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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.