realestateassetssold(1) (12,095) (2,402)Assetssold,netofretainedminorityinvestment(2) (7,891) –Initialandsubsequentleasepaymentsforrealestateoption(1) (3,178) –GoodwillrelatedtosalesofCompanyDrive-Ins (966) (194)Deferredgainforrealestateoption(3) (809) –Lossonassetsheldforsale (65) –Refranchisinginitiativegains,net $ 6,758 $ 972

(1) Duringthefirstquarteroffiscalyear2017,aspartofa53drive-inrefranchisingtransaction,theCompanyenteredintoadirectfinancingleasewhichincludedanoptionforthefranchiseetopurchasetherealestatewithinthenext24months.Inaccordancewithleaseaccountingrequirements,becausetheexerciseofthisoptioncouldoccuratanytimewithin24months,theportionoftheproceedsfromtherefranchisingattributabletothefairvalueoftheoptionwasappliedastheinitialminimumleasepaymentfortherealestate.Thefranchiseeexercisedtheoptioninthelastsixmonthsofthefiscalyear.Untiltheoptionwasfullyexercised,thefranchiseemademonthlyleasepaymentswhichareincludedinotheroperatingincome,netofsub-leaseexpense.

(2) Netassetssoldconsistedprimarilyofequipment.(3) Thedeferredgainof$0.8millionisrecordedinothernon-currentliabilitiesasaresultofarealestatepurchaseoption

extendedtothefranchiseeinthesecondquarteroffiscalyear2017.ThedeferredgainwillcontinuetobeamortizedintoincomethroughJanuary2020whentheoptionbecomesexercisable.

7.LeasesLeasingArrangementsasaLessor TheCompany’sleasingactivitiesconsistprincipallyofleasingcertainlandandbuildingsaswellassubleasingcertainbuildingstofranchiseoperators.ThelandandbuildingportionsforthemajorityoftheseleasesareclassifiedasoperatingleasesandhaveleasetermsexpiringthroughMarch2032.Theleasesclassifiedasdirectfinancingleasesarerelatedtoownedandsubleasedpropertiesthatwererecentlyrefranchised(seenote6-RefranchisingofCompanyDrive-Ins).ThetermsoftheseleasesexpirethroughSeptember2031.Theseleasesincludeprovisionsforcontingentrentalsthatmaybereceivedonthebasisofapercentageofsalesinexcessofstipulatedamounts.Incomeisnotrecognizedoncontingentrentalsuntilsalesexceedthestipulatedamounts.Someleasescontainescalationclausesoverthelivesoftheleases.Forpropertyownedbythirdparties,theleasetermrunsconcurrentlywiththetermofthethird-partyleasearrangement.Mostoftheleasescontainrenewaloptionperiodsoffiveyearsattheendoftheinitialterm. ComponentsofnetinvestmentindirectfinancingleasesareasfollowsatAugust31:

2017 2016Minimumleasepaymentsreceivable $ 18,156 $ 15,108Lessunearnedincome (5,932) (5,134)Netinvestmentindirectfinancingleases 12,224 9,974Lessamountduewithinoneyear (371) (115)Amountdueafteroneyear $ 11,853 $ 9,859 Initialdirectcosts incurred inthenegotiationandconsummationofdirect financingleasetransactionshavenotbeenmaterial.Accordingly,noportionofunearnedincomehasbeenrecognizedtooffsetthosecosts.


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FutureminimumrentalpaymentsreceivableasofAugust31,2017,areasfollows Direct Operating FinancingYearsendedAugust31: 2018 $ 5,510 $ 1,087 2019 5,641 1,156 2020 5,619 1,269 2021 5,615 1,365 2022 5,664 1,362 Thereafter 46,155 11,917 $ 74,204 18,156 Lessunearnedincome (5,932) $ 12,224

LeasingArrangementsasaLessee CertainCompanyDrive-Insleaselandandbuildingsfromthirdparties.Theseleases,withleasetermsexpiringthroughMay2037,includeprovisionsforcontingentrentsthatmaybepaidonthebasisofapercentageofsalesinexcessofstipulatedamounts.Forthemajorityofleases,thelandportionsareclassifiedasoperatingleases,andthebuildingportionsareclassifiedascapitalleases. FutureminimumleasepaymentsonoperatingandcapitalleasesasofAugust31,2017,areasfollows:

Operating CapitalYearsendedAugust31: 2018 $ 8,785 $ 4,706 2019 8,703 3,699 2020 8,700 3,267 2021 8,056 3,186 2022 7,244 2,678 Thereafter 51,856 7,072 Totalminimumleasepayments(1) $ 93,344 24,608 Lessamountrepresentinginterestaveraging5.5% (4,977) Presentvalueofnetminimumleasepayments 19,631 Lessamountduewithinoneyear (3,464) Amountdueafteroneyear $ 16,167

(1) Minimumpaymentshavenotbeenreducedbyfutureminimumrentalsreceivableundernoncancellableoperatingsubleasesof$7.6million.Theyalsodonotincludecontingentrentalswhichmaybedueundercertainleases.Contingentrentalsforcapitalleasesamountedto$0.3million,$0.9millionand$1.0millioninfiscalyears2017,2016and2015,respectively.

TotalrentexpenseforalloperatingleasesconsistsofthefollowingfortheyearsendedAugust31:

2017 2016 2015Minimumrentals $ 11,224 $ 12,441 $ 12,659Contingentrentals 283 284 174 Totalrentexpense 11,507 12,725 12,833Lesssubleaserentals (2,513) (2,372) (2,235) Netrentexpense $ 8,994 $ 10,353 $ 10,598


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8.Property,EquipmentandCapitalLeases Property,equipmentandcapitalleasesconsistofthefollowingatAugust31:

Estimated UsefulLife 2017 2016Property,equipmentandcapitalleases: Land $ 117,402 $ 154,420 Buildingsandimprovements 8–25yrs 251,695 325,068 Drive-Inequipment 5–7yrs 75,410 132,488 Brandtechnologydevelopmentandotherequipment 2–5yrs 126,179 110,554 Propertyandequipment,atcost 570,686 722,530 Accumulateddepreciation (272,233) (345,284) Propertyandequipment,net 298,453 377,246

Capitalleases Lifeoflease 45,315 43,991 Accumulatedamortization (31,388) (28,857) Capitalleases,net 13,927 15,134 Property,equipmentandcapitalleases,net $ 312,380 $ 392,380

Depreciationexpenseforpropertyandequipmentwas$35.6million,$40.4millionand$41.7millionforfiscalyears2017,2016and2015,respectively.Land,buildingsandequipmentwithacarryingamountof$110.8millionatAugust31,2017,wereleasedunderoperatingleasestofranchiseesandotherparties.Theaccumulateddepreciationrelatedtothesebuildingsandequipmentwas$45.0millionatAugust31,2017.Amortizationexpenserelatedtocapitalleasesisincludedwithindepreciationandamortizationontheconsolidatedstatementsofincome.AsofAugust31,2017,theCompanyhadnodrive-insunderconstructionwithcoststocomplete. Interestincurredinconnectionwiththeconstructionofnewdrive-insandtechnologyprojectsiscapitalized.Capitalizedinterestwas$0.6million,$0.6millionand$0.4millionforfiscalyears2017,2016and2015,respectively.

9.AccruedLiabilities AccruedliabilitiesconsistofthefollowingatAugust31:

2017 2016Wagesandemployeebenefitcosts $ 17,705 $ 23,416Propertytaxes,salesandusetaxesandemploymenttaxes 5,634 8,936Unredeemedgiftcards 11,319 10,571Other 10,188 8,990 $ 44,846 $ 51,913

10.Debt Long-termdebtconsistsofthefollowingatAugust31: 2017 2016ClassA-22016-1seniorsecuredfixedratenotes $ 422,521 $ 423,938ClassA-12016-1seniorsecuredvariablefundingnotes 60,000 –ClassA-22013-1seniorsecuredfixedratenotes 155,000 155,000 637,521 578,938Lessunamortizeddebtissuancecosts (9,405) (11,334)Lesslong-termdebtduewithinoneyear – (1,417) Long-termdebtdueafteroneyear $ 628,116 $ 566,187

AtAugust31,2017,therewerenofuturematuritiesoflong-termdebtforfiscalyears2018and2019,$155.0millionforfiscalyear2020,$60.0millionforfiscalyear2021andnomaturitiesforfiscalyear2022.


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Duringfiscalyear2013,inaprivatetransaction,varioussubsidiariesoftheCompany(the“Co-Issuers”)refinancedandpaid$155.0millionoftheSeries2011SeniorSecuredFixedRateNotes,ClassA-2(the“2011FixedRateNotes”)withtheissuanceof$155.0millionofSeries2013-1SeniorSecuredFixedRateNotes,ClassA-2(the“2013FixedRateNotes”),whichbearinterestat3.75%perannum.The2013FixedRateNoteshaveanexpectedlifeofsevenyears,interestpayablemonthly,noscheduledprincipalamortizationandananticipatedrepaymentdateinJuly2020. OnMay17,2016,inaprivatetransaction,theCo-Issuersissued$425.0millionofSeries2016-1SeniorSecuredFixedRateNotes,ClassA-2(the“2016FixedRateNotes”),whichbearinterestat4.47%perannum.The2016FixedRateNoteshaveanexpectedlifeofsevenyearswithananticipatedrepaymentdateinMay2023. TheCo-IssuersalsoenteredintoasecuritizedfinancingfacilityofSeries2016-1SeniorSecuredVariableFundingNotes,ClassA-1(the“2016VariableFundingNotes”and,togetherwiththe2016FixedRateNotes,the“2016Notes”)toreplacetheSeries2011-1SeniorSecuredVariableFundingNotes,ClassA-1(the“2011VariableFundingNotes”).The2016revolvingcreditfacilityprovidesaccesstoamaximumof$150.0millionof2016VariableFundingNotesandcertainothercreditinstruments,includinglettersofcredit.Interestonthe2016VariableFundingNotesisbasedontheone-monthLondonInterbankOfferedRateorCommercialPaper,dependingonthefundingsource,plus2.0%,perannum.Anannualcommitmentfeeof0.5%ispayablemonthlyontheunusedportionofthe2016VariableFundingNotesfacility.The2016VariableFundingNoteshaveanexpectedlifeoffiveyearswithananticipatedrepaymentdateinMay2021withtwoone-yearextensionoptionsavailableuponcertainconditionsincludingmeetingaminimumdebtservicecoverageratiothreshold. Sonicusedaportionofthenetproceedsfromtheissuanceofthe2016FixedRateNotestorepayitsexisting2011FixedRateNotesand2011VariableFundingNotesinfullandtopaythecostsassociatedwiththesecuritizedfinancingtransaction,includingprepaymentpremiums. LoanoriginationcostsassociatedwiththeCompany’s2016transactiontotaled$12.5millionandwereallocatedamongthe2016Notes.Loancostsarebeingamortizedovereachnote’sexpectedlife,andtheunamortizedbalancerelatedtothe2016VariableFundingNotesandthe2016FixedRateNotesisincludedinothercurrentassetsandlong-termdebt,net,respectively,ontheconsolidatedbalancesheets. Inconnectionwiththe2016transactiondescribedabove,theCompanyrecognizedan$8.8millionlossfromtheearlyextinguishmentofdebtduringthethirdquarteroffiscalyear2016,whichprimarilyconsistedofa$5.9millionprepaymentpremiumandthe$2.9millionwrite-offofunamortizeddeferredloanfeesremainingfromtherefinanceddebt. AsofAugust31,2017,theweighted-averageinterestcostofthe2013FixedRateNotesandthe2016FixedRateNoteswas4.1%and4.8%,respectively.Theweighted-averageinterestcostofthe2016VariableFundingNoteswas3.2%.Theweighted-averageinterestcostincludestheeffectoftheloanoriginationcosts. Whilethe2013FixedRateNotesandthe2016FixedRateNotesarestructuredtoprovideforseven-yearlivesfromtheiroriginalissuancedates,theyhavelegalfinalmaturitydatesofJuly2043andMay2046,respectively.The2016VariableFundingNotesarestructuredtoprovideforafive-yearlifewithtwoone-yearoptionsavailableundercertainconditionsandwithalegalfinalmaturitydateofMay2046.TheCompanyintendstorepayorrefinancethe2013FixedRateNotesandthe2016Notesonorbeforetheendoftheirexpectedlives.IftheCompanyprepaysthedebtpriortotheanticipatedrepaymentdatetheCompanymayberequiredtopayaprepaymentpenaltyundercertaincircumstances.Intheeventthe2013FixedRateNotesandthe2016Notesarenotpaidinfullbytheendoftheirexpectedlives,theyaresubjecttoanupwardadjustmentintheannualinterestrateofatleast5%.Inaddition,principalpaymentswillacceleratebyapplyingalloftheroyalties,leaserevenuesandotherfeessecuringthedebt,afterdeductingcertainexpenses,untilthedebtispaidinfull.Also,anyunfundedamountunderthe2016VariableFundingNoteswillbecomeunavailable. TheCo-IssuersandSonicFranchisingLLC(the“Guarantor”)areexistingspecialpurpose,bankruptcyremote,indirectsubsidiariesofSonicCorp.thatholdsubstantiallyallofSonic’sfranchisingassetsandrealestate. AsofAugust31,2017,assetsforthesecombinedindirectsubsidiariestotaled$287.2million,includingreceivablesforroyalties,certainCompanyandFranchiseDrive-Inrealestate,intangibleassetsandrestrictedcashbalancesof$61.9million.The2013FixedRateNotesandthe2016Notesaresecuredbyfranchisefees,royaltypaymentsandleasepayments,andtherepaymentofthe2013FixedRateNotesandthe2016NotesisexpectedtobemadesolelyfromtheincomederivedfromtheCo-Issuer’sassets.Inaddition,theGuarantor,aSonicCorp.subsidiarythatactsasafranchisor,hasguaranteedtheobligationsoftheCo-Issuersunderthe2013FixedRateNotesandthe2016Notesandpledgedsubstantiallyallofitsassetstosecurethoseobligations. NeitherSonicCorp.,theultimateparentoftheCo-IssuersandtheGuarantor,noranyothersubsidiaryofSonicCorp.,guaranteesorisinanywayliablefortheobligationsoftheCo-Issuersunderthe2013FixedRateNotesandthe2016Notes.TheCompanyhas,however,agreedtocausetheperformanceofcertainobligationsofitssubsidiaries,principallyrelatedtomanagingtheassetsincludedascollateralforthe2013FixedRateNotesandthe2016NotesandcertainindemnityobligationsrelatingtothetransferofthecollateralassetstotheCo-Issuers.


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The2013FixedRateNotesandthe2016Notesaresubjecttoaseriesofcovenantsandrestrictionscustomaryfortransactionsofthistype,including(i)requiredactionstobettersecurecollateralupontheoccurrenceofcertainperformance-relatedevents,(ii)applicationofcertaindispositionproceedsasnoteprepaymentsafterasettimeisallowedforreinvestment,(iii)maintenanceofspecifiedreserveaccounts,(iv)maintenanceofcertaindebtservicecoverageratios,(v)optionalandmandatoryprepaymentsuponchange incontrol, (vi) indemnificationpayments fordefectiveor ineffectivecollateral,and (vii)covenantsrelatingtorecordkeeping,accesstoinformationandsimilarmatters.Ifcertaincovenantsorrestrictionsarenotmet,the2013FixedRateNotesandthe2016Notesaresubjecttocustomaryacceleratedrepaymenteventsandeventsofdefault.Althoughmanagementdoesnotanticipateaneventofdefaultoranyothereventofnoncompliancewiththeprovisionsofthedebt,ifsucheventoccurred,theunpaidamountsoutstandingcouldbecomeimmediatelydueandpayable.

11.FairValueofFinancialInstruments Thefairvalueoffinancialinstrumentsistheamountatwhichtheinstrumentcouldbeexchangedinacurrenttransactionbetweenwillingparties.TheCompanyhasnofinancialliabilitiesthatarerequiredtobemeasuredatfairvalueonarecurringbasis. TheCompanycategorizesitsassetsandliabilitiesrecordedatfairvaluebaseduponthefollowingfairvaluehierarchyestablishedbytheFASB:• Level1valuationsusequotedpricesinactivemarketsforidenticalassetsorliabilitiesthatareaccessibleatthemeasurement

date.Anactivemarketisamarketinwhichtransactionsfortheassetorliabilityoccurwithsufficientfrequencyandvolumetoprovidepricinginformationonanongoingbasis.

• Level2valuationsuseinputsotherthanactivelyquotedmarketpricesincludedwithinLevel1thatareobservablefortheassetorliability,eitherdirectlyorindirectly.Level2inputsinclude:(a)quotedpricesforsimilarassetsorliabilitiesinactivemarkets,(b)quotedpricesforidenticalorsimilarassetsorliabilitiesinmarketsthatarenotactive,(c)inputsotherthanquotedpricesthatareobservablefortheassetorliabilitysuchasinterestratesandyieldcurvesobservableatcommonlyquotedintervalsand(d)inputsthatarederivedprincipallyfromorcorroboratedbyobservablemarketdatabycorrelationorothermeans.

• Level3valuationsuseunobservableinputsfortheassetorliability.Unobservableinputsareusedtotheextentobservableinputsarenotavailable,therebyallowingforsituationsinwhichthereislittle,ifany,marketactivityfortheassetorliabilityatthemeasurementdate.

TheCompany’scashequivalentsarecarriedatcostwhichapproximatesfairvalueandtotaled$73.9millionand$59.2millionatAugust31,2017and2016,respectively.ThisfairvalueisestimatedusingLevel1methods. ThefairvalueoftheCompany’s2013FixedRateNotesand2016FixedRateNotesapproximatedthecarryingvalue,includingaccruedinterest,of$578.2millionand$579.6millionatAugust31,2017and2016,respectively.ThefairvalueoftheCompany’s2016VariableFundingNotesapproximatedthecarryingvalue,includingaccruedinterest,of$60.1millionatAugust31,2017.The2016VariableFundingNoteshadnobalanceatAugust31,2016.Thefairvalueofthe2013FixedRateNotesand2016NotesisestimatedusingLevel2inputsfrommarketinformationavailableforpublicdebttransactionsforcompanieswithratingsthataresimilartotheCompany’sratingsandfrominformationgatheredfrombrokerswhotradeintheCompany’snotes.

12.IncomeTaxes TheCompany’sincomebeforetheprovisionforincometaxesisclassifiedbysourceasdomesticincome. ThecomponentsoftheprovisionforincometaxesconsistofthefollowingfortheyearsendedAugust31:

2017 2016 2015Current: Federal $ 30,352 $ 20,137 $ 14,597 State 3,921 3,791 3,576 34,273 23,928 18,173Deferred: Federal (2,378) 4,372 10,592 State (91) 137 (1,528) (2,469) 4,509 9,064 Provisionforincometaxes $ 31,804 $ 28,437 $ 27,237


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TheprovisionforincometaxesdiffersfromtheamountcomputedbyapplyingthestatutoryfederalincometaxrateduetothefollowingforthefiscalyearsendedAugust31: 2017 2016 2015Amountcomputedbyapplyingataxrateof35% $ 33,413 $ 32,377 $ 32,103Stateincometaxes(netoffederalincometaxbenefit) 2,489 2,553 1,330Employmentrelatedandothertaxcredits,net (1,834) (2,324) (2,096)Changeinuncertaintaxpositions – (3,027) –Federaltaxbenefitofstatutorytaxdeduction (1,560) (1,279) (4,093)Other (704) 137 (7) Provisionforincometaxes $ 31,804 $ 28,437 $ 27,237

DeferredtaxassetsandliabilitiesconsistofthefollowingatAugust31: 2017 2016Deferredtaxassets: Allowancefordoubtfulaccountsandnotesreceivable $ 419 $ 387 Leasingtransactions 3,083 3,222 Deferredincome 3,011 2,991 Accruedliabilities 4,339 6,187 Stockcompensation 3,156 2,446 Other 929 757 Statenetoperatinglosses 18,031 16,303 Totaldeferredtaxassets 32,968 32,293 Valuationallowance (16,254) (14,638) Totaldeferredtaxassetsaftervaluationallowance $ 16,714 $ 17,655

Deferredtaxliabilities: Prepaidexpenses $ (956) $ (1,119) Investmentinpartnerships,includingdifferencesincapitalization, depreciationanddirectfinancingleases (4,026) (4,125) Property,equipmentandcapitalleases (23,756) (31,565) Intangiblesandotherassets (22,983) (21,628) Debtextinguishment (838) (1,676) Directfinancinglease (4,256) (72) Totaldeferredtaxliabilities (56,815) (60,185) Netdeferredtaxliabilities(noncurrent) $ (40,101) $ (42,530)

StatenetoperatinglosscarryforwardsexpirebeginninginDecember2017throughMay2038. ManagementdoesnotbelievetheCompanywillbeabletorealizethestatenetoperatinglosscarryforwardsutilizingfutureincomeexclusiveofthereversalofexistingdeferredtaxliabilitiesandthereforehasprovidedavaluationallowanceof$16.3millionand$14.6millionasofAugust31,2017and2016,respectively. AsofAugust31,2017and2016, theCompanyhadapproximately$0.6millionofunrecognized taxbenefits, includingapproximately$0.4millionand$0.3million,respectively,ofaccruedinterestandpenalty.Ifrecognized,thesebenefitswouldfavorablyimpacttheeffectivetaxrate. TheCompanyrecognizesestimatedinterestandpenaltiesasacomponentofitsincometaxexpense,netoffederalbenefit,asacomponentofprovisionforincometaxesintheconsolidatedstatementsofincome.DuringtheyearsendedAugust31,2017,2016and2015,theCompanyrecognizedanegligiblenetexpense,anetbenefitof$0.1millionandnetexpenseof$0.1million,respectively.


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AreconciliationofunrecognizedtaxbenefitsisasfollowsforfiscalyearsendedAugust31:

2017 2016Balanceatbeginningofyear $ 625 $ 3,652 Additionsfortaxpositionsofprioryears 18 725 Reductionsfortaxpositionsofprioryears – (2,838) Reductionsduetosettlement – (212) Reductionsduetostatuteexpiration – (702)Balanceatendofyear $ 643 $ 625

TheCompanyoroneofitssubsidiariesissubjecttoU.S.federalincometaxandincometaxinmultipleU.S.statejurisdictions.AtAugust31,2017,theCompanywassubjecttoincometaxexaminationsforitsU.S.federalincometaxesandforstateandlocalincometaxesgenerallyafterfiscalyear2013.TheCompanyanticipatesthattheresultsofanyexaminationsorappeals,combinedwiththeexpirationofapplicablestatutesoflimitationsandtheadditionalaccrualofinterestrelatedtounrecognizedbenefitsonvariousreturnpositionstakeninyearsstillopenforexamination,couldresultinachangetotheliabilityforunrecognizedtaxbenefitsduringthenext12monthsrangingfromanegligibleincreasetoadecreaseof$0.6milliondependingonthetimingandtermsoftheexaminationresolutions.

13.Stockholders’Equity(Deficit)EmployeeStockPurchasePlan TheCompanyhasanemployeestockpurchaseplan(“ESPP”)thatpermitseligibleemployeestopurchasetheCompany’scommonstockata15%discountfromthestock’sfairmarketvalue.Participatingemployeesmaypurchasesharesofcommonstockeachyearuptothelesserof10%oftheirbasecompensationor$25thousandinthestock’sfairmarketvalue.AtAugust31,2017,0.8millionshareswereavailableforgrantundertheESPP.

Stock-BasedCompensation TheSonicCorp.2006Long-TermIncentivePlan(the“2006Plan”)providesflexibilitytoawardvariousformsofequitycompensation,suchasstockoptions,stockappreciationrights,performanceshares,RSUsandothershare-basedawards.AtAugust31,2017,6.5millionshareswereavailableforgrantunderthe2006Plan.TheCompanygrantsstockoptionstoemployeeswithaseven-yeartermandathree-yearvestingperiodandgrantsRSUstoemployeeswithaminimumfullvestingperiodofthreeyears.TheCompanygrantsstockoptionstoitsBoardofDirectorswithaseven-yeartermandone-yearvestingperiodandalsograntsRSUstoitsBoardofDirectorsthatvestoveroneyear.TheCompany’spolicyistoissuesharesfromtreasurystocktosatisfystockoptionexercises,thevestingofRSUsandsharesissuedundertheESPP. Totalstock-basedcompensationcostrecognizedforfiscalyears2017,2016and2015was$3.9million,$3.8millionand$3.5million,respectively,netofrelatedincometaxbenefitsof$1.3million,$1.2millionand$1.0million,respectively.AtAugust31,2017,thetotalremainingunrecognizedcompensationcostrelatedtounvestedstock-basedarrangementswas$7.5millionandisexpectedtoberecognizedoveraweightedaverageperiodof1.9years. TheCompanymeasuresthecompensationcostassociatedwithstockoption-basedpaymentsbyestimatingthefairvalueofstockoptionsasofthegrantdateusingtheBlack-Scholesoptionpricingmodel.TheCompanybelievesthevaluationtechniqueandapproachutilizedtodeveloptheunderlyingassumptionsareappropriateincalculatingthefairvaluesoftheCompany’sstockoptionsgrantedduringfiscalyears2017,2016and2015.Estimatesoffairvaluearenotintendedtopredictactualfutureeventsorthevalueultimatelyrealizedbytheemployeeswhoreceiveequityawards.ThefairvalueofRSUsgrantedisequaltotheCompany’sclosingstockpriceonthedateofthegrant. Thepershareweightedaveragefairvalueofstockoptionsgrantedduring2017,2016and2015was$6.65,$8.23and$8.83,respectively.Inadditiontotheexerciseandgrantdatepricesoftheawards,certainweightedaverageassumptionsthatwereusedtoestimatethefairvalueofstockoptiongrantsintherespectiveperiodsarelistedinthetablebelow:

2017 2016 2015Expectedterm(years) 5.3 5.3 5.0Expectedvolatility 34% 34% 34%Risk-freeinterestrate 2.0% 1.4% 1.3%Expecteddividendyield 2.2% 1.5% 1.2%


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TheCompanyestimatesexpectedvolatilitybasedonhistoricaldailypricechangesoftheCompany’scommonstockforaperiodequaltothecurrentexpectedtermoftheoptions.Therisk-freeinterestrateisbasedontheU.S.treasuryyieldsineffectatthetimeofgrantcorrespondingwiththeexpectedtermoftheoptions.TheexpectedoptiontermisthenumberofyearstheCompanyestimatesthatoptionswillbeoutstandingpriortoexerciseconsideringvestingschedulesandhistoricalexercisepatterns.

StockOptions AsummaryofstockoptionactivityundertheCompany’sstock-basedcompensationplansfortheyearendedAugust31,2017,ispresentedinthefollowingtable: Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Options Price Life(Yrs.) ValueOutstandingSeptember1,2016 2,334 $ 18.37 Granted 670 25.26 Exercised (292) 10.74 Forfeitedorexpired (176) 27.74 OutstandingatAugust31,2017 2,536 $ 20.42 3.92 $ 13,501

ExercisableatAugust31,2017 1,632 $ 16.88 2.77 $ 13,501

Proceedsfromtheexerciseofstockoptionsforfiscalyears2017,2016and2015were$2.7million,$3.8millionand$18.7million,respectively.ThetotalintrinsicvalueofoptionsexercisedduringtheyearsendedAugust31,2017,2016and2015was$4.6million,$18.9millionand$21.8million,respectively.

RestrictedStockUnits AsummaryoftheCompany’sRSUactivityduringtheyearendedAugust31,2017ispresentedinthefollowingtable:

Weighted Average Restricted GrantDate StockUnits FairValueOutstandingSeptember1,2016 92 $ 28.90 Granted 49 28.88 Vested (17) 29.36 Forfeited (29) 29.65OutstandingatAugust31,2017 95 $ 26.64

TheaggregatefairvalueofRSUsthatvestedduringthefiscalyearsendedAugust31,2017,2016and2015was$0.5million,$0.4millionand$1.1million,respectively.

ShareRepurchasePrograms InAugust2014,theBoardofDirectorsextendedtheCompany’ssharerepurchaseprogram,authorizingtheCompanytopurchaseupto$105.0millionofitsoutstandingsharesofcommonstockbeginningSeptember1,2014throughAugust31,2015.InOctober2014,theCompanyenteredintoanacceleratedsharerepurchase(“ASR”)agreementwithafinancialinstitutiontopurchase$15.0millionoftheCompany’scommonstock.Inexchangefora$15.0millionup-frontpayment,thefinancialinstitutiondeliveredapproximately0.6millionshares.DuringJanuary2015,theASRpurchaseperiodconcluded.TheCompanypaidanadditional$0.1millionwithnoadditionalsharesdelivered,resultinginanaveragepricepershareof$26.32.InFebruary2015,theCompanyenteredintoadditionalASRagreementswithafinancialinstitutiontopurchase$75.0millionoftheCompany’scommonstock.Inexchangefora$75.0millionup-frontpayment,thefinancialinstitutiondeliveredapproximately2.1millionshares.TheASRtransactionscompletedinJuly2015with0.3millionadditionalsharesdelivered,resultinginanaveragepricepershareof$31.38.TheCompanyreflectedtheASRtransactionsasarepurchaseofcommonstockforpurposesofcalculatingearningspershareandasaforwardcontractindexedtoitsowncommonstock.Theforwardcontractmetalloftheapplicable


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criteriaforequityclassification.IncludingsharesrepurchasedthroughtheASRtransactionsdescribedabove,duringthefiscalyear2015,approximately4.2millionshareswererepurchasedforatotalcostof$123.8million,resultinginanaveragepricepershareof$29.46. InAugust2015,theBoardofDirectorsextendedtheCompany’ssharerepurchaseprogram,authorizingtheCompanytopurchaseupto$145.0millionofitsoutstandingsharesofcommonstockthroughAugust31,2016.TheBoardofDirectorsfurtherextendedthesharerepurchaseprogrameffectiveMay2016,authorizingthepurchaseofuptoanadditional$155.0millionoftheCompany’soutstandingsharesofcommonstockthroughAugust31,2017.Duringfiscalyear2016,approximately5.2millionshareswererepurchasedforatotalcostof$148.3million,resultinginanaveragepricepershareof$28.48. InOctober2016,theBoardofDirectorsincreasedtheauthorizationunderthesharerepurchaseprogramby$40.0million.During fiscal year2017,approximately6.7millionshareswererepurchased fora totalcostof$172.9million, resulting inanaveragepricepershareof$25.71.InAugust2017,theBoardofDirectorsapprovedanincremental$160.0millionsharerepurchaseauthorizationoftheCompany’soutstandingsharesofcommonstockthroughAugust31,2018.Thetotalremainingamountauthorizedunderthesharerepurchaseprogram,asofAugust31,2017,was$160.0million. Sharerepurchaseswillbemadefromtimetotimeintheopenmarketorotherwise,includingthroughanASRtransaction,underthetermsofaRule10b5-1plan,inprivatelynegotiatedtransactionsorinroundlotorblocktransactions.Thesharerepurchaseprogrammaybeextended,modified,suspendedordiscontinuedatanytime.WeplantofundthesharerepurchaseprogramfromexistingcashonhandatAugust31,2017,cashflowsfromoperationsandborrowingsunderour2016VariableFundingNotes.Dividends InAugust2014,theCompanyinitiatedaquarterlycashdividendprogramandpaidaquarterlydividendof$0.09pershareofcommonstock,totaling$18.8millionforfiscalyear2015,andpaidaquarterlydividendof$0.11pershareofcommonstock,totaling$21.3millionforfiscalyear2016.Forfiscalyear2017,theCompanypaidaquarterlydividendof$0.14pershareofcommonstock,totaling$24.1million.Subsequenttotheendoffiscalyear2017,theCompanydeclaredaquarterlydividendof$0.16pershareofcommonstocktobepaidtostockholdersofrecordasofthecloseofbusinessonNovember8,2017,withapaymentdateofNovember17,2017.ThefuturedeclarationofquarterlydividendsandtheestablishmentoffuturerecordandpaymentdatesaresubjecttothefinaldeterminationoftheCompany’sBoardofDirectors.

14.EmployeeBenefitandCashIncentivePlans TheCompanysponsorsaqualifieddefinedcontribution401(k)planforemployeesmeetingcertaineligibilityrequirements.Undertheplan,employeesareentitledtomakepre-taxcontributions.TheCompanymatchesanamountequaltotheemployee’scontributionsuptoamaximumof6%oftheemployee’ssalariesdependingonyearsofserviceandincome.TheCompany’scontributionsduringfiscalyears2017,2016and2015were$1.9million,$1.8millionand$1.6million,respectively. TheCompanyhasshort-termandlong-termcashincentiveplans(the“IncentivePlans”)thatapplytocertainemployees,andgrantsofawardsundertheIncentivePlansareatalltimessubjecttotheapprovaloftheCompany’sBoardofDirectors.UndercertainawardspursuanttotheIncentivePlans,ifpredeterminedearningsgoalsaremet,apredeterminedpercentageoftheemployee’ssalarymaybepaidintheformofabonus.TheCompanyrecognizedasexpenseincentivebonusesof$8.3million,$13.4millionand$12.4millionduringfiscalyears2017,2016and2015,respectively.15.CommitmentsandContingenciesPaymentCardBreach OnSeptember18,2017,theCompanywasinformedbyitspaymentcardprocessorthatthereappearedtobesuspiciousactivityinvolvingcreditanddebitcardsusedatcertainSonicDrive-Inlocations.Uponlearningofthesuspiciousactivity,theCompanyimmediatelycontactedandbeganworkingwithlawenforcementto investigatethematter. Atthesametime,theCompanyimmediatelylauncheditsowninvestigationwiththehelpofexperiencedthird-partyforensicsfirms.OnOctober4,2017,theCompanyissuedapublicstatementnotifyingguestsandthepublicthatithaddiscoveredthatcreditanddebitcardnumbersmayhavebeenacquiredwithoutauthorizationaspartofamalwareattackexperiencedatcertainSonicDrive-Inlocations.TheCompany’sinvestigationisongoing,andtheCompanycontinuestoworkcloselywithexperiencedthird-partyforensicsfirmsandlawenforcementofficialstofurtherinvestigatethismatter. Subsequent toSeptember18,2017, theCompany incurredcostsassociatedwith thispaymentcardbreach, includinglegalfees,investigativefeesandcostsofcommunicationswithcustomers.Inaddition,paymentcardcompaniesmayissueassessmentsforcardreplacementandcardissuerlossesallegedtobeassociatedwiththepaymentcardbreach,aswellasfinesandpenaltiesrelatingtothepaymentcardbreach.TheCompanyexpectsthatcertainofsuchcostsandassessmentswillbecoveredundertheCompany’scyberliabilityinsurancecoverage.


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Currently,theCompanycannotreasonablyestimatealossorrangeoflossesassociatedwithresolutionofthepaymentcardnetworks’expectedclaimsfornon-ordinarycourseoperatingexpensesoranyamountsassociatedwiththenetworks’expectedclaimsforallegedcardissuerlossesand/orcardreplacementcosts.Alossassociatedwithresolvingsuchclaimsisnotreasonablyestimable,inpartbecausetheCompanyhasnotyetreceivedthird-partycardissuerlossreportingfromthepaymentcardnetworksandbecausetheinvestigationintothematterisongoingandtherearesignificantfactualandlegalissuestoberesolved.TheCompanybelievesthatitispossiblethattheultimateamounttobepaidonpaymentcardnetworkclaims,totheextentnotcoveredby,orinexcessofthelimitsof,theCompany’scyberliabilityinsurance,couldbematerialtoitsresultsofoperationsinfutureperiods.TheCompanywillcontinuetoevaluateinformationasitbecomesknownandwillrecordanestimateforlossesatthetimeortimeswhenitisbothprobablethatalosshasbeenincurredandtheamountofthelossisreasonablyestimable. Inaddition,theCompanyexpectstoincursignificantlegalandotherprofessionalservicesexpensesassociatedwiththepaymentcardbreachinfutureperiods.TheCompanywillrecognizetheseexpensesassuchservicesarereceived.

Litigation TheCompanyisinvolvedinvariouslegalproceedingsandhascertainunresolvedclaimspending.Basedontheinformationcurrentlyavailable,managementbelievesthatallclaimscurrentlypendingareeithercoveredbyinsuranceorwouldnothaveamaterialadverseeffectontheCompany’sbusiness,operatingresultsorfinancialcondition.

NoteRepurchaseAgreement OnDecember20,2013,theCompanyextendedanotepurchaseagreementtoabankthatservestoguaranteetherepaymentofafranchiseeloan,withatermthrough2018,andalsobenefitsthefranchiseewithalowerfinancingrate.Intheeventofdefaultbythefranchisee,theCompanywouldpurchasethefranchiseeloanfromthebank,therebybecomingthenoteholderandprovidinganavenueofrecoursewiththefranchisee.TheCompanyrecordedaliabilityforthisguaranteewhichwasbasedontheCompany’sestimateoffairvalue.AsofAugust31,2017,thebalanceofthefranchisee’sloanwas$5.5million.

LeaseCommitments TheCompanyhasobligationsundervariousoperatingleaseagreementswiththird-partylessorsrelatedtotherealestateforcertainCompanyDrive-Inoperationsthatweresoldtofranchisees.Undertheseagreements,whichexpirethrough2029,theCompanyremainssecondarilyliablefortheleasepaymentsforwhichitwasresponsibleastheoriginallessee.AsofAugust31,2017,theamountremainingundertheseguaranteedleaseobligationstotaled$13.5million.Atthistime,theCompanydoesnotanticipateanymaterialdefaultsundertheforegoingleases;therefore,noliabilityhasbeenprovided.

PurchaseObligations AtAugust31,2017,theCompanyhadpurchaseobligationsofapproximately$151.8millionwhichprimarilyrelatedtoitsestimatedshareofsystemcommitmentsforfoodproducts.TheCompanyhasexcludedagreementsthatarecancelablewithoutpenalty.

16.SelectedQuarterlyFinancialData(Unaudited)

FirstQuarter SecondQuarter ThirdQuarter FourthQuarter 2017 2016 2017 2016 2017 2016 2017 2016Totalrevenues $ 129,551 $145,803 $ 100,158 $133,160 $123,990 $165,239 $123,568 $ 162,118Incomefromoperations 27,052 26,045 22,627 22,212 35,441 38,880 38,155 40,315Netincome(1) $ 13,118 $ 12,458 $ 10,963 $ 10,819 $ 18,751 $ 15,353 $ 20,831 $ 25,437Basicincomepershare(2) $ 0.29 $ 0.25 $ 0.25 $ 0.22 $ 0.44 $ 0.32 $ 0.50 $ 0.54Dilutedincomepershare(2) $ 0.28 $ 0.24 $ 0.25 $ 0.22 $ 0.44 $ 0.31 $ 0.50 $ 0.53

(1) Forfiscalyear2017,includestheaftertaxlossof$0.6milliononrefranchisingtransactionsandtheaftertaxgainof$2.4milliononthesaleofinvestmentinrefranchiseddrive-inoperationsinthefirstquarter,theaftertaxgainof$4.3milliononrefranchisingtransactionsinthesecondquarter,theaftertaxgainof$0.4milliononrefranchisingtransactionsinthethirdquarterandtheaftertaxgainof$0.1milliononrefranchisingtransactions,aftertaxrestructuringchargesof$1.1millionandtheaftertaxgainonthesaleofrealestateof$3.0millioninthefourthquarter.Forfiscalyear2016,includestheaftertaxgainonthesaleofrealestateof$1.2millionandataxbenefitof$0.6millionfromtheretroactivereinstatementoftheWorkOpportunityTaxCreditandresolutionofincometaxmattersinthesecondquarter,the$5.7millionaftertaxlossfromearlyextinguishmentofdebtinthethirdquarterandtheaftertaxgainonrefranchisingtransactionsof$0.7millionandtheFIN48releaseofincometaxcreditsanddeductionsof$3.0millioninthefourthquarter.

(2) Thesumofpersharedatamaynotagreetoannualamountsduetorounding.


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Report of Independent Registered Public Accounting Firm

TheBoardofDirectorsandStockholdersSonicCorp.: WehaveauditedtheaccompanyingconsolidatedbalancesheetsofSonicCorp.andsubsidiariesasofAugust31,2017and2016,andtherelatedconsolidatedstatementsofincome,stockholders’equity(deficit),andcashflowsforeachoftheyearsinthethree-yearperiodendedAugust31,2017.Inconnectionwithourauditsoftheconsolidatedfinancialstatements,wealsohaveauditedfinancialstatementscheduleII.TheseconsolidatedfinancialstatementsandthefinancialstatementschedulearetheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsandthefinancialstatementschedulebasedonouraudits. WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion. Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialpositionofSonicCorp.andsubsidiariesasofAugust31,2017and2016,andtheresultsoftheiroperationsandtheircashflowsforeachoftheyearsinthethree-yearperiodendedAugust31,2017,inconformitywithU.S.generallyacceptedaccountingprinciples.Alsoinouropinion,therelatedfinancialstatementschedule,whenconsideredinrelationtothebasicconsolidatedfinancialstatementstakenasawhole,presentsfairly,inallmaterialrespects,theinformationsetforththerein. Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),SonicCorp.’sinternalcontroloverfinancialreportingasofAugust31,2017,basedoncriteriaestablishedinInternalControl–IntegratedFramework(2013)issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO),andourreportdatedOctober27,2017,expressedanunqualifiedopinionontheeffectivenessofSonicCorp.’sinternalcontroloverfinancialreporting.

(signed)KPMGLLP

OklahomaCity,OklahomaOctober27,2017

47

Management’s Report on Internal Control Over Financial Reporting

ThemanagementoftheCompanyisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreporting.TheCompany’sinternalcontrolsystemwasdesignedtoprovidereasonableassurancetotheCompany’smanagementandBoardofDirectorsregardingthepreparationandfairpresentationofpublishedfinancialstatements.Allinternalcontrolsystems,nomatterhowwelldesigned,haveinherentlimitations.Therefore,eventhosesystemsdeterminedtobeeffectivecanprovideonlyreasonableassurancewithrespecttofinancialstatementpreparationandpresentation. TheCompany’smanagementassessedtheeffectivenessoftheCompany’sinternalcontroloverfinancialreportingasofAugust31,2017.Inmakingthisassessment,itusedthecriteriasetforthbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissioninInternalControl-IntegratedFramework-2013.Basedonourassessment,webelievethat,asofAugust31,2017,theCompany’sinternalcontroloverfinancialreportingiseffectivebasedonthosecriteria. TheCompany’sindependentregisteredpublicaccountingfirmthatauditedthe2017financialstatementsincludedinthisannualreporthasissuedanattestationreportontheCompany’sinternalcontroloverfinancialreporting.Thereportappearsonthefollowingpage.

48

Report of Independent Registered Public Accounting Firm

TheBoardofDirectorsandStockholdersSonicCorp.: WehaveauditedSonicCorp.’sinternalcontroloverfinancialreportingasofAugust31,2017,basedoncriteriaestablishedinInternalControl–IntegratedFramework(2013)issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).SonicCorp.’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting,includedintheaccompanyingManagement’sReportonInternalControloverFinancialReporting.OurresponsibilityistoexpressanopiniononSonicCorp.’sinternalcontroloverfinancialreportingbasedonouraudit. WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,andtestingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk.Ourauditalsoincludedperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinion. Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements. Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate. Inouropinion,SonicCorp.maintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofAugust31,2017,basedoncriteriaestablishedinInternalControl–IntegratedFramework(2013)issuedbyCOSO. Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theconsolidatedbalancesheetsofSonicCorp.andsubsidiariesasofAugust31,2017and2016andtherelatedconsolidatedstatementsofincome,stockholders’equity(deficit),andcashflowsforeachoftheyearsinthethree-yearperiodendedAugust31,2017,andourreportdatedOctober27,2017expressedanunqualifiedopiniononthoseconsolidatedfinancialstatements.

(signed)KPMGLLP

OklahomaCity,OklahomaOctober27,2017

49

Directors and Officers

BoardofDirectorsCliffordHudsonChairman,ChiefExecutiveOfficerandPresidentSonicCorp.

TonyD.Bartel2ChiefOperatingOfficerGameStopCorp.

R.NealBlack3FormerChiefExecutiveOfficerandPresidentJos.A.BankClothiers,Inc.

StevenA.Davis2FormerChairmanandChiefExecutiveOfficerBobEvansFarms,Inc.

LaurenR.Hobart3PresidentDick’sSportingGoods,Inc.

KateS.Lavelle1,2

FormerExecutiveVicePresidentandChiefFinancialOfficerDunkin’Brands,Inc.

J.LarryNichols1,2,4

ChairmanEmeritusDevonEnergyCorporation

FedericoF.Peña1,2

SeniorAdvisorColoradoImpactFund

FrankE.Richardson1,2

ChairmanF.E.Richardson&Co.,Inc.

JeffreyH.Schutz1,3

ManagingDirectorCentennialVentures

KathrynL.Taylor2ChiefofEconomicDevelopment,CityofTulsa,Oklahoma

SusanE.Thronson3FormerSeniorVicePresident,GlobalMarketingMarriottInternational,Inc.

1 MemberoftheNominatingandCorporateGovernanceCommittee

2 MemberoftheAuditCommittee3 MemberoftheCompensationCommittee4 LeadIndependentDirector

OfficersCliffordHudsonChairman,ChiefExecutiveOfficerandPresident

ClaudiaS.SanPedroExecutiveVicePresidentandChiefFinancialOfficer

JohnH.BuddIIIExecutiveVicePresidentandChiefDevelopmentandStrategyOfficer

JoseA.DueñasExecutiveVicePresidentandChiefBrandOfficer

PaigeS.BassSeniorVicePresidentandGeneralCounsel

ChristinaD.VaughanPresidentofSonicRestaurants,Inc.(theCompany’srestaurant-operatingsubsidiary)

E.EdwardSarochSeniorVicePresidentofFranchiseRelations

AnitaK.VanderveerSeniorVicePresidentofPeople

TanishiaM.BeachamSeniorVicePresidentofFranchiseOperationsandMarketingImplementation

DavidW.AbneyVicePresidentofQualityAssurance

LoriI.AbouHabibVicePresidentandChiefMarketingOfficer

K.WayneBraytonVicePresidentofFacilitiesandEquipment

MichelleE.BrittenVicePresidentandChiefAccountingOfficer

R.DouglasCookVicePresidentandChiefEnterpriseArchitect

CarolynC.CumminsVicePresidentofComplianceandCorporateSecretary

MarkW.DavisVicePresidentofCybersecurityandEnterpriseSystems

JonC.DorchVicePresidentofIntegratedCustomerEngagement

JohnJ.DoyleVicePresidentofRetailSystemsManagement

DarinP.DuganVicePresidentofNationalMarketing

ChristopherR.GravesVicePresidentandRealEstateCounsel

JacquesA.GrondinVicePresidentofFranchiseOperations–WestRegion

LisaHammondVicePresidentofProgramManagementOffice

CathyN.HarrellVicePresidentofFieldMarketing

RalphF.HeimVicePresidentofMediaandIntegratedMarketing

CoreyR.HorschVicePresidentofInvestorRelationsandTreasurer

M.AnneHughesVicePresidentofInternalAudit

AndrewIrickVicePresidentofNewFranchiseesandOperations–NortheastRegion

BobbyL.JonesVicePresidentofFranchiseOperations–NorthCentralRegion

JohnnyD.JonesVicePresidentofDevelopment

L.KimLewisVicePresidentofDigitalStrategies

RoyM.Maines,Jr.VicePresidentofOperationsReadinessandCompliance

DianeL.PremVicePresidentofOperationsServices

MatthewJ.ScheinVicePresidentofOperationsTechnology

JeffreyD.SemlerVicePresidentofCustomerExperience

DailA.SmithVicePresidentofOperationsSonicRestaurants,Inc.

C.NelsonTaylorVicePresidentofFoodSafety

ScottB.UehleinVicePresidentofProductInnovationandDevelopment

MicheleA.VarianVicePresidentofSupplyChainandPurchasing

J.ToddWekenborgVicePresidentofFranchiseOperations–SoutheastRegion

BarbaraA.WilliamsVicePresidentofBrandInsights

LindaA.WiseleyVicePresidentofFranchiseOperations–SouthCentralRegion

CharlesB.WoodsVicePresidentofTax

ChristineO.WoodworthVicePresidentofPublicRelations

50

Corporate Information

Corporate Offices300 Johnny Bench DriveOklahoma City, Oklahoma 73104405-225-5000

Web Addresswww.sonicdrivein.com

Stock Transfer AgentComputershare462 South 4th Street, Suite 1600Louisville, Kentucky 40202800-884-4225web.queries@computershare.comwww.computershare.com/investor

Independent Registered Public Accounting FirmKPMG LLPOklahoma City, Oklahoma

Annual MeetingOur 2018 Annual Meeting of Shareholders will be held at 1:30 p.m. Central Standard Time on January 31, 2018, at our corporate offices, 4th Floor, 300 Johnny Bench Drive, Oklahoma City, Oklahoma.

Annual Report on Form 10-KA copy of our annual report on Form 10-K for the year ended August 31, 2017, as filed with the Securities and Exchange Commission (“SEC”), may be obtained without charge upon written request to Claudia S. San Pedro, Executive Vice President and Chief Financial Officer, at our corporate offices. In addition, we make available free of charge through our website at sonicdrivein.com annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed with or furnished to the SEC. The reports are available as soon as reasonably practical after we electronically file such material with the SEC, and may be found on our website under “Investors.”

Forward-Looking StatementsThis annual report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements reflect management’s expectations regarding future events and operating performance and speak only as of the date thereof. These forward-looking statements involve a number of risks and uncertainties. Factors that could cause actual results to differ materially from those expressed in, or underlying, these forward-looking statements are detailed in the Company’s annual and quarterly report filings with the SEC. The Company undertakes no obligation to publicly release revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required to be reported under the rules and regulations of the SEC.

Stock Market InformationOur common stock trades on the NASDAQ Global Select Market under the symbol SONC. At December 4, 2017, we had approximately 18,000 shareholders, including beneficial owners holding shares in nominee or “street” name.

The table below sets forth our high and low sales prices for the Company’s common stock and cash dividends paid during each fiscal quarter within the two most recent fiscal years.

Fiscal Year Ended August 31, 2017 Dividends Per High Low Common ShareFirst Quarter $ 28.87 $ 21.12 $ 0.14Second Quarter $ 28.60 $ 24.57 $ 0.14Third Quarter $ 29.44 $ 22.50 $ 0.14Fourth Quarter $ 30.05 $ 22.66 $ 0.14

Fiscal Year Ended August 31, 2016 Dividends Per High Low Common ShareFirst Quarter $ 29.99 $ 22.72 $ 0.11Second Quarter $ 33.18 $ 24.91 $ 0.11Third Quarter $ 36.34 $ 28.80 $ 0.11Fourth Quarter $ 30.91 $ 26.17 $ 0.11

During the fourth quarter of 2014, the Company initiated a cash dividend program and the first dividend under this program at $0.09 per common share was paid during the first quarter of fiscal year 2015. The Company has increased its dividend payment each year since then. The current quarterly rate effective with the payment made in the first quarter of fiscal year 2018 was increased 14% to $0.16 per common share. The future declaration of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of the Company’s Board of Directors.

Comparison of Five-Year Cumulative Total ReturnThe graph below matches Sonic Corp.’s cumulative five-year total return on common stock with the cumulative total returns of the NASDAQ Composite index and the S&P 600 Restaurants Small Cap index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from 8/31/2012 to 8/31/2017.

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Sonic Corp.

8/31/14 8/31/15 8/31/16 8/31/17

NASDAQ Composite S&P 600 Restaurants Small Cap

300 Johnny Bench Drive Oklahoma City, OK 73104

sonicdrivein.com

2017 annual report to shareholders an appetite for more · 2020-05-16 · 2017 annual report to...

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