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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Registrant's Telephone Number, Including Area Code: (405) 225-5000

        Securities Registered Pursuant to Section 12(b) of the Exchange Act:

None

Securities Registered Pursuant to Section 12(g) of the Exchange Act:

Common Stock, Par Value $.01
Rights to Purchase Series A Junior Preferred Stock, Par Value $.01

        Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for the shorter period that the Registrant has had to file the reports), and (2) has been subject to the filing requirements for the past 90 days. YES X . No     .

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES X . NO     .

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) YES X . NO     .

        As of October 31, 2003, the aggregate market value of the 37,412,342 shares of common stock of the Company held by non-affiliates of the Company equaled approximately $1.04 billion, based on the closing sales price for the common stock as reported for that date. As of October 31, 2003, the Registrant had 39,289,863 shares of common stock issued and outstanding (excluding 9,963,930 shares of common stock held as treasury stock).

Documents Incorporated by Reference

        Part III of this report incorporates by reference certain portions of the definitive proxy statement which the Registrant will file with the Securities and Exchange Commission in connection with the Company’s annual meeting of stockholders following the fiscal year ended August 31, 2003.

FORM 10-K OF SONIC CORP.

TABLE OF CONTENTS

FORM
10-K

SONIC CORP.

PART I

Item 1. Business

General

        Sonic Corp. (the “Company”) operates and franchises the largest chain of drive-in restaurants in the United States. As of August 31, 2003, the Company had 2,706 restaurants in operation, consisting of 497 Company-owned restaurants and 2,209 franchised restaurants, principally in the southern two-thirds of the United States. At a typical Sonic restaurant, a customer drives into one of 24 to 36 covered drive-in spaces, orders through an intercom speaker system, and has the food delivered by a carhop within an average of four minutes. Most Sonic restaurants also include a drive-through lane and many include patio seating.

        The Company has two operating subsidiaries, Sonic Industries Inc. and Sonic Restaurants, Inc. Sonic Industries Inc. serves as the franchisor of the Sonic restaurant chain, as well as the administrative services center for the Company. Sonic Restaurants, Inc. develops and operates the Company-owned restaurants. References to “Sonic,” the “Company,” “we,” “us,” and “our” in this report are references to Sonic Corp. and its subsidiaries and predecessors, unless the context indicates otherwise.

        Our objective is to maintain our position as, or to become, a leading operator in terms of the number of quick-service restaurants within each of our core and developing markets. We have developed and are implementing a strategy designed to build the Sonic brand and to continue to achieve high levels of customer satisfaction and repeat business. The key elements of that strategy are: (1) a unique drive-in concept focusing on a menu of quality made-to-order food products including several signature items; (2) a commitment to customer service featuring the quick delivery of food by carhops; (3) the expansion of Company-owned and franchised restaurants within Sonic’s core and developing markets; (4) an owner/operator philosophy, in which managers have an equity interest in their restaurant, thereby providing an incentive for managers to operate restaurants profitably and efficiently; and (5) a commitment to strong franchisee relationships.

        The Sonic drive-in restaurant chain was begun in the early 1950’s by Sonic’s predecessors. Sonic Corp. was incorporated in the State of Delaware in 1990 in connection with its 1991 public offering of common stock. Our principal executive offices are located at 300 Johnny Bench Drive, Oklahoma City, Oklahoma 73104. Our telephone number is (405) 225-5000.

Menu

        Sonic restaurants feature Sonic signature items, such as made-to-order sandwiches and hamburgers, extra-long cheese coneys, hand-battered onion rings, tater tots, specialty soft drinks including cherry limeades and slushes, and frozen desserts. In addition, our restaurants offer certain other items during limited-time promotions.

        Sonic began offering a breakfast menu in certain test markets in October 1999. The breakfast menu is currently offered in all Sonic restaurants. Items on the breakfast menu include sausage, ham, or bacon with egg and cheese Toaster_® sandwiches, sausage and egg burritos, and specialty breakfast drinks. Sonic restaurants are open beginning no later than 7 a.m. and serve the full menu all day.

Restaurant Locations

        As of August 31, 2003, Sonic owned or franchised 2,706 drive-in restaurants, which are located in 30 states, principally in the southern two-thirds of the United States, and in Mexico. We identify markets based on television viewing areas and further classify markets as either core or developing. We define our core television markets as those markets where the penetration of Sonic restaurants (as measured by population per restaurant, advertising levels, and share of restaurant spending) has reached a certain level of market maturity established by management. All other television markets where restaurants are located are referred to as developing markets. A market may be located where it extends into more than one state. Our core markets contain approximately 72% of all Sonic restaurants as of August 31, 2003. Developing markets are located in the states indicated below and Mexico. Many states have both core markets and developing markets. We have five restaurants in Mexico and one development agreement providing for four additional restaurants to be opened in Mexico in the next three years. The following table sets forth the number of Company-owned and franchised restaurants by core and developing markets as of August 31, 2003:

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Expansion

        During fiscal year 2003, we opened 35 Company-owned restaurants and our franchisees opened 159 restaurants. During fiscal year 2004, we anticipate approximately 200 new Sonic restaurant openings, including 165 to 170 restaurant openings by our franchisees. That expansion plan involves the opening of new restaurants by franchisees under existing area development agreements, single-store development by existing franchisees, and development by new franchisees. We believe that our existing core and developing markets offer a significant growth opportunity for both Company-owned and franchised restaurant expansion. The ability of Sonic and its franchisees to open the anticipated number of Sonic drive-in restaurants during fiscal year 2004 necessarily will depend on various factors. Those factors include (among others) the availability of suitable sites, the negotiation of acceptable lease or purchase terms for new locations, local permitting and regulatory compliance, the financial resources of Sonic and its franchisees, and the general economic and business conditions to be faced in fiscal year 2004.

        Our expansion strategy for Company-owned restaurants involves two principal components: (1) the building-out of existing core markets and (2) the further penetration of current developing markets. The Company is always in the process of identifying new developing markets for the opening of both Company-owned and franchised restaurants. In addition, we may consider the acquisition of other similar concepts for conversion to Sonic restaurants.

Restaurant Design and Construction

        The typical Sonic drive-in restaurant consists of a kitchen housed in a one-story building flanked by two canopy-covered rows of 24 to 36 parking spaces, with each space having its own intercom speaker system and menu board. In addition, since 1995, we have incorporated a drive-through service and patio seating area in most new restaurants. A few Sonic restaurants provide an indoor seating area and a few restaurants are located in non-traditional areas such as shopping mall food courts and convenience stores.

Marketing

        We have designed our marketing program to differentiate Sonic drive-in restaurants from our competitors by emphasizing five key areas of customer satisfaction: (1) wide variety of distinctive made-to-order menu items, (2) the personal manner of service by carhops, (3) speed of service, (4) quality, and (5) value. The marketing plan includes promotions for use throughout the Sonic chain. We support those promotions with television, radio commercials, point-of-sale materials, and other media as appropriate. Those promotions generally center on products which highlight signature menu items of Sonic drive-in restaurants.

        Each year Sonic (with involvement of the Sonic Franchise Advisory Council) develops a marketing plan. Funding for our marketing plan has three components: (1) the Sonic Advertising Fund, (2) the Sonic Marketing Fund, and (3) local advertising expenditures. The Sonic Advertising Fund is a national media production fund that we administer. The franchisee must contribute 0.375% to 0.75%, depending on the type of license agreement, of the franchisee’s gross revenues to the Sonic Advertising Fund. Once a sufficient number of Sonic restaurants have been opened in a market, we require the formation of advertising cooperatives among restaurant owners to pool and direct advertising expenditures in local markets. The franchisee must spend 1.125% to 3.25%, depending on the type of license agreement, of gross revenues on local advertising, either directly (if the advertising cooperative for the franchisee’s market is not yet formed) or through participation in the local advertising cooperative. The members of each local advertising cooperative may elect and frequently do elect to require the cooperative’s member drive-ins to contribute more than the minimum percentage of gross revenues to the advertising cooperative’s funds. For fiscal year 2003, franchisees participating in cooperatives contributed an average of 3.94% of gross revenues to Sonic advertising cooperatives. As of August 31, 2003, 2,604 Sonic restaurants (96% of the chain) participated in advertising cooperatives. The System Marketing Fund complements local advertising efforts in attracting customers to Sonic restaurants by promoting the message of the Sonic brand to an expanded audience. The primary focus of the System Marketing Fund is to purchase advertising on national cable and broadcast networks and other national media and sponsorship opportunities. The System Marketing Fund is funded by 1.0% (0.5% prior to September 1, 2003) of each franchisee’s gross revenues, which amount is either redistributed from the local advertising

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cooperatives to the System Marketing Fund or, if no advertising cooperative has been formed, is paid directly to the System Marketing Fund by the franchisee with a corresponding deduction in the amount the franchisee is required to spend on local advertising.

        The total amount spent on media (principally television) exceeded $100 million for fiscal year 2003 and we expect media expenditures to exceed $110 million for fiscal year 2004.

Purchasing

        We negotiate with suppliers for our primary food products (hamburger patties, dairy products, chicken products, hot dogs, french fries, tater tots, cooking oil, fountain syrup, and other items) and packaging supplies to ensure adequate quantities of food and supplies and to obtain competitive prices. We seek competitive bids from suppliers on many of our food products. We approve suppliers of those products and require them to adhere to product specifications that we establish. Suppliers manufacture several key products for Sonic under private label and sell them to authorized distributors for resale to Company-owned and franchised restaurants.

        We require our Company-owned and franchised restaurants to purchase from approved distribution centers. By purchasing as a group, we have achieved cost savings, improved food quality and consistency, and helped decrease the volatility of food and supply costs for Sonic restaurants. For fiscal year 2003, the average cost of food and packaging for a Sonic restaurant, as reported to us by our Company-owned and franchised restaurants, equaled approximately 27.8% of net revenues. We believe that negotiating and purchasing food as a system has allowed Sonic restaurants to avoid menu price increases that otherwise might have occurred.

Food Safety and Quality Assurance

        To ensure the consistent delivery of safe, high-quality food, we created a food safety and quality assurance program. Sonic’s food safety program promotes the quality and safety of all products and procedures utilized by all Sonic restaurants, and provides certain requirements that must be adhered to by all suppliers, distributors, and restaurants. We also have a comprehensive, restaurant-based food safety program called Sonic Safe. Sonic Safe is a risk-based system that utilizes Hazard Analysis & Critical Control Points (HACCP) principles for managing food safety and quality. Our food safety system includes employee training, supplier product testing, drive-in food safety auditing by independent third parties, and other detailed components that monitor the safety and quality of Sonic’s products and procedures at every stage of the food preparation and production cycle. Employee training in food safety is covered under our Sonic restaurant training program, referred to as the STAR Training Program. This program includes specific training information and requirements for every station in the restaurant. We also provide training in ServSafe, the most recognized food safety training certification in the restaurant industry.

General Operations

        Management Information Systems. We utilize point-of-sale equipment in each of our Company-owned and franchised restaurants. Certain financial and other information is polled on a daily basis from most Company-owned restaurants. We are developing software and hardware enhancements to our management information systems to facilitate communication and the exchange of information among the corporate office and Company-owned and franchised restaurants.

        Reporting. The license agreement requires all Sonic restaurants to submit a profit and loss statement on or before the 20^th of each month. All Company-owned stores and approximately 931 or 42% of franchise stores submit their data electronically. We expect to add more stores to electronic reporting which will reduce resources needed for manual processing of store level data.

        Hours of Operation. Sonic restaurants typically operate seven days a week. All Sonic restaurants participate in the breakfast program and are typically open from 7:00 a.m. to 11:00 p.m.

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Company Operations

        Restaurant Personnel. A typical Company-owned restaurant is operated by a manager, two to four assistant managers, and approximately 25 hourly employees, many of whom work part-time. The manager has responsibility for the day-to-day operations of the restaurant. Each supervisor has the responsibility of overseeing an average of four to seven Company-owned restaurants. We employ 14 directors of operations who oversee an average of five to six supervisors within their respective regions and report to either a regional vice president or a vice president. The Company has three regional vice presidents and three vice presidents. Sonic employs a senior vice president of operations based in Oklahoma City who oversees the operations of all Company-owned restaurants.

        Ownership Program. The Sonic restaurant philosophy stresses an ownership relationship with supervisors and managers. As part of the ownership program, either a limited liability company or a general partnership is formed to own and operate each individual Company-owned restaurant. We own a majority interest, typically at least 60%, in each of these limited liability companies and partnerships. Generally, the supervisors and managers own a minority interest in the limited liability company or partnership. Supervisors and managers are not employees of Sonic or of the limited liability companies or partnerships in which they have an ownership interest. As owners, they share in the profits and are responsible for their share of any losses incurred by their restaurant. We believe that our ownership structure provides a substantial incentive for restaurant supervisors and managers to operate their restaurants profitably and efficiently.

        Sonic records the interests of supervisors and managers as “minority interest in earnings of restaurants” under costs and expenses on its financial statements. We estimate that the average percentage interest of a supervisor was 16% and the average percentage interest of a manager in a restaurant was 18% in fiscal year 2003. Each restaurant distributes its available cash flow to its supervisors and managers and to Sonic on a monthly basis pursuant to the terms of the operating agreement or partnership agreement for that restaurant. Sonic has the right, but not the obligation, to purchase the minority interest of the supervisor or manager in the restaurant. The amounts of the buy-in and the buy-out are based on the restaurant’s sales during the preceding 12 months and approximate the fair market value of a minority interest in that restaurant.

        Each restaurant usually purchases equipment with funds borrowed from Sonic at competitive rates. In most cases, Sonic alone owns or leases the land and building and guarantees any third-party lease entered into for the site.

         Company-owned Restaurant Data. The following table provides certain financial information relating to Company-owned restaurants and the number of Company-owned restaurants opened and closed during the past five fiscal years.

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Franchise Program

        General. As of August 31, 2003, we had 2,209 franchised restaurants operating in 30 states and Mexico. A large number of successful multi-unit franchisee groups have developed during the Sonic system’s 50 years of operation. Those franchisees continue to develop new restaurants in their franchise territories either through area development agreements or single site development. Our franchisees opened 159 restaurants during fiscal year 2003 and we expect our franchisees to open approximately 165 to 170 Sonic restaurants in fiscal 2004. We consider our franchisees a vital part of our continued growth and believe our relationship with our franchisees is good.

        Franchise Agreements. Each Sonic restaurant, including each Company-owned restaurant, operates under a franchise agreement that provides for payments to Sonic of an initial franchise fee and a royalty fee based on a graduated percentage of the gross revenues of the restaurant. Our current license agreement provides for a franchise fee of $30,000 and an ascending royalty rate beginning at 1% of gross revenues and increasing to 5% as the level of gross revenues increases. Approximately 96% of all Sonic restaurants opening in fiscal year 2004 are expected to open under the current license agreement. Pursuant to the terms of existing area development agreements, the remaining 4% of all Sonic restaurants opening in fiscal year 2004 will open under a former version of the license agreement, which provides for a franchise fee of $15,000 or $30,000 and an ascending royalty rate beginning at 1% of gross revenues and increasing to 4% or 5% as the level of gross revenues increases. All license agreements to be issued to restaurants opening in fiscal year 2004 provide for a term of 20 years, with one 10-year renewal option. We have the right to terminate any franchise agreement for a variety of reasons, including a franchisee’s failure to make payments when due or failure to adhere to our policies and standards. Many state franchise laws affect our ability to terminate or refuse to renew a franchise.

        As of August 31, 2003, 36.3% of all Sonic restaurants were subject to the 1% to 5% graduated royalty rate, 10.5% were subject to the 1% to 4% graduated royalty rate, and 53.2% were subject to a former version of the license agreement (which is no longer being issued) providing for a 1% to 3% graduated royalty rate. For fiscal year 2003, Sonic’s average royalty rate equaled 3.34%. Beginning in fiscal year 2004 and continuing through fiscal year 2010, a total of 188 franchised restaurants currently operating under the license agreement providing for the 1% to 3% graduated royalty will have their royalty rates increase to the 1% to 4% graduated royalty rate. The license agreements for the remaining 29 restaurants which are subject to the 1% to 3% graduated royalty rate will expire beginning in fiscal year 2004 and continuing through fiscal year 2010. Restaurants currently operating under those expiring license agreements will either cease operations or renew their licenses pursuant to the terms of the then current license agreement. We expect that such automatic increase of royalty rates under certain existing license agreements and the renewals of the other expiring license agreements will contribute to an increase in our royalty revenues.

        Area Development Agreements. We use area development agreements to facilitate the planned expansion of the Sonic drive-in restaurant chain through multiple unit development. While many existing franchisees continue to expand on a single restaurant basis, approximately 74% of the new franchised restaurants opened during fiscal year 2003 occurred as a result of then-existing area development agreements. Each area development agreement gives a developer the exclusive right to construct, own and operate Sonic restaurants within a defined area. In exchange, each developer agrees to open a minimum number of Sonic restaurants in the area within a prescribed time period. If the developer does not meet the minimum opening requirements, we have the right to terminate the area development agreement and grant a new area development agreement to other franchisees for the area previously covered by the terminated area development agreement.

        During fiscal year 2003, we entered into 41 new area development agreements calling for the opening of 147 Sonic drive-in restaurants during the next four years. As of August 31, 2003, we had a total of 149 area development agreements in effect, calling for the development of 607 additional Sonic restaurants during the next five years, with 159 of those restaurants contemplated to open during fiscal year 2004. We cannot give any assurance that our franchisees will achieve that number of new restaurants for fiscal year 2004 or during the next five years. Of the 152 restaurants scheduled to open during fiscal year 2003 under area development agreements in place at the beginning of that fiscal year, 113 or 74% opened during the period.

        Our realization of the expected benefits under various existing and future area development agreements currently depends and will continue to depend upon the ability of the developers to open the minimum number of

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restaurants within the time periods required by the agreements. The financial resources of the developers, as well as their experience in managing quick-service restaurant franchises, represent critical factors in the success of area development agreements. Although we grant area development agreements only to those developers whom we believe possess those qualities, we cannot give any assurances that the future performance by developers will result in the opening of the minimum number of restaurants contemplated by the area development agreements or reach the compliance rate we have previously experienced.

        Franchised Restaurant Development. We assist each franchisee in selecting sites and developing restaurants. Each franchisee has responsibility for selecting the franchisee’s restaurant location, but must obtain our approval of each restaurant design and each location based on accessibility and visibility of the site and targeted demographic factors, including population density, income, age and traffic. We provide our franchisees with the physical specifications for the typical Sonic drive-in restaurants.

        Franchisee Financing. Other than the agreements described below, we do not generally provide financing to franchisees or guarantee loans to franchisees made by third parties.

        We have an agreement with GE Capital Franchise Finance Corporation (“GEC”), pursuant to which GEC made loans to existing Sonic franchisees who met certain underwriting criteria set by GEC. Under the terms of the agreement with GEC, Sonic provided a guaranty of 10% of the outstanding balance of a loan from GEC to the Sonic franchisee. The portions of loans made by GEC to Sonic franchisees that are guaranteed by the Company total $5.0 million as of August 31, 2003. We ceased guaranteeing new loans made under the program during fiscal year 2003 and have not been required to make any payments under our agreement with GEC.

        Franchisee Training. Each franchisee must have at least one individual working full time at the Sonic drive-in restaurant who has completed the Sonic Management Development Program before opening or operating the Sonic drive-in restaurant. The program consists of 12 weeks of on-the-job training and one week of classroom development. The program emphasizes food safety, quality food preparation, quick service, cleanliness of restaurants, management techniques and consistency of service. Furthermore, our management teams receive training in ServSafe, the most recognized food safety training certification in the restaurant industry.

        Franchisee Support. In addition to training, advertising and food purchasing as a system, and marketing programs, we provide various other services to our franchisees. Those services include: (1) assistance with quality control through area field representatives, to ensure that each franchisee consistently delivers high quality food and service; (2) support of new franchisees with guidance and training in the opening of their first three Sonic restaurants; (3) assistance in selecting sites for new restaurants using demographic data and studies of traffic patterns; (4) and one-stop shopping for all equipment needed to open a new restaurant through N. Wasserstrom & Sons, Inc. in Columbus, Ohio, and Concept Services, Inc. in Austin, Texas. Our field services organization consists of 15 field service consultants, 12 field marketing representatives, four regional marketing directors, four new franchise consultants, four regional vice presidents, all with responsibility for defined geographic areas, and a director and vice president of new franchise services. The field service consultants provide operational services and support for our franchisees, while the field marketing representatives assist the franchisees with the development of cooperative and local market promotional activities. New franchise consultants support the successful integration of new franchisees into the Sonic system from training through the first months following the opening of each of the franchisee’s first three Sonic restaurants. We also have six real estate directors who assist the franchisees with the identification of trade areas for new restaurants and the franchisees’ selection of sites for their restaurants, subject to Sonic’s final approval of those sites. Four field training consultants provide a variety of other services to franchisees.

        Franchise Operations. Sonic’s franchisees operate all restaurants in accordance with uniform operating standards and specifications. These standards pertain to the quality and preparation of menu items, selection of menu items, maintenance and cleanliness of premises, and employee responsibilities. We develop all standards and specifications with input from franchisees, and they are applied on a system-wide basis. Each franchisee has full discretion to determine the prices charged to its customers.

        Franchise Advisory Council. We have established a Franchise Advisory Council which provides advice, counsel, and input to Sonic on important issues impacting the business, such as marketing and promotions, operations, purchasing, building design, human resources, technology, and new products. The Franchise Advisory Council

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currently consists of 18 members selected by Sonic. Currently we have six executive committee members who are selected at large. The remaining 12 members are regional members who represent four defined regions of the country and serve three-year terms. We have developed nine Franchise Advisory Council task groups comprised of 40 total members who serve two-year terms and lend support on individual key priorities.

        Franchised Restaurant Data. The following table provides certain financial information relating to franchised restaurants and the number of franchised restaurants opened, purchased from or sold to Sonic, and closed during Sonic’s last five fiscal years.

Competition

        We compete in the quick-service restaurant industry, a highly competitive industry in terms of price, service, restaurant location, and food quality, and an industry often affected by changes in consumer trends, economic conditions, demographics, traffic patterns, and concerns about the nutritional content of quick-service foods. We compete on the basis of speed and quality of service, method of food preparation (made-to-order), food quality and variety, signature food items, and monthly promotions. The quality of service, featuring Sonic carhops, constitutes one of our primary marketable points of difference with the competition. There are many well-established competitors with substantially greater financial and other resources. These competitors include a large number of national, regional and local food services, including quick service restaurants and casual dining restaurants. A significant change in pricing or other marketing strategies by one or more of those competitors could have an adverse impact on Sonic’s sales, earnings, and growth. In selling franchises, we also compete with many franchisors of fast-food and other restaurants and other business opportunities.

Seasonality

        Our results during Sonic’s second fiscal quarter (the months of December, January and February) generally are lower than other quarters because of the climate of the locations of a number of Company-owned and franchised restaurants.

Employees

        As of August 31, 2003, we had 288 full-time corporate employees. This number does not include the approximately 15,000 full-time and part-time employees employed by separate partnerships and limited liability companies that operate our Company-owned restaurants or the supervisors or managers of the Company-owned restaurants who own a minority interest in the separate partnerships or limited liability companies.

        None of our employees is subject to a collective bargaining agreement. We believe that we have good labor relations with our employees.

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Trademarks and Service Marks

        Sonic owns numerous trademarks and service marks. We have registered many of those marks, including the “Sonic” logo and trademark, with the United States Patent and Trademark Office. We believe that our trademarks and service marks have significant value and play an important role in our marketing efforts.

Government Regulations

        We must comply with regulations adopted by the Federal Trade Commission (the “FTC”) and with several state laws that regulate the offer and sale of franchises. We also must comply with a number of state laws that regulate certain substantive aspects of the franchisor-franchisee relationship. The FTC’s Trade Regulation Rule on Franchising (the “FTC Rule”) requires that we furnish prospective franchisees with a franchise offering circular containing information prescribed by the FTC Rule.

        State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states. Those laws regulate the franchise relationship, for example, by requiring the franchisor to deal with its franchisees in good faith, by prohibiting interference with the right of free association among franchisees, by regulating discrimination among franchisees with regard to charges, royalties, or fees, and by restricting the development of other restaurants within certain prescribed distances from existing franchised restaurants. Those laws also restrict a franchisor’s rights with regard to the termination of a franchise agreement (for example, by requiring “good cause” to exist as a basis for the termination), by requiring the franchisor to give advance notice and the opportunity to cure the default to the franchisee, and by requiring the franchisor to repurchase the franchisee’s inventory or provide other compensation upon termination. To date, those laws have not precluded us from seeking franchisees in any given area and have not had a significant effect on our operations.

        Each Sonic restaurant must comply with regulations adopted by federal agencies and with licensing and other regulations enforced by state and local health, sanitation, safety, fire, and other departments. Difficulties or failures in obtaining the required licenses or approvals can delay and sometimes prevent the opening of a new restaurant.

        Sonic restaurants must comply with federal and state environmental regulations, but those regulations have not had a material effect on their operations. More stringent and varied requirements of local governmental bodies with respect to zoning, land use, and environmental factors can delay and sometimes prevent development of new restaurants in particular locations.

        Sonic and its franchisees must comply with laws and regulations governing labor and employment issues, such as minimum wages, overtime, and other working conditions. Many of the food service personnel in Sonic restaurants receive compensation at rates related to the federal minimum wage and, accordingly, increases in the minimum wage will increase labor costs at those locations.

Available Information

        We maintain an internet website with the address of http://www.sonicdrivein.com. Copies of the Company’s reports filed with, or furnished to, the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K and any amendments to such reports are available for viewing and copying at such internet website, free of charge, as soon as reasonably practicable after filing such material with, or furnishing it to, the Securities and Exchange Commission.

Item 2. Properties

        Of the 497 Company-owned restaurants operating as of August 31, 2003, we operated 219 of them on property leased from third parties and 278 of them on property we owned. The leases expire on dates ranging from 2004 to 2023, with the majority of the leases providing for renewal options. All leases provide for specified monthly rental payments, and some of the leases call for additional rentals based on sales volume. All leases require Sonic to maintain the property and pay the cost of insurance and taxes.

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        We moved our corporate headquarters to a new building in the Bricktown district of downtown Oklahoma City in November 2003 and have entered into a 15 year lease to occupy approximately 78,000 square feet in the new building. The lease expires in November 2018 and has two five-year renewal options. Formerly our corporate headquarters were located at 101 Park Avenue where we leased 68,568 square feet of office space. This lease expires on November 30, 2003. We also lease 10,000 square feet of warehouse space in Oklahoma City. The lease for the warehouse space expires in December 2003.

Item 3. Legal Proceedings

        Sonic is involved in various legal proceedings and has certain unresolved claims pending. The ultimate liability, if any, for the aggregate amounts claimed cannot be determined at this time. Management believes that all claims currently pending are either adequately covered by insurance or would not have a material adverse effect on our business or financial condition.

Item 4. Submission of Matters to a Vote of Security Holders

        Sonic did not submit any matter during the fourth quarter of the Company’s last fiscal year to a vote of Sonic’s stockholders, through the solicitation of proxies or otherwise.

Item 4A. Executive Officers of the Company

Identification of Executive Officers

        The following table identifies the executive officers of the Company.

Business Experience

        The following sets forth the business experience of the executive officers of the Company for at least the past five years.

        J. Clifford Hudson has served as the Company’s Chairman of the Board since January 2000 and has been Chief Executive Officer of the Company since April 1995. Mr. Hudson has served in various executive offices with the Company since 1985, including President from 1994 to 2000. He has served as a Director of the Company since 1993. Mr. Hudson served as Chairman of the Board of Securities Investor Protection Corporation, the federally-chartered organization which serves as the insurer of customer accounts with brokerage firms, from 1994 to 2001.

        Pattye L. Moore has served as President of the Company since January 2002 and a Director of the Company since January 2001. Ms. Moore served as the Company’s Executive Vice President from January 2000 until January 2002. Ms. Moore served as Senior Vice President of Marketing and Brand Development of the Company from August 1996 until January 2000. From August 1995 until August 1996, Ms. Moore served as Senior Vice President of

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Marketing and Brand Development for Sonic Industries Inc. and served as Vice President of Marketing of Sonic Industries Inc. from June 1992 to August 1995. Ms. Moore serves as a director of ONEOK, Inc., a publicly-held company engaged in several aspects of the energy business.

        Ronald L. Matlock has served as the Company’s Senior Vice President, General Counsel and Secretary since January 2000. Mr. Matlock served as the Company’s Vice President, General Counsel and Secretary from April 1996 until January 2000. Mr. Matlock has also served as a director of Sonic Restaurants, Inc. and as a director of Sonic Industries Inc. since April 1996. Prior to joining Sonic, Mr. Matlock practiced law from January 1995 to April 1996 with the Matlock Law Firm in Oklahoma City, Oklahoma, concentrating in corporate, securities and franchise law.

        W. Scott McLain has served as the Company’s Senior Vice President and Chief Financial Officer since January 2000. Mr. McLain served as the Company’s Vice President of Finance and Chief Financial Officer from August 1997 until January 2000. From August 1997 until August 1999 he also served as the Company’s Treasurer. From April 1996 to August 1997, he served as the Company’s Vice President of Finance and Treasurer. From August 1993 until joining Sonic, Mr. McLain served as Treasurer of Stevens International, Inc. in Fort Worth, Texas. From April 1991 to August 1993, Mr. McLain served as a Manager at Price Waterhouse in Dallas, Texas.

        Michael A. Perry has served as Senior Vice President of Operations and Director of Sonic Restaurants, Inc. since August 2003. Mr. Perry served as Vice President of Franchise Services of Sonic Industries Inc. from September 1998 until August 2003. He also served as the Vice President of Operations Services of Sonic Restaurants, Inc. from March 1998 until August 1998. From October 1994 until joining Sonic in 1998, Mr. Perry was a Region Vice President for Au Bon Pain Co., Inc. in Chicago, Illinois. From February 1993 until October 1994, Mr. Perry served as a Senior Director of Operations for Taco Bell Corp., Division of Pepsico, in Elmhurst, Illinois.

        Stephen C. Vaughan has served as the Company’s Vice President of Planning and Analysis since January 1999 and has served as Treasurer since November 2001. He also served as a Vice President of Sonic from August 1997 until January 1999, and as its Controller from January 1996 until January 1999.

        Terry D. Harryman has served as the Company’s Controller since January 1999. From October 1996 until January 1999, Mr. Harryman served as the Company’s Director of Tax. From January 1998 until January 1999, Mr. Harryman also served as the Company’s Assistant Treasurer. Mr. Harryman served as Assistant Treasurer of Sonic Industries Inc. and Sonic Restaurants, Inc. from October 1996 until January 2002.

PART II

Item 5. Market for the Company’s Common Stock and Related Stockholder Matters

Market Information

        The Company’s common stock trades on the Nasdaq National Market (“Nasdaq”) under the symbol “SONC.” The following table sets forth the high and low closing bids for the Company’s common stock during each fiscal quarter within the two most recent fiscal years as reported on Nasdaq. Share amounts set forth below and elsewhere in this report have been adjusted to reflect the results of the February 2002 three-for-two stock split.

Stockholders

        As of November 1, 2003, the Company had 489 record holders of its common stock.

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Dividends

        The Company did not pay any cash dividends on its common stock during its two most recent fiscal years and does not intend to pay any dividends in the foreseeable future.

Securities

        The following table sets forth information about the Company’s equity compensation plans as of August 31, 2003.

Equity Compensation Plan Information

Item 6. Selected Financial Data

        The following table sets forth selected financial data regarding the Company’s financial condition and operating results. One should read the following information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” below, and the Company’s Consolidated Financial Statements included elsewhere in this report.

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Selected Financial Data
(In thousands, except per share data)

    (1)        Adjusted for a 3-for-2 stock split in 2002 and 2000

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

        This annual report contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent our expectations or belief concerning future events, including the following: any statements regarding future sales or expenses, any statements regarding the continuation of historical trends, and any statements regarding the sufficiency of our working capital and cash generated from operating and financing activities for our future liquidity and capital resources needs. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements. We caution that those statements are further qualified by important economic and competitive factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, risks of the restaurant industry, including risks of food-borne illness, a highly competitive industry and the impact of changes in consumer spending patterns, consumer tastes, local, regional and national economic conditions, weather, demographic trends, traffic patterns, employee availability and cost increases. In addition, the opening and success of new restaurants will depend on various factors, including the availability of suitable sites for new restaurants, the negotiation of acceptable lease or purchase terms for new locations, permitting and regulatory compliance, our ability to manage the anticipated expansion and hire and train personnel, the financial viability of our franchisees, particularly multi-unit operators, and general economic and business conditions. Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized.

Results of Operations

        Sonic derives its revenues primarily from Company-owned restaurant sales and royalty payments from franchisees. We also receive revenues from initial franchise fees, area development fees, and the selling and leasing of signs and, in limited circumstances, real estate. In addition, Sonic owns and receives income from a minority interest in a few franchised restaurants. Costs of Company-owned restaurant sales and minority interest in earnings of restaurants relate directly to Company-owned restaurant sales. Other expenses, such as depreciation, amortization, and general and administrative expenses, relate to both Company-owned restaurant operations, as well as our franchising operations. Our revenues and expenses are directly affected by the number and sales volumes of Company-owned restaurants. Our revenues and, to a lesser extent, expenses are also affected by the number and sales volumes of franchised restaurants. Initial franchise fees and franchise royalties are directly affected by the number of franchised restaurant openings.

        The following table sets forth the percentage relationship to total revenues, unless otherwise indicated, of certain items included in Sonic’s statements of income. The table also sets forth certain restaurant data for the periods indicated.

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Percentage Results of Operations and Restaurant Data
($ in thousands)

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        Comparison of Fiscal Year 2003 to Fiscal Year 2002. Total revenues increased 11.6% to $446.6 million during fiscal year 2003 from $400.2 million during fiscal year 2002. Company-owned restaurant sales increased 12.3% to $371.5 million during fiscal year 2003 from $330.7 million during fiscal year 2002. Of the $40.8 million net increase, $41.1 million was due to the net addition of 104 Company-owned restaurants since the beginning of fiscal year 2002, ($53.6 million from the addition of 75 newly constructed restaurants and 77 acquired restaurants since the beginning of fiscal year 2002 less $12.5 million from 48 stores sold or closed during the same period). The increase in Company-owned restaurant sales from the net addition of restaurants was partially offset by slight sales decreases in the amount of $0.3 million by stores open the full reporting periods of fiscal years 2003 and 2002.

        Franchise royalties increased 8.2% to $66.4 million during fiscal year 2003, compared to $61.4 million during fiscal year 2002. Of the $5.0 million increase, approximately $3.9 million was attributable to an increase in the number of franchise restaurants operating in fiscal year 2003 compared to fiscal year 2002. The balance of the increase resulted from an increase in the effective royalty rate from 3.27% in fiscal year 2002 to 3.34% in fiscal year 2003 as substantially all of the new stores opened under the newest license agreement, which has a higher average royalty rate. In addition, each of our license agreements contains an ascending royalty rate feature that allows the royalty rate to increase as sales volumes increase. Franchise fees increased 16.3% to $4.7 million as 159 franchise drive-ins opened during fiscal year 2003 as compared to 142 during fiscal year 2002.

        We expect total revenues to grow during fiscal year 2004 by approximately 13% to 15% based on targeted same-store sales growth of 1% to 3% as well as the addition of approximately 190 to 200 new drive-ins (25 to 30 Company-owned and 165 to 170 franchised locations). We anticipate that the continued benefit of the ascending royalty rate and new franchise store openings will result in $6.0 to $7.0 million in incremental franchise income (royalties and fees) in fiscal year 2004. In addition, substantially all new drive-ins will open under our newest form of license agreement which contains a higher average royalty rate and initial opening fee.

        Restaurant cost of operations, as a percentage of Company-owned restaurant sales, was 74.7% during fiscal year 2003 compared to 73.2% during fiscal year 2002. Food and packaging costs, as a percentage of Company-owned restaurant sales remained flat at 26.0% of Company-owned restaurant sales as a result of a generally favorable commodity environment including lower unit level costs for several items including beef and dairy costs. The decrease in unit level costs was offset by a slight increase in discounting from standard menu prices during the year. Payroll and employee benefits, as a percentage of Company-owned restaurant sales, increased 86 basis points to 29.6% of sales as a result of an increased investment in store level labor and higher worker’s compensation and health insurance costs. We continued to invest in management infrastructure at the store level as we rolled out breakfast to the remaining 50% of our stores in fiscal year 2003. We believe that this investment will not only help breakfast be successful but will also lay an important foundation for growing our average unit volumes over time. Other operating expenses, as a percentage of Company-owned restaurant sales, increased 52 basis points primarily as a result of the lack of growth in average store volumes, an increase in the rate of advertising contributions in preparation for the breakfast rollout and rent expense related to the acquisition of franchise drive-ins where the franchisee retained the real estate. Minority interest in earnings of restaurants decreased, as a percentage of Company-owned restaurant sales, to 3.9% during fiscal year 2003, compared to 4.5% during fiscal year 2002 as a result of the decline in our restaurant-level margins. Most of the managers and supervisors of Company-owned restaurants own a minority interest in the restaurants, and a substantial portion of their compensation flows through the minority interest in earnings of restaurants.

        Looking forward, we expect restaurant cost of operations, as a percentage of Company-owned restaurant sales, to increase in the range of 50 basis points as a result of the increased investment in store-level operations for the first half of fiscal year 2004 and upward pressure on food costs notably dairy and beef costs. We continue to look for ways to strengthen our partnership program which may include greater ownership for store-level partners. However, since we expect store-level margins to decrease in fiscal year 2004, minority interest in earnings of restaurants is expected to remain flat or decline as a percentage of Company-owned restaurant sales.

        Selling, general and administrative expenses decreased, as a percentage of total revenues, to 7.9% during fiscal year 2003, compared with 8.4% during fiscal year 2002 as a result of the leverage of operating at higher sales volumes. We expect selling, general and administrative expenses to grow in the range of 8% to 10% in fiscal year

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2004 while continuing to decline as a percentage of total revenues. We anticipate that a significant portion of our future revenue growth will be attributable to Company-owned restaurants. Company-owned restaurants require a lower level of selling, general and administrative expenses, as a percentage of revenues, than our franchising operations since most expenses of Company-owned restaurant operations are reflected in restaurant cost of operations and minority interest in restaurant operations.

        Depreciation and amortization expense increased 12.1% to $29.2 million during fiscal year 2003 compared to $26.1 million in fiscal year 2002, while remaining flat as a percentage of total revenue. The increase in depreciation resulted primarily from new drive-in development and store acquisitions in the third fiscal quarter of 2003. Looking forward, we expect depreciation to grow by approximately 10% for fiscal year 2004, including a higher rate of growth in the first half of the year as a result of restaurants acquired in the San Antonio market. See Note 1 of the Notes to Consolidated Financial Statements for additional information regarding the San Antonio acquisition.

        During fiscal year 2002, two drive-ins in developing markets became impaired under the guidelines of FAS 121 — “Accounting for the Impairment of Long-Lived Assets” and estimates were revised on two stores which were previously impaired under FAS 121. As a result, a provision for impairment of long-lived assets of $1.3 million was recorded for the drive-ins’ carrying cost in excess of its estimated fair value. We adopted FAS 144 — “Accounting for the Impairment or Disposal of Long-Lived Assets,” which superceded FAS 121, effective at the beginning of fiscal year 2003. During fiscal year 2003, two drive-ins became impaired under the guidelines of FAS 144, which resulted in a provision for impairment of $0.7 million to reduce the drive-ins’ carrying cost to estimated fair value. We continue to perform quarterly analyses of certain underperforming restaurants. It is reasonably possible that the estimate of future cash flows associated with these restaurants may change in the near future resulting in the need to write-down assets associated with one or more of these restaurants to fair value.

        Income from operations increased 8.7% to $89.5 million during fiscal year 2003 from $82.3 million during fiscal year 2002, due primarily to the growth in revenues and other matters discussed above.

        Net interest expense in fiscal year 2003 declined 1.6% to $6.2 million from $6.3 million in fiscal year 2002. The year-over-year decline in short-term interest rates combined with the refinancing of $20.0 million in senior notes more than offset the effect of the increase in amounts outstanding under the line of credit resulting from additional borrowings to fund share repurchases of $26.5 million and capital expenditures of $90.0 million, including $35.6 million for acquisitions. Going forward, we expect interest expense to continue to decline, particularly in the latter part of fiscal year 2004, depending on the level of share repurchases and acquisition activity

        Provision for income taxes reflects an effective federal and state tax rate of 37.25% for fiscal year 2003 and 2002. Net income increased 9.6% to $52.3 million during fiscal year 2003 from $47.7 million in fiscal year 2002. Diluted earnings per share increased to $1.29 per share during fiscal year 2003, compared to $1.13 per share during fiscal year 2002, for an increase of 14.2%.

        Comparison of Fiscal Year 2002 to Fiscal Year 2001. Total revenues increased 21.0% to $400.2 million during fiscal year 2002 from $330.6 million in fiscal year 2001. Company-owned restaurant sales increased 23.6% to $330.7 million during fiscal year 2002 from $267.5 million in fiscal year 2001. Of the $63.2 million increase, $58.9 million was due to the net addition of 140 Company-owned restaurants since the beginning of fiscal year 2001 ($61.4 million from the addition of 74 newly constructed restaurants and 75 acquired restaurants since the beginning of fiscal year 2001, less $2.5 million from nine stores sold or closed during the same period). Average sales increases of approximately 1.7% by stores open the full reporting periods of fiscal year 2002 and 2001 accounted for $4.3 million of the increase.

        Franchise royalties increased 13.2% to $61.4 million during fiscal year 2002, compared to $54.2 million in fiscal year 2001. Of the $7.2 million increase, approximately $3.9 million was attributable to franchise same-store sales growth of 3.2% combined with an increase in the effective royalty rate from 3.18% in fiscal year 2001 to 3.27% in fiscal year 2002. Each of our license agreements contains an ascending royalty rate feature whereby the royalty rate increases as sales volumes increase. The balance of the increase resulted from an increase in the number of franchise restaurants operating in fiscal year 2002 compared to fiscal year 2001. Franchise fees decreased 8.8% as 142 franchise drive-ins opened during fiscal year 2002 as compared to 157 in fiscal year 2001. However, the

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average franchise fee increased as a greater percentage of stores opened under the newest form of license agreement, which has a higher franchise fee and royalty rate.

        Restaurant cost of operations, as a percentage of Company-owned restaurant sales, was 73.2% during fiscal year 2002 compared to 73.0% in fiscal year 2001. Food and packaging costs, as a percentage of Company-owned restaurant sales, remained flat as lower than expected beef costs and a moderation in dairy costs were offset by slightly increased discounting from standard menu prices. Payroll and employee benefits, as a percentage of Company-owned restaurant sales, increased 40 basis points as a result of an increase in average wage rates, increased investment in store-level labor as a part of the our commitment to outstanding customer service, and an increase in training and store-level management for the rollout of the breakfast program to a significant number of restaurants. Other operating expenses, as a percentage of Company-owned restaurant sales, decreased 13 basis points primarily as a result of the leverage of higher sales volumes and improvements in utility costs. Minority interest in earnings of restaurants decreased, as a percentage of Company-owned restaurant sales, to 4.5% during fiscal year 2002, compared to 4.7% in fiscal year 2001 as a result of the decline in overall restaurant-level margins.

        Selling, general and administrative expenses decreased, as a percentage of total revenues, to 8.4% during fiscal year 2002, compared with 9.3% in fiscal year 2001 as a result of the leverage of operating at higher sales volumes. Depreciation and amortization expense increased 9.3% to $26.1 million during fiscal year 2002 compared to 17.6% in fiscal year 2001 while declining as a percentage of revenue to 6.5% as compared to 7.2% the prior year. The increase in depreciation resulted primarily from new drive-in development and store acquisitions in the third fiscal quarter of 2002. The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective September 1, 2001 which resulted in a reduction in amortization expense of $2.2 million during fiscal year 2002 as compared to fiscal year 2001, excluding any related tax effects.

        During fiscal year 2002, two drive-ins in developing markets became impaired under the guidelines of FAS 121 — “Accounting for the Impairment of Long-Lived Assets,” and estimates were revised on three stores which were previously impaired under FAS 121. As a result, a provision for impairment of long-lived assets of $1.3 million was recorded for the drive-ins’ carrying cost in excess of their estimated fair value. During fiscal year 2001, two drive-ins became impaired under FAS 121 resulting in an impairment of $0.8 million.

        Income from operations increased 21.8% to $82.3 million during fiscal year 2002 from $67.6 million in fiscal year 2001 due primarily to the growth in revenues and other matters discussed above.

        Net interest expense during fiscal year 2002 increased 14.4% to $6.3 million from $5.5 million in fiscal year 2001. This increase was the result of additional borrowings to fund share repurchases of $26.0 million and capital expenditures of $71.1 million, including $20.5 million for acquisitions.

        Provision for income taxes reflects an effective federal and state tax rate of 37.25% for fiscal year 2002 and 2001. Net income increased 22.4% to $47.7 million in fiscal year 2002 compared to $39.0 million in fiscal year 2001. Diluted earnings per share increased to $1.13 per share during fiscal year 2002, compared to $0.93 per share in fiscal year 2001, for an increase of 21.5%.

Liquidity and Sources of Capital

        Net cash provided by operating activities increased $6.7 million or 8.1% in fiscal year 2003 as compared to the same period in fiscal year 2002, primarily as the result of the increase in operating profit before depreciation and amortization, partially offset by the gain on disposition of assets and the provision for deferred income taxes.

        We opened 35 newly-constructed restaurants and acquired a net of 11 existing restaurants from franchisees in fiscal year 2002. We funded total capital additions for fiscal year 2003 of $90.0 million, which included the cost of newly-opened restaurants, new equipment for existing restaurants, retrofits of existing restaurants, restaurants under construction, acquired restaurants, and other capital expenditures, from cash generated by operating activities and through borrowings under our line of credit. During fiscal year 2003, we purchased the real estate for 22 of the 87 newly-constructed and acquired restaurants. We expect to own the land and building for most of our future newly-constructed restaurants.

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        We repurchased approximately 1.2 million shares of common stock under our stock repurchase program during fiscal year 2003 at an aggregate cost of $26.5 million. Our Board of Directors expanded the stock repurchase program in August 2003, increasing the funds authorized for the repurchase of the Company’s common stock to $50.0 million and extended the term of the program to December 31, 2004. As of August 31, 2003, our total cash balance of $13.2 million reflected the impact of the cash generated from operating activities, borrowing activity, and capital expenditures mentioned above.

        We had an agreement with a group of banks which provided the Company with an $80.0 million line of credit expiring in July of 2004. On April 23, 2003, we amended the bank line of credit agreement to increase the maximum borrowing commitment from $80.0 to $125.0 million and extend the maturity of the agreement by two years to July 2006. The Company refinanced $20.0 million of long-term debt, which matured on April 1, 2003, under its senior unsecured notes with amounts available under its line of credit. We plan to use the line of credit to finance the opening of newly-constructed restaurants, acquisitions of existing restaurants, purchases of the Company’s common stock and for other general corporate purposes. As of August 31, 2003, our outstanding borrowings under the line of credit were $79.3 million, at an effective borrowing rate of 2.8%, as well as $0.7 million in outstanding letters of credit. The amount available under the line of credit as of August 31, 2003, was $45.0 million. See Note 9 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s long-term debt.

        We plan capital expenditures of $50.0 million in fiscal year 2004, excluding potential acquisitions and share repurchases. These capital expenditures primarily relate to the development of additional Company-owned restaurants, stall additions, relocations of older restaurants, store equipment upgrades, and enhancements to existing financial and operating information systems. We expect to fund these capital expenditures through borrowings under our existing line of credit and cash flow from operations. We expect to generate free cash flow (which we define as net income plus depreciation and amortization less capital expenditures, other than franchise acquisitions and share repurchases) of $40 million to $45 million during fiscal 2004. The Company has long-term debt maturing in fiscal years 2004, 2005 and 2006 of $0.1 million, $34.6 million and $83.9 million, respectively. We expect to refinance amounts maturing in 2005 under the senior secured notes with our line of credit and plan to extend the line of credit maturing in 2006 under existing renewal options and to increase the amount available as needed. We believe that existing cash and funds generated from operations, as well as borrowings under the line of credit, will meet the Company’s needs for the foreseeable future.

         We entered into an agreement with certain franchisees during fiscal year 2003, which provides them with the option to sell 50 restaurants to us anytime during the period commencing January 1, 2004 and ending June 30, 2005. We estimate that the cost of the acquisition, if it were to occur, would be in the range of $31 to $37 million and anticipate that the acquisition would be funded through operating cash flows and borrowings under the Company’s existing line of credit.

Contractual Obligations and Commitments

        In the normal course of business, Sonic enters into purchase contracts, lease agreements and borrowing arrangements. Our commitments and obligations as of August 31, 2003, are summarized in the following table:

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Impact of Inflation

        Though increases in labor, food or other operating costs could adversely affect our operations, we do not believe that inflation has had a material effect on income during the past several years.

Seasonality

        We do not expect seasonality to affect operations in a materially adverse manner. Our results during our second fiscal quarter (the months of December, January and February) generally are lower than other quarters because of the climate of the locations of a number of Company-owned and franchised restaurants.

Critical Accounting Policies and Estimates 

        The Consolidated Financial Statements and Notes to Consolidated Financial Statements contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to use its judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. These assumptions and estimates could have a material effect on the Company’s Financial Statements. We evaluate our assumptions and estimates on an ongoing basis based on historical experience and various other factors that are believed to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

        We annually review our financial reporting and disclosure practices and accounting policies to ensure that our financial reporting and disclosures provide accurate and transparent information relative to the current economic and business environment. We believe that of our significant accounting policies (see Note 1 of Notes to Consolidated Financial Statements), the following policies involve a higher degree of risk, judgment and/or complexity.

        Impairment of Long-Lived Assets. We review each restaurant for impairment when events or circumstances indicate it might be impaired. We test for impairment using historical cash flows and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. In addition, at least annually we assess the recoverability of goodwill and other intangible assets related to our brand and restaurants. These impairment tests require us to estimate fair values of our brand and our restaurants by making assumptions regarding future cash flows and other factors. If these assumptions change in the future, we may be required to record impairment charges for these assets.

        Ownership Program/Allowance for Uncollectible Notes and Accounts Receivable. Our restaurant philosophy stresses an ownership relationship with supervisors and drive-in managers. Most supervisors and managers of Company-owned restaurants own an equity interest in the restaurant, which is financed by the Company. These notes are typically financed for a term of five years, bear interest at market rates, and are secured by the partner’s equity interest. We evaluate whether the partner notes are collectible and make estimates of bad debts based on the restaurant’s financial performance and collection history with individual partners. If an individual restaurant’s performance declines, the probability of default by the partners is increased. Supervisors and managers are not employees of Sonic or of the restaurant in which they have an ownership interest.

        The investments made by managers and supervisors in each partnership or limited liability company are accounted for as minority interests in the financial statements. The ownership agreements contain provisions, which give Sonic the right, but not the obligation, to purchase the minority interest of the supervisor or manager in a restaurant. The amount of the investment made by a partner and the amount of the buy-out are based on a number of factors, primarily upon the restaurant’s financial performance for the preceding 12 months, and are intended to approximate the fair value of a minority interest in the restaurant. Such payments are accounted for under the purchase method of accounting.

        We collect royalties from franchisees and provide for estimated losses for receivables that are not likely to be collected. General allowances for uncollectible receivables are estimated based on historical trends. Although we

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have a good relationship with our franchisees and collection rates are currently high, if average sales or the financial health of franchisees were to deteriorate, we may have to increase reserves against collection of franchise revenues.

        Contingency Reserves. From time to time, we are involved in various legal proceedings and have certain unresolved claims pending involving taxing authorities, franchisees, suppliers, employees and competitors. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as estimate potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each issue. In addition, our estimate of probable losses may change in the future due to new developments or changes in approach such as a change in settlement strategy in dealing with these matters. We believe that all claims currently pending are either adequately covered by insurance or would not have a material adverse effect on the Company’s business or financial condition.

        Advertising. Under our license agreements, each drive-in, either Company-owned or franchise, must contribute a minimum percentage of revenues to a national media production fund (Sonic Advertising Fund) and spend an additional minimum percentage of gross revenues on local advertising, either directly or through Company-required participation in advertising cooperatives. A portion of the local advertising contributions is redistributed to a System Marketing Fund, which purchases advertising on national cable and broadcast networks and other national media and sponsorship opportunities. (See further description under Item 1, Marketing.)

        As stated in the terms of existing license agreements, these funds do not constitute assets of the Company and the Company acts with limited agency in the administration of these funds. Accordingly, neither the revenues and expenses nor the assets and liabilities of the advertising cooperatives, the Sonic Advertising Fund, or the System Marketing Fund are included in the Company’s consolidated financial statements. However, all advertising contributions by Company-owned restaurants are recorded as an expense in the Company’s financial statements.

        Revenue Recognition Related to Franchise Fees and Royalties. Initial franchise fees are nonrefundable and are recognized in income when all material services or conditions relating to the sale of the franchise have been substantially performed or satisfied by the Company. Area development fees are nonrefundable and are recognized in income on a pro-rata basis when the conditions for revenue recognition under the individual development agreements are met. Both initial franchise fees and area development fees are generally recognized upon the opening of a franchise drive-in or upon termination of the agreement between the Company and the franchisee.

        Our franchisees are required under the provisions of the license agreements to pay the Company royalties each month based on a percentage of actual net royalty sales. However, the royalty payments and supporting financial statements are not due until the 20^th of the following month. As a result, we accrue royalty revenue in the month earned based on estimates of franchise store sales. These estimates are based on actual sales at Company-owned stores and projections of average unit volume growth at franchise stores.

        Income Taxes. We provide for income taxes based on our estimate of federal and state tax liability. In making this estimate, we consider the impact of legislative and judicial developments. As these developments evolve, we will update our estimate which could result in an adjustment to the tax rate.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

        We are exposed to market risk from changes in interest rates on debt and notes receivable, as well as changes in commodity prices.

        Our exposure to interest rate risk currently consists of our Senior Notes, outstanding line of credit, and notes receivable. The Senior Notes bear interest at fixed rates which average 6.8%. The aggregate balance outstanding under the Senior Notes as of August 31, 2003 was $60.0 million. Should interest rates increase or decrease, the estimated fair value of these notes would decrease or increase, respectively. As of August 31, 2003, the estimated fair value of the Senior Notes exceeded the carrying amount by approximately $2.8 million. The line of credit bears interest at a rate benchmarked to U.S. and European short-term interest rates. The balance outstanding under the line of credit was $79.3 million as of August 31, 2003. We have made certain loans to the supervisors and managers who own a minority interest in our Company-owned restaurants and franchisees totaling $13.3 million as of August 31, 2003. The interest rates on these notes are generally between 8.5% and 10.5%. We believe the fair market value of these notes

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approximates their carrying amount. The impact on our results of operations of a one percent interest rate change on the outstanding balances under the line of credit as of the end of fiscal year 2003 would be approximately $0.6 million.

        The Company and its franchisees purchase certain commodities such as beef, potatoes, chicken and dairy products. These commodities are generally purchased based upon market prices established with vendors. These purchase arrangements may contain contractual features that limit the price paid by establishing price floors or caps; however, we have not made any long-term commitments to purchase any minimum quantities under these arrangements. We do not use financial instruments to hedge commodity prices because these purchase agreements help control the ultimate cost and any commodity price fluctuations are generally short term in nature.

        This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in financial markets.

Item 8. Financial Statements and Supplementary Data

        The Company has included the financial statements and supplementary financial information required by this item immediately following Part IV of this report and hereby incorporates by reference the relevant portions of those statements and information into this Item 8.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        No disagreements between the Company and its accountants have occurred within the 24-month period prior to the date of the Company’s most recent financial statements.

Item 9A. Controls and Procedures

        As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14 under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART III

Item 10. Directors and Executive Officers of the Company

        We have adopted a code of ethics that applies to our chief executive officer, chief financial officer, treasurer and controller.  Sonic has posted a copy of the code on its internet website at the internet address: http://www.sonicdrivein.com.  Copies of the code may be obtained free of charge from the Company’s website at the above internet address.

        Information regarding Sonic’s executive officers is set forth under Item 4A of Part I of this report. The other information required by this item is incorporated by reference from the definitive proxy statement which Sonic must file with the Securities and Exchange Commission in connection with Sonic’s annual meeting of stockholders to be held January 21, 2004 (the “Proxy Statement”) under the captions “Election of Directors” and “Section 16 Compliance.”

Item 11. Executive Compensation

        The information required by this item is incorporated by reference from the Proxy Statement under the caption “Executive Compensation.”

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Item 12. Security Ownership of Certain Beneficial Owners and Management

        The information required by this item is incorporated by reference from the Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.”

Item 13. Certain Relationships and Related Transactions

        The information required by this item is incorporated by reference from the Proxy Statement under the caption “Certain Relationships and Related Transactions.”

Item 14. Principal Accounting Fees and Services

        The information required by this item is incorporated by reference from the Proxy Statement under the caption “Report of the Audit Committee.”

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Financial Statements

        The following consolidated financial statements of the Company appear immediately following this Item 15:

Financial Statement Schedules

        The Company has included the following schedule immediately following this Item 15:

        The Company has omitted all other schedules because the conditions requiring their filing do not exist or because the required information appears in Sonic’s Consolidated Financial Statements, including the notes to those statements.

Exhibits

        The Company has filed the exhibits listed below with this report. The Company has marked all employment contracts and compensatory plans or arrangements with an asterisk (*).

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Reports on Form 8-K

        The Company filed a report on Form 8-K on June 23, 2003, reporting its press release announcing results for the Company’s third fiscal quarter.

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Report of Independent Auditors

The Board of Directors and Stockholders
Sonic Corp.

We have audited the accompanying consolidated balance sheets of Sonic Corp. as of August 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended August 31, 2003. Our audits also included the financial statement schedule listed in Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sonic Corp. at August 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

F-1

Sonic Corp.

Consolidated Balance Sheets