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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.         .

        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 February 29, 2004, the aggregate market value of the 56,561,395 shares of common stock of the Company held by non-affiliates of the Company was $1,279,814,696, based on the closing sales price for the common stock as reported for that date. As of October 31, 2004, the Registrant had 60,147,794 shares of common stock issued and outstanding.

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 no later than 120 days after August 31, 2004.

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 (“Sonic Drive-Ins”) in the United States. As of August 31, 2004, the Company had 2,885 Sonic Drive-Ins in operation, consisting of 539 Partner Drive-Ins and 2,346 Franchise Drive-Ins, principally in the southern two-thirds of the United States. Partner Drive-Ins are those Sonic Drive-Ins owned and operated by either a limited liability company or a general partnership. We own a majority interest, typically at least 60%, and the supervisor and manager of the drive-in own a minority interest in each Partner Drive-In limited liability company or general partnership. Franchise Drive-Ins are owned and operated by our franchisees. At a typical Sonic Drive-In, 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 Drive-Ins 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 Drive-In chain, as well as the administrative services center for the Company. Sonic Restaurants, Inc. develops and operates the Partner Drive-Ins. 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 distinctive 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 Partner Drive-Ins and Franchise Drive-Ins 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 Drive-Ins feature Sonic signature items, such as made-to-order sandwiches and hamburgers, extra-long cheese coneys, hand-battered onion rings, tater tots, salads, specialty soft drinks including cherry limeades and slushes, and frozen desserts. In addition, Sonic Drive-Ins offer certain other items during limited-time promotions.

        All Sonic Drive-Ins also offer a breakfast menu. Items on the breakfast menu include sausage, ham, or bacon with egg and cheese Breakfast Toaster_® sandwiches, sausage and egg burritos, and specialty breakfast drinks. Sonic Drive-Ins are open beginning no later than 7 a.m. and serve the full menu all day.

Restaurant Locations

        As of August 31, 2004, Sonic owned or franchised 2,885 Sonic Drive-Ins, which are located in 29 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 Drive-Ins (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 Sonic Drive-Ins 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 71% of all Sonic Drive-Ins as of August 31, 2004. Developing markets are located in the states indicated below and Mexico. Some states have both core markets and developing markets. The following table sets forth the number of Partner Drive-Ins and Franchise Drive-Ins by core and developing markets as of August 31, 2004:

Expansion

        During fiscal year 2004, we opened 21 Partner Drive-Ins and our franchisees opened 167 Franchise Drive-Ins. During fiscal year 2005, we anticipate approximately 200 to 215 new Sonic Drive-In openings, including 170 to 180 openings by our franchisees. That expansion plan involves the opening of new Sonic Drive-Ins by franchisees under existing area development agreements, single-store development by existing franchisees, and development by new

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franchisees. We believe that our existing core and developing markets offer a significant growth opportunity for both Partner Drive-In and Franchise Drive-In expansion. The ability of Sonic and its franchisees to open the anticipated number of Sonic Drive-Ins during fiscal year 2005 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 2005.

        Our expansion strategy for Partner Drive-Ins 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 Partner Drive-Ins and Franchise Drive-Ins. In addition, we may consider the acquisition of other similar concepts for conversion to Sonic Drive-Ins.

Restaurant Design and Construction

        The typical Sonic Drive-In consists of a kitchen housed in a one-story building flanked by 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 Sonic Drive-Ins. We have 133 Sonic Drive-Ins that provide an indoor seating area, 47 of which 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-Ins 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-Ins.

        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) local advertising expenditures, and (3) the Sonic Marketing Fund. The Sonic Advertising Fund is a national media production fund that we administer. Each Sonic Drive-In must contribute 0.375% to 0.75%, depending on the type of license agreement, of the Sonic Drive-In’s gross revenues to the Sonic Advertising Fund. Once a sufficient number of Sonic Drive-Ins have been opened in a market, we require the formation of advertising cooperatives among drive-in owners to pool and direct advertising expenditures in local markets. Each Sonic Drive-In must spend 1.125% to 3.25%, depending on the type of license agreement, of the drive-in’s gross revenues on local advertising, either directly (if the advertising cooperative for the drive-in’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 2004, drive-ins participating in cooperatives contributed an average of 4.04% of their Sonic Drive-In’s gross revenues to Sonic advertising cooperatives. As of August 31, 2004, 2,766 Sonic Drive-Ins (96% of the chain) participated in advertising cooperatives. The System Marketing Fund is funded out of the required local advertising expenditures by either redistributing 2.0% (1.0% prior to September 2004) of each Sonic Drive-In’s gross revenues from the local advertising cooperatives to the System Marketing Fund or, if no advertising cooperative has been formed, requiring the Sonic Drive-In to pay directly 2.0% of its gross revenues to the System Marketing Fund with a corresponding deduction in the amount the drive-in is required to spend on local advertising. The System Marketing Fund complements local advertising efforts in attracting customers to Sonic Drive-Ins 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 total amount spent on media (principally television) exceeded $110 million for fiscal year 2004 and we expect media expenditures to exceed $120 million for fiscal year 2005.

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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, produce 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 Partner Drive-Ins and Franchise Drive-Ins.

        We require our Partner Drive-Ins and Franchise Drive-Ins 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 Drive-Ins. For fiscal year 2004, the average cost of food and packaging for a Sonic Drive-In, as reported to us by our Partner Drive-Ins and Franchise Drive-Ins, equaled approximately 28% of net revenues.

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 Drive-Ins, and provides certain requirements that must be adhered to by all suppliers, distributors, and Sonic Drive-Ins. 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 Drive-In training program, referred to as the STAR Training Program. This program includes specific training information and requirements for every station in the drive-in. We also provide training in ServSafe to drive-in managers. ServSafe is 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 Partner Drive-Ins and Franchise Drive-Ins. Certain financial and other information is polled on a daily basis from most Partner Drive-Ins and many Franchise Drive-Ins. We are continuing to develop software and hardware enhancements to our management information systems to facilitate improved communication and the exchange of information among the corporate office and Partner Drive-Ins and Franchise Drive-Ins.

        Reporting. The license agreement requires all Sonic Drive-Ins to submit a profit and loss statement on or before the 20^th of each month. All Partner Drive-Ins and 1,128 or 48% of Franchise Drive-Ins submit their data electronically. We expect to add more Sonic Drive-Ins to electronic reporting which will reduce resources needed for manual processing of restaurant level data.

        Hours of Operation. Sonic Drive-Ins typically operate seven days a week and are open from 7:00 a.m. to 11:00 p.m.

Company Operations

        Restaurant Personnel. A typical Partner Drive-In 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 Partner Drive-In. Each supervisor has the responsibility of overseeing an average of four to seven Partner Drive-Ins. Sonic Restaurants, Inc. (“SRI”), Sonic’s operating subsidiary, oversees the operations and development of and provides administrative services to all Partner Drive-Ins. SRI employs 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 of SRI. SRI’s four regional vice presidents and three vice presidents report to the president of SRI.

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        Ownership Program. The Sonic Drive-In 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 Partner Drive-In. 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. The amount of ownership percentage is separately negotiated for each Partner Drive-In. 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 Partner Drive-In. We believe that our ownership structure provides a substantial incentive for Partner Drive-In supervisors and managers to operate their restaurants profitably and efficiently. Additional information regarding our ownership program is incorporated herein by reference to Ownership Program/Allowance for Uncollectible Notes and Accounts Receivable in Part II, Item 7, at page 24 of this Form 10-K.

        Sonic records the interests of supervisors and managers as “minority interest in earnings of restaurants” under costs and expenses of Partner Drive-Ins on its financial statements. We estimate that the average percentage interest of a supervisor was 15% and the average percentage interest of a manager in a Partner Drive-In was 17% in fiscal year 2004. Each Partner Drive-In 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 Partner Drive-In’s sales during the preceding 12 months and approximate the fair market value of a minority interest in that restaurant. Most supervisors and managers finance the buy-in with a loan from a financial institution.

        Each Partner Drive-In 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.

        Partner Drive-In Data. The following table provides certain financial information relating to Partner Drive-Ins and the number of Partner Drive-Ins opened and closed during the past five fiscal years.

Franchise Program

        General. As of August 31, 2004, we had 2,346 Franchise Drive-Ins operating in 29 states and Mexico. A large number of successful multi-unit franchisee groups have developed during the Sonic system's 51 years of operation. Those franchisees continue to develop new Franchise Drive-Ins in their franchise territories either through area development agreements or single site development. Our franchisees opened 167 Franchise Drive-Ins during fiscal year

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2004 and we expect our franchisees to open approximately 170 to 180 Franchise Drive-Ins in fiscal 2005. We consider our franchisees a vital part of our continued growth and believe our relationship with our franchisees is good.

        Franchise Agreements. Each Sonic Drive-In, including each Partner Drive-In, 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 drive-in. Our current standard 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. For non-traditional drive-ins, which are those Sonic Drive-Ins located in venues such as shopping mall food courts and convenience stores, the license agreement provides for a franchise fee of $15,000 and a flat royalty rate of 5% of gross revenues. Approximately 95% of all Sonic Drive-Ins opening in fiscal year 2005 are expected to open under the current standard license agreement, with the remaining 5% expected to open in venues that would be included under the non-traditional license agreement. The current standard license agreement provides for a term of 20 years, with one 10-year renewal option. The term for a non-traditional Sonic Drive-In is typically 10 years, with two five-year renewal options. 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, 2004, 41% of all Sonic Drive-Ins were subject to the 1% to 5% graduated royalty rate, 50% were subject to a former version of the license agreement (no longer being issued) providing for a 1% to 4% graduated royalty rate, and 9% were subject to a former version of the license agreement (also no longer being issued) providing for a 1% to 3% graduated royalty rate. For fiscal year 2004, Sonic's average royalty rate equaled 3.49%. Beginning in fiscal year 2005 and continuing through fiscal year 2010, a total of 127 Franchise Drive-Ins 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 132 Franchise Drive-Ins which are subject to the 1% to 3% graduated royalty rate began expiring in fiscal year 2004 and will continue to expire through fiscal year 2015. The license agreements for the 97 Franchise Drive-Ins which are subject to the 1% to 4% graduated royalty rate begin expiring in fiscal year 2004 and will continue to expire through fiscal year 2017. Franchise Drive-Ins 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 increases 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 drive-in basis, approximately 69% of the new Franchise Drive-Ins opened during fiscal year 2004 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 Drive-Ins within a defined area. In exchange, each developer agrees to open a minimum number of Sonic Drive-Ins 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 2004, we entered into 30 new area development agreements calling for the opening of 98 Franchise Drive-Ins and amended seven existing development agreements calling for the opening of an additional 53 Franchise Drive-Ins, all during the next six years. As of August 31, 2004, we had a total of 157 area development agreements in effect, calling for the development of 570 additional Sonic Drive-Ins during the next seven years. We cannot give any assurance that our franchisees will achieve that number of new Franchise Drive-Ins for fiscal year 2005 or during the next seven years. Of the 199 Franchise Drive-Ins scheduled to open during fiscal year 2004 under area development agreements in place at the beginning of that fiscal year, 116 or 58% 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 Sonic Drive-Ins 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

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opening of the minimum number of Sonic Drive-Ins contemplated by the area development agreements or reach the compliance rate we have previously experienced.

        Franchise Drive-In Development. We assist each franchisee in selecting sites and developing Sonic Drive-Ins. Each franchisee has responsibility for selecting the franchisee's drive-in location, but must obtain our approval of each Sonic Drive-In 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.

        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 $4.6 million as of August 31, 2004. 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 who has completed the Sonic Management Development Program before opening or operating the Sonic Drive-In. The program consists of a minimum 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 Sonic Drive-Ins, 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 Drive-Ins; and (3) assistance in selecting sites for new Sonic Drive-Ins using demographic data and studies of traffic patterns. Our field services organization consists of 14 field service consultants, 12 field marketing representatives, four regional marketing directors, five new franchise consultants, four regional vice presidents, all with responsibility for defined geographic areas, a director and vice president of new franchise services, and a vice president of franchise finance. The field service consultants provide operational services and support for our franchisees, while the field marketing representatives assist the franchisees with the development of advertising 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 Drive-Ins. We also have six real estate directors who assist the franchisees with the identification of trade areas for new Franchise Drive-Ins and the franchisees' selection of sites for their Franchise Drive-Ins, subject to Sonic's final approval of those sites. Ten field training consultants provide training to franchisees in such areas as shift management, customer service and financial controls.

        Franchise Operations. Sonic's franchisees operate all Franchise Drive-Ins 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 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 six Franchise Advisory Council task groups comprised of 49 total members who serve two-year terms and lend support on individual key priorities.

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        Franchise Drive-In Data. The following table provides certain financial information relating to Franchise Drive-Ins and the number of Franchise Drive-Ins opened, purchased from or sold to Sonic, and closed during Sonic's last five fiscal years.