In the Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Sonic Corp.," "the Company," "we," "us," and "our" refer to Sonic Corp. and its subsidiaries.

Overview

Sales momentum for the first quarter of fiscal year 2013 continued to improve from the prior year. System-wide same-store sales increased 3.0% during the first quarter of fiscal year 2013 as compared to an increase of 0.1% for the same period last year. Same-store sales at Company Drive-Ins increased 4.2% during the first quarter of fiscal year 2013 as compared to a decline of 0.1% for the same period last year. We believe the initiatives we have implemented over the last few years, including product quality improvements, a greater emphasis on personalized service and a tiered pricing strategy, have set a solid foundation for growth which is reflected in our operating results. We continue to focus on our innovative product pipeline as well as our day-part promotional strategy to drive same-store sales. We utilize a multi-layered growth strategy which incorporates same-store sales growth, operating leverage, deployment of cash, an ascending royalty rate and new drive-in development to achieve earnings growth. Positive system-wide same-store sales is the most important layer and drives operating leverage and increased operating cash flows.

Revenues decreased to $126.0 million for the first quarter of fiscal year 2013 from $128.3 million for the same period last year, which was primarily related to the refranchising of 34 Company Drive-Ins during the second fiscal quarter of 2012, partially offset by an increase in same-store sales. Restaurant margins at Company Drive-Ins improved by 80 basis points during the first quarter of fiscal year 2013, reflecting the leverage of positive same-store sales as well as moderating commodity cost inflation. First quarter results for fiscal year 2013 reflected net income of $6.1 million or $0.11 per diluted share, an increase of 12% and 22%, respectively, as compared to net income of $5.5 million or $0.09 per diluted share for the same period last year.

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

                            System-wide Performance

                                ($ in thousands)



                                                     Three months ended
                                                        November 30,
                                                     2012           2011
          Percentage increase in sales                   2.7 %         0.5 %
          System-wide drive-ins in operation(1):
          Total at beginning of period                 3,556         3,561
          Opened                                           1             2
          Closed (net of re-openings)                     (8 )          (8 )

          Total at end of period                       3,549         3,555


          Average sales per drive-in:              $     258       $   247

          Change in same-store sales(2):                 3.0 %         0.1 %

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

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

Results of Operations

Revenues. The following table sets forth the components of revenue for the reported periods and the relative change between the comparable periods.

                                    Revenues

                                ($ in thousands)



                                   Three months ended                            Percent
                                      November 30,             Increase         Increase
                                   2012          2011         (Decrease)       (Decrease)
  Revenues:
  Company Drive-In sales         $  93,456     $  96,782     $     (3,326 )           (3.4 %)
  Franchise Drive-Ins:
  Franchise royalties and fees      29,920        29,076              844              2.9
  Lease revenue                      1,486         1,288              198             15.4
  Other                              1,146         1,133               13              1.1

  Total revenues                 $ 126,008     $ 128,279     $     (2,271 )           (1.8 %)

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

                             Company Drive-In Sales

                                ($ in thousands)



                                                   Three months ended
                                                      November 30,
                                                   2012           2011
            Company Drive-In sales               $ 93,456       $ 96,782
            Percentage decrease                      (3.4 %)        (0.5 %)

            Company Drive-Ins in operation(1):
            Total at beginning of period              409            446
            Opened                                     -              -
            Closed (net of re-openings)                -              -

            Total at end of period                    409            446


            Average sales per Company Drive-In   $    230       $    218
            Percentage increase                       5.5 %          0.9 %

            Change in same-store sales(2)             4.2 %         (0.1 %)

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

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

Same-store sales for Company Drive-Ins increased 4.2% for the first quarter of fiscal year 2013, as compared to a decline of 0.1% for the same period last year. Company Drive-In sales decreased $3.3 million, or 3.4%, during the first quarter of fiscal year 2013, as compared to the same period last year. This decrease was primarily attributable to a $6.7 million reduction in sales from the refranchised drive-ins discussed earlier and a $0.4 million decrease related to drive-ins that were closed during or subsequent to the first quarter of fiscal year 2012 partially offset by a $3.7 million improvement in same-store sales and $0.1 million of incremental sales from new drive-in openings during fiscal year 2012.

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

                             Franchise Information

                                ($ in thousands)



                                                    Three months ended
                                                       November 30,
                                                   2012           2011
          Franchising revenues(1)                $  31,406      $  30,364
          Percentage increase (decrease)               3.4 %         (1.2 %)

          Franchise Drive-Ins in operation(2):
          Total at beginning of period               3,147          3,115
          Opened                                         1              2
          Closed (net of re-openings)                   (8 )           (8 )

          Total at end of period                     3,140          3,109


          Franchise Drive-In sales               $ 808,660      $ 781,703
          Percentage change                            3.4 %          0.7 %

          Effective royalty rate(3)                   3.70 %         3.68 %

          Average sales per Franchise Drive-In   $     262      $     251

          Change in same-store sales(4)                2.9 %          0.2 %

(1) Consists of revenues derived from franchising activities, including royalties, franchise fees and lease revenues. See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended August 31, 2012.

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

(3) Represents franchise royalties as a percentage of Franchise Drive-In sales.

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

Same-store sales for Franchise Drive-Ins increased 2.9% for the first quarter of fiscal year 2013 as compared to 0.2% for the same period last year. Franchising revenues increased $1.0 million, or 3.4%, for the first quarter of fiscal year 2013 as compared to the same period in 2012, which was primarily driven by an increase in franchise royalties. The increase in franchise royalties and our effective royalty rate during the first quarter of fiscal year 2013 was largely attributable to an increase in same-store sales, partially offset by various development incentives and certain franchisee restructuring efforts. In addition, approximately $0.3 million of the increase in franchising revenues during the first quarter of fiscal year 2013 was attributable to incremental royalties from the refranchised drive-ins discussed earlier.

Operating Expenses. The following table presents the overall costs of drive-in operations as a percentage of Company Drive-In sales. Other operating expenses include direct operating costs such as marketing, telephone and utilities, repair and maintenance, rent, property tax and other controllable expenses.

                            Company Drive-In Margins



                                             Three months ended         Percentage
                                                November 30,              Points
                                             2012            2011       (Decrease)
     Costs and expenses(1):
     Company Drive-Ins:
     Food and packaging                         28.5 %        28.6 %           (0.1 )
     Payroll and other employee benefits        35.8          36.3             (0.5 )
     Other operating expenses                   23.5          23.7             (0.2 )

     Cost of sales                              87.8 %        88.6 %           (0.8 )

(1) Calculated as a percentage of Company Drive-In sales

Restaurant-level margins improved by 80 basis points during the first quarter of fiscal year 2013 reflecting leverage from improved same-store sales and, to a lesser extent, the refranchising of 34 lower performing Company Drive-Ins during the second quarter of fiscal year 2012. Food and packaging costs improved by 10 basis points during the quarter, which was a result of a combination of a slowdown in commodity cost inflation and moderate price increases taken over the preceding twelve months. Payroll and other employee benefits as well as other operating expenses improved by a combined 70 basis points during the first quarter of fiscal year 2013 primarily from leveraging positive same-store sales.

Selling, General and Administrative ("SG&A"). SG&A expenses increased $0.7 million, or 4.6%, to $16.1 million for the first quarter of fiscal year 2013 from $15.4 million for the same period in fiscal year 2012. The increase in SG&A was largely attributable to an increase in variable compensation costs during the first quarter of fiscal year 2013.

Depreciation and Amortization. Depreciation and amortization expense remained relatively flat increasing by $0.1 million to $10.6 million for the first quarter of fiscal year 2013 from $10.5 million for the same period last year.

Net Interest Expense. Net interest expense decreased $0.3 million, or 4.4%, to $7.5 million for the first quarter of fiscal year 2013 from $7.9 million for the same period last year, primarily due to a decline in our long-term debt balance. See "Liquidity and Sources of Capital" and "Item 3. Quantitative and Qualitative Disclosures About Market Risk" below for additional information on long-term debt.

Income Taxes. The provision for income taxes reflects an effective tax rate of 36.6% for the first quarter of fiscal year 2013 as compared to 38.1% for the same period in 2012. This decline was primarily attributable to a decrease in our liability for unrecognized tax benefits resulting from the favorable settlement of a federal tax audit during the first quarter of fiscal year 2013. Our tax rate may continue to vary significantly from quarter to quarter depending on the timing of stock option exercises and dispositions by option-holders, changes in tax credit legislation, changes to uncertain tax positions, and as circumstances on other tax matters change. Subsequent to the end of the first quarter of fiscal year 2013, legislation was passed that reinstated and extended certain employment tax credits. We estimate this change to have a favorable impact on our fiscal year 2013 tax rate with the largest impact in the second quarter relating to the retroactive portion of the tax credit.

Financial Position

Total assets decreased $24.0 million, or 3.5%, to $656.8 million during the first three months of fiscal year 2013 from $680.8 million at the end of fiscal year 2012. The decrease in total assets was largely attributable to the use of $16.9 million of cash for the acquisition of outstanding common stock under our stock repurchase program during the first quarter of fiscal year 2013. In addition, net property, equipment and capital leases decreased by

$5.0 million, excluding the reclassification discussed below, resulting primarily from depreciation during the quarter partially offset by capital additions. During the first quarter of fiscal year 2013, a franchisee exercised an option to acquire land and buildings leased or subleased from us relating to previously refranchised drive-ins. The net book value of these assets was $39.0 million at November 30, 2012. As a result, we reclassified $39.0 million of net property, equipment and capital leases to assets held for sale (approximately $34 million in "assets held for sale" and approximately $5 million in noncurrent "other assets, net") at November 30, 2012. For additional information on this transaction, see note 5 - Assets Held for Sale, included in Part 1, Item 1, "Financial Statements" in this Form 10-Q.

Total liabilities decreased $13.4 million, or 2.1%, to $608.2 million during the first three months of fiscal year 2013 from $621.5 million at the end of fiscal year 2012. This decrease was largely attributable to a $7.1 million decrease in income taxes payable stemming from tax payments during the first quarter of fiscal year 2013. Contributing to the overall decline was $3.8 million of scheduled debt principal repayments during the first quarter of fiscal year 2013 and a $3.3 million decrease in accrued liabilities primarily related to the payment of bonuses and other liabilities that were accrued as of August 31, 2012.

Total stockholders' equity decreased $10.6 million, or 17.9%, to $48.6 million during the first three months of fiscal year 2013 from $59.2 million at the end of fiscal year 2012. This decrease was attributable to $18.1 million in purchases of common stock under our stock repurchase program during the first three months of fiscal year 2013. These purchases were partially offset by current year earnings of $6.1 million.

Liquidity and Sources of Capital

Operating Cash Flows. Net cash provided by operating activities decreased $1.7 million to $14.8 million for the first three months of fiscal year 2013 as compared to $16.4 million for the same period in fiscal year 2012. This decline primarily resulted from an increase in income tax payments in the first quarter of fiscal year 2013 as compared to the same period last year, largely offset by changes in operating liabilities relating to timing of payments.

Investing Cash Flows. Cash used in investing activities during the first quarter of fiscal year 2013 decreased slightly to $3.3 million compared to $4.3 million for the same period in fiscal year 2012. During the first three months of fiscal year 2013, we used $5.9 million of cash for purchases of property and equipment as outlined in the table below. These cash outflows were partially offset by $2.1 million in proceeds primarily related to the sale of surplus property during the quarter. The balance of the change relates to an increase in notes receivable and other investments. The following table sets forth the components of our investments in property and equipment for the first three months of fiscal year 2013 (in millions):

   Replacement equipment and technology for existing drive-ins           $ 2.3
   Corporate technology investments                                        2.0
   Rebuilds, relocations and remodels of existing drive-ins                1.0
   Retrofits, drive-thru additions and LED signs in existing drive-ins     0.5
   New Company Drive-Ins, including drive-ins under construction           0.1

   Total purchases of property and equipment                             $ 5.9

Financing Cash Flows. Net cash used in financing activities increased $6.9 million to $21.4 million for the first quarter of fiscal year 2013 from $14.5 million for the same period in fiscal year 2012. This increase was primarily attributable to the use of $16.9 million of cash during the first three months of fiscal year 2013 to purchase outstanding common stock under our current stock repurchase program as compared to $9.9 million for the same period in fiscal year 2012 under a prior stock repurchase program.

On August 15, 2012, our Board of Directors approved a stock repurchase program. Under this program, we are authorized to purchase up to $40 million of our outstanding shares of common stock through August 31, 2013. During the first quarter of fiscal year 2013, approximately 1.8 million shares were acquired pursuant to this program for a total cost of $18.1 million. As of November 30, 2012, the total remaining amount authorized for repurchase was $20.8 million. Share repurchases may be made from time to time in the open market or in negotiated transactions, depending on share price, market conditions and other factors. The stock repurchase program may be

extended, modified, suspended or discontinued at any time. We plan to fund the stock repurchase program from existing cash on hand at November 30, 2012 and cash flows from operations. In December 2012, subsequent to the end of the first quarter of fiscal year 2013, we purchased an additional 0.6 million shares under this program for a total cost of $6.0 million.

As of November 30, 2012, our total cash balance of $58.7 million ($42.7 million of unrestricted and $15.9 million of restricted cash balances) reflected the impact of the cash generated from operating activities, cash used for stock repurchases, and capital expenditures mentioned above. We believe that existing cash, funds generated from operations and the $100 million available under our Series 2011-1 Senior Secured Variable Funding Notes, Class A-1, will meet our needs for the foreseeable future.

Critical Accounting Policies and Estimates

Critical accounting policies are those the Company believes are most important to portraying its financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2012.